Global Trade, Debt, and Stimulus: a short Explanation

The Chinese run a large trade surplus with the US. This leads them to have a huge stockpile of dollars. This allows them to peg their own currency to whatever dollar value they want. Since they do all their foreign trade in dollars, there is simply no international market for their domestic currency, so international traders are simply shut out. (For other countries who do trade their currencies on the international market, lacking a supply of dollars means that currency traders could make runs on their currency, and the buying and selling of it would be out of their control.)

The surplus of extra dollars leaves the Chinese with a question of what to do with those dollars. In the past, they were content to invest in US debt securities, in effect, expanding their supply of dollars. However, stockpiling dollars is good for the Chinese in absolute terms, because dollars are the international trade currency. Thus, with extra dollars, they can buy anything else in the world.

When the international collapse in trade happened last year, many analysts thought China would be hit hard, because they are so export-dependent. However, they responded to the collapse in export trade with an almost unbelievably large dose of domestic spending. This is where their dollar stockpile came in, because they were able to stimulate their own economy by spending all the dollars they had stockpiled buying raw materials.

Oil, copper, rare elements, whatever they wanted, they were able to buy, using their dollars. They have also been investing heavily in gold, although not for use in industrial stimulus, but as a hedge against dollar collapse.

They could then pay their citizens in their own currency to do the work. Printing out their own money for domestic projects was not necessarily inflationary. For one, it was partially just holding the line, fighting deflation and unemployment from the collapse in international trade. For another, it can’t cause a currency devaluation, because their currency is not traded internationally.

The same process, printing out your own money, does not work for making international payments. Foreigners will see that you are diluting your money, and the exchange rate will fall. This defeats the purpose of printing more money in the first place, since it now costs more for the same trade.

For this reason, many times throughout world history, two types of money are used, one for domestic trade, one for international trade. For example, the US went off the gold standard for domestic dollars in 1933, but didn’t go off the gold standard for international dollars until 1971. It is also the reason why the world is clamoring for a new international trade currency now. International trade needs an absolute standard of measure, to prevent countries from screwing the system by printing more of their own currency (such as they see the US doing now).

So, with their stimulus money, the Chinese have been stockpiling raw materials and using them to put their people to work on infrastructure projects. This is true capital investment, and increases their wealth-creating capacity for the future, as well as putting people to work today.

Our stimulus money is not based on a trade surplus, but is simply based on diluting the dollar through deficit spending and monetization of government debt. Nor is our stimulus money providing the basis for future wealth creation or even repairing old infrastructure. Our stimulus money is simply covering budget shortfalls and continuing welfare payments. Thus, we will be in a worse position when the stimulus ends, having the same economic condition, but then with a higher debt load.

Looking forward, the US economy is in between a rock and a hard place. Keeping the dollar as the international reserve currency means that the US will continue to have its industrial base undercut by cheaper foreign competition and be the target for mass immigration because of the overvalued dollar. When the change finally happens, and the dollar is removed as international reserve, the US faces a massive inflation, from the return of dollars to domestic use and currency devaluation. The longer we wait, the worse the economic collapse will be when it does happen, since we will have to rebuild our industrial economy from scratch.

The only solution to that guaranteed eventuality is to take aggressive proactive steps, sooner rather than later. For example, the US should take decisive steps to safeguard its industrial base now, while the dollar is strong, rather than later, after currency collapse. The US should also cease all inflationary policies (such as deficit spending and monetization of debt), which are literally driving the world away from the dollar reserve standard. An even more radical approach would involve repudiation of the national debt, leaving the rest of the world holding the bag of worthless paper, and reinvesting in America’s industrial powerbase through protection from imports and outsourcing/off shoring.

In short, Americans should start thinking of themselves a people, rather than just as expendable units of profit manipulation in an international economy.