I used to think that money theory was very complex. Then I realised a fundamental truth that simplified everything:
§ Money has no intrinsic value; it is merely a voucher, or bundle of vouchers for goods and services.
So, if we Europeans buy Chinese goods, we pay for them with Euros, which are just vouchers for goods and services produced in Europe. If the Chinese don’t need any of our goods at the moment, there are two things they can do with these Euros: they can store them in their bank vaults to use at a future time, or they can swap them for, say, American Dollars, i.e., vouchers for goods made in America.
If the Chinese have no present need for either American or European goods and services, there is something else they can do: they can use their vouchers to buy real property (i.e., land or buildings) in Europe and America.
Now, when the Chinese buy real property in Singapore, an interesting phenomenon occurs. Singapore charges property owners a property tax. So the Chinese, having paid Singapore Dollars for their real property, then have to continue paying every year for the same property. In this way, ownership of Singapore property becomes a service that Singapore can provide to the Chinese in return for currency.
Some people argue that GB style Rates have much the same effect as Property Tax. This is not actually true, because Rates are a tax payable by Occupiers on the Annual Value, or Earning Power, of real property, whereas Property Tax is payable by Owners based on the Market Value of the property, i.e., it continues to be payable even if the property has an inflated market value and no commensurate earning power. If, however, owners find that their property continues to bear a heavy burden of tax, without commensurate earnings, they will get fed up holding the property and will want to sell again.
If the Chinese don’t want to buy our Real Property, there is something else they can do with their Euros and Dollars: they can buy our Bonds with them. However, bonds are merely I.O.Us, in other words the Chinese are merely loaning the vouchers back to us to re-use. Shall we buy Chinese goods and services with these borrowed Euros and Dollars?
Ultimately, it comes down to this: your vouchers should be used to purchase goods and services, or they are really worth nothing at all.
Let’s consider that all the goods and services traded between China and Europe are simplified into one category, say Sloppy Joes. Let’s say that one Euro can buy you one European Sloppy Joe. The reason why we, in Europe, buy so many Chinese Sloppy Joes is, of course, that they are offering to sell us 10 Sloppy Joes for one Euro. However, when they get their Euro, they are not inclined to buy our Sloppy Joes, because they are simply too dear. So they keep piling up our Euros (and American Dollars) in their bank vaults.
Here is the truth of the matter: The Euro must fall against the Yuan, so that our Sloppy Joes become better value for the Chinese. We try to fall against the Yuan, but the latter is tied to the Dollar, so the Euro falls against the Dollar. But, in reality, the American Dollar is under the same pressure to fall against the Yuan, so the Euro can’t fall very far against the Dollar, without coming under pressure to rise again. The Chinese can affect the Euro/ Dollar relationship by shifting their Euros and Dollars from European bonds to American bonds, and back again.
The solution to the whole mess is quite clear: the Yuan must rise against the Dollar. If that happens, the Euro can rise a bit against the Dollar.