2021-06-22

How Should China Respond to U.S. Monetary Drugs

iFeng: 面对危机 当美国“嗑药”般撒钱时我们该怎么办?
The American madness of "spending money" never ends? Fu Peng: It's like "taking drugs"

Overwhelmed by water, the United States seems to never look back on its quantitative easing (QE) journey. Since the outbreak of the new crown epidemic early last year, in order to prevent the economy from sinking deeper and deeper into the "epidemic quagmire", the United States has introduced a series of fiscal stimulus plans since March last year. Entering this year, after Biden took office, he has further accelerated the pace of America's "big water release".

Statistics show that in January of this year, Biden, who had just taken office, announced a large-scale stimulus package of US$1.9 trillion in his speech; at the end of March, Biden announced another US$2.25 trillion fund plan and US$1.8 trillion family. Plan; At the end of May, Biden threw another $6 trillion government expenditure budget proposal for fiscal year 2022. In addition, last year, the scale of the US fiscal stimulus plan for more than a year has broken the ten trillion dollar mark, and the continuous crazy "spending money" behavior has also been rated as "epic" release by the outside world.

The cost of the United States' repeated "release of water" has become apparent. According to the latest data released by the US Department of Labor, the US CPI in May increased by 0.8% month-on-month and 5% year-on-year, which was not only higher than market expectations, but also set the largest increase since August 2008, which is approaching the economic crisis.

Faced with concerns about the global economic crisis caused by the "explosion" of US inflation indicators, Fu Peng believes that such changes are the most important lessons learned from the world economy in the past decade. "The currency system established after World War II actually has a huge flaw. Just to say that this flaw is that all of us are not willing to face it and face it in ordinary times or even in times of crisis." "Fu Peng used the word "drug" to describe it. He stated that the behavior of the United States can be described in simple words as-whenever there is a crisis, it will take drugs. "Take the medicine first. As for the future, I'll talk about it later."

What is "drug use"? In Fu Peng’s explanation, “drug use” means left-handed stimulus and a mismatch in the right-hand, which eventually led to the failure of the central bank’s monetary policy in the original monetary system. “So nominal interest rates have been lying on the floor, but the actual inflation high."

"Taking drugs" to the end: the rich will always be rich, the poor will always be poor

Fu Peng believes that the essence of Keynesianism is to generate excessively low real interest rates through a combination of "left and right hands", thereby breeding asset bubbles. And in such a cycle, there will be a kind of appearance, that is, "As long as we carry it over, the crisis will not be a crisis." "As long as there is an asset bubble, the original asset recession can be carried over, and as long as it has passed, the crisis will not be a crisis." As to whether this logic holds up, Fu Peng argues dialectically that "it is right and wrong", but In his view, looking at this question in different time dimensions, the answer will be completely different. For the moment, he said, “We can’t wait for people to die before we solve them. We save people and hold them back first, but you may not consider a problem, what are the negative effects it brings.”

What are the negative effects? From public information, it can be seen that the United States continues to "self-heel", which has caused the central banks of many developed economies such as Europe and Japan to substantially expand their balance sheets. Emerging markets have frequently cut interest rates. Some regions and countries have even entered negative interest rates. The world has to collectively under the influence of the United States. Towards "easy". On the other hand, inflation represented by commodity prices is happening, and Biden’s fiscal stimulus has also caused all domestic prices in the United States to rise, but the people are still spending wildly. As Sam Bullard, senior economist at Wells Fargo Bank, pointed out, “It seems that every time Individuals are trying to increase prices."

However, in Fu Peng's view, if this loose farce is not restrained, it may trigger a social crisis that is more terrifying than the economic crisis. "The big problem of the global economy is no longer discussing the'economy' itself. The big problem facing the world now is the'social' problem. Constant strong stimulus has brought too low real interest rates and capital costs, and the profit-seeking nature of capital will As a result, some people have made huge profits from investing in assets such as houses, causing a serious gap between the rich and the poor in society and distorting all classes of society. He believes that with such reciprocity, a phenomenon will appear in society: after every crisis, the rich will always be rich, and the poor will always be poor.

Therefore, Fu Peng warned that “the drug will not go on in the end, and the road of'taking drugs' cannot go on forever.”

Relying on "release of water" to pass on risks? The trend of U.S. stocks is evidence

Since continuous "release of water" is not a wise move, why does the United States not mean to stop at all? To this question, Fu Peng gave a direct answer-"Don't dare to collapse."

Fu Peng pointed out that after Powell took over as chairman of the Federal Reserve in 2018, although the U.S. economic data represented by U.S. stocks looks good, the actual economic structure is already very poor. The body of this person is still very poor, and because this person's body simply cannot hold the real interest rate level before the financial crisis, although he is out of the ICU, his body is still deteriorating."

This kind of internal and external contradiction has also become the deep-seated reason for Fu Peng's eyes that the United States continues to pass on risks to the world. "This structural problem cannot be solved by the United States itself."

The trend of US stocks may be proof. "U.S. stocks will see a V-shaped reversal soon after every plunge. As long as the volatility of U.S. stocks rises, it will quickly hit a record high, almost every year." Why does this happen? Fu Peng's interpretation of this is that whenever asset prices are ready to clear, the Fed will use lower nominal and real interest rates to hold back the assets, so that the assets will not be destroyed. "As someone said, there are two things in this world that cannot be broken. One of them is the US stock market."

For this kind of "holding" behavior, Fu Peng believes that the reason why the U.S. dare not let U.S. stocks collapse is precisely the reason why the monetary system is essentially unable to resolve the contradictions between the economy and society. Questions to think about.

Similar to Fu Peng’s point of view, this description has recently come from Robert W. Baird & Co. The investment strategy analyst Ross Mayfield seems to have been confirmed. When evaluating the CPI data that just hit a record high, he believes that "such data is not enough to make the Fed retreat, and the latter-the overall picture-is important." Ross Mayfield said, "If the economy is strong, people go shopping, Retail sales are high, and prices are rising because of demand, which is good for the stock market."

How to deal with it?

During the summit, Zhu Guangyao, the former deputy minister of the Ministry of Finance, gave a response from the perspective of the United States and the world when talking about the issue of "water release" in the United States or the economic crisis that will be caused. He said that with regard to the Fed’s “release of water”, one should not only see its impact on the flood of market liquidity, but also its effect on economic stability. “In this kind of crisis, it is necessary to stabilize the society and stabilize the economy. Vigorous macroeconomic measures need to be taken."

On the other hand, regarding the spillover influence of the Fed, Zhu Guangyao specifically pointed out the need for policy coordination by countries around the world, especially the G20 countries. "I think this aspect needs to be urgently strengthened. We are all in the same boat, working together to deal with the crisis, and negotiate and cooperate to deal with the new challenges facing the global economy in the post-epidemic period, so as to achieve a sustainable, strong, balanced and global economy. Inclusive growth is the goal of the G20."

Ma Guangyuan, an independent economist and deputy director of the Central Economic Commission of the China Democratic National Construction Association, took a firm and positive attitude in the face of the challenge of "discharging water." In his view, there is no need to worry too much about the crisis, "After every major crisis, the global industry will usher in a reshuffle. This crisis has just given the Chinese economy the unprecedented opportunity to top the global digital intelligence economy. ."

In Ma Guangyuan’s view, China’s layout in digital technology construction is already in a leading position in the world, and China’s manufacturing industry just happens to provide the best application scenarios for the digital intelligence economy, and the core of the global supply chain industry chain system is gradually shifting to China. These backgrounds have brought a rare window of development for China's digital intelligence economy.

China could have decoupled anytime it wanted to stop relying on the U.S. consumer market. Similarly, the U.S. has had 14 years to face its strucutural problems, has also done nothing to address them.

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