0:00:00.600,0:00:03.430
In the last video, we saw a[br]reality where the currency

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between, or the exchange rate[br]between, the Yuan and the

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dollar started off at 10 to 1.

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And at that exchange rate,[br]China was shipping more

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goods-- in terms of whether you[br]measure it in dollars or

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Yuan --was shipping more to[br]the U.S. than the U.S. was

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shipping to China.

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And because of that, we saw an[br]imbalance in the currencies.

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The Yuan became more expensive,[br]or the dollar

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became cheaper, until eventually[br]Chinese goods got

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expensive enough that there was[br]less demand in the U.S.

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and U.S. goods got cheap enough,[br]that there was more

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demand in China, that the trade

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actually came into balance.

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Now, that's OK if everyone[br]wanted to have balanced trade,

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but what if the Chinese[br]government didn't want that.

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They said, hey, we needed to[br]develop, the United States is

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already developed, we want to[br]have an industrial base, we

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want to have a market to[br]sell our goods to.

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We want to export more to[br]the United States than

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we import from them.

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We want export-led growth.

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So they don't like the dynamic[br]that they saw, they did not

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like the currency, they[br]did not like the

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Yuan getting expensive.

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So let's say the Chinese[br]government-- let me scroll up

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a little bit --so the Chinese[br]government wants to keep

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currency exchange pegged at-- I[br]ran out of space over there

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--at CNY 10 per dollar.

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And they want that because they[br]want this situation to

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keep on going forever, that[br]China keeps shipping more to

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the U.S. than the U.S. ships to[br]China, or maybe they wanted

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to go even more, that China[br]keeps shipping more and more

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to the U.S. than the U.S. ships[br]to China so that China

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could build its industrial[br]base.

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And, I guess the more sinister[br]view is also so that the

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United States' industrial[br]base gets depleted.

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That they keep manufacturing[br]things cheaper and cheaper and

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cheaper, and then United States

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manufacturers can't compete.

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And we'll talk about this in[br]more videos, it's not it's not

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clear that it's 100%[br]one-sided.

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There's actually some benefits[br]that the United States also

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gets from this, and we'll[br]discuss that more.

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It's a little bit[br]more involved.

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So how could they do this?

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Let's just say that the Chinese[br]government wants this

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reality, and they want[br]this reality frozen.

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They do not want the reality[br]where the trade balances.

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How could they intervene in[br]currency markets so that this

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doesn't change?

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Because, as we said, if more[br]Chinese goods are being

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bought, there's more demand[br]for Yuan, the Yuan should

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appreciate, the dollar[br]should go down.

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But how do you get both?

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How do you have your cake[br]and eat it too?

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How do you get more goods being[br]shipped to the United

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States than back to China[br]without the Yuan appreciating?

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And the way you do that,[br]there's the Chinese

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government, or maybe in[br]particular we could talk about

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the Chinese Central Bank.

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The Chinese Central Bank, which[br]is a part of the Chinese

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government can say, hey, to[br]keep our Yuan devalued, we

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will print money.

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So let me draw the Chinese[br]Central Bank.

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Let me do this in a new color.

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And what they do, they can[br]actually just print money.

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So we had this scenario that I[br]had outlined in the last two

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videos where we had[br]this imbalance.

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There was demand for[br]CNY 1,000, but only

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supply of CNY 500.

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So what they can do is[br]just equalize this.

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They could just print CNY 500[br]and then try to convert that

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into dollars.

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So what just happened?

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Now all of a sudden, we have[br]$100 that are trying to be

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converted into roughly CNY 1,000[br]or if that exchange rate

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were to be constant.

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So there's demand[br]for CNY 1,000.

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Before the Chinese Central Bank[br]got involved, there was

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only a CNY 500 supply.

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But now the Chinese Central[br]Bank says, OK, there's a

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demand for CNY 1,000, there's[br]only CNY 500 supply, we're

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going to produce another[br]CNY 500.

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We literally can just print it,[br]and then they will convert

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what they printed[br]into dollars.

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So just like that, you[br]now have a balance

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of supply and demand.

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You have CNY 1,000, 500 here and[br]500 here that want to be

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converted into dollars, and then[br]you have $100 that want

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to be converted into,[br]I guess, CNY 1,000.

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So if they were to do this, the[br]currency wouldn't change.

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The exchange rate[br]would change.

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The supply and demand of the two[br]currencies would be equal.

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Now, and that would work and[br]frankly that's what they have

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been doing for some time now.

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But there's one kind[br]of catch here.

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The whole time that they're[br]doing this, what is happening?

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Well, they keep shipping more to[br]the United States then the

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United States is shipping[br]to China.

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These guys keep having to print[br]Yuan and buy dollars

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with those Yuan in[br]order to keep the

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Chinese currency cheap.

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So these people are going to[br]keep accumulating dollars.

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They just keep printing Yuan[br]and then they just keep

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accumulating dollars.

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Let me draw that over here, so[br]the Chinese Central Bank just

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starts accumulating many,[br]many dollars.

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They can they can print Yuan[br]as much as they want, those

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Yuan, they trade them into[br]dollars and then these guys

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start accumulating more and[br]more dollars over here.

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And the more that they want this[br]trade imbalance to occur,

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the longer they want it to[br]occur, the more dollars that

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they will have to accumulate.

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So they have to just keep[br]on doing it, they can't

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even stop doing it.

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They have to keep doing it in[br]order to keep the trade

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balance the way it is.

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And in the next video, I'll talk[br]about what they actually

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have to do with these dollars[br]because they actually won't

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just keep it in cash, what they[br]actually have to do with

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these dollars, and then what[br]effect that actually might

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have on the United[br]States economy.

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Then we could talk about how[br]this might unwind itself, but

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we'll find out it's actually[br]very difficult for this

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scenario to unwind once[br]it gets started.