Wednesday, October 27, 2004
Our Trade Imbalance
When you think about it we've got a pretty good deal with China. Suppose the dog has been getting up on the sofa for years and as many times as you've called in the upholstery cleaners, shoddy is the sofa's name. You go to a good furniture store and find that you can get a new sofa, eight way hand tied with hardwood frame, for $3000. The sofa is made in China as is most everything it seems. You give the store your credit card and the next day 2 Bees delivers your new sofa to you. For a week you forbid the dog to jump up and lay her head in your lap as you watch the BoSox.
Now the credit card company gives $3000 to the China manufacturer, they put some aside for business and the balance they invest in the debt of the US. They send back the money and we ship them some of our debt. The debt pays a small interest rate and is paid back in US Dollars. So far, now, we have their sofa, their recycled US Dollars and they have some of our debt. We take their dollars and make new loans to other families that need new sofas. Banks use fractional banking, which means that when you deposit $1000 dollars, $9000 worth of loans can be made. More US Dollars created means each dollar is worth less. Therefore the US debt that China owns is worth less.
How long does China continue playing this game? As long as they benefits them!