id: 749c59f4-5e6d-4975-9e42-7323c938dc33
Why does the world follow the crisis when the United States raises interest rates? - Huxiu.com#
Omnivore#
Highlights#
Vietnam is currently similar to China during the US interest rate hike cycle from 2004 to 2006. The domestic and foreign exchange goals of monetary policy are consistent, and raising interest rates is actually beneficial to "us". ⤴️ ^33cdbe88
Two economies of equal scale but with different economic cycles are actually beneficial to global economic stability. This not only requires us to have confidence in the free convertibility of the renminbi, but also requires our economic policies to be more internationally responsible than the United States. ⤴️ ^bb9fda1f
This is likely to be the outcome of the internationalization of the renminbi. With two different systems and economic cycles from the United States, other countries are caught in the middle and lean towards whichever side is more suitable for them.
Why does the world follow the crisis when the United States raises interest rates?#
I. The United States - Interest - Firm
Every time the United States enters an interest rate hike cycle, the US dollar index soars, and a bunch of emerging economies that were once thriving suddenly face financial crises. Even developed countries experience significant currency devaluation and struggle to protect themselves.
At this time, a bunch of financial self-media outlets come out and say that the United States uses the interest rate hike cycle to harvest the development achievements of other countries, suppress emerging economies, and even restrain developed countries that are allies, causing chaos everywhere to ensure its status as the only superpower.
The so-called "America's interest and firmness" refers to the interest rate weapon of the United States, which is as firm as a sickle.
Is this really the case? Yes and no.
To clarify this issue, we need to understand two things:
- What happened before and after the Federal Reserve's interest rate hikes and cuts?
- Why does the world get affected when the United States raises its interest rates?
II. Why does the Federal Reserve raise interest rates?
First, let's explain: What kind of interest rates does the Federal Reserve raise?
The interest rates raised by the Federal Reserve are not deposit rates or loan rates, but the "federal funds rate," which is the interest rate at which banks in the United States lend and borrow funds from each other. So, why can the Federal Reserve decide this if it is a bank rate?
This is a matter of wording. The "federal funds rate" of the Federal Reserve is more like a regulatory target, just like the monthly work plan we set for ourselves.
With this target, the Federal Reserve uses open market operations to influence the money supply to drive interbank transactions back to the target federal funds rate.
When the Federal Reserve's target is to raise interest rates, it reduces the money supply, i.e., "tightens monetary policy." For example, by selling government bonds, the money supply in the US market decreases, and the interbank lending rates naturally increase, achieving the goal of the Federal Reserve's interest rate hike.
When the funding costs of financial institutions increase, the interest rates for loans and bonds naturally increase as well. Companies will reduce new investments, and inefficient companies may go bankrupt, releasing more labor to the market. With more unemployed people and fewer job opportunities, wages will decrease, breaking the "wage-price" spiral of inflation and solving the high inflation problem in the United States.
Of course, there are many explanations for the causes of inflation, and here we have used the most classic one. However, most reasons can be solved by raising interest rates.
Therefore, when the United States raises interest rates, it is to solve the problem of high inflation in the United States at the expense of the economic recession and increased unemployment rate domestically. Conversely, lowering interest rates is to stimulate the domestic economy, not intentionally trying to take advantage of the world.
However, although there is no malicious intent subjectively, objectively, the cycle of the US dollar's interest rate hikes and cuts does exacerbate global economic fluctuations and is the main cause of global financial crises in recent decades.
Why is this the case? This is what the US Treasury Secretary Connally said during the Nixon era:
"The dollar is our currency, but it's your problem."
III. The US Currency and Global Issues
The currency used in international trade requires strong credit guarantees, large quantities, stability, and free convertibility, and most countries are willing to accept it. Under these conditions, the US dollar, euro, pound sterling, and yen are the most suitable choices.
Due to the cost of currency exchange, if there is no external intervention, there is a natural tendency for one currency to dominate international trade. Therefore, over time, the US dollar has become the most widely used currency.
Using the currency of a particular country as the international trade currency naturally creates a contradiction - the contradiction between the country's monetary policy and the global economic situation.
The amount of currency required in international trade is related to the scale of international trade, which has been steadily increasing. This requires more currency. Why were gold and silver used as international trade currencies for a long time but then phased out in the 20th century? It is precisely because the volume of international trade has expanded rapidly, and there is not enough gold and silver.
The ideal state of the US dollar should be to grow steadily with the scale of international trade. However, the US dollar is not only an international currency but also a tool for the US government's debt to its people and businesses.
In early 2020, the United States faced a pandemic and responded by significantly lowering interest rates and injecting US dollars into the market. The US government also provided direct funding, distributing actual US dollars to the people and businesses.
The US domestic dollars and the US dollars used in international trade are the same dollars, so they naturally flow overseas.
Since the scale of international trade is stable, there is no need for so many US dollars. However, with extremely low US dollar interest rates, there is a tendency for foreign investment or capital arbitrage, buying other countries' currencies. As a result, the supply of other countries' currencies becomes insufficient, and they have to overissue their own currencies.
This year, the United States has experienced the most severe inflation and high employment rates in decades. The Federal Reserve has begun to raise interest rates recklessly again, reclaiming the liquidity through interest rate differentials.
As a result, capital that was previously converted into other currencies is now being converted back into US dollars. This surplus of domestic currency leads to the early signs of inflation, and other central banks have to follow the United States in raising interest rates to reclaim liquidity. Otherwise, it will cause significant inflation or a sharp devaluation of the exchange rate in their own countries.
Just as radiation therapy kills cancer cells, it also kills more normal cells. While the United States solves domestic problems by raising interest rates, it leaves behind a big problem for the international community - this is the meaning of "The dollar is our currency, but it's your problem."
If you don't accept the US dollar, you cannot conduct international trade normally. But if you accept the US dollar, you will to some extent lose the autonomy of monetary policy. Following the US in raising or lowering interest rates, if the economic situation in your own country is opposite to that of the United States, it may lead to an economic crisis.
Therefore, there is a "impossible triangle" of "free convertibility of currency, fixed exchange rate, and independent monetary policy," where you must give up one of these three options.
IV. The "Impossible Triangle" in the Strong US Dollar Cycle
Since 2022, during the US interest rate hike cycle, governments around the world have been trying to save themselves under the background of a strong US dollar and capital outflows. Based on their own actual conditions, they have taken different measures:
The Hong Kong dollar's linked exchange rate system is a fixed exchange rate and a shadow currency of the US dollar, which cannot be changed. As an international financial center, Hong Kong must have complete currency convertibility. Therefore, Hong Kong has completely lost its independent monetary policy.
Although the Hong Kong economy is facing recession and a real estate market crash, it still has to follow the interest rate hikes to further weaken the economy and cause stock market declines. Otherwise, it will intensify capital outflows, and once foreign exchange reserves are exhausted, the linked exchange rate cannot be maintained.
South Korea, as an export-oriented major economy, needs a certain degree of currency stability but is unwilling to completely give up its independent monetary policy. It can only constantly weigh the pros and cons between the two and raise interest rates to a certain extent while controlling currency depreciation.
However, whether the desired effect can be achieved depends on the operating space left by the country's economic growth and inflation level for the central bank's monetary policy and the operating space left by foreign exchange reserves for the exchange rate. If the strong US dollar persists for too long and turns into low growth and high inflation, it will cause a financial storm like the one in 1998, with domestic banks going bankrupt and foreign exchange reserves exhausted, and no one can save them.
Although Japan is also an export-oriented major economy, the situation is different. The government is unwilling to give up its long-term negative interest rate policy and can only allow currency depreciation.
However, the depreciation of the yen is limited. Once it reaches the level of 1998, Japan will have to intervene in the foreign exchange market for the first time in 24 years, buying yen and selling US dollars. It is worth noting that with Japan's economic scale, once the yen collapses, it may affect the world, and the United States cannot say "It's your problem."
The Turkish lira can be freely converted, and the central bank insists on an independent and autonomous currency. It has chosen the "bold move" of cutting interest rates in the opposite direction, resulting in a significant depreciation of the Turkish lira and an astonishing inflation rate of 80%.
This is very cruel. The middle-class can convert their lira assets into US dollar assets and hedge against the rising cost of living through real estate appreciation. However, low-income groups without assets become victims in this round of inflation.
On the other hand, countries whose domestic economic conditions are synchronized with the United States have less pressure during this round of US interest rate hikes:
Due to its strong economic growth and large operating space for monetary policy, India is not afraid to follow the United States in raising interest rates. The Indian rupee remains stable overall. If a global financial crisis occurs in the future, India will become a safe haven. Therefore, the Indian government is also taking the opportunity to improve the status of the Indian rupee in international trade.
In the "impossible triangle," few developed economies choose to give up "free convertibility of currency" because the cost is too high and it will cause a collapse of capital. Moreover, the government does not have the control ability - except for China.
China adheres to an independent monetary policy of "putting ourselves first." When the United States raises interest rates, we lower interest rates. We also want to keep the renminbi exchange rate as stable as possible to stabilize foreign investment confidence. This inevitably requires stricter foreign exchange controls, and the side effect is delaying the internationalization of the renminbi, pushing the current problems to the future.
Similar to China, Vietnam has foreign exchange controls and limited free convertibility in the capital account. In addition, Vietnam's economy has high growth in recent years and no ambition for the international currency status of the Indian rupee. Therefore, there is more room for operation in the "impossible triangle." It was only this week that Vietnam began raising interest rates for the first time. Moreover, Vietnam's housing prices have skyrocketed in the past two years, so raising interest rates can also solve domestic problems, killing two birds with one stone.
==Vietnam is currently similar to China during the US interest rate hike cycle from 2004 to 2006. The domestic and foreign exchange goals of monetary policy are consistent, and raising interest rates is actually beneficial to "us".==
Therefore, the phrase "The dollar is our currency, but it's your problem" can also be understood as "If you have problems of your own, then the US dollar becomes your problem."
V. How to Overthrow the Dollar Hegemony?
To summarize:
The US dollar is the global reserve currency, but the US monetary policy only focuses on the domestic economy and completely ignores internationalism. As a result, when the United States loses weight, the whole world has to eat junk food; when the United States gains weight, the whole world has to take diet pills.
This is called "a friend in need is a friend indeed."
Every time this happens, there are always people shouting loudly: "As long as the dollar hegemony exists, the world will not be peaceful."
But things are not that simple. The US monetary policy should be criticized, but it should not turn into a conspiracy theory. Conspiracy theorists like to treat results as causes, which actually exaggerates the strength of the United States. They are far from being able to manipulate the global economy.
More importantly, the whole world needs to reflect on why the United States rarely considers the global reaction when deciding on monetary policy. It is because the world does not have other choices - the yen and the euro are worse than the US dollar.
Therefore, if you want to overthrow the dollar hegemony and free the world from the influence of the unethical US monetary policy, the only way is to internationalize the renminbi and compete with the US dollar.
==Two economies of equal scale but with different economic cycles are actually beneficial to global economic stability. This not only requires us to have confidence in the free convertibility of the renminbi but also requires our economic policies to be more internationally responsible than the United States.==
The content is the author's independent opinion and does not represent the position of Huxiu.com. No reproduction without permission. For authorization, please contact hezuo@huxiu.com
If you have any objections or complaints about this article, please contact tougao@huxiu.com
People who are changing or want to change the world are all on the Huxiu APP.