Journey

Sail in ship of ambition and anchor at harbour of success

The World War 3 (between China and US) has started?

As i write this article , one would have read a lot about  sub prime crisis in the newspapers and would have seen how Lehman tumbled and AIG was rescued by Fed and Us bail out of $700 bn . At the same time in the east China has built a forex reserve of $500bn from last 6 months and a total of $2 trillion .

Now before explaining the startergy of how Chinese are going to conquer the world , I would take some time to make the reader aware  of some common economic concepts which will be used in this article .

The Basic Concepts

Forex Reserve essentially means the foreign currency held by a central bank of a nation . For a nation , the deficit/surplus is calculated by Exports(X) –  imports(M) .

So for a nation having greater exports and lesser imports is desired . For exports to increase , we say that we should be able to provide any quantity at a cheaper cost . Say if one country sells 1 kg of cotton for 2$ and some other country for 3$ , buyers willl buy form country that is selling for 2 $ .

So to increase exports there are two ways

1> Increase Productivity … which ll decrease the cost of production and which will inturn decrease the rate at which u can sell … This involves technology heavily ……

The other way is the most intresting way …. “Devalue your currency” ..

How does devaluing your currency increase your export ?

Now say 1 $ = 45 Rs  . Say 45 Rs gets you  1 kg of rice . So a foreigner by paying 1 $ will take 1kg of rice . If you devalue ur currency Say you make 1 $ = 60 Rs then the same foreigner will take home 1.33kgs of rice for 1$ . Or in ither terms u have decreased the cost .. thereby increasing exports .

Simialrly this will make imports more dearer ..as a result imports(M) will decrease .

So for a nation Forex reserve = M – X increase !!

But economics is all abt balances .. the flip side is you r also importing inflation … which would again cause a increase in cost of production .

How is China attacking US

China as mentioned earlier  has huge forex reserver ..about $2 trillion . But there is a imbalance in trade between US and China . China is a major exporter of the goods to US ..US pays China .. and China parks this money in US as Us treasurey bills .

Other way trade is very neglible here ..case where US exports to China .

So Chinese central Bank always makes sure that yuan is weak . This is in accordance to the above explained principle ..so that it can have a competitive edge in the global market.   Because of China even other Asian countries make sure that their currency is undervalued .

Now coming back to the point ..This way China holds huge amount of Us tresaury bills .Just imagine if China sells all it bills ( $ 2 trillion) ..Us would choke with liquidity chrunch ..n intrest rates will blow off the roof …

Thus China is equipping itself to a position where it can rule the world ..

The stratergy followed is same as Us follwed against USSR during cold war .. The next World war ( WW3)  has started .Its not a war  to be fought by weapons ..Its all abt economics …………………………

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