Finance and capital markets
- Currency exchange introduction
- Currency effect on trade
- Currency effect on trade review
- Pegging the yuan
- Chinese Central Bank buying treasuries
- American-Chinese debt loop
- Debt loops rationale and effects
- China keeps peg but diversifies holdings
- Carry trade basics
- Comparing GDP among countries
China keeps peg but diversifies holdings. Created by Sal Khan.
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- It seems the GBP has traditionally been more valuable relative to many other currencies (e.g. compared to the US, it has often had 2x the value of the dollar). Is this because the UK continues to export much more than it imports? I'm trying to understand the idea of relative value of currency. I guess my question is: Why do currencies not eventually stabilize to 1:1 (as is suggested by earlier videos on pegging the yuan)? Is it because of a fixed import/export ratio between 2 countries? Thanks!(9 votes)
- The answer to your question is:
The closest thing we have to a worldwide currency is silver (Pound sterling originally meant one pound of sterling (92.5%) silver alloy and dollar is a word derived from the dutch, taler and again refers to silver) or gold. Gold is especially useful as a means of exchange as it is in relatively short supply (all the gold ever mined would fit in three olympic sized swimming pools), it does not tarnish, corrode or react it simply remains unchanged (unlike say cocoa beans which will eventually decompose). There is also no use for gold other than as jewellery, whilst silver is used in photography and electronics.
Governments historically have devalued their currency towards the end - Ancient Rome started mixing other metals with silver in their coins as the empire wained and silver became in short supply. UK moved off the silver standard in 1920 (meaning you could change your note for silver or gold at the Bank of England) and Nixon in 1971 closed the gold window on exchanging dollars for gold.
Without some finite limit to the amount of money which can exist there can ultimately be no stability as the US government can now just run the printing presses and make dollars out of nothing.
When the UK was the economic hegemonic power (the superpower) everyone traded in pounds and the number of pounds was limited to the amount of silver owned by the bank of England. When the US was the economic hegemonic power the amount of dollars was limited to the amount of gold in the federal reserve and everyone traded in dollars.
The UK moved away from the silver standard and lost it's position, the US moved away from the gold standard and lost it's position we are now in a similar position to the 1920's where there was a war between US and Germany to determine who would next be economic hegemon.
Now the US has moved away from holding assets to back its currency and so central banks around the world are buying up silver and gold.
As the US has printed an extra $1 trillion in the past two years the value of the finite assets (gold, silver, wheat, cocoa, etc.) has gone up because there is a greater supply of money for the same supply of goods.
As the value of money can be manipulated then there is a profit incentive for banks to use it instead of gold as it is easier to confuse people with money rather than with gold.
Hopefully Sal might do a video on how we moved away from trading in gold to promissory notes for gold stored in bank vaults to government promissory notes in the eighteenth century.(7 votes)
Can you explain more about why Great Britain is buying the US dollar to keep its currency low, and not some other currency? And why would GB buy another country's currency to keep the pound low instead of printing more of it's own currency? Also are there any books that you would recommend about currency? Thanks so much! :)(5 votes)
- Well, the UK does print more of its own currency. China has a huge supply of US dollars because of the trade imbalence. It spends these dollars to buy UK pounds. So, UK pound is becoming more expensive in terms of dollars. This is why UK buys US dollars in exchange for its own currency that it prints; it is only by increasing demand for dollar and increasing supply of domestic currency that US/UK exchange rate will stay stable.(10 votes)
- Why does China need to diversify its holdings?? Is it that the Chinese want to diversify their risk and therefore they buy pounds? If so- if UK goes on to buy dollars again, doesnt it mean that the Chinese are ultimately in a way buying dollars(i mean US bonds). How then would risk be reduced?(5 votes)
- Risk is not reduced but the risk is spread beyond the US/China to all countries in the world - now the UK has a vested interest in supporting the USD exchange rate and the Yuan exchange rate, so too does the Euro and all Eurozone nations when the Chinese helped bailout Greece, so too does Brazil and Mexico and Australia who all rely on Chinese investment.
See Sal's video on systemic failure of the banking system leading to the collapse of Lehmann Brothers etc. and think systemic failure of governments.(3 votes)
- Nice video! Question, though: how much is the UK Pound worth to the US Dollar?(2 votes)
- What I didn't get from this series of video's is how the Chinese Central Bank is just printing money. Where is that coming from? Is the cost for printing more money just higher inflation?(2 votes)
- Not necessarily,
more money = inflation when more money = more consumption,
if more money = more jobs and more factories,
then more money = more investment and low unemployment.(2 votes)
- I checked the government web page, looks like now United kingdom data are different, instead of 511 bn i see now 242,5 bn, why?(2 votes)
- 4:12Are chinese buying UK assets by paying in dollars? If so, why would UK allow to be paid in dollars instead of pounds/euro?(1 vote)
- It does not matter what currency they use to actually do the deal. Either they give the seller dollars, and the seller exchanges them to whatever currency he wants, or they exchange some of their dollars for pounds, and give the seller pounds. Dollars and pounds and euros are constantly trading on world markets.
The issue is that if the Chinese have a lot of dollars and want to buy stuff in other currencies, SOMEONE has to buy the dollars and sell the other currencies, and that will put downward pressure on the dollar simply because the Chinese are increasing the supply of them.(2 votes)
- hey guys,
China buying U.K holdings and thus U.K buying U.S holdings so that their currency stays fairly constant as Sal mentioned. wouldn't this result in the same effect for China? i.e if China stops buy U.K holdings then U.K will stop buying U.S holdings and that will have same effect as China stop buying U.S holdings.
idk how its any different and the benefits of China doing so??(1 vote)
- The reason for this is that China can now have more diversified holdings. China is not as dependent on the U.S., because not as much of the People's Bank of China is controlled by the U.S.(2 votes)
- Question: Why are all these private bankers - including the private bankers that own the Federal Reserve Bank - allowed to create all the money they want out of thin air?
Is it not true that all this mumbo jumbo simply hides the fact that in the USA alone, the private bankers have created somewhere between 1 to 1.5 Quadrillion (15 zeros) of money out of thin air?!
Banks do nothing more than create for themselves bogus reasons why they should be allowed to create money out of thin air!(1 vote)
- Note: The Federal Reserve Bank is a private bank - you will not find it listed in the Government Blue Pages; rather it is in the Yellow Pages next to Federal Express!
This year Goldman Sachs admitted to creating over 617 Trillion in worthless phony securities & Chase over 100 trillion (naturally there were no prosecutions)
So why don't we stop here spreading the garbage about how currency manipulation is in some way good for the economy, or trade... or anything else!
Cut the crap!
FACT: All of this is simply a way bankers can permit themselves to create all the phony money they want out of thin air! Period!
You won't get wise with the sleep still inside your eyes!
You don't get something for nothing - You can't even have freedom for free!(1 vote)
We know the US is running a relatively large trade deficit relative to China in 2009. We imported $260 billion more than we exported to China. And we know from the last few videos that the way that China is keeping their currency from appreciating because of this trade imbalance is that they're going out there, printing money, and using that yuan to buy dollar assets. And we see over here in 2006, 2007, 2008, major increases in US assets. But what's a little bit more interesting is that, in 2009, we didn't have a huge increase. It's pretty large by any standard, but not large enough to offset the actual trade imbalance. So how did China keep its currency peg? Even better, let's actually look at-- because this isn't just the Chinese government. These are just ownership of US assets by Chinese nationals. But we can actually look at the major foreign holders of treasury securities. This actually comes from the Treasury's own website. And it tells us how much different central banks, how many the treasury securities they are actually holding. And you can see China is the biggest holder. If you go to November of 2009, it has $929 billion. This is the People's Bank of China. It has $929 billion worth of US treasuries. But what's interesting here, it is the largest holder, but as we go from November of 2009 to November of 2010 their holdings actually went down. Not by a ton. They're still right around $900 billion. But they went down. So given the fact that we have this trade deficit, given the fact that they want to peg their currency, and that they want to print money, and go buy other people's assets, how did this happen? How did the number of treasuries actually go down? And actually how were they able to reduce the amount of all US assets that they bought? Now, the treasury answer is they don't have to just buy treasuries. They could by other US assets, but even over here we saw that they didn't buy a ton of other US assets. And a clue to what's happening here, and this isn't exactly what's necessarily happening, it's far more complicated than I could explain in one video, is that we do see other countries whose US Treasury holdings are increasing dramatically over the course of 2010. In particular, you see the United Kingdom. Their holdings have grown from $155 billion to $500 billion over the course of 2010. And this is relative. The United Kingdom does not have a significant trade imbalance one way or the other with the United States. And we actually see we actually see that it's currency really didn't change much over the course of 2010. It's been about the same. And this looks more dramatic than it really is. So the answer, and it could be much more complicated than this, is that China has decided to somewhat diversify from buying US treasuries, and in particular US assets. And maybe they're diversifying to the pound sterling, maybe they're diversifying to the Euro. And so they will start buying, say, British assets. But the British don't want their currency to appreciate too much because then they'll suffer trade consequences. Their goods will be too expensive. And so the British Central Bank would then want to maybe, so that their currency does not appreciate relative to the dollar, they'll want to go and buy American assets. And that's what it looks like is actually happening. And maybe one other small point is that the Chinese government has slowly allowed its currency to appreciate. But the appreciation isn't as dramatic as this chart makes it look. This is 6.8 yuan to the dollar at the beginning of 2010 to about 6.6. And we're not getting close to 0 here. This is just from 6.8 to 6.6. But over the last several years they have slowly been allowing their currency to appreciate. But what's really happening is that they're diversifying away from dollar assets. But when they buy those other currencies those people are going to want to buy dollar assets to keep their currency from moving too much.