Japan and China Selling U.S. Assets: How It Spells Trouble for the Federal Debt
Note: This is an article variation of Peter St Onge's video, Japan and China selling U.S. assets.
As the global economic gears grind in seemingly unpredictable ways, a new concern has emerged regarding the stability of America's federal debt. According to Peter St Onge, Ph.D., the plummeting values of the Japanese Yen and the Chinese Yuan could have rippling effects that imperil the U.S. debt market.
The Great Plunge
"The Japanese Yen and the Chinese Yuan are both plummeting," says St Onge. "And it's not just a one-off event; it's a protracted crash." The fall of the Yen has been severe—nearly 7% in the last two months, making for a total fall of almost 40% since the start of the pandemic. The Chinese Yuan hasn't fared much better, losing 10% since May. The implications? Both countries, which are significant holders of U.S. debt, might be compelled to sell off their American assets.
The Fed's Role
The catalyst for these currency plummets lies across the Pacific. St Onge points out that the market now expects the U.S. Federal Reserve to keep interest rates higher for longer, which drains money from countries like China and Japan, which offer much lower interest rates. In Japan, the rates are actually negative, at -0.1%. In China, they hover around 3.25%.
Government's Hasty Actions
The natural reaction for both the Japanese and Chinese governments is to swing into action by selling their U.S. debt to soak up their declining currencies. Japan's top foreign exchange official, Masato Kanda, issued a desperate plea against the rapid decline in the Yen. Meanwhile, China has ordered its private banks to sell their dollar assets and buy up the Yuan.
Currency and Trade Dynamics
"Japan and China usually prefer weaker currencies to boost their exports," St Onge notes. "However, the current situation has inverted that dynamic." When the currency is too weak, imports get expensive, and that's a problem for countries like Japan that import nearly 100% of its gasoline. Wages in Japan are about half of those in the U.S., so the weaker Yen makes gasoline prohibitively expensive for the average citizen.
St Onge offers a rather grim prediction: "U.S. data is telling the Fed to keep it up, China is actually cutting rates to stave off financial collapse, and Japan is far from the Fed's rate of 5.25%." He concludes that more investors will likely flee China and Japan, leading to the U.S. Treasury losing its two best customers. This could push the Federal Reserve to reconsider its policy of selling U.S. debt to fight inflation, perhaps driving inflation rates back toward double digits.
In a world of ever-changing economic landscapes, St Onge's analysis serves as a potent reminder of the complex web that ties global economies together. To stay updated on this and other financial intricacies, don't forget to subscribe to Peter St. Onge's channel.