Today I will talk about why the relationship between a trade surplus country and a deficit country is a zero-sum game. The trade surplus is positive, the trade deficit is negative, the surplus and the deficit add up to zero. The surplus of the trade surplus country would turn into indebtedness owed by the trade deficit countries. Deficit countries manifest it as external debt. This zero-sum relationship has become a bit complicated under the economic globalization of the multilateral trading system, but the truth can still be glimpsed. For example, from 2000 to 2018, the United States had a cumulative current account deficit of $ 10 trillion, and the United States’ net external debt was also $ 10 trillion. Similarly, from 2000 to 2018, China’s cumulative current account surplus was US $ 3.3 trillion, and China’s foreign exchange reserves were US $ 3.1 trillion. So, the question arises: The deficit countries could borrow infinitely without limit. Regardless of whether the debtor countries can afford to repay their debts, how does the surplus countries continue to operate? This is very important. This is the key to cracking the Triffin paradox. Below I continue to use stories to explain how the zero-sum game is operated between countries.
Say if the Chinese family has four sons, each of them living independently, dad would preside over a fair competition between the brothers, and dad would have the right to print money. Initially, trade was between the four brothers. The eldest son sells bread to the second son. The eldest son’s income is the second son’s spending. The second son must sell the equivalent worth of products in order to have money to buy the eldest son’s products. Among brothers, one party’s income is the other’s expenditure, the four brothers exchange with each other, living a self-sufficient life, this model is the so-called domestic demand economy. Therefore, when any economist advocates a domestic demand-based economy, I will chuckle as people could not be rich without foreign wealth, and so is the country. The Chinese people must not rely solely on domestic demand in order to lead the world’s richest life. The domestic demand-based economy is like the four brothers’ economy. To become rich, we must embrace globalization. That is why President Xi put forward a great vision of a community of shared future for mankind.
Well, let’s get back to the story. Dad wishes the family to get richer and accumulate more savings. He encourages the four brothers to work harder and sell the surplus output to other families. As a result, the four brothers increased working hours, increased output, and sold the surplus products to the American family.
In the course of the transactions, the Chinese family sold 50,000 yuan of goods to the American family, but only 20,000 yuan of the goods sold to the Chinese family in return. Americans has no equivalent income, therefore unable to repay the remaining 30,000 yuan to the Chinese family. So, the brothers go to their father claiming that they could not do the business anymore. “We sold to The American 50,000 yuan of goods with the cost amounted to 40,000 yuan. American owe us 30,000, how do we pay for the wages and raw materials?”
Dad thought about it for a while. He figured out he could print money to the four brothers and let the Americans owed him money. So, dad bought the debt of 30,000 yuan, which became the foreign exchange reserve. In this way, old dad kept on buying the American debt notes. As he printed money to buy the debt notes is virtually without cost, he earned interest instead. Therefore, no hurry to urge the American to repay the debts. Not only did the Chinese family do this, but the Japanese and The Europeans sold their goods in the same way to the American family as well. They also do not bother to force the American to repay their debts. Just like this, the Americans ended up with more and more debts.
By 2018, the American family’s external debt had reached 50% of its total annual income. Among them, most money owed to the Chinese Family. At this time, the father of the Chinese family felt that something was wrong, sooner of later those debt notes would go bad. But the Americans owes too much debt, and the Chinese worry that selling them could lead to a collapse of the U.S. currency. So, they began to discuss with other families how to sell the US debt without causing the US dollar to collapse. . ….
The above story is the clearing problem of our current trading system. The global foreign exchange reserves are $1.1 trillion, and the net foreign debt of the United States is $10 trillion. It proves that the global trade imbalance is essentially coming from the long-term deficit of the United States. The United States has taken advantage of its dollar reserve status to absorb global savings. The savings of the world’s people have filled the US consumer debt. Consumer debt itself does not create value. US debt is more worrying. New debt is used to pay off old debt, and total debt continues to increase at a rate of 500 billion US dollars each year, the dollar has become a Ponzi scheme. With such a simple and clear truth, what do economists say? They say, “You are layman, this is the famous “Triffin Paradox”! Because the United States is a trade deficit country and the US dollar is willing to assume liabilities to foreign countries, can the US dollar be called a global reserve currency? It is because China is Trade surplus country and foreign exchange reserve contributor, so the RMB can never become a global reserve currency! “
My God! Western economics is the most ridiculous knowledge I know. Why would countries be accumulating foreign exchange reserves for the American consumption??? At the core of the Triffin paradox, must the precursor conditions of an international reserve currency be a global debt king??? In the next talk, let me analyze the Triffin paradox. In the past, I have rolled out the simple facts about currency issues, now the exciting part is coming! Designing a new global currency system begins with cracking the Triffin paradox. Only by breaking Triffin’s paradox can the community of human destiny move on ahead.
Time is up for this session. The dollar problem concerns all of us. Out of this centennial change, the most important one is the change of currency. Foreseeing correctly how this happen perhaps providing the biggest opportunity for wealth explosion in the next 20 years. This is my original aim for this series of lectures. Keep listening, and you will definitely gain something.
Thank you, see you next time.
November 1, 2019 Ma Xia
