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With regard to the maintainance of a balance of payments, if a country wishes to import more, they must export more. If they cannot export more manufactured, semi-manufactured goods or services, then they must export common shares, bonds, and various other securities.

What happens though if the number of notes [fiat currency] is increased by one or both of the contracting [trading] partners?

The prices of the commodities and hence, the balance of payments must adjust. Assume that the US, wanting via WalMart, to import Chinese manufactured goods, refused to increase the notes in circulation. Then, either the price of US exports must drop, or the difference be made up via securities. Now, if the price of US exports drops in relation to Chinese manufactured goods, then a greater quantity of goods will be required to balance the payments. Less goods are available to sell in domestic markets.

That the US tends to produce higher value goods, with higher technology etc, you had the interesting problem of China, a developing economy, not being able to afford US production, and to lower the price might have incurred economic losses.

Increase the notes in circulation. Through this artifice, the balance of payments could be balanced. By increasing the notes in circulation, the goods held for sale, become cheaper, thus a greater volume are demanded.

Paradoxically it was China who increased their note circulation. China printed Yuan in receipt of dollars from their exporters, and purchased with the dollars, US securities. Thus the balance of payments, balanced.

Essentially China entered a credit transaction with the US, foregoing present consumption for future consumption. The products that the Chinese desired, were in point of fact dollars, foreign reserves. The Asian debacle of 1997 and the collapse of the Tiger economies was a currency collapse driven by a lack of foreign reserves against US dollar direct and indirect investments.

Thus, to purchase more dollars, the Chinese had to sell more manufactured items. Thus, drop the price of manufactured goods, or increase the money supply. The money supply was increased, and the purchase of US dollars and assets increased.

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