American-Chinese Debt Loop


Where we left off in the last
series of videos, we had the Chinese Central Bank that was
trying to make sure that the yuan does not appreciate
too much. So the way they did that is that
they bought up all of the excess dollars using yuan
that they printed. So what they do is, they print
yuan– I’ll do the yuan in this blue color– so they print
yuan, and then they use that printed yuan to buy dollars
in the open market. And what that does is it props
up the demand for dollars and keeps the price of yuan down,
so then they get dollars. So they print yuan and
they buy dollars. And as we saw, they have to keep
doing this in order to keep the yuan deflated,
or in order to keep the dollar inflated. And this is so that they
can maintain a favorable balance of trade. But as they do this, they’re
just building the stockpile of dollar reserves. And as we mentioned in the last
video, they’re not just keeping a big vault of
dollar bills there. They’re going to use it to buy
assets, and they’re going to buy liquid and safe assets. And the main asset they’re
going to buy is U.S. Treasury bills. So then they take these dollars
and they buy U.S. Treasury bills. And let me draw some of the
other actors here, because they can buy it from two
separate people. There is the United
States government. So there is the U.S. Treasury. They are going to issue Treasury
bills, when they essentially just need
to borrow money. And then there’s other people
that have already bought Treasury bills. So let me draw them over here. So then there are other people
who own Treasury bills. So this is someone who owns a
Treasury bill right over here, wearing a hat, maybe
with a little bit of hair and a moustache. So this is someone who
owns a Treasury bill. So just to give a review, when
the U.S. government wants to borrow money, people hand the
U.S. government money– I’ll draw it as a dollar bill, right
over there– they hand the U.S. Treasury money, and
then the U.S. Treasury gives them an IOU. This IOU is what a Treasury bill
is, and what it entitles the holder of this piece of
paper to, it allows them to get interest from the Treasury,
depending on what type of Treasury bill
or bond it will be. It’ll be over a certain
period of time. I have a whole video on this,
especially the ones where I talk about the yield curve. And then at some future date,
the U.S. Treasury is going to pay them a larger amount of
money than they put back in. So this right here is a
Treasury bond or bill. T-bill if it’s a shorter
duration, Treasury bond if it’s a longer duration. This is a Treasury bond. It is a loan to the
U.S. Treasury. Now, the Chinese Central
Bank, they have all these excess dollars. They can buy treasuries from
either two sources. When the U.S. Treasury itself
needs to raise funds, it will essentially put these
IOUs for auction. It will sell them to whoever
is willing to take them for the least interest. So let me
put it this way, so what they can do is they can give the
money directly to the U.S. Treasury, when the U.S. Treasury
puts Treasury bills or Treasury bonds
up for auction. So it can give the money
directly to the U.S. Treasury, and then the U.S. Treasury will
give them one of these IOUs, or it could buy it from
someone already has it out in the open market. This is a very deep, very,
very liquid open market. Or they can give these people
right over here money, and then they would transfer the IOU
over to this Central Bank. So what is happening at
the Central Bank? What is essentially
happening here? What’s essentially happening
is the Chinese Central Bank printing money to buy dollars
that it will then essentially lend to the U.S. Treasury. So it looks kind of convoluted,
but the essence of what is happening here is that
the Chinese government, you have the Chinese Central Bank
lending to the U.S. government. And it might be buying other
assets, but the Treasury bonds and bills are really the main
form of liquid asset they might be buying. So how does this affect the
United States, other than the fact that instead of owing other
investors these IOUs, it now owes it to the Chinese? But what is the net effect of
having this player out here, having this very significant
player out there, that is fairly aggressively willing to
pay for U.S. government IOUs, U.S. treasuries? What is the effect of that? Well, we saw in the yield curve
video that the more people willing to give you a
loan, the lower the interest rates are going to be. And I can show you a very
simple example of that. If I’m looking to borrow– and
I’m no longer talking about nations, I’m just talking about
Sal now– let’s say that I’m over here, and I’m looking
to borrow $10. And I say, hey, who’s willing
to give me the best deal on $10, and I’m going to pay
you back next week. So you might come along and say,
I’ll lend it to you for 10% interest over a week. So you can pay me
$11 next week. So this would essentially be
10% interest over the week. You give me $10 now, and if I
agree to you, then I’ll give you $11 in a week. That would be 10% interest. But then let’s say
Mary comes along. And she says, oh, I can do
better than Mr. Orange Guy over there. This is Mary. I’ll lend you $10, and you can
pay me $10.50 next week. So notice what happened. Both of these people
have $10 to lend. They’re looking to get some
return on their $10. If he was the only player here,
I’d have to go to him and say, OK I’m going to pay
you 10% interest. Then she says, no, no, no, I also have
$10 and, gee, I’d be happy with just a 5% return. $0.50 off of my $10 in one week,
that’s a good return. So right now, look
at this person. But the more money that’s
available to borrow, the more competitive this side of the
equation is going to be, and the lower the interest
rate I can get. You can imagine even a third
person says, no, no, no, wait! I’ve got $10. Let me draw this third person,
who says, I have $10, and you know what? It’s going to just be sitting
in my bank account doing nothing unless I
lend it to you. You can pay me, I don’t know,
$10.25 next week. And then I’m going to
go to this person. So the larger than the number
of people willing to lend to me, the lower my interest
rate will be. Or another way you could think
of it, the larger the supply of money to be lent, that leads
to lower– you can view it different ways. You could view it as lower
borrowing costs, which is another way of just saying lower
interest. Or you can even view it as cheaper money. It costs less to borrow
the money. The cost of borrowing money
is the interest. Now, what does that do? What does having
lower interest? So this is just a small example
with me trying to borrow $10. The more people there are, the
more competitive that is, the better interest rate I’ll have.
So you just take that same notion to kind
of a macro level. The U.S. government is
constantly borrowing money. The more people out there
willing to give it money, willing to buy the U.S.
government’s IOUs, the lower the interest rate will be. So the net effect of having
this major buyer of U.S. Treasuries is that having them
out there accumulating all of these dollars, taking them all
out of the foreign exchange markets and then using them to
buy treasuries, it lowers the interest rate for treasuries. So the net effect is the
U.S. Treasury has lower borrowing costs. So what does that mean? So let’s make it very clear. So the Chinese buy treasuries,
which are essentially loans to the U.S. government,
then the U.S. has lower borrowing costs. The U.S. has lower interest
or borrowing cost. And I’m talking about the government
right now. And this has several interesting
side effects. This means that it’s
easier for the government to finance deficits. They don’t have to
pay as much in interest to finance deficits. So that means that they
can spend more. They can give out more payments
to U.S. citizens, or they could lower taxes,
either one. Both of those would
lead to deficits. So it’s easier so that the
government can either spend more or they don’t have
to raise taxes. Or they could they could lower
taxes, because they don’t have to spend as much in interest. Now, the other interesting thing
that the U.S. Treasury borrowing costs go down, that
means that the interest rate on everything goes down. This is one of the benchmark
interest rates. And you should watch the video
on the yield curve if you want to understand more about it. And I know some of you are
saying, wait, doesn’t the Federal Reserve set
interest rates? The Federal Reserve only sets
overnight, very short-term. If you’re going to borrow money
overnight in your bank, that’s what the Federal
Reserve sets. If the U.S. government is
borrowing money over 5 or 10 years or 20 years, that
is that by the market. That is set by a market
mechanism very similar to what I showed just over here. So this is dependant
on more capital being there to be borrowed. So this is 10-year, and 15-year,
and 20-year debt for the U.S. becomes cheaper. But this makes all debt
in the U.S. cheaper. And there’s two ways
you can think about why this piece happens. One is, just on a very
superficial level, people say, hey, you know, someone like
General Electric is only a little bit more risky than
the U.S. government. If the U.S. government only has
to pay 3% on its on debt that it has to pay back in 10
years, maybe General Electric should only have to pay
0.3% more than that. So you use the U.S. government
as a baseline, and then depending on people’s
risk, they pay a little higher spread. Another way to think about
it is up here. The Chinese government is just
pouring dollars either directly into the U.S.
government, or into the actual U.S. Treasury market. So this guy right now,
he has more dollars. He’s not going to use the
Treasury, because he thinks treasuries are too expensive,
which means that their interest is too low. So he’s going to take these
dollars he got from the Chinese, and he’s going to
lend it to someone else. That dollar is still there. He’ll lend it to General
Electric, or maybe he’s a credit card company and he’ll
lend it to the consumer. So in general, all debt in
the U.S. gets cheaper. Now, what’s the net effect
of all of these points? What’s the net effect of
this, all debt in the U.S. Becomes cheaper? There’s just more dollars for
loan in the U.S., more dollars than people can borrow. The government is spending more,
or the government will lower taxes. What is the net effect
of all of this? Well, people will either have
more money in their pockets, because they’ve gotten a
government job or they’ve maybe gotten some type of
entitlement payment. Or, they’re going to have more
money in their pockets, because they’re paying
lower taxes. Or they’re going to have more
money in their pockets, because it’s easier for them
to put more debt on their credit card, or to refinance
their mortgage. So all of these lead to more
cash in American pockets. Now, that’s obviously not an
unambiguously good thing, because this is all financed
with debt. It’s not just solid
debt-free cash. So more cash in American
pockets essentially financed with debt. And this debt, as you can see,
it’s either occurring at the credit card level, it could
be occurring even at the corporate debt level, or it’s
occurring indirectly at the government level. But all of this is being enabled
by the fact that China is willing to buy treasuries,
which means that China is really just willing to
lend to the U.S. So what’s happening? China is artificially keeping
its currency low, and it’s doing that by buying dollars,
taking those dollars and essentially lending them
to the United States. And that eventually ends up in
the hands of American people and companies, and even
the government. And what are they going to do? Well, they’re going to buy cheap
Chinese products that are artificially cheap because
the currency is lower. And obviously, you know, they do
have lower labor costs and all of that, but it’s even lower
to the American than it would be if the currency were
allowed to freely float. So the net effect of this entire
scenario that I’ve been describing over the last few
videos, is that the Chinese are essentially lending money
to the Americans to then go ahead and buy more
Chinese products.

66 comments on “American-Chinese Debt Loop”

  1. Philip Kennedy says:

    First comment! This makes more sense than ever… Thanks

    PhilipK100

  2. Philip Kennedy says:

    I hope you've more videos on this topic on the way… I've been looking for this sort of thing since 2008 – well done Sal… I wonder does the US Government ever pay some or a proportion of their debts back at certain intervals and what effect that has on money supply from both China and USA? Again thanks for educating me 🙂

  3. S0up3rD0up3r says:

    debt > actual money

    the monetary system is bound to collapse.

  4. rax7 says:

    it is pronounced "Yee-an"

  5. EJ Musik says:

    He's a good teacher, just wish he didn't repeat himself so much (e.g. "print yuan… print yuan… print… … yuan"). I personally find it hard to listen through a whole tutorial when he continuously speaks in this manner. But like I typed previously, he's a good teacher. Also, he is very generous to provide this service. Just some constructive feedback from the peanut gallery.

  6. staticbb says:

    what do they print?

  7. MusicalAndTall says:

    @PhilipK100 You fail 🙂

  8. JoesMonkeyLand says:

    @ceresWar Why don't you just respect someones opinion? Not all people learn the same way.

  9. KingVikram says:

    @lianghaochen
    Yes, that's correct. Korean money is called Won. Chinese money is called Renminbi and measured in units of Yuan (and some others like Jiao, Fen etc.). Renminbi is most widely distributed in terms of Yuan hence Chinese money is effectively called Yuan. And I believe Sal is saying Yuan even if the pronunciation is being heard as Won. He even wrote down Yuan on the screen if you notice it.

  10. amoxintubeu says:

    Basicly, the US sells the paper a.k.a. US dollars in exchange for goods from other countries. Most countries are very happy to sell cheap stuffs to the US. So, it causes the US burden with trade deficit, and the US is no longer competitive in terms of manufacturing and price. American people still enjoy consumption while the trade deficit is tremendously widening. I don't know what will happen at the end of the day if China, S. Korea, Taiwan, Japan, Singapore stop valuing the dollars.

  11. Quinstol says:

    Thanks, Sal. I think I enjoy your videos on finance and economics more than any other subject.

    It's nice to have some sort of solid understanding about what's going on and why when I hear someone offhandedly mention on the news that "Chinese is devaluing its currency" or "buying up American debt."

  12. Mr Pep Talk says:

    You don't need to repeat what you're writing while talking slowly; just write it.

  13. TreachMarkets says:

    So is it possible to buy yuan, get yuan free?

    (couldnt help myself)

  14. Franklin8491 says:

    This long winded repetitious explanation, leaves out some very important things, such as: Why are the Chinese doing this? – Why are they piling up all those dollars and letting the U.S. government spend them rather than spend them, themselves? and What is the effect of the printing of vast quantities of their own currency by the Chinese. (Its inflationary, so the Chinese borrow some of the printed currency back using "sterilization bonds" – which increases Chinese interest rates.

  15. streetmoney21 says:

    Man this is a great video. Very clear and easy to understand the important message behind it. I hope all the subscribers from my channel watches this video.

  16. boeing747200lr says:

    I like the third guy with a bucked tooth

  17. ITILII says:

    @TreachMarkets buy enough dollars, get USA for free

  18. ITILII says:

    @insanemagicguy spend more and more wars, though the US has not declared war since 1941 (and a declaration of war voted by the Congress is required under the Constitution), but taxes are on the way up

  19. Leo 晨洋 Liu says:

    @Franklin8491
    chinese are spending them, themselves. they have been horting them for a long time because its just the asian mentality. you save rather than spend.

  20. Franklin8491 says:

    @daynvattah
    But what do the Chinese expect to do with more than a trillion dollars which they have already accumulated and continue to accumulate with no end in sight? – If the U.S. government raised taxes so that we were running a surplus, and invested the surplus in Chinese bonds, people would think we were nuts.

  21. Leo 晨洋 Liu says:

    @Franklin8491
    first people like horting money. why do all the rich people wanna become even richer when they already have 100 of millions or more? second there you go again, if US government would do that people would go nuts. Chinese wont because of the saving rather than spending mentality. Even though the living condition should be better than what it is right now, peoples lives are getting better day by day, BECAUSE of the currency policy taken by the Chinese government.

  22. Leo 晨洋 Liu says:

    @Franklin8491
    one more thing: if you have been poor for most of your live, then suddenly better days are coming, you could either spend all the money or saving them because of your past experience. And China is clearly doing the latter.

  23. Tucktasticationister says:

    Wow…. this all made total sense… not even joking. You are my hero Mr. Khan! Thank you.

  24. Franklin8491 says:

    I'll try to answer my own questions: "Why are they piling up all those dollars?"- Initially, their goal was to build up their industries by increasing low priced exports so as to drive out competition – but now I think the reason is mostly political. – China is a nuclear power and we owe it a lot of money – making it less likely that we will try to impose our way of running the world on China – As to final question re interest rates, google "sterilization bonds" and "china"

  25. William Dukane says:

    Basically, China supports the Tea Party. Interesting.

  26. FortNikitaBullion says:

    DBCG Don't Buy Chinese Goods.

  27. Tommy3632 says:

    @ Clint45s China already has control over a portion of America second only to Japan
    The time to wake up probably came and went, even if the troops came home tomorrow and all spending ceased its already too late
    what's happening right now is that they are trying to stop the boat from sinking by making the hole bigger so the water will get out faster and i think we all know how that is going to end
    All America can do is watch how the Yuan rises and the Dollar drops like a rock

  28. jchien says:

    @aswayb why don't u just fast forward the parts where he repeats himself for the benefit of first time viewers on the subject like me.

  29. jchien says:

    let's not forget the dollars the chinese central bank buys with the yuan they print are also printed freely at will by the U.S. central bank – the fed.

  30. deniskatashkentskiy says:

    the chinese control the world xD
    Thanks a lot Sal!

  31. TreachMarkets says:

    @60fft It's a joke (buy one, get one free… get it?)

  32. rainydaymyc says:

    The incorrect pronunciation is really distracting for people who understand Chinese. Yuan sounds more like yu (you) – en (like in the word end)…not "won."

  33. samazing18 says:

    Overall, great video! But If i could offer some constructive criticism, you have a habit of repeating yourself over and over while you're writing, which is really distracting. You should go back and edit your videos so that it flows better. RSAnimate does this really well, so check those videos out for reference.

  34. dominikb12 says:

    + one more effect – buying more 10 year bonds "flattens" the yield curve an thus depletes the difference between short term borrowing(for the bank) and long term lending(for the bank) an being so the banks are not so "willing" to lend because they don't reap the profit they usually could on "bigger" short-long term difference.

  35. Billy Bob Mirango says:

    Not a wizard here, but when the Chinese hold so much US$, when do they determine the rate?
    Micro level…. if you owe too much debt to 'Sweet Lenny", he gets nervous… your credibility starts to drop. Perhaps China demands a higher rate.
    What if the USA devalues their $ for competative reseans?
    What if they decide to do business with India and Vietnam rather than China?
    What if they put tariffs on China to bolster their own econ?
    What if USA create a false flag and rip the Chinese debt up?

  36. Aubrianne Scheldt says:

    SALMAN!! The last part of your video is wrong!!!!! The US is an Autonomous Currency Issuing nation. It can create dollars at any time. A debt is not a true debt if it is denominated in a currency you can create at any time. This is why US debt is default free!!!! This is why the Chinese are so willing to keep buying Treasuries!!! Modern Monetary Realism.

  37. Ali Ababwa says:

    c'mon the chances of that happening are yuan in a million

  38. HuiChyr says:

    Wow … he's blaming Chna for USA debt problem. Get the Treasury to stop selling debt in the MARKET so China won't have Treasuries to buy.

  39. SurfingMaster999 says:

    Video is too long. 

  40. John Rogers says:

    They ought to at least Print 2 That's It

  41. John Rogers says:

    Yuan or some Shit

  42. Lorenzo Marchetti says:

    Excellent basis to understand better Richard Duncan's The dollar crisis.

  43. Alex Partridge says:

    So why doesn't the us just print it's own money interest free and not have to worry about paying interest back to china?

  44. Alex Partridge says:

    So why doesn't the us just print it's own money interest free and not have to worry about paying interest back to china?

  45. Nick says:

    this therefore ruins good paying us manufacturing jobs, giving us citizens less money to spend relying on more debt which they cant pay back, therefore creating more public debt that these same citizens eventually can't pay back bec tax revenues will also be diminished if good jobs are lost and not created, ultimately resulting in the collapse of modern civilization like we are currently witnessing given the volatility and acceleration in the devaluation of the global markets. Consumption is the fuel of this bullshit. Bec if westerners slow consuming the crazy wheel of capitalism stops and the whole thing is ruined. It doesn't help that wall st with the help of US bond holders such as the saudis the russians and the chinese hold our fates in their hands bec they are dumping us treasury bonds like crazy bec they are smart enough to know they've milked this puppy (U.S.) for all its worth. Every drip,

  46. Dylan ZHU says:

    So what does China central bank get out of this? i mean whats the point of doing so, buying a bunch of t-bills and lowering its yields, it just doesn't make sense. I can only guess its Chinese government doing US gov a favour in exchange of some trading benefit, and the Chinese might think US will increase its rate anyway and so is the USD/CNY, so that they can sell the bonds and earn a spread.

  47. The Investor says:

    It is a nice basic level video but stops when it starts getting really interesting. The question becomes which situation is better to be in. China might be contributing to low interest rates and the video states that China lends to the US to buy Chinese products. There is a flip to that though. The US produces its own currency. They owe dollars, not gold, Yuan, etc. The US can print dollars. This does not lead to inflation getting out of control since there is an increase in goods and services. So the US is giving China a currency which it produces and getting all the real stuff in return. China is getting bits of paper. What happens in the event that China dumps their treasuries? They probably can't. What would be the consequences for China if they did? Even if they did, those treasuries would then get bought by someone else, Germans, Japanese etc. Which situation would you rather be in? Shame the video stopped when it did. I would love to hear his opinion taking these thoughts into account.

  48. Japorikiskiswa C says:

    China in a sense making the US economy diabetic. Letting it chew more than it can digest. I have dealt with the Chinese and they are the most ruthless and clever when it comes to Economics. China for the most part stole US manufacturing from the US, along with it are technologies and other intellectual properties. China is just waiting before it will drop US from the loop IMO. And that is US loosing world influence.

  49. Muhammad M says:

    Economy full of manipulation

  50. 东皇太一 says:

    CHINA BUYS THE US DEBTS BECAUSE IN THE entering of WTO ,it a pre requiste….if you do not buy US debts use doller,you are not allowed to go in…

  51. 东皇太一 says:

    let's not forget the dollars the chinese central bank buys with the yuan they print are also printed freely at will by the U.S. central bank

  52. Tina Jackson says:

    My confusion is the problems for China and America are not solved. Whether America would pay off with Yuan? If not, How will China resolve foreign reserve problem? And for another thing, America needs to pay extra money for the US dollar debts .So, it means America is trapped into debts

  53. I'ma laugh I'ma cry says:

    Is the yuan backed by gold or is it a fiat currency ?

  54. Theja Roop says:

    The guy in the video at 2:10 (wearing a hat) might be Arab Sheikh's..

  55. Smith King says:

    Americans love to spend money that they don't have.

  56. Texas Ray says:

    Yuan (yu an) not wan.

  57. Texas Ray says:

    US treasury bill are no safer or more secure than dollars.
    They are subject to the same inflation.
    And when the US defaults (as it certainly will) the bonds will be as worthless as the dollars.

  58. Cory Mclaughlin says:

    Its a good vid … I just can't listen to him repeat himself over and over again

  59. Michael Chan says:

    Who will take the Yuan & give them dollars?
    Everyone is holding dollars

  60. Benihana says:

    China has dumped 400 billion dollars worth of treasuries. And every time. Some country decided to buy them. So the impact on the american economy is pretty much the same. Someone will come in and subsidize the american economy instead of China. China should dump american treasuries and spend it all on the military. america will be fine because some idiot will always by american bonds

  61. Phil Keyouz says:

    The question is what happen if they continue to buy US $ but stop buying US bonds ?

  62. Paul Romanowski says:

    Looks like highly illigal, speculation to get dollars for ious

  63. Bhokor says:

    In the long range it is unsustuinable for the US , and China knows it

  64. RoadShamanTv says:

    You print YUUAAAN

  65. 5astelija says:

    I think this video doesnt really focus on the important bit. In economics, money is just a tool. What a nation should seek is not (loaned) money but productivity, jobs and growth. The important net effect here is that undervalued yan boosts chinese exports, which essentially moves unemployment from China to the US and other nations with a floating currency.

  66. Will Statmen says:

    a hat and mustache! he sures know how to make learning fun! huge love from china! 🇨🇳

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