Build wealth with a sinking dollar?
If you want to build wealth, you're numero uno problem will be a sinking dollar. If your wealth - everything you own - is denominated in dollars, then it's value has been sinking since at least 2001 (and arguably long before that). Too many people ignore this. Here's a brief picture of why this matters.
The stuff we buy in the U.S. mostly comes from outside the U.S. We pay the people who make this stuff in dollars. As the value of our US dollar goes down relative to their currency, we have to pay more for what they make.
But the government statistics say "inflation" has been low. Remember when the government speaks of inflation they mean price inflation. Price inflation is simply when the price for the same item goes up.
Part of the reason that price inflation hasn't been all that bad (according to the government's statistics) is that a lot of the stuff we buy is from Canada. People always talk about everything being made in China. But a lot of that is the sort of stuff we consumers buy in retail stores. There's a lot of other stuff that's made in Canada that we import to the U.S. In fact, our biggest trading partner in the whole world is Canada.
We don't always see "Made in Canada" labels because a lot of stuff that we import from Canada is manufactured goods like cars. A lot of automobiles are manufactured in Canada.
But now the Canadian dollar has been rising relative to the U.S dollar. It's done this before and fallen back. It kind of goes in fits and starts. But the trend now seems to be steadily building for the Canadian dollar (which once was worth only 70 cents) to soon be equal to the dollar. When that happens, it will mean a rise of about 43%!
But let's not forget about China altogether. Much of what we buy in stores has, for many years now, been made in China. And the dollar has held steady relative to the Chinese currency. It has held steady for a reason. China has not allowed the price of their currency to "cost" more in dollars (the technical description is that they "peg" their currency to the dollar). Without going into the details of foreign exchange and the way modern currencies are manipulated by government's and their central banks, let's just say that the Chinese can and have made sure that their currency stays steady in value to the dollar.
Why has this been important to the Chinese? Because they have been building their own economy by selling lots of goods to the U.S. Its a simple as that. And if their currency increases in value relative to the dollar, and it took more dollars to buy their goods, then their goods would no longer be the cheapest on the block. And we folks in the U.S. might not have bought as much of their stuff; which means that they might not have been able to goose their economic growth all these years by selling to us.
But that may be about to change. Here why.
The Chinese economy may have grown enough so that their own citizens have built up their own wealth. The Chinese save a lot of what they earn - almost 35% in some instances. So they've amassed wealth over all the years that they were selling us all that stuff. Now that they have some wealth and are earning higher incomes than what they were earning before, the Chinese may be buying more of their own goods. They'll be eating their own cooking, so to speak.
If that happens, then they will not have to keep their currency's value at the same value it's been relative to the dollar. If it goes up a bit, then it won't slow down their economy since the Chinese consumers themselves will pick up any slack caused by a rise (for us in the U.S.) in the price of Chinese goods.
Why wouldn't the Chinese just keep their currency the same as its been relative to the U.S. dollar? Because by letting their currency increase in value, the Chinese consumer will have a stronger, more valuable currency. And they will now be able to afford more of their own goods. It's a process that, once it starts, will kind of feed on itself. Stronger Chinese currency, more buying power for the Chinese consumer. They'll even be buying imported goods more and more (maybe even American stuff!), as their currency gains strength.
None of this is happening in a big way now. But there's been talk of it already for a few years, and it seems to be picking up steam now, as the dollar continues to sink relative to the world's other currencies. It could catch fire soon - or it could take a few more years.
Now what about building wealth with a sinking dollar? Can you build wealth with a sinking dollar? No. But the Chinese can.
For us in the U.S., it's long overdue for us to do something to protect our wealth from this sinking dollar. I wouldn't count on our government doing anything to reverse this trend anytime soon. And the demand for our poor dollar seems to be slowly waning around the world.
I'll talk more about what you can do to protect yourself in the future posts.
The stuff we buy in the U.S. mostly comes from outside the U.S. We pay the people who make this stuff in dollars. As the value of our US dollar goes down relative to their currency, we have to pay more for what they make.
But the government statistics say "inflation" has been low. Remember when the government speaks of inflation they mean price inflation. Price inflation is simply when the price for the same item goes up.
Part of the reason that price inflation hasn't been all that bad (according to the government's statistics) is that a lot of the stuff we buy is from Canada. People always talk about everything being made in China. But a lot of that is the sort of stuff we consumers buy in retail stores. There's a lot of other stuff that's made in Canada that we import to the U.S. In fact, our biggest trading partner in the whole world is Canada.
We don't always see "Made in Canada" labels because a lot of stuff that we import from Canada is manufactured goods like cars. A lot of automobiles are manufactured in Canada.
But now the Canadian dollar has been rising relative to the U.S dollar. It's done this before and fallen back. It kind of goes in fits and starts. But the trend now seems to be steadily building for the Canadian dollar (which once was worth only 70 cents) to soon be equal to the dollar. When that happens, it will mean a rise of about 43%!
But let's not forget about China altogether. Much of what we buy in stores has, for many years now, been made in China. And the dollar has held steady relative to the Chinese currency. It has held steady for a reason. China has not allowed the price of their currency to "cost" more in dollars (the technical description is that they "peg" their currency to the dollar). Without going into the details of foreign exchange and the way modern currencies are manipulated by government's and their central banks, let's just say that the Chinese can and have made sure that their currency stays steady in value to the dollar.
Why has this been important to the Chinese? Because they have been building their own economy by selling lots of goods to the U.S. Its a simple as that. And if their currency increases in value relative to the dollar, and it took more dollars to buy their goods, then their goods would no longer be the cheapest on the block. And we folks in the U.S. might not have bought as much of their stuff; which means that they might not have been able to goose their economic growth all these years by selling to us.
But that may be about to change. Here why.
The Chinese economy may have grown enough so that their own citizens have built up their own wealth. The Chinese save a lot of what they earn - almost 35% in some instances. So they've amassed wealth over all the years that they were selling us all that stuff. Now that they have some wealth and are earning higher incomes than what they were earning before, the Chinese may be buying more of their own goods. They'll be eating their own cooking, so to speak.
If that happens, then they will not have to keep their currency's value at the same value it's been relative to the dollar. If it goes up a bit, then it won't slow down their economy since the Chinese consumers themselves will pick up any slack caused by a rise (for us in the U.S.) in the price of Chinese goods.
Why wouldn't the Chinese just keep their currency the same as its been relative to the U.S. dollar? Because by letting their currency increase in value, the Chinese consumer will have a stronger, more valuable currency. And they will now be able to afford more of their own goods. It's a process that, once it starts, will kind of feed on itself. Stronger Chinese currency, more buying power for the Chinese consumer. They'll even be buying imported goods more and more (maybe even American stuff!), as their currency gains strength.
None of this is happening in a big way now. But there's been talk of it already for a few years, and it seems to be picking up steam now, as the dollar continues to sink relative to the world's other currencies. It could catch fire soon - or it could take a few more years.
Now what about building wealth with a sinking dollar? Can you build wealth with a sinking dollar? No. But the Chinese can.
For us in the U.S., it's long overdue for us to do something to protect our wealth from this sinking dollar. I wouldn't count on our government doing anything to reverse this trend anytime soon. And the demand for our poor dollar seems to be slowly waning around the world.
I'll talk more about what you can do to protect yourself in the future posts.
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