Thursday, April 14, 2011

Why we should care that China has $3 trillion in foreign reserves

China now has over $3 trillion in foreign reserves

This bit of financial information needs a bit of translation. It mean that China has in its possession a lot more foreign money (mostly U.S. dollars) than most other countries. Japan, for example, has only $1 trillion.

This is important to Americans for two reasons:

1. Having so much foreign currency allows the Chinese to artificially deflate the value of their money, which means they can sell the stuff they make for less and therefore sell more of it. That is good for them because it keeps their employment up but bad for us because it keeps ours down.

2. On the other hand, much of the U.S. dollars that the Chinese possess is in the form of Treasury securities and other forms of federal debt. Which means that we can still keep borrowing when we don't have enough real money to pay our bills. But the U.S. borrows so much money that it is making the Chinese nervous about our ability to repay it.

So, in a nutshell, we are borrowing a lot of money from the Chinese which helps them artificially lower the value of their money and sell us a lot of stuff for much less than we could make it. Which adds to U.S. unemployment.

American consumers, including those who are unemployed, compound this dilemma by borrowing money from their credit cards in order to buy the Chinese stuff which keeps Chinese workers employed.


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