Chinese Domestic Demand and the Purchasing of U.S. Treasury Bonds

How is domestic demand supposed to expand while we are spending money on buying U.S. Treasury bonds?

The U.S. Department of Treasury’s recent report on the revision of international capital flow showed that China’s ownership of U.S. Treasury bonds increased 30 percent to $1.16 trillion, further securing its position as America’s largest creditor. In addition, the report indicated that from June 2010 to December 2010, China’s ownership of U.S. Treasury bonds never fell below $1.1 trillion. These figures show U.S. Treasury bonds are still China’s number one choice for the investment of their foreign exchange reserves.

As for now, the American Federal Reserve holds $1.1 trillion in U.S. Treasury bonds; by mid-year, before the second round of quantitative easing ends, the American Federal Reserve will hold more U.S. debt than China and Japan combined. The Federal Reserve is basically acting as America’s central bank; where is this money coming from? Does it not come from the printing of money by the Federal Reserve? Since the financial crisis, the Federal Reserve’s balance sheet has expanded rapidly. The Federal Reserve Chairman, Ben Bernanke, has been given the nickname of “Helicopter Ben” because of the way he has made “airdrops” of money into the American market.

America is printing money madly, and what about China? Lately, the entire country has been discussing the central bank and how it is creating inflation by the superfluous printing of money. Experts blame the over printing of money for the recent rise in China’s food prices. But there is a hole in this explanation. Food prices are rising for the entire world. Could it be that the printing of Chinese money has caused the entire world’s food prices to increase? That would suggest that the Chinese Yuan is the global currency. After careful research we found that this is not the case.

How much of China’s debt do you think the People’s Bank of China has bought? This may be hard for the Chinese to hear, but the answer is none. Why is it like this? The laws of the People’s Bank of China prohibit it from over-drafting from the treasury. They also do not allow the direct purchase or sale of national debt or any other government debt. They forbid the loaning of money to local governments and all levels of governmental departments; furthermore, they prohibit loaning money to non-financial institutions and other organizations and individuals.

The reason for these rules is very simple; lawmakers want to prevent the Central Bank from printing money for the government to spend. These politicians who have studied Western economics abroad believe that the irresponsible printing of money by the Central Bank is the basic reason for inflation. This is clearly written in the Western economic textbooks. But, if America is the epitome of Western economics, then why does it neglect this principle? And not only does America neglect it, why does it print money without any constraint at all?

China has pushed hard to increase domestic demand for many years; domestic demand, however, has never truly expanded, and the reason is extremely simple: The common Chinese person has very little money in their hands. How are they supposed to expand domestic demand? The raising of the money supply in China mainly depends on exports. The cash that businesses receive for their exports is first taxed by the government; then, a part is given to suppliers; then, it is used to expand the production scale of the business; next, it is given to the owner so he can buy a house and a car; finally, after most of it has been taken, a little money is given to the workers as salary.

Why do businesses want to export products to America? It is because America’s ability to consume is the greatest in the world. Actually, most of the money that Americans use to consume is borrowed; even the American government is living beyond its means. The Chinese government, due to the fact that the Chinese people cannot afford to spend money, are picking up U.S. dollars and using them to loan money back to Americans so they can spend it. If this pattern does not end, it will be very difficult for the Chinese to expand their domestic demand.

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