WEBVTT

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In the last video, we saw a
reality where the currency

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between, or the exchange rate
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,
China was shipping more

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goods-- in terms of whether you
measure it in dollars or

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Yuan --was shipping more to
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
imbalance in the currencies.

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The Yuan became more expensive,
or the dollar

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became cheaper, until eventually
Chinese goods got

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

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and U.S. goods got cheap enough,
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
wanted to have balanced trade,

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

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

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already developed, we want to
have an industrial base, we

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want to have a market to
sell our goods to.

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We want to export more to
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
that they saw, they did not

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like the currency, they
did not like the

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Yuan getting expensive.

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

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a little bit --so the Chinese
government wants to keep

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currency exchange pegged at-- I
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
want this situation to

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keep on going forever, that
China keeps shipping more to

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

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to go even more, that China
keeps shipping more and more

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to the U.S. than the U.S. ships
to China so that China

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could build its industrial
base.

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

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United States' industrial
base gets depleted.

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That they keep manufacturing
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
more videos, it's not it's not

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clear that it's 100%
one-sided.

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There's actually some benefits
that the United States also

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

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It's a little bit
more involved.

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So how could they do this?

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Let's just say that the Chinese
government wants this

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reality, and they want
this reality frozen.

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They do not want the reality
where the trade balances.

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How could they intervene in
currency markets so that this

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doesn't change?

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Because, as we said, if more
Chinese goods are being

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bought, there's more demand
for Yuan, the Yuan should

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appreciate, the dollar
should go down.

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But how do you get both?

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How do you have your cake
and eat it too?

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How do you get more goods being
shipped to the United

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States than back to China
without the Yuan appreciating?

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And the way you do that,
there's the Chinese

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government, or maybe in
particular we could talk about

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the Chinese Central Bank.

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The Chinese Central Bank, which
is a part of the Chinese

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government can say, hey, to
keep our Yuan devalued, we

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will print money.

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So let me draw the Chinese
Central Bank.

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Let me do this in a new color.

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And what they do, they can
actually just print money.

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

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videos where we had
this imbalance.

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There was demand for
CNY 1,000, but only

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supply of CNY 500.

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So what they can do is
just equalize this.

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They could just print CNY 500
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
$100 that are trying to be

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

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were to be constant.

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So there's demand
for CNY 1,000.

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Before the Chinese Central Bank
got involved, there was

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only a CNY 500 supply.

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

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

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going to produce another
CNY 500.

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

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what they printed
into dollars.

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So just like that, you
now have a balance

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of supply and demand.

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

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

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to be converted into,
I guess, CNY 1,000.

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

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The exchange rate
would change.

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

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Now, and that would work and
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
of catch here.

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

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Well, they keep shipping more to
the United States then the

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United States is shipping
to China.

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These guys keep having to print
Yuan and buy dollars

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with those Yuan in
order to keep the

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Chinese currency cheap.

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So these people are going to
keep accumulating dollars.

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They just keep printing Yuan
and then they just keep

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accumulating dollars.

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

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starts accumulating many,
many dollars.

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They can they can print Yuan
as much as they want, those

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Yuan, they trade them into
dollars and then these guys

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start accumulating more and
more dollars over here.

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

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the longer they want it to
occur, the more dollars that

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they will have to accumulate.

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So they have to just keep
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
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
about what they actually

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

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

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these dollars, and then what
effect that actually might

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have on the United
States economy.

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

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

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scenario to unwind once
it gets started.