@Indian Investor

You have in your comment detailed China’s purchases of US debt.  But what is the point?  The point in my opinion has to do with global imbalances.  The US by issueing fiat money to the rest of the world, buys and consumes real utilities (real wealth) from it.  This can happen because a mild world inflation is all that the new dollars generates.

Can you tell me how much new money (USD) the US is adding to the rest of the world in, say, a month?  Or a quarter?  Is the answer to be found in the flow of funds accounts?

Or to take a different track, calculate the total increase in world money supply.  There are UN stats to this effect.  How much of it was USD?  The US stopped publishing M3, which has the term eurodollars component.  I wonder whether the UN still reports it (Monthly Statistical Bulletin).

All of which brings us to: (and it may seem unrelated) China’s strategy of export led growth.  US multinationals shift their production to China, thus plowing in capital in that geography.  They work with cheap labour to produce the goods US needs.  China benefits-their workers are integrated into the world market, and serve its needs.  US benefits-they get something for nothing.  Win-win you think?

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One Response to “@Indian Investor”

  1. Indian Investor Says:

    You have a good perspective there to look at the total world increases in money supply, rather than only USD increases. My point was to quantify the major change in capital inflows to the US from China.
    The traditional compulsion for almost all countries to hold their reserves in USD is disappearing – for a combination of reasons, including current account imbalances and the end of the post WW II geopolitical regime.
    When the world changes, very few people realize that something has changed. And the impact of the change is sometimes felt only years later. In 2008, something changed fundamentally in the world of high finance, and the world is never going to be the same again, ever.
    What this change means is that there will be trmendous new opportunities and growth in China in the medium term. The US economy will lag far, far behind.
    The much-vaunted de coupling could very well be a slow painful inching process rather than a quick turn around as previously expected.

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