Foreign exchange and trade
Pegging the Yuan How the Chinese Central Bank could peg the Yuan to the dollar by printing Yuan and buying dollars (building up a dollar reserve)
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- -
- 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.
- -
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At 5:31, how is the moon large enough to block the sun? Isn't the sun way larger?
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