While I don't doubt that China is accumulating gold the article has the reasons and effects wrong.
BUYING GOLD DOES NOT REDUCE INFLATION, INCREASE THE VALUE OF A CURRENCY, OR REDUCE THE MOENY SUPPLY.
Buying gold increases inflation (think Spain in the 1500s ), reduces the value of a currency (there is a lot more of it) , and increases the money supply as more is printed to buy the gold.
In the past China bought LOTS of US Treasury bonds. They were selling a lot more goods then they were buying and had an excess of dollars which would push the value of the Chinese currency up and then make it harder for them to export. So they bought US currency from Chinese businesses by printing CHinese currency. They then used those dollars to buy US bonds which at the time actually paid interest. So the CHinese currency was backed by US bonds. This held the value of the Chinese currency down.
So instead of buying MORE bonds to keep the value of the CHinese currency in line with the dollar so they can remain export competitive, they are buying gold.
Every time they buy more gold they are putting more Chinese currency in circulation and throwing all the US dollars out in to the world keeping their balance of trade in check. They could buy anything. In the past they bought a LOT of copper. If Chinese consumers bought more from other countries, the currencies would be in balance and this would not be happening.
Right now the world is in a race to see who can devalue their currency the fasted to gain a competitive advantage and reduce unemployment in their own country. China just happens to be winning. That is why their GDP growth has been so high over the last few years and we have lost a lot of our manufacturing.
I have thought as a way to stimulate our economy that the US should print money and buy gold along with congress spending money on infrastructure (fix bridges, high speed rail, energy conservation, etc)
Toofuzzy
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