Everyone thinks that
Here’s how it works. China paves over thousands of acres of its best farmland to make industrial parks, builds factories, hires millions of workers, buys oil, aluminum, copper, etc., and makes tennis shoes, TVs, power tools, Christmas ornaments, you name it, and sends them over to fill the shelves of our Wal-marts, Toys R Us, Bed Bath n Beyond, etc. We buy physical objects that make our lives more enjoyable at extremely low prices and send the Chinese pieces of paper that say they’re entitled to cash the paper in to get a wheelbarrow-full of dollar bills.
Now what does a Chinese factory owner do with a wheelbarrow-full of dollar bills? Well, he has a couple of options. He could spend the dollars to buy some
Suppose our factory owner wants to buy 10 lbs of apples. That would cost him roughly $20 at
This is a no-brainer. Trade in those dollars for RMB and buy Chinese!
Now the bank is stuck with a pile of dollar bills. What do they do with them? You’ve got lots of Chinese factory owners trying to trade in dollars for RMB. Only a few Chinese are trying to get dollars to send their kid to some American prep school or to go on a junket to
So now the central bank is inundated with a mountain of dollars. What do they do with them? A dollar isn’t much good in
The bottom line: China sent us goods that we wanted, bought, and (hopefully) enjoyed (we exclude the exploding tires, killer pet food, and the $20 CD player that broke after 2 weeks), and in exchange China got pieces of paper.
But didn’t the Chinese factory owners buy Chinese goods with the RMB they got for cashing in the dollars? Well, here’s a complication. If
When you sell more goods than you buy, you’re saving. Most of us do this in our younger years—we sell our labor for wages, and set aside part of those wages as savings. When we retire, we spend more than we earn.
This process can’t go on forever.
Millions of Chinese are living better, too. But instead of a 5,000 square foot home with marble counters, Jacuzzis, etc., a Chinese family is thrilled to have a 500 square-foot condo a 90-minute bus ride from the office. And the factory workers who actually make the stuff we buy are ecstatic to live in an industrial park dormitory 500 miles from their home town and be locked down in a factory doing the same repetitive task 12 hours a day while breathing toxic fumes.We kept this game going for quite a while, but what Washington Post columnist Steven Pearlstein labeled the "Mirage Economy" might be coming to an end. The housing bubble finally popped and China is having trouble keeping its inflation from getting out of hand.