Monday, July 28, 2008

What happens when the dollar shrinks ..

Especially when $1 = Indian Rs. 1

Over the past few months the dollar has been declining against the Euro. This spurred me to think of some discussions I had with friends a few years ago.

The talk was centered around immigration into the US and what makes an individual leave her or his country to go for better prospects in a developed country like USA.

There are various reasons why people move : better job prospects, lesser political tension, better infrastructure support and last but not the least is money driven by growing economy.

In his book "The World is Flat" Friedman talks about how jobs have moved from one country to another largely due to the growth and advancement in technology which link the developed and developing nations.

Today jobs are shifted overseas for getting the same done cheaply. What does one spot at the end of the tunnel?

Today the value of $1 is approximately Rupees 40 in Indian currency. Will a perfect flat world be considered when $1 = Rs 1 or 1 yuan or 1 pesos?

Rather than going into how this could happen lets consider if this does happen what kind of effect will it have. I surveyed a few Indian friends I have and most of them said that Indians would return back to their country since the whole purpose of them coming here was to make money and if thats no longer true then there is no incentive to stay.

That was an immediate reaction. If one thinks more about the same thing. If $1 would become Rs. 1 then will American businessmen see any point to outsource? Will that mean all centers or outsourced jobs would come back to the US?
What would that mean for the Indian economy? Will it fear to lose all these jobs or think of outsourcing them somewhere?

There are some that move to other countries to attain more freedom and just to run away from their home land if the lifestyle back home is not to their liking.

I also spoke to some of my Latin friends , one from Venezuela thought that the baby boomer generation might move back faster if that happens.

The general feeling I got was life after retirement is easier in one's home country.

These are my general thoughts thinking about the same. I will jot down more. I welcome a discussion here :)


jGeee said...

I am not sure $1 = 1 rs means that the living standards would be the same? The price of money if based off a market with many factors.

You ask a question if a company would outsource given equal macro level statistics. I would say yes. Competitive advantage and economies of scale would most likely concentrate different types of business in different parts of the world.

abra-ka-dabra said...

dollar shrinking would mean doom-s-day for exporters in India.And IT industry,the single most top-dollar generating conglomorate will be struggling to survive.This will mean unemployment in huge numbers.IT/ITES are the highest recruiters.
So,the way i see it too much of a dollar shrinking can pave a hindrance to the economic growth of the country.
A balance has to be struck so that the import-export can both have a win-win situation

ann said...

For better or worse, America is the world's biggest consumer and the economies of the Chinas and Indias of the world are pegged to the USD. With this dependence in place (it is so far), these countries will not allow their currencies to appreciate compared to the dollar. Hence, you see the rupee devaluation to Rs46:$1. Now, with this bailout and the subsequent inflation, the dollar is going to see some free-fall, but is there an alternate holding currency? Is it back to gold as a standard? Wonder how this is going to play out.

Dorian Wales said...

Just "stumbled" on to your blog. Looks promising. Keep up the good work! Dorian

Tapan said...

Thanks Dorian.
Ann: Nice questions. These 3 things: $, Gold and Oil sometimes go hand in hand with one of the other and inverse to the third one.
With the flattening of the world, one consequence is that it could be a global economic slowdown.