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June 12, 2011


I think people are asginat the trade deficit because they don't understand where money comes from. They think there are a finite number of dollars and if we give too many dollars to china we won't have enough here in the US. This is a mistake. The monetary system is not a zero sum game. Banks create money when they lend it. They can lend out more money than they have in deposits. This creates money. If I buy something from china and add value to it, that increases the money supply in the US because I can borrow money on the value I added.If I borrow $100 to buy widgets from china and I convert them to super-cogs worth $1000, I can then borrow $900 from the bank. Where did that $900 come from? The bank could create that money because I created value when I made super-cogs. I can then use the $900 to pay my employees and pay the bank back as I sell my super-cogs. In this way $900 is added to the economy here in the US even though I sent $100 to china.

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