What advantages of buying USA bonds to China ?
In order to maintain a trade imbalance, we know that the Chienese Central Government needs to keep its currency artificially weak.
and to do that they essentially can print their currency and use that to buy US dollars.
so what they do is they increase the supply of Yuan and they increase the demand for dollars
keeping their currency weak
Now the next question you might ask is
what do they do with the actual dollars that they bought with the Yuan
that they printed.Well, they do not want to just sit on those dollars
they don't want to. They prefer to be collecting some type of interest
on that money. So instead of just keeping it all in some warehouse in some place
they actually just lend that money to the US Government and they lend
that money by buying US treasury bonds, by buying T-Bills and T-notes
So that money that they use that they bought with their printed
Yuan, that goes to the US Treasury. that goes to the US treasury
The US Treasury gives the Chinese Central Bank Treasury bonds
Gives them Treasury bonds
So these are Treasury bonds.
Now what is the effects of this.
Clearly the Bank of China is getting interest on
its money now. Its helping to finance the US Goverment's debt
But may be even more interestingly, it is creating
incremental demand for T-bonds. So it is creating demand for T-bonds
for Treasury bonds. Now what does that do?
Well if you are increasing the demand for anything thats also
going to increase the price. So the price of
Treasury bonds, of T-bills and T-notes goes up
T-bills are of durations less than one year but notes
are durations more than a year
So the price goes up. What happens if the price goes up
that means that the interest
The interest that the government has to pay on this debt
goes down. So that means that the interest goes down.
I will explain that more in depth in other videos
Now the interest goes down, that means the cost of borrowing
for the US government goes down
But thats also the benchmark rate for the cost of debt
in general. so in general it finances US debt
Both of the Government and really just credit, more broadly
So debt becomes cheaper
Debt cheaper inside of the United States.
This is Salman Khan from the Khan Academy For CNBC.
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