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http://www.gold-eagle.com/editorials_05/gerbino102507.html
China and Japan - The Big Currency Misconception
Because of competitive devaluations, already mentioned above, the death of the dollar may not be as fast as some people think. Also one of the big misconceptions that I keep reading about is that China and Japan will soon dump their holdings of dollar denominated Treasuries because they are losing value with the dollar going down. Not true.
Follow this very carefully.
A million dollars of clothing is exported from China to the U.S.
A million dollars is sent to China.
The Chinese factory owners send the million dollars to the central bank, and ask for the equivalent in renminbi so they can pay their workers and suppliers.
No problem so far.
But what does the Chinese central bank do?
They actually create (print) $1 million worth of renminbi, and send this off to the factories and keep the original $1 million, and buy U.S.Treasuries with it.
The central bank does not have to exchange the dollars for renminbi's, they can create an additional $1 million worth of renminbi's.
Since China now has $1 million in local currency they earned for the clothing, does the central bank even care if the value of extra $1 million in U.S. Treasuries they own goes down by 20% or more?
The answer is no.
China sent $1 million of clothing to the U.S., and now they have $1 million of local currency and $1 million of US Treasuries. Easy money.
China now has more money in circulation (M1) than the United States. $1.9 trillion vs. $1.4 trillion. The reason is that they have been double dipping.
In the above example the $1 million they have in U.S. Treasuries is all gravy, and this is what the Chinese have done the last 10 years -- and that is why their money supply has mushroomed. When the time comes they will most likely take the trillions they have in U.S. Treasuries, and come back to the U.S. and buy buildings and factories (like the Japanese did in the late 80's) Spending dollars for dollar denominated assets in the U.S. will have zero effect on the exchange rate. So the argument that these Treasuries are a huge overhang on the U.S. dollar because the Chinese don't want to lose value is not true. They are so far ahead already it doesn't matter. Of course the local citizens will now have to put up with plenty of inflation that is coming to China from all the new money floating around the country.
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A worthwhile Chinese Article
