Sunday, October 26, 2008

Next money question

We have a collection of Canadian coins that have been given to us over the years as change from MacBurger’s, the Stuff Mart, yard sales, and various other places. Being the honest citizens we are, when we notice we have them we put them away rather than try to use them in hopes no one else will notice getting them any more than we did at the time. Now, I’m not really interested in collecting Canadian money, but the only legitimate way I know of to get rid of them, besides giving them away or selling them to a collector, is to go to Canada and buy something with them. And that’s not going to happen, so I’m stuck with useless Canadian money.

I understand that something similar happens on the international scene — if we buy a million dollars worth of stuff from China, then China has a million US dollars that they have to do something with, and ultimately this money comes back to us in the form of someone somewhere buying American goods or services.

This would make sense if we were dealing with hard currency, but I’m pretty sure it’s virtual money.

Here’s how I imagine it happens: When Stuff Mart buys a shipload of Chinese doodads to put on the shelves in its stores, there isn’t really a guy with $1 million in Federal Reserve Notes handing it over to a guy at the Chinese factory. No, Stuff Mart’s bank debits one million credits, converts it to yen, and then those credits are applied to the factory’s bank account.

So this is a mechanical question — how does this really work?

There’s a philosophical question underlying it, but I’ll get to that later.

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