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February 2009
March 2009

2009-02-15 »

The price of money in China

People keep posting articles like Why China Needs US Debt. I think most of us know enough to disregard random opinion pieces written by lobbyists, and most of us who read such an article will get a "wait, that can't be right" feeling. But what exactly is wrong? China obviously does need us, right? Or why would they trade with us?

I first started to understand the problem while I was watching the Canadian federal election debates and someone (it might have been the Green Party leader) said something like, "We have to cut back on our oil exports! It's killing Canada's manufacturing industry!"

...and I did a double take. Wait. What?

I had to look into it a bit before I understood. What was happening was that the increased oil prices were causing a flood of activity into Canada's Oil Sands projects, and thus a massive increase in oil exports. Increased exports were raising the value of the Canadian dollar (which, importantly, is not pegged to any other currency). A higher Canadian dollar makes it harder for people from other countries to buy Canadian stuff: not just oil, but anything. And unlike with oil, our other industries didn't have a massive natural (read: Canada's really big) competitive advantage. Which means that if our oil exports expand massively, it kills our manufacturing sector.

The success of one industry, unrelated except by trading in the same currency,(1) can harm another industry. And that realization, to me, was a new and important one.

Now, back to China. Their currency, in light of being pegged to the US currency, is essentially the same as the US currency. What does that mean? Success in exports in one sector (China manufacturing) can damage the market in another sector (US manufacturing) even if they manufacture totally different things, simply because the successful market artificially raises the prices of the unsuccessful market.

Now, pegging your currency can be kind of expensive. China does it by stockpiling truckloads of US dollars. Well, more precisely, they buy US debt, which is essentially the same thing. What this really means is that China takes much of the profit from its exports and mails them back to the US (as "debt"), so that the US can afford to buy more Chinese stuff.

In the article I linked to above, the claim is that China needs US debt to keep increasing, because there's simply nothing else in the world big enough to spend all those US dollars on. And that's true, in a sense, if you believe that money has intrinsic value. Of course, China is smart enough to know that it doesn't.

...which is where it gets even stranger.

Even though China knows money is worthless, they keep shipping their perfectly valuable manufactured goods to us in exchange for worthless pieces of paper.(2) How dumb is that?

Not dumb. Brilliant.

Our whole theory of economics is based on two axioms, one of which is that human wants are unlimited. But we're starting to figure out that's not really true. As a society, we're slowly realizing that more consumption doesn't lead to more happiness. So what does?

For a lot of people, maybe the secret to daily happiness is just this: a stable job and the feeling that you're doing it well and helping society.

By exporting stuff to us by the crapload - and "oh darn, poor us, we're such victims" denominating their wealth in US dollars - they ensure that they have jobs and happiness. We're the helpless, unproductive, soulless consumers.

Call it victory by superior philosophy.(3)


(1) Of course, our manufacturing industry also uses a lot of energy, and high energy prices are bad for them too. But that's true for everyone's manufacturing industry, so it's not automatically a competitive disadvantage.

(2) Thought experiment: imagine China as a black box with inputs and outputs. From the point of view of China, sending us useful goods (which we'll use up and then dump in our landfills) is a lot like just taking those goods and dumping them in the ocean. As far as China is concerned, nothing would be very different if all the ships just sank before they arrived here.

(3) It's a strange war, though: you don't have to worry about them invading us if they win. What would they steal? Our consumers?

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