The reason for this is to be found in a building with a gray-brown stone facade in Beijing, above the entrance of which it says “State Foreign Exchange Office”. In front of it the red national flag is waving. In professional circles, this authority is known by its abbreviation Safe. Safe is a kind of anti-fort knox: Instead of gold, the agency hoards US government bonds. “The foreign exchange management by China is a far underestimated factor that has completely transformed the world economy in the past 20 years or so,” says the economist Richard Duncan, a former employee of the World Bank and author of several books, in which he right, among other things, the financial crisis of 2008 precisely predicted. China and other East Asian countries do not spend the dollars they earn on goods, but instead book these revenues as currency reserves on their central banks’ balance sheets. This practice is new. In the past, central banks only held small amounts of foreign currency, after all, they had precious metals as reserves.
China, Japan, Taiwan, Hong Kong, India and South Korea together now hold reserves totaling six trillion US dollars. That is a third of the US annual economic output. These countries would therefore be entitled to all goods and services that Americans manufacture from January to April of each year. But they do not claim this wealth. You keep the money and invest it in securities. The US government and business benefit enormously from this practice. Because the dollars that Americans use to pay for goods in Asia come back to the United States — because Asians buy US government bonds — and keep the economy there going. A trade deficit that does not make poor, but rich. The goal of most ordinary people is to make more than to spend. They invest their surpluses in one form or another, pay off a property or leave what they have left in the account. Countries with trade surpluses such as China, Japan or Germany cannot store foreign currency in the form of cash. Therefore, they have to export capital. When a Chinese company collects dollars, the Chinese government has to invest them somewhere. For the same reason, Germany is also one of the largest exporters of capital.
China mainly buys US securities for its dollars: government bonds and stocks. Richard Duncan: “The deficit foreign trade finances the state budget and the stock exchange prices in America. In other words: China is funding Trump. ” To a large extent, the global economy lives well with the large flows of money. “The world economy would be much smaller without this development,” says Duncan. Because unlike in the past, innovations would no longer be slowed down so much by scarcity of money. Thanks to lavish investments and many exports, China has succeeded in lifting one billion citizens out of poverty. The Americans, on the other hand, were able to enjoy a higher standard of living than their own economy actually allows. They were given sneakers and smartphones and in return they delivered debt securities of doubtful value to Asia. Central bank balance sheets are — unlike the proverbial Swabian housewife — very patient.
Did the president understand? Perhaps. Does he act accordingly? Definitely not.
In this country, too, there are many errors that result from confusing macroeconomics with microeconomics. So it is not only German industry that explains the export success. But the cheap euro. In times of an independent D‑Mark, a trade surplus would inevitably have led to an appreciation of the currency, which would have made goods more expensive abroad and thus initiated a correction. From the point of view of many economists, the Germans’ pride in their trade surplus, which they see as proof of their efficiency, is also irritating. It is the export — not the surplus — that reflects the popularity of German goods. If it were faced with an equally high import volume, there would be no problems. However, the large difference between the two values does not make you richer, but causes trouble. The idea that a trade surplus is a value in itself dates back to Goldfinger’s time. At that time, a plus in foreign trade brought an influx of precious metals and thus the possibility of making more liquidity available domestically. Only more gold made it possible to spend more money. The banks were able to grant more loans, jobs and new products were created. Today, however, liquidity is already in abundance. The excess therefore hardly has a positive effect.
The currencies of the export masters China and Germany should therefore be significantly revalued in order to correctly reflect the situation. That would only be possible if the currencies were freely tradable with one another. But it is precisely these demands that currently contradict the current dogma both in Germany and in China. The euro with the common exchange rate for Italy and Germany is considered inviolable. And China is also not considering releasing the yuan for trading. So the big wheel of financial flows will keep turning, reserves in East Asia will increase, as will US liabilities. “A disruption of this cycle,” says Richard Duncan, “would almost certainly be the trigger for a new depression.”