Sunday, October 19, 2014

Explaining the Exchange Rate World

Remember, this is a blog written by an American, designed for Americans and ex-pat's, and not Germans.  So the topic today....is the Euro and the exchange rate.

When I arrived in Germany in 1978....one of the top ten things you had to grasp and understand was the Deutsch Mark (DM) situation.  You got paid every two weeks, and you converted some part of your income at the base bank (Rhein Main for me) over to DM.  At the time, it was roughly 2.25 DM to the dollar.

After a while, you learned that the rate went up and down....daily.  It's not something that you'd typically think about while living in the US....but here, it's different.

Folks had a strategy, while realistic or ill-conceived.....that the rate was always better two days prior to pay-day.  I never believed this idea.....but lots of Americans would buy their DM prior to pay-day.
I would say the low point of that two year point for me when when the DM rate got down to 2.05.  Naturally, this meant you got less DM, or you paid more for your DM than when it was up around 2.2.  Course, if you were only buying enough for pocket-money, beer and weekend entertainment....you only needed 150 DM to accomplish that, and the difference between 2.05 and 2.2 isn't that big of a deal.

I left in 1980, and came back in 1984 to Germany.  The exchange rate had radically changed during the Reagan era.  It was now 2.85 for the average that year.  You could buy a lot of marks for a better price.  1985 went to an even higher level with it almost hitting 3.5 at some point.

I knew enlisted guys who went downtown Kaiserslautern and bought BMWs in 1985.  I went on numerous tours and trips that year, with lots of DM in my pocket.  Tens of thousands of GI's in Germany had a great year....spent a ton of money....and it all came back to the exchange rate.

When I came back in 1992...it had sunk to the 1.6 DM to the dollar level.  The Air Force tried to make up for the negative situation....giving you enough housing money and a fair allowance....but you tended to limit your spending off-base to strictly restaurants and limited travel.  

By 1998, it was pressing up toward 1.8 DM to the dollar and people were more positive.  There was talk of the Euro coming in, and always a hint of better exchange rates.

The initial stage of the Euro?  It was set to roughly 1.1 Euro to the dollar.  That lasted roughly a year, and later fell to .79 by 2004.....two years into the Euro period.

Americans who were civilians and working in Germany?  We were all pretty aware of the rate.....fairly negative with the original deals worked out with our companies.....and questioning how this made sense for our budget planning process.  If you had a mortgage of 1,200 Euro on a house....it was pretty simple in 2002 and you were paying roughly 1,200 dollars for the place.  Two years later, at .86, you were now paying $1,395.  That's roughly $200 more than what you started with only two years ago.  Where did the $200 come from?  Savings or what you would have put toward a new car.

The typical German?  They never saw this or had to play this game.

At some point in 2008, it actually got down to around .64.  I sat in some meeting with the American company I worked for, and a dozen of us in the room were voicing issues.  There had to be some increased allowance to cover this cost of living issue.  The sad truth was that the company signed a contract with the US government for services, and it had nothing in it to work in a more dismal Euro exchange environment.  The company wouldn't lessen profits, and other than just leaving Germany....there wasn't much to say or do.

Our company boss had actually sat down with a currency expert in Frankfurt.  Personally, the currency guy even admitted that there just wasn't a logical reason for the Euro to have fallen from 1.1 to .64 over this period except for a US-led strategy to cheapen US-made products, and entice Europeans to "buy cheap".  It was a strategy developed while in the DM era with the Clinton Administration and continued to be played out with the Bush Administration.

I've sat and read over the idea.  It won't be discussed by anyone much beyond the banking folks, and they tend to see some type of manipulation going on. It's the only way to entice Europeans to buy American-made products.  You see the same concept with tourism....a German is able to buy a remarkably cheap but up-scale vacation in the US for 1,200 Euro.

In recent weeks....the Euro has been climbing.  It's presently around .76 and there's a number of Frankfurt currency folks talking of a .80 trend by January.  A handful of folks even think the Euro might slide on up to .90 by the end of 2016.  The manipulation factor?  Well.....if you were German, or French, or Italian.....you'd like to really sell more products in the US.  But with the rate down near .65.......that just wasn't going to happen.  Now at .76?  Things are getting interesting.

The US losing an edge on the market by their products getting less cheap to sell in Europe?  Well, yeah.

More Americans touring Europe because of a cheaper Euro?  Well, yeah.

I've spent around four decades around Europe, and have come to view the exchange rate as a curious thing.  I had a business professor who used the price of a McDonalds menu bag in Paris to explain the real cost of life compared to the US standard pricing for the same bag.  It was a five-star explanation and made perfect sense.  The same logic doesn't work today. The issue is.....McDonalds of Gemany now buys almost all of it's products within Germany, with nothing imported in for the operation.  What the bag costs.....doesn't relate to anything within the US now.

It's hard to get across this whole discussion of currency and value to a typical American, or for that matter.....a typical German.

It matters, but it's like an invisible wall, and you don't know you've hit it....until you actually stumble up against it and feel some pain.  Just my humble two cents on currency.

No comments: