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Current time:0:00Total duration:12:24

Video transcript

now that we have a general layout in our minds of how all of the mechanics are fitting together what I want to do in this video is discuss a little bit about why the different actors would do what they are how they could benefit or get hurt from this cycle and really why it's so hard to unwound each of the actors why it's so hard for them to unwind themselves from this scenario and where I finished off this last video I talked about more cash being in American pockets because of all of because of essentially debt being cheap or government can spend more money lower taxes and I said no that's more money for to buy Chinese products but it's in general more money just for Americans to spend on each other just to spend on each other they might buy each other's houses or buy each other services so in a lot of ways it does stimulate the economy for any Keynes Ian's out there the more you spend that will stimulate the economy lower taxes for more conservatives that also can stimulate the economy and in general debt being cheaper lower interest rates all of these things stimulate the economy now normally when you're stimulating the economy like this and you have all of these factors you have the risk of higher inflation but remember inflation or at least price inflation is just the price of all of your goods but notice we're buying more and more cheaper goods and interest rates are low so to some degree this whole cycle also keeps it looks I guess you could say the the surface growth that the average American consumer experienced this looks very positive and inflation stays slow so we could also say money back money money to buy to buy each each other's each other's services each other's services now with that said let's think about why the different actors want to do this so let's think about it from the Chinese perspective let's think about it from the Chinese perspective so if you are China and you're starting off you are a real communist country maybe 30 years ago and then you start to have market-based reforms and you really want to enter the developing world but you don't have the industrial base in the late 70s or early 80s to really compete with the German in the Americas or the end of Japan's West the Americans in the United States on their terms so one advantage of export-led growth export-led growth is when you're just beginning to develop maybe you have a more well you have a less developed Society you have less of an industrial base so you have export led growth you can actually build you actually will encourage investment in factories that can go and produce things for the developed world so for for the developed world and by keeping your currency low by artificially keeping your currency low and let me be clear a lot of which just standard free trade labor costs are going to be cheaper in a place like China or India that has a lower standard of living so there would be with just straight-up free trade with no manipulation of currency you would have things that would move offshore manufacturing and services and move offshore but if you supercharge it if you make it even cheaper to manufacture to do business in China it'll just accelerate the investment in production in China so this export led growth so let me put it this way let me put it this way artificially artificially suppressed currency and this also happened with Japan after World War two artificial suppressed currency and to some degree we wanted that because we wanted Japan to become intertwined with the United States we wanted it to be successful we saw what happened to Germany after World War one where it became it was so economically unsuccessful that it was very easy for a character like Hitler to come to power so we learned our lesson we said you know it's never good for another country to not have an economic recovery so we actually did some degree many people think encourage it in Japan for anyway you artificially suppress a currency it makes your exports cheaper it makes your exports cheaper and which then encourages more investment in production at home so then that leads to more production at home more production at home and in this case what I'm talking about home I'm talking about China or and and more production at home means more investment at home more investment if you're producing more in China you're gonna have to build more factories more investment more investment at home and this means literally more jobs and and to a large degree capital for the Chinese people more jobs in capital more jobs and capital and as you become more efficient and more as you go down that development curve you will become more and more competitive over a whole series of industries and the idea is once once your people get developed enough once your people get developed enough you will have enough capital at home you will have enough of a consumer base at home that some of this extra capacity can then turn back to your own people that you can then use these Goods to sell to your own people to increase their standard of living so at first you are building washing machines and refrigerators for the United States and Europe and because you're building those washing machines those are jobs for Chinese and eventually once they have enough money once there's a critical mass of a middle-class Chinese that same capacity could be used to sell washing machines and refrigerators to the Chinese and it was written and it would raise their standard of living so manufacturing so it builds a manufacturing base so let me put it it builds a manufacturing base and a home market let me put it that way so this is kind of from from China's point of view it looks unambiguously good builds builds manufacturing base manufacturing base and and home can stand a domestic consumer market domestic consumer market which just means people in China once they have jobs and they have capital will be able to buy the goods themselves and domestic consumer market now where is the negative here you could imagine if you are the developed country that is buying these Goods these arts these they would be cheap to begin with but now they're being even there even more artificially cheap well you lose your manufacturing base so if you look at from the US from the US point of view from the US point of view you lose you lose the manufacturing base manufacturing base and it's very clear that this has been happening whether you want to point to Japan or in general we've been losing our manufacturing base to other countries and some people view this is a good thing some people say hey we are further down the development curve we shouldn't focus on manufacturing since manufacturing always tends to go to whoever can do it for the cheapest price we should focus on knowledge things whether it's pharmaceutical industry or the IT industry so there's maybe maybe an argument there but the other reason why this is maybe compelling to the United States is it's it's lower cost lower cost lower cost so this looks like a negative and it is really a negative on some level but the one I guess you could call it a superficial positive is lower cost for for American for American consumers so if you're not one of the people who lost their jobs at the manufacturing plant and you're some you're you know the great majority of the rest of Americans it seems like a good thing things are cheaper for you it's cheaper to buy clothes for your kids it's cheaper to buy a car it's cheaper to buy a refrigerator it's cheaper to buy an air conditioner now the problem is when and how does this end because this whole cycle that we create I mean it might sound good for China you know and in theory it sounds good you you suppress your currency your goods are cheap more production at home more investment at home more capital jobs eventually point that capital point that investment back at your own home market and now you are a developed country seems to make a lot of sense but it's it's easier said than done in particular it's not a trivial thing to make that whole market be as consumptive or as consumer driven as maybe some of these developed markets abroad the other problem is this whole time remember what's happening you're just accumulating this mass of in this case US dollars and you're using it to go essentially lend to Americans to lend to the government and she gets lent to the American people and the minute that you stop doing it think about what happens the minute that you stop not only let's not even talk about unwinding this let's say the minute you stop buying dollars your currency will inflate and the holdings these trillions of dollars of assets these trillions of dollars so the minute that you stop these trillions of dollars of adopt these trillions of dollars that you've accumulated will drop in value because the minute you stop buying dollars the currency markets will allow the wand to appreciate the dollar to drop and so stop buying stop buying leads to drop in value drop in value and and that's just if they stop buying if they actually ever tried to unwind this situation you would have as soon as they start selling these that would drop the value of whether you want to call it the dollar or the US Treasuries even more and so everything else they're holding would drop an even more value so the whole time in order to keep their currency propped up they've been buying these assets they've been buying these dollars but the very act of unwinding it will I won't say make it worthless but it will it will it will make the it will it will make the value of their holdings go down dramatically so you have a very hard situation for the Chinese it's a hard situation to even get out of and it's just as hard for the US because if you think about it a lot of people in the US would look at this and they'd say hey this is horrible this is why our manufacturing base has gone away and it is partially true and so they would say hey let the currencies let the currencies just do it they will let you know no more artificial distortions no more manipulation by governments let the currencies be freely trading but what would happen then what would happen to the United States the minute that the unite that China stops doing this stops artificially supporting their currency or even worse the minute they start unwinding all of this for all of these dollars that they've accumulated what's going to happen they're gonna start selling US Treasuries there's going to be lower demand for US Treasuries because not even buying it they might be selling it interest rates are going to go up long-term interest long-term long-term interest would go up in the United States now when long-term interest rates goes up that means that borrowing is harder that people will want more interest to lend you money that credit card rates will go up and in general the entire United States economy will go down why are we in this recession right now because it is harder to borrow that we were so dependent on cheap debt and when that got a little less cheap everything kind of ground to a halt that would be even worse that would be even worse if the Chinese stopped buying our debt and allowed interest rates to go up so we are kind of locked in this very perverse cycle where although it looks like the Chinese are unambiguous lis I guess benefiting from this they are accumulating these assets and the minute that they try to stop accumulating those assets the value of those assets are going to go down and even though that the United States looks like it's getting their manufacturing base depleted and that is true it is getting its manufacturing base depleted because of this it is keeping interest rates low and if you're a politician you like that it makes the overall environment look superficially positive I'll leave you there and let you think about this whole situation for a little bit in the next video I'll try to do a little bit of analogy just think about where all of this might go