What the popularity of German brothels can teach us about the perils of a strong U.S. dollar

Lessons in who wins and who loses when a country's currency goes up or down

Super dollar.
(Image credit: (Jerry Hoare/Illustration Works/Corbis))

A funny thing is happening on the Swiss-German border.

Swiss customers are streaming into German brothels, according to Business Insider, driven by a recent spike in the value of the franc, Switzerland’s currency. That spike didn’t quite bring the franc into equivalent value with the euro — the currency used in Germany and much of the rest of the Continent — but it did make goods and services priced in euros about 20 percent cheaper compared to the franc. People who earn their wages in francs can now get a lot more bang (ahem) for their buck across the border.

But the sudden shift is also wreaking havoc on Swiss businesses. The country’s economy relies heavily on exports, and importers of Swiss goods and services have suddenly found their purchases 20 percent more expensive. Swiss businesses find themselves having to cut prices, cut wages, increase working hours, and change up their business models.

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There’s a lesson in here for Americans, and really everyone who cares about their economy: nothing happens in isolation. It may seem like a “strong” dollar is a straightforwardly good thing (It’s strong! Vacations overseas are so much cheaper!), but there’s always a counterbalancing move — and quite possibly a heavy cost.

Economies can be analogized to organic bodies or hydraulic systems. If one organ in the body is doing one thing, that’s affecting every other organ in various ways. If pressure is building up in one area of the hydraulics, it’s getting released somewhere else. If one dial is going up, another dial is going down.

What’s important to remember is that governments have the capacity to move the dials in one direction or another. No one has total control over how their currency is valued versus others. But policy-makers can choose to push in one direction or another. If they crank one dial up, it’s because they think keeping it up is worth some other dial going down. So you always want to be asking, which dials are policy-makers valuing, and why?

What just happened in Switzerland was arguably a result of choices made by the powers that be in the European Union. Euro monetary policy has been kept far too tight in the post-2008 recovery, and European officials have insisted on austerity as the price for bailing out the E.U.'s less fortunate members, despite the massive economic damage those policies are doing. So now Greece and possibly even Spain might decide to just cut their losses and make do with their own currencies.

That made people who had parked their money in euros skittish that the currency union wouldn’t be able to hold itself together. Many of them ran to the relative stability of the Swiss franc instead. That drove up the value of the franc — over 40 percent in a single year, threatening the very situation Switzerland is in now — so the Swiss National Bank (SNB) stepped in to push the franc back down.

About midway through January, the SNB threw in the towel on that effort. And up went the franc.

Over here in the States, the situation is a bit different, but the same fundamental forces and trade-offs apply. And our government has been making a series of choices for a while now to keep the dollar "strong."

For instance, the U.S. Federal Reserve has been targeting an inflation rate of 2 percent for a few decades now. There are lots of reasons for targeting a higher rate of, say, 4 percent. One of them is that a dollar that devalued quicker would be worth less compared to other currencies, encouraging our trade deficit to shrink.

The way the the U.S. has handled international financial negotiations is another factor. In the aftermath of the East Asian financial crisis in the 1990s, the U.S. and the International Monetary Fund treated the Asian countries much the way the E.U. has treated countries like Greece: insisting on austerity and massive debt repayment in exchange for bailouts. So other developing countries, terrified of ending up in the same boat, built up massive reserves in U.S. dollars, which drove up the value of America's currency.

The result has been a big and persistent U.S. trade deficit since at least the mid-1990s. That's contributed to the Walmart-ization of our economy, as cheap goods flood in from abroad and undermine good high-paying jobs for the working class. The demand sucked out of the U.S. economy by the trade deficit has to be replaced by either higher government deficits, or by more private borrowing to keep consumption up. And as we found out in 2008, mass private borrowing can end badly.

The global economy is a hydraulic system, after all. Pressure is always moving from one place to another. But sometimes governments make decisions about where the pressure should or shouldn't be able to go. And as the recent surrender of the SNB shows, when that pressure builds up enough, something’s gotta give.

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