If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

Main content
Current time:0:00Total duration:6:52

Video transcript

in the last video we saw a reality where the currency between or the exchange rate between the wand and the dollar started off at ten to one and at that exchange rate at that exchange rate China was shipping more goods in terms of whether you measured it in dollars or Juan was shipping more to the US than the US was shipping to China and because of that we saw an imbalance in the currencies the wand became more expensive or the dollar became cheaper until eventually Chinese goods got expensive enough that there was less demand in the US and US Goods got cheap enough that there was more demand in China that the trade actually came into balance now what that's okay if everyone wants to wanted to have balance trade but what if the Chinese government didn't want it that they said hey we needed to develop the United States has 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 didn't like the currency they did not like the one getting expensive so let's say the Chinese government let me scroll up a little bit so the Chinese the Chinese government government wants wants to keep currency currency exchange exchange pegged pegged pegged at I ran out of space over there they want to keep currency exchange pegged at 10:1 per dollar and they want that because they want this situation to keep on going forever the China keeps shipping more of the US than the US ships to China or maybe they'll even they even wanted to go even more that China keeps shipping more and more to the US than the US shipped to China so that China could build its industrial base and I guess a more sinister view is also so that the United States is industrial base gets depleted that they keep manufacturing things cheaper and cheaper and cheaper the united states manufacturers can't compete and we'll talk about this in more videos it's not it's not it's it's actually not clear that it's a hundred percent one-sided that there's actually some benefits of 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 bounces 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 is more demand for wan the wan 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 then back to China without the one appreciating and the way you do that there the Chinese government or maybe in particular we could talk about the such Chinese central bank the Chinese central bank which is a part of the Chinese government can say hey to keep our wan devalued we will print money so let me draw the Chinese central bank so the central bank of China so what the central bank of China let me intervene over here the central bank of China so let me do this in a new color so right over here we have the Chinese the Chinese central central the Chinese central bank and what they do they can actually just print money so we had this a generic scenario that I had outlined in the last two videos where we had this imbalance there was demand for a thousand one but only supply of five hundred one so what they can do is just equalize this they could just print they could just print five hundred one so they literally could just print 501 501 and then try to convert that into dollars and then try or they will convert that into dollars convert it in to dollars so what just happened now all of a sudden we have $100 that are trying to be converted into roughly a thousand wons or if that exchange rate were to be constant so there's demand for a thousand ones before the Chinese central bank got involved there was only a 501 supply but now the Chinese central bank says okay there's a demand for a thousand one there's only 500 Wan supply we're gonna produce another 500 Wan we literally can just print it and then they will convert what they printed in two dollars so just like that you now have a balance of supply and demand you have a thousand one 500 here and 500 here that want to be converted into dollars and then you have a hundred dollars that want to be converted into I guess a thousand one so if they were to do this the currency wouldn't change the supply and then or the exchange rate wouldn't exchange the supply and demand of the two currencies would be equal now there's 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 what is happening well they keep shipping more to the United States than the United States is shipping to China these guys keep having to print one and buy dollars with those wan in order to keep the Chinese currency cheap so these people are going to keep accumulating dollars they just keep printing one and then they just keep accumulating dollars so let me draw that over here so the Chinese central bank just starts accumulating many many dollars they can they can print one as much as they want those wan go into the they've trade them into dollars and then they start these guys start accumulating these guys just start accumulating more and more dollars over here and the more that they want this trade and balance to occur the longer that they wanted 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 have to keep doing it in order to keep the trade balance the way it is 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 and then we could talk about how this might unwound unwind itself but we'll find out it's actually very difficult for all of this for the scenario to unwind once it gets started