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> It's far less complex than you might think. If China did not buy US debt or other debt then there currency would inflate which would harm their economy in the
by xenophanes 18y ago
> It's far less complex than you might think. If China did not buy US debt or other debt then there currency would inflate which would harm their economy in the short term.
Why? If they create stuff, and don't print any money, then shouldn't their currency deflate? For each bit of currency, there is more wealth.
- Retric 18y agoTo maintain a artificially low exchange rate with the US and the rest of the world China uses a fixed exchange rate with exchange rate with the USD. To do this they need to collect a frighting amount of currency every year or the Yuan is going to increase in value. If they hold that cash without lending it then the US government would need to create money to avoid deflation and the Chinese would lose out on the interest they would get by loaning the money. Effectively this is loaning the US money at zero interest while the the USD they hold is deflating. They can use some of this money to buy raw materials or intangible assets, but if buy finished products then the cost of raw materials would increase and they can just pirate most movies / software without cost. PS: US debt is one of the few places you can safely hide a frighting amount of money. People have been buying notes whose interest rate is well below inflation even as the US borrows insane amounts of money to deal with this mess just for the safety.