Like your critique... So we are using the word currency when we are really talking about numbers on computer screen. So how does that work? The number says $100 us? Just curious because I assume we aren't talking about 100 dollar bills here.
Although my buddy in Iraq did have suitcases of 100 dollar bills as that was how the local contractors were paid. So is the Chinese 2 Trillion in 100s or numbers on a computer?
Well... it's a bit tricky to get a handle on....... First off, the Iraqi was, as economists would say, 'not in equilibrium', therefore the need for USD notes. I presume that is no longer the case today. .. . But, I may be mistaken.
The Chinese $2trillion, where did it come from and how did it get on their computer screen? is the question, I believe. Let's imagine the world in 1990, China was dirt poor and had literally hundreds of millions of un/underemployed people who had no hope of a job, no education, no imported goods in the shops, no cars, no nothin'. How do you fix THAT mess? I'd give up before even trying if I had that steaming pile o' dung on my plate. But, the government there said at some level, 'let's become the factory of the world'. And they invited foreigners (textile?) in and said 'we'll give you land and tax breaks, just give our people work. They may be uneducated and illiterate, but they are happy to earn 10 cents/hr. Oh, and you must have a local partner at 51%'. Slowly the foreigners arrived and brought with them factories and assembled/sold crap to the USA and Europe.
Now, thank you for reading this far as that background is necessary to the actual answering of your question where it gets interesting. The factory produces 100 tons of an item. We could call 'crap' or widgets. Economists generally prefer the term 'widget' even if the other term better describes the products coming from China. So, 100 tons of widgets, sold to Wal-mart at $10,000/ton, that's $1million USD. Wal-Mart has $1million USD, Chinese factory has 100 tons of crap. They trade one for the other; the Chinese factory puts the 100 tons of crap into containers and they sail to L.A. Walmart sends by bank wire transfer $1million to the Chinese factory's bank account. Walmart now has 100 tons of junk to sell, and the factory has $1million USD. (Wal-mart got that $1million USD in their bank account from it's customers in the USA, who paid with their hard earned dollars, either cash or debit card). Now, the factory has a problem. It has to pay the workers 10 cents an hour in the local currency. And electricity, and rent, and suppliers, bribes, taxes etc. all need to be paid in Yuan. But, it only has USD, not Yuan. So, it goes to the bank and says "I want to trade this USD for Yuan". AND HERE IS THE MAIN DIFFERENCE BETWEEN CHINA AND THE REST OF THE FREE WORLD:
1) The Chinese gov't, not the market, sets the exchange rate. 2) It prints 'new' yuan to exchange for the $1million. 3) This USD is now in China's currency reserve and (presumably) they park this money in US Treasuries.
So, basically, China's money supply is increasing at the rate of it's global trade. The USA gov't doesn't have to pay interest on that $1m beyond the current level on T-notes, which, as ALL MUSTASCHIANS know, is a really, really piss-poor investment, often not even keeping up with inflation. But, how else do you park $2 trillion (seriously)? The difference between the interest on the T-note and inflation results in a transfer of wealth from China to the USA.
So, the answer to the question is; the $2trillion started out as USD notes in American's bank accounts and is now in the account of the Chinese gov't, but crumbling in value every year, to the benefit of the USA.
Additional factoid for those who have read this far: China is actively seeking to increase its reserves. The gov't places a limit of $50,000 on the amount of USD that a person/company can purchase every year. The result is fewer imported goods and therefore lower consumption in China than would otherwise be the case.
