In the last video, we saw a reality where the currency
between, or the exchange rate between, the Yuan and the
dollar started off at 10 to 1.
And at that exchange rate, China was shipping more
goods-- in terms of whether you measure it in dollars or
Yuan --was shipping more to the U.S. than the U.S. was
shipping to China.
And because of that, we saw an imbalance in the currencies.
The Yuan became more expensive, or the dollar
became cheaper, until eventually Chinese goods got
expensive enough that there was less demand in the U.S.
and U.S. goods got cheap enough, that there was more
demand in China, that the trade
actually came into balance.
Now, that's OK if everyone wanted to have balanced trade,
but what if the Chinese government didn't want that.
They said, hey, we needed to develop, the United States is
already developed, we want to have an industrial base, we
want to have a market to sell our goods to.
We want to export more to the United States than
we import from them.
We want export-led growth.
So they don't like the dynamic that they saw, they did not
like the currency, they did not like the
Yuan getting expensive.
So let's say the Chinese government-- let me scroll up
a little bit --so the Chinese government wants to keep
currency exchange pegged at-- I ran out of space over there
--at CNY 10 per dollar.
And they want that because they want this situation to
keep on going forever, that China keeps shipping more to
the U.S. than the U.S. ships to China, or maybe they wanted
to go even more, that China keeps shipping more and more
to the U.S. than the U.S. ships to China so that China
could build its industrial base.
And, I guess the more sinister view is also so that the
United States' industrial base gets depleted.
That they keep manufacturing things cheaper and cheaper and
cheaper, and then United States
manufacturers can't compete.
And we'll talk about this in more videos, it's not it's not
clear that it's 100% one-sided.
There's actually some benefits that the United States also
gets from this, and we'll discuss that more.
It's a little bit more involved.
So how could they do this?
Let's just say that the Chinese government wants this
reality, and they want this reality frozen.
They do not want the reality where the trade balances.
How could they intervene in currency markets so that this
doesn't change?
Because, as we said, if more Chinese goods are being
bought, there's more demand for Yuan, the Yuan should
appreciate, the dollar should go down.
But how do you get both?
How do you have your cake and eat it too?
How do you get more goods being shipped to the United
States than back to China without the Yuan appreciating?
And the way you do that, there's the Chinese
government, or maybe in particular we could talk about
the Chinese Central Bank.
The Chinese Central Bank, which is a part of the Chinese
government can say, hey, to keep our Yuan devalued, we
will print money.
So let me draw the Chinese Central Bank.
Let me do this in a new color.
And what they do, they can actually just print money.
So we had this scenario that I had outlined in the last two
videos where we had this imbalance.
There was demand for CNY 1,000, but only
supply of CNY 500.
So what they can do is just equalize this.
They could just print CNY 500 and then try to convert that
into dollars.
So what just happened?
Now all of a sudden, we have $100 that are trying to be
converted into roughly CNY 1,000 or if that exchange rate
were to be constant.
So there's demand for CNY 1,000.
Before the Chinese Central Bank got involved, there was
only a CNY 500 supply.
But now the Chinese Central Bank says, OK, there's a
demand for CNY 1,000, there's only CNY 500 supply, we're
going to produce another CNY 500.
We literally can just print it, and then they will convert
what they printed into dollars.
So just like that, you now have a balance
of supply and demand.
You have CNY 1,000, 500 here and 500 here that want to be
converted into dollars, and then you have $100 that want
to be converted into, I guess, CNY 1,000.
So if they were to do this, the currency wouldn't change.
The exchange rate would change.
The supply and demand of the two currencies would be equal.
Now, and that would work and frankly that's what they have
been doing for some time now.
But there's one kind of catch here.
The whole time that they're doing this, what is happening?
Well, they keep shipping more to the United States then the
United States is shipping to China.
These guys keep having to print Yuan and buy dollars
with those Yuan in order to keep the
Chinese currency cheap.
So these people are going to keep accumulating dollars.
They just keep printing Yuan and then they just keep
accumulating dollars.
Let me draw that over here, so the Chinese Central Bank just
starts accumulating many, many dollars.
They can they can print Yuan as much as they want, those
Yuan, they trade them into dollars and then these guys
start accumulating more and more dollars over here.
And the more that they want this trade imbalance to occur,
the longer they want it to occur, the more dollars that
they will have to accumulate.
So they have to just keep on doing it, they can't
even stop doing it.
They have to keep doing it in order to keep the trade
balance the way it is.
And in the next video, I'll talk about what they actually
have to do with these dollars because they actually won't
just keep it in cash, what they actually have to do with
these dollars, and then what effect that actually might
have on the United States economy.
Then we could talk about how this might unwind itself, but
we'll find out it's actually very difficult for this
scenario to unwind once it gets started.