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Current time:0:00Total duration:2:36

Video transcript

let's review how China can maintain a trade imbalance with the United States by artificially keeping its currency weak so we had a simplified scenario where we had an exchange rate of six un per one dollar we had a Chinese manufacturer selling 50 million dollars worth of microwaves in the United States we had a US software producer selling 20 million dollars worth of software in China if we had a floating exchange rate the supply of dollars is much greater than the demand for dollars so that the dollar would become weaker it would become weaker and everyone would become stronger and that would resolve the trade imbalance we saw that the People's Bank of China does not want that to happen so what they do is they artificially create they artificially create demand for dollars to keep it strong they do that by essentially just printing one and converting it to dollars and that obviously also increases the supply of yuan so it makes that less expensive it weakens the Wan strengthens the dollar now they're not just going to sit on literally cash with those dollar bills they'll actually want to lend them out so what this does is it increases the supply increases the supply of money for loans supply of loans well if you increase the amount of dollars that can be lent that's going to lower the cost of borrowing dollars so the effect is you are lowering borrowing costs and if you're lowering borrowing costs that just means interest is less and it's easier to use your credit card either for the year the US government or if you're the US consumer now if things if debt becomes cheaper if that is cheaper debt is cheaper or we have lower interest rates if you have a lower interest rate on your credit card that means that you're just going to consume more consume more so the end result the big picture of what's happening here in order to maintain a trade imbalance in order to keep its currency pegged you have the Chinese central bank essentially essentially Lent printing money converting it to dollars and then lending that to the US government and consumer and what are they going to do with it essentially they're going to end up buying more Chinese goods in our simplified example they'll buy even more microwaves this is Salman Khan of the Khan Academy for CNBC