Monday, March 12, 2012

The Chinese Start to Spend the Dollars They Have Collected

China's trade balance plunged $31.5 billion into the red in February as imports swamped exports to leave the largest deficit in at least a decade.

Import growth of 39.6 percent on the year in February was the strongest in a year,and more than twice the rate of export growth of 18.4 percent.

A positive or negative trade balance in and of itself is no big deal. However, this shift is significant as a signal that the Chinese appear to no longer be propping up the dollar. This is resulting in Chinese purchases using dollars. In other words, the Chinese are now bidding with dollars, against you and me for products and services.

This should not be taken as a negative position on the Chinese. What would you do if for decades, you were stuffed with a foreign currency? If the Chinese no longer absorb dollars and further start spending what they have, the price inflation tsunami will be all that much greater.

It's going to get really ugly on the price front.

9 comments:

  1. How does this cause prices to rise? Either they are bidding with US dollars, or whoever they loan money to is.

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    1. the bids themselves will cause prices to rise. rather than holding reserves as was expected, they are making those bids.

      http://en.wikipedia.org/wiki/Price_mechanism

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    2. They weren't just sitting on dollars. They were lending them the US government, which was being used to pay its employees and welfare recipients.

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  2. I agree the Dollars previously held by the Chinese will accelerate price inflation in the US as they return to our shores. Do you think the repatriation of Dollars will also have the same effect as a growing money supply? I imagine Dollars in China and other countries are already included in money supply statistics (M2), so the flow back into the US should not impact M2 growth rates. However, is it not likely this inflow of money will act the same way as any other source of money supply growth and have all the same consequential influences as described by Austrian Business Cycle Theory?

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    1. the dollar supply is the dollar supply; the supply does not "flow." ownership in part, via bank accounts, changes hands.

      no matter who owns it at any given time, it is in the money supply.

      see gary north's archives for more on this.

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    2. If the Chinese move towards spending more dollars rather than holding them, this reduces the reservation demand for dollars, which lowers the purchasing power of the dollar below what it otherwise would be.

      Even without changes in money supply, changes in reservation demand for money, or "desire to hold", will affect money's purchasing power.

      This is why in all historical cases of very high inflation, the purchasing power of money will fall at a faster rate than the rate of money supply increase. Once inflationary expectations take hold, people no longer want to hold money, and the increased spending feeds a spiral of rapidly escalating prices.

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  3. Robert, is this caused, in part, by China, Russia, and Japan all deciding to abandon the dollar as reserve currency in their inter-country exchanges? China would have dollars to spend (before they are debased further).

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  4. Name that movie:

    "The Arabs have taken billions of dollars out of this country, and now they must put it back! It is ebb and flow! It is tidal gravity! It is ecological balance!"

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    1. I can't place it... and that makes me mad as hell and I'm not gonna take it anymore!

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