I have always wonder why its so much stronger ? when you go to Japan, everything is cheaper in a sense and the U.S dollar means more in Japan. Why is that ?
In: Economics
I love this topic, so I want to present a bit longer of an answer:
1. First think about what currency represents – units of value. Before currency, if I made bread and you made wine, and I wanted your wine, I better hope you also wanted my bread at the same time, otherwise we’d have to find someone that had something you wanted and who wanted my bread and we could make a three way trade. Obviously difficult and not a good way to structure an economy. Currency is invented and we have shells that have no real functional value of their own, but they’re pretty and everyone wants them, and we each know that you’ll still want them a year from now, so I trade you my shell for your wine, then you can use your shell on whatever you want.
2. Eventually, gold and precious metals were discovered and everyone wants those. But the problem is what if it’s not pure gold? What if the weights are off. This leads to standardized currencies made out of precious metals. These would be weighed and known that this type of coin weighed this much and thus had such-and-such value.
3. But, holding all these metals got heavy and inconvenient, so we eventually developed paper currency. But paper isn’t valuable, so what gives? The gold is now being held in a secure location (bank) and whoever bears the note to the bank is entitled to exchange that for the preset amount of gold. Gold is held *in reserve*, so to speak (this is important for later).
4. Now, say the government needs to print more money (people are born and get jobs and create value for the economy, so we need more money to represent that added value). For a period of time, the US (and other countries) were on the Gold Standard, meaning that there had to be a direct link between the money printed and the gold stored by the government. However, for a massive country that is an international super power, it becomes difficult to do what we do with money and tie that back to gold, so we got off the gold standard and replaced it with *fiat money*. This essentially boils down to, “Don’t worry, we’re good for it”. The government believes it can corral a large enough force of men and weapons that if it ever had to make good on loans, it could do so. Now, we as citizens, and other nations in the world that trade with the US have implicitly agreed that the government can make good on any financial promise.
5. Now, how can the government be so sure? We have military bases stationed literally all over the world, many of them capable of wiping out small countries just with the resources on hand. We have the ability to take out the military targets of any nation on earth with little resistance in the span of days. We can get a workforce of engineers to anywhere on earth within a day, working to solve some problem. What does this mean practically speaking? We can be the biggest bully on the playground and force everyone to more or less play nice with each other, we can keep international shipping lanes that transport hundreds of billions of dollars worth of goods safe from pirates, all over the world. Because of this power, when we say we’re good for it, and that we will honor trades with us using the dollar, it has weight and meaning to it to others, just as if the Rock showed up to your elementary school and said he’d protect you from the bad kids, but you also had to be play nice.
6. Therefore, to many countries, having a dollar is just as valuable as having a gold nugget. Therefore, these countries store not (just) gold in reserve, but dollars (in the forms of government bonds, oftentimes), which is what makes the dollar the world’s *reserve currency*.
7. Now, there’s a problem in the US where politicians are abusing the fiat system to print more money to fund their personal/party agenda. All of those trillion dollar plus omnibus spending bills that congress keeps passing is in large part “paid” for by printing new money. Don’t worry, we’re good for it, they say. But at the same time, where we had approx. $1 trillion dollars worth of currency for our approx. $1 trillion dollars worth of value, now we have $2 trillion worth of currency for the same $1T of value. The currency has been inflated, making its value per dollar go down. Other countries might start to get worried. “The US could just print billions of dollars and pay me what they owe me, but those billions will be worth a fraction of what it was worth when I bought the bond.” They might not want to keep as many dollars in reserve if they think the dollar might become less valuable. They might want… Chinese yuan instead.
8. I think that’s what you were asking, but to specifically address comparing currencies, on the one hand, your dollar goes more in Japan for certain goods, but less in others. You may be able to buy sushi for less than you pay in the US, but watermelons are exorbitantly expensive in Japan compared to the US. On the other hand, how many yen you can trade a dollar for changes constantly based on macro factors – will the dollar crumble? If people believe that, the dollar is less valuable compared to the yen. Did Japan announce they are going to print more yen and double the amount in circulation, then the value of each individual yen will go down compared to the dollar, and so on.
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