glendokid

John Hussman: Debunking the 'Global Liquidity' Myth

I believe that you have made the mistake of assuming that the amount of money is constant. If the Chinese government lowers reserve requirements, the amount of money in China increases. Some of that is, say, invested in US stocks. Does this mean the the Chinese claim on American production has thus increased? No, the Chinese purchaser bought American dollars, thus some entity in the US now has Chinese currency (or equivalents) and thus the US claim on Chinese production equals the claim in the previous sentence.

International economics is hard. The real problem, I think (but not confidently) is that the Chinese government is keeping huge foreign reserves (US treasuries mainly) and thus artificially preventing the Chinese currency from moving higher versus the dollar. they CANNOT present this "claim on US production" else the Chinese currency will go way up and stop their economy because of the loss of exports. See the famous story about John Maynard Keynes and the attempt to make Germany pay reparations after WW I.