subject: Why the Value of Your Savings Depends on China and Japan and What to Do About It [print this page] Why the Value of Your Savings Depends on China and Japan and What to Do About It
The value of the US dollar and savings evaluated in dollars is significantly dependent on China and Japan. Because the US Federal government spends more than it collects in tax revenues, it has to borrow 42 cents for every dollar it spends. And, China and Japan are the leading lenders to the US government.
The Federal government gets the money it spends either from taxes, borrowing, or printing new money. It's clear that if the government cannot borrow as much as it wants, it will need to raise taxes or print more money. Printing money causes inflation which rapidly lowers the buying power or value of your money.
Not only that, but US tax policies over past decades have encouraged manufacturers to move jobs abroad. This means that fewer goods are actually produced in the United States. You can easily verify that by looking in any store to see where the products on display are made. This causes us to import more goods than we can export. As a consequence, more dollars flood foreign markets to purchase goods for import into the United States. This further weakens the US dollar.
China and Japan are both major buyers of US debt and major sellers of manufactured goods to the United States. As of January 2011, China held $1.1 trillion and Japan held $886 billion in US debt. Increasing US debt and our trade deficit both work to weaken the US dollar. In 2009, for example, you would have to spend $7.24 in weaker dollars to buy what $1.00 would have bought in 1960.
This situation has not be overlooked by Congress. The Congressional Research Service noted in March of 2010 that "the fear that if foreigners suddenly decided to stop holding U.S. Treasury securities or decided to diversify their holdings, the dollar could plummet in value and interest rates would rise."
So, what can we expect of China and Japan in the future?
China's current evaluation of the dollar indicates that they believe the weakening of the dollar against other currencies will continue. Premier Wen Jiabao indicated a year ago in March that he was worried about the safety of China's investments in US dollars.
Japan, of course, is right now facing a major financial crisis due to the recent tsunami. The long term effects of recovery from this event are yet to be determined. But, it would not be hard to imagine that Japan could reevaluate its purchasing of US debt if it faces a long and arduous recovery process.
Both these situations should cause concern about the long term value of the dollar. If your savings are mostly invested in US securities, it might be time to diversify to other investment vehicles like gold or foreign stocks. This would give you more security over the long term value of your assets.
