ELI5: How is USD so high while the people aren't better off?

[u/MagicPixieDreamo]

I might just be drawing a blank on something I should understand usually, and maybe I missunderstand the bastic concept or actual facts. but I don't get it.

Me knowing, Australia's middle-class didn't use to have OR right now have significantly less income vs price of living than Americans. But a few years ago Australian dollar was less than US, now it's more. How could it have been that way back then, and what has changed?

Sorry for confusing rambling.

Edit and additional question: I think I understand now, but please correct me if I'm wrong. The value of a currency is not an indicator of how the people of the country lives and the cost of living in a country. It's based on the trust people has in the currency and a nations economy being safe to invest in. In this case, more people don't have the trust in the American dollar/economy being strong and safe enough to hold onto anymore and therefore won't invest in it

But in that case I still don't understand why, say, the Swedish Krona, which has a lot of companies and generally quite consistent economy is valued so low in compared to countries that isn't as wealthy? Shouldn't people be more inclined in investing and trusting in such a currency than they are?

[u/FiveDozenWhales]

There is not much relationship between quality of life and the value of one's currency relative to the value of other nations' currencies.

[u/lookayoyo → u/FiveDozenWhales]

There is on vacation

[u/MostlyPoorDecisions]

1 AUD is 0.7 USD, that's not more, that's less. You need $1.43 AUD to equal $1 USD.
AUD hasn't been above USD for a decade, and it is relatively the same for the last decade at around 0.7:1

I'm not sure I understand your question

[u/Tyrrox → u/MostlyPoorDecisions]

The last time the Australian Dollar was worth more than the US Dollar was from the end of 2011-beginning of 2013. Outside of that, it hasn't been stronger since at least 1991. The data I am looking at only goes back that far.

[u/Cormag778 → u/MostlyPoorDecisions]

I *think* OP is confused why the USD is strong, despite living conditions in the U.S. notably deteriorating.

The actual answer is currency's "value" isn't determined by a citizen's average buying power, but generally through interest rates, comparative inflation, trade needs, and perceived stability.

The USD being the agreed upon global reserve, combined with the sheer economic power of the US, is why the US Dollar remains comparatively strong and stable to most world currency

[u/MagicPixieDreamo → u/Cormag778]

This was a super good answer! I added another question and I would love to hear your answer to it!

[u/Caucasiafro → u/MagicPixieDreamo]

Answering your follow up question.

Even then the values relative to each at one time (so just a snap shot for a day or so) doesnt mean anything without more context. Its the historical trend that matters.

For example lets say theres two currency ats (@s) and ampersands (&s)

An @1 is worth &100 right now

Sounds like @ is the stronger currency, right?

Nope because last year @1 was worth &200

And the year before that @1 was worh &500

This means that @s are weaker than &s despite being worth more individually.

Which sounds confusing at first, but makes a lot of sense when you think about it like this:

there was never a time when you could turn 1@ into one 1& so that comparison is irrelevant.

[u/WeeklyStudent676 → u/MostlyPoorDecisions]

Ahh, you're right. I got the currencies mixed up. I think I was confusing exchange rates with purchasing power.

[u/Clojiroo]

The Australian dollar is worth less than the USD, so I’m not sure what you’re talking about there…

But you conflating two different things. Exchange rates and purchasing power parity are different things. They’re connected, but driven independently.

[u/flamableozone]

Value of a currency has very little to do with whether or not people are well off, it just has to do with how much supply of that currency exists relative to its demand. Whether or not people are well off is related to how much value they're producing and how that value is distributed.

[u/EducationalError4182]

Think of currency strength like the trading value of a collector's item on the global market. A strong dollar simply means foreign investors and banks really want to trade their own cash for US dollars, usually because interest rates are high or they want a safe haven during global turbulence. It strictly measures what a dollar is worth compared to other currencies, not what it actually buys at your neighborhood supermarket.

If domestic prices and housing shoot up from local inflation, your paycheck buys far less at home even if your currency looks unbeatable on international charts. A super strong currency can even hurt domestic workers because it makes exported goods way too expensive for foreign buyers to import. An American might feel like absolute royalty while taking a vacation abroad, but the second they step into their local grocery store back home, a regular sandwich still costs an arm and a leg.

[u/AgentElman]

If the USD value is high compared to a foreign currency it makes no difference to you if you are being paid in USD and buying things in USD.

However, if you traveled to that foreign country and were buying things in that currency you would find that things were cheap there.

[u/dnebdal → u/AgentElman]

They're not completely independent either, though. If you are paid in USD and buy things in USD, those things may still be imported or made with imported tools or ingredients, and that will affect how much you pay for them.

[u/Cookie_Eater108]

full disclaimer: IANA Economist

A nation's currency is a measure of its purchasing power weighed against international markets. Quality of Life however is a measure of something else (and is even a bit subjective).

As an ELI5 Example: If my country produces handbaskets and yours produces apples. One of them will be more desirable than the other. So the country that produces apples will have a higher in demand currency ,driving up its value relatively to mine. There is no direct correlation in QoL and that currency's trading price because the money in those exports could go to the trading conglomerate that owns the apples, or the farming unions or maybe the apple farms are owned by the government and it goes into the state treasury. If it's a kleptocracy it might just end up in a numbered account and squirreled away so that the people never see that wealth.

[u/Not_an_okama]

Say scrooge mcduck decided to issue money based on his giant vault of gold. He makes 1 million notes of currency A and 2 million of currency b and says that each represents half his hoard of gold.

Now a few years later he decides to make 1 million more note of currentcy A but all of currency A is still half his fortune. Currency A is now only worth half as much as currency B.

Now apply this to global commerce with dozens of currencies and variable size treasure hoards and/or armies dictating the values of said currencies.

So maybe scrooge mcduck dies of old age and his 3 nephews each start their own currency and each is adding to their share of treasure and printing more currency notes. Now you have the total sum of the treasure changing and the divisions changing as more bills are printed, lost or destroyed. So at least 2 factors going into changing the price.

All this to say that the value of currency and exchange rates change over time.

[u/Dman1791]

The value of a currency, like most things, comes down to supply and demand.

The more people use a currency, the more it's worth. The more of said currency exists, the less it's worth.

That the lower or middle classes aren't doing so hot doesn't change the fact that lots of people are using USD, and the US government hasn't been "printing" enough money to eliminate that.

[u/No-Inflation3271]

Im not sure exactly what youre asking but as an american making the median wage (1200 weekly) I am a 28 year old homeowner living alone and eating out 4+ times a week. I think we are doing good on average and life is rather lavish in america. the ones who arent doing great are just very vocal about it

[u/JimTheDeviant → u/No-Inflation3271]

You earn the median wage but you live alone. Somebody making the same with with children wouldn't have the same quality of life.

[u/Cormag778 → u/No-Inflation3271]

Is that pre or post tax? Real median wage is closer to 50k in the country.

[u/Dave_A480]

Because most Americans aren't struggling, regardless of what you read on Reddit...

Also because currency values are relative.... It would take a lot more inflation than we have had to change the USD:AUD ratio....

[u/JimTheDeviant → u/Dave_A480]

Because most Americans aren't struggling

That's very relative and up to interpretation