Markets – Fanyu Zhao

Insights about US Deficits and the Impact on Bond Yields

Facts

Trump Administration is widely seen as likely to increase or maintain high fiscal deficits.
To assess the impact of large deficits on yields, it is important to look at the total debt in the economy,
not just government debt.

What matters for markets and the economy is how much collective new credit is being created, and the incentive and desire of investors to buy it.
Debt Supply & Demand amount would flow to Rate. If government spending increases, then it means debt supply increases (there would be more borrowing), pushing up rate to increase.

High Borrowing -> High Rate -> Depressed the private borrowing.

Low/Normal level of credit creation would otherwise drive down inflation.

Two Cases:

Bad Scenario: Push up Inflation.

Total Debt/GDP increase (private and public debt / GDP) increase && Currency Weaken. Then Yield Curve would steepen, derived by long term rate increase, as nobody purchase the long term bond.

Think about a graph with x-axis (term), y-axis (yield), and a upward sloping curve.

Yield curve steepens.
Good Scenario (now the US situation): Do not drive up Inflation

Under this case, no buyers are buying the long-term debts.

Total Debt/GDP increases, but yield curve is flat. Public squeezes private investment. The increase in public debt does not increase private borrowing, so no extra purchasing resulted from households. Help relieve the inflation.

Yield curve flattens.
Example:

Now is the Good Scenario: The top-left figure shows the current credit creation in US is under normal level. Top-right figure shows that Public and Private debts are negative correlated. Public squeezes private, so total debt did not get up too much high.

1980s: Top-left figure shows total debts went high; Top-right figure shows public and private were positively correlated. So, bottom-left figure shows inflation hikes.

Bottom-right figure shows implicitly that the current long minus short term rate is at low level, imply that the yield curve is flat, consistent with our Good/Bad Scenario Rationale.

Supply & Supply Side of Debts

Supply Side: Currently, there are high public borrowing, and low private borrowing.
Demand Side:

Due to previous QE, Debt yield is high for investors => that would be attractive to un-levered investors, because Debts still bring enough return and less risks, attractive to people.

However, the levered investors fact different situation. As they hold debts already, high debt rate would become both their costs and returns.
The current real yield is about 2% in US, which is high relative to much of the rest of developed world. US nominal yields are at levels where the yield is attractive and diversifying relative to stocks allocation for those who need to supplement debts into their portfolio.

Again, the current yield curve is flat. For leveraged investors, they have debts liability already. Returns and Costs of debts offset.

Reference

Bridge-Water

Our Thoughts on Large US Deficits and Their Impact on Bond Yields

债券的分析框架

债券利率波动存在上下限区间

上限：实体部门的投资回报率，ROIC (return on invested capital)。因为上市公司ROIC要超过债券的利率，企业才有可能借债，不然承担不了利息成本
- 行业的负债水平与ROIC呈负相关，因为负债越高，投资回报率倾向于越低
- 高负债行业对债券市场影响大，因为规模大。
下限：刚性融资需求的利率水平，主要包括：城投 & 地产
- 城投代表地方政府的隐性担保，相当于信用高，风险低，因此利率低。
- 刚需融资需求萎缩，会拉低利率，因此利率下限降低

当前债券市场的特征

长短期利率脱钩，当前处于bull flat的情况

Bull Flat 意味着：长期利率降低，长期债价格上升，短期相对不变，整个收益率曲线goes flatter
Theoretically, 短端利率的波动大，且响应速度快。但当前短期利率没有明显变化，意味着市场对短期政策力度预期低，因此不投向短期。

后续债券市场的展望

方向（按照2025年利率上下限变动趋势来预测2025年利率的变动）
上限：拆分ROIC贡献的主要行业，2024年为光伏和电力等，2025年预计两行业增长有限，得有新兴产业才能支撑ROIC增长。ROIC预期不提升，因为没有增长机会；

下限：此前有刚性融资需求的城投债 & 地产拉跨，需求少，需要有新的刚性融资需求的部门增加才能推动利率下限上升。当前城投债预期也不提升，因为没有新的基建项目和空间，房地产也拉跨，因此没有需求。

总之，若无新的增长点，上下限方向均向下。
空间

当下房租（租金回报率）和按揭还款（融资成本）倒挂明显。未来有趋近的空间，因此有余地。
假设明年CPI回到1.5%，PPI回到0%，用贷款利率减去CPI和PPI的均值为实际利率。用此实际利率与历史对比，也仅处于中性水平。画外音，明年CPI大概率回不到1.5%，可能更低，因此明年实际利率更高，无法刺激经济。所以还有更多的降息空间。
此外，今年存贷款利率下调幅度多于货币市场资金成本（货币市场投资or理财收益更高），所以存款从银行表内向外转移。因为货币市场投资主要投向债等，这意味着短期债的收益高于存款利率，因此CB还有执行Open Market Operation，降息的空间。

节奏

利率走势和很多宏观指标脱钩，因为宏观统计数据失真（高估），无法反应真实情况，而利率作为市场真正交易的产品，能更好的反映市场的真实情况，因此存在利率与其他指标脱钩的情况。
目前，还有一个指标，企业信贷规模变化，与利率还有显著的相关性。因此可以通过推断企业信贷的供求端，即信贷供给&企业杠杆率，来推断利率变化的节奏。
化债or信用的周期：第一阶段，通过密集的发行新债券，置换旧债券，拉动社融增速，因为有新债券发行，对资金需求高，短期利率推高；第二阶段，逐步偿还新债券，在债务偿还过程中，信贷会收缩，利率逐步下降；第三阶段，债还接近尾声期，信贷增速和杠杆率将降到低位，利率降至低点。后续才会重启宽信用的周期。

目前还处于第一阶段，新债券集中发行会推高利率。

即使目前经济政策是降利率，但是与信贷周期短期推高利率叠加，可能导致2025年上半年（化债or信用周期的第一阶段），整体利率下降不明显，因为政策的降利率和信贷周期的升利率对冲了一部分。后半年利率会逐步下行。

但具体也要看OMO的力度。

Be careful if they Talked the Talk, Walked the walk, disappointing the mkt and people again and again.

Reference

https://www.bilibili.com/video/BV16ViRYJEY8/

关于中国经济现在 – 付鹏在汇丰的报告

当前经济模式从增长转为分配

当前经济模式由增长（把蛋糕做大），变为分配（把蛋糕切好）。参考日本的1980s后的状况，经济没有增长并不意味人均变差了或者人不幸福了（日本消失的40年），同时而经济增长也不意味着人均都增长了（近年我国的增长模式）。

如何应对

当前上述由增长转为分配的背景下，普通人需要做的是，参与到到分蛋糕的过程中，参与分配，而不是参与增长。But how to do it?

离权力近一点，离资源近一点，就能多吃一点。
而卖劳动力（按以前增长的模式挣钱），就只能少吃一点。

日本低利率时代，巴菲特carry trade，在日本发日元债，以低利率（低成本）借钱，然后直接投资日本公司。In other words, 巴菲特参与了日本过去40年的存量财富分配。

当前经济困境

经济流转的过程，一方的消费是另一方的收入。然而消费和收入流转需要时间。

当经济扩张时：富人先进五星级酒店，富人先买超跑，富人先吃海鲜，然后逐步下沉，到最后是老百姓吃上海鲜，老百姓开上汽车，老百姓进五星级酒店。
当经济收缩时，却是相反的：先收缩的是底层。网约车司机、快递员、外卖小哥等是对经济需求反馈最快的。而坐办公室的往往反馈很慢，要等年终降薪、发不出工资、裁员等才会有反馈。同时，近年网约车司机数量剧增并不是因为农村劳动力进城，更多的是，中产阶级的陨落。只不过是你的阶层不一样，你看的问题不一样。
从经济数据反馈，经济收缩的时候是底层先吃苦，往往一定周期后才能传递到经济数据上，因此宏观经济指标的反馈将滞后。

经济数据不真实，实际情况是通缩，没有增长。

主要原因是人口问题，老龄化及劳动人口缩减。

刺激经济的方式

关于说法“内债不是债”。诚然不同于外债需要用外汇还，有本币的国家可以通过印钱来还债，但是长期以往会导致流通中的货币增加，产生潜在通胀问题（可能当前短期通缩，因为没有过量现金流通，但货币总量增加了，长期一定会有通胀风险）。

国家政府需要长期稳定就需要保持Public Sector的平衡。债务增加需要靠（1）借新还旧（2）提升税收还。

税收收入 = 税基 * 税率
税基 = f(人口，收入，消费意向, etc)
税收收入 = f(人口，收入) * 税率
当前总人口少了，只有增加收入，或者增加税率，才能满足债务增加。

此前，公共部门的债，企业债，可以通过供给侧改革&房地产等方式输出给私人部门，换句话说是将企业和政府债转移，由老百姓买单。但当前，人口结构和人口总量不一样了。当前供给过剩，及需求不足同时存在，导致价格（PPI，CPI）一降再降。

房地产市场

房价在2008年-2015年第一波上涨，而2015年-19年才是上涨幅度最大的，此阶段也是80s后需求最旺盛的年代。然而收入增长并没有房价增长快，房价是由需求推动的，而非购买力。北京的房价收入比是世界最高的一批。

买房的时候抵押贷款，相当于把自己的未来收入折现抵押给银行，买房。房子此后换手，如200万买了卖400万，相当于把债务转移给接手人，由其未来现金流折现来偿还。所以房价上涨，而收入未上涨，相当于掏空年轻人或者中年人更多年的未来收入。

如果收入不增长，那么实际各种交易都是在做资源分配，而非增长。一批人的财富来自于另一批人的债务，如上文200万房卖400万的例子。但如果没有更多的年轻人愿意买房了，400万的房卖出600万了，相当于旁氏骗局的链条断了，比较收入没有实际增长。

而房价在整个经济体中有着重要的意义，关联着抵押和债务。如果房价降，相当于资产降，而债务不变，只能equity降低（相当于wealth降低），如果equity降到0或为负，则资不抵债。

放大到宏观，纵向，收入上涨才能保证房地产的需求和价格。而收入可以理解为未来现金流折现，未来年轻人的收入折现。如果年轻人少了，相当于能折现的收入少了，房价难免下跌。年轻人把房子买走了，让中老年或者少数人（如房地产开发）获得了财富，但是年轻人获得了负债。

未来消费结构

当前人口少了，人口结构变了，老年人成为了消费的主导（尹瑞哲的报告，年轻人少的省份消费能力强），同时中长期看，消费的结构向年轻人的方向转变

中国企业周期

中国可以用很短的时间将产业链做到“全球遥遥领先”，在政策的保护期，PPI为正，企业都可以活，但同时由于有利润空间，企业进入市场，会造成很多同类竞争。但一旦保护期一到，到市场经济竞争的情况下，企业开始打价格战，开始PK、竞争、内卷，PPI开始转负。然后一轮产业过剩，开始淘汰。

政府驱动再引导新的产业。用这种前浪推后浪的方式，推动整个产业各个环节的周期缩短到五年，但是代价就是很多行业会以很快的速度进入到PPI为负，而所有能到PPI为负的产业，最后能活下来都得感谢有自己的负债端，有居民部门能买单。一旦内需不足，居民部门不再为企业负债买单（或者无法买单，因为经济压力自底层向上传导），就会出危机，就是当前经济现状。

所以看产业链成熟度，或者说看周期投资时，不能等产业已进入竞争模式的时候投（如新能源），因为在价格战，博弈分蛋糕，就像抽签众多企业中能成活的一个（当然也不要买行业ETF，而如果一定要投此行业，投最有机会活下来的，负债端压力小的，有打价格战空间的）。要在政策利好的时候投，因为在把蛋糕做大，有政策保护。

投资是看预期，不是现状。

供给侧改革

中国供给侧改革的起点是2002年，PPI为正，核心CPI为正，有效需求为正。持续到2012年，供给开始过剩，但有效需求可以继续加杠杆（相当于居民部门用负债端扩大的方式支撑供给侧扩张），但供给矛盾已经产生，2009年供需双落，这就是中国这一轮从2012年开始的大周期的末端。

此处时间有点混乱，付鹏建议看《朱镕基总理答记者问》，三卷本。

“只要人还在，啥债都能化”。只要人不在，这债怎么化？税率。量收不上来，就抓率。

财政、利率、汇率传导

当财政需要扩张，利率下降，财政花钱短期内不会流转到居民部门，国内经济的有效需求不够，储蓄过剩，投资回报率下降，利率下降。

在这种背景下，汇率就代表着你的实际回报率以及本币购买力，是减弱的，本币贬值。

日本长期低利率，而同时保证汇率稳定的原因。理论上将，利率差会导致汇率差，但日元此前相对稳定。原因是日本进行carry trade，大企业（三井、三菱etc）低息借日元然后买海外资产。用海外资产来支撑日元汇率。然而企业通过carry trade挣了钱，老百姓无法进行此操作（其实老百姓也可以买海外股票，但是大多数老百姓没有这么做），老百姓穷了（收入降低无法支撑消费）所以日元的稳定才难以维持。

Implications

当前两会提出财政和货币双重宽松，希推高国内CPI避免通缩，短期市场可能会利好，因为投资者不希望踏空，且不希望被通胀影响。但交易上可能只有短期影响，因为债务需要用税收买单，宏观经济的核心问题（人口）并没有解决，且没有新的技术能推动经济增长，那么中长期就难以维系。

交易上可能短期实现收益后投资海外资产比较好。

Others

投资方向，中产面临巨大困境，做高端（爱马仕），做低端（拼多多。放弃中端（LV，Chanel，Prada）
消费模式类似，只有老人的消费和年轻人的消费可以做，中年人的消费能力降低。
投资产业要投早期的产业，已经成熟的只能投负债端优秀的或有价格战能力的。

Reference

https://www.wenxuecity.com/news/2024/12/02/125897172.html

About Gold

About Gold ?

There seems some “irrational” movements of gold price since the end of 2023.

How gold should be priced? What factors affect the pricing of gold. Here below are some of my reading and insights.

Typical Determinants

Typically, the gold price is considered to be correlated with a list of factors:

Inflation
In counter with the inflation.
Long-term Real Interest Rate

TIPS, the Treasury Inflation-Protected Securities, is considered to be the real-interest rate, as the inflation rate is counter-deducted. The long-term rate, specifically 10-yr rate, is preferred as we generally assume holding the Gold in a long-term investment horizon. The long-term Real Interest Rate is considered as the opportunity of holding gold. Therefore, the higher rate, the greater the cost of holding golds, and less demand of gold. Price decrease thereafter.
US Dollar

The Brandon Wood System links the gold price with US Dollar, with 35USD = 1 ounce Gold. Since the collapse of Brandon Wood System, there is not a fixed exchange rate between USD and Gold anymore. However, USD is still the most important determinant of gold price in that the unit of Gold price is still USD/ounce. It is also like an exchange rate, the more per ounce value of gold is, the more USD/ounce should be. Or, contrastively, the weak USD is, the more USD/ounce shall be.

US Dollar Index

The US Dollar Index might be consider an proxy of the strength and weakness of US dollar. However, as US dollar is the weighted geometric mean of the exchange rates of six major currencies compared to the US dollar:
- Euro (EUR) – 57.6% weight
- Japanese yen (JPY) – 13.6% weight
- British pound (GBP) – 11.9% weight
- Canadian dollar (CAD) – 9.1% weight
- Swedish krona (SEK) – 4.2% weight
- Swiss franc (CHF) – 3.6% weight
  The USD Index is actually a composite of weighted average of above listed currency. The increase of US dollar index means USD is appreciated w.r.t. above currencies. I.E. if USD appreciates w.r.t. EURO, then USDX is likely to increase.
  
  Therefore, an increase in USDX means appreciation of USD, and then USD/ounce shall decrease, gold price decrease.

Risks / Uncertainty
Demand and Supply from Central Banks.

We ignore the impact of demand and supply from individuals and industries, but focus on the demand of Central Banks. Like what those CB did during February and March 2024 would increase the demand of gold price.

Empirical Research

Refer to the research report from CICC, a four-factor model is established. The authors specified the relationship between gold and those four factors, one by one.

The dependent variable: Gold Price. (Also, attention that they focus on the gold price, not the return as machine learning usually do)
Explanatory Variables:
- US Real Interest rate
Capture the Opportunity Cost of holding gold. Similar as the explanation in the above section.
- US Dollar Index,
Similar as the explanation in the above section.
- Central Bank Net Gold Purchasing,
The supply side is limited, demand is mainly driven by the Central Banks of US, China, EU, JP, etc.
- US Gov Debt Level.
This factor represents the credibility of US dollar or US government. The greater US Debt level, the less credit-worthy the US gov is. Then, the more desire of holding gold as the counter party of US Dollar credibility.

The Statistic table is shown below.

The author argue that people do not need to consider the spurious regression though the R-squared is incredibly high. They state that the reason is that they are only considering the model like a co-integration model. They have tested the integration of the residual term, and find that the residual is stationary. High R-squared means there are less left in the residual.

Their explanation is like the Bull Shit. However, we just ignore the bull shit econometric modeling and statistic figure in the above table, as we are not doing academic. Let consider the predictable power and the implication of the model.

Here below is their simulated result and the real gold price movement. Let’s investigate is their model perform as good as stated in their report. Also, let’s see how ML way could perform.

Code Example

Gold_Price_Analysis.html

USD流转信用硅谷银行

QE

本来美元作为通用货币，而且很稳定，美国慢慢印钱慢慢灌水就行了，可惜来了疫情，为了刺激US内的经济循环，全世界委屈下，然后开始大量印钱，美国牛逼。短期情况下价格水平不变，（1）超额印出的美元可以用来购买import其他国家的资产（2）促进国内消费，带动健康的经济循环。

QT

随着时间段变长，中长期市场会超额印钱速了美元贬值，一般情况下，每次贬值到一定程度的时候都会加息让美元回流。因为加息之后收益利率变高，投资者可以买美元存银行或者换美元买美国其他资产，带来USD需求增加，让在外流动的美元减少，推动美元升值。然后US付利息。财政费用支出增加（财政部，cb配合，以及us gov资产负债表研究 wait to be done）。

QE+QT Circulate

吸收到一定程度后，USD升值，市场中的USD量达到适当（quasi-equilibrium）水平后，可以重复QE QT过程。

综上：QE+QT结合相当于：投资者（其他国家）把钱存入银行（US），银行（US）给投资者利息，然后用投资者的钱，买投资者（其他国家）的资产。In short, US用付利息（money）去买世界的goods and services。但是，所谓利息，不过是张纸，或者说credit paper罢了。

Some Facts in Reality

中国通过出口，挣了很多Current account surplus 贸易顺差，即中国在出口商品的过程中，挣了很多USD。此时。中国世界工厂的职能使得，进口商进口中国商品的时候，对CNY需求增加，使得CNY相对升值。曾经中国对CA surplus的处理是，买gov bond，但是近年逐步增加对实体资产的持有，以及对gold的持有（2020-2021全球QE的背景下，gold储备量保证该国货币的信用水平。USD持有也有为其他国家货币提供credibility的功能，但是该功能在US超量QE的背景下逐渐下降）。持有实体资产的好处在于，不是paper currency，相对更加保值且有能力转换为生产力，受到风险时也更加稳定。
US QE的时候，中国也处在疫情全国quarantine的阶段，出口减少，导致全球市场上超额印发的USD没有办法购买足够的商品（中国supply少了很多，其他国家同样export少了）。此时US QE的超量不能被市场消化，US通胀大幅上涨。US为了避免hyper- inflation，加息收回USD。
各国EU，Canada，UK等（JP不同）为了避免在USD升贬值的过程中被US收割资产，基本上选择和US类似节奏的升降息，以避免本国资产大幅流出。中国外汇管制，资产难以流出。 => 超额USD难以被消耗。

俄乌问题+各种sanction使得如俄罗斯，伊朗等国家出现无法转账等问题，这些国家的货币流通出现困难，使得这些国家货币的credit下降。（此时这些国家对于USD的需求增加）。
石油美元的勾在新能源大背景下稍微减弱，但是已经稳定。
etc

总之，在目前短期内，超额USD难以被消耗，US只能继续大幅加息，高利息高收益，为了吸引其他国家钱流入，为了收回超发的货币避免通胀。

硅谷银行

US QE+QT毕竟是宏观行为，但是它改变了收益率的模式。最明显的特征就是收益率曲线倒挂。长期利率低于短期利率。这导致微观层面，消费者存入银行的钱长期不如短期给的利息多，消费者缩减投资期限的情况增加。银行挤兑出现。

USD信用崩塌的情况逐渐出现。

Diamond and Rajan’s Study about Financial Crisis 2008

The authors noted the financial crisis of 2008 was caused by mainly three reasons.

U.S. financial sectors misallocated resources to real estate.
Commercial and Investment banks had a large proportion of their instruments in their Balance Sheet.
Investments were largely financed with short-term debts.

The following will illustrate why those facts happen.

1. Misallocation of Investment

Step 1. World Crisis pushed up risks.

The financial crisis in emerging markets, East Asia Econ Collapsed, `Russia Defaulted, South America, etc made investors circumspect.

Step 2. Capital Controls made CA surplus.

To react to those unexpected events and prevent domestic industries from the incumbents, governments started to conduct capital controls. Also, investors were unwilling to invest (they cut down investments and even consumptions) or charge a high-level risk premium. A number of countries became net exporters.

Step 3. “dot-com” bubble derived another global crisis.

Those exporters then had a current accounts surplus and transferred the CA surplus into “savings” (investment). Those savings were invested into the high-return business, the IT industry. However, another nightmare happened that is the “dot-com” bubble collapsed around the 2000s.

Step 4. CB QE and US financial innovations made a housing bubble

Central Banks QE, lowered the interest rate, which ignited demand for housing. The house price spiked. In the U.S., financial innovation (securitization) drew more marginal-credit-quality buyers into the market. The crisis manifested itself.

Step 5. Asymmetric information enforced the bubble.

Because rating agencies were at a distance from the homeowner, they could process only hard information. Asymmetric information enforced the bubble. Housing prices surged to prevent “default”.

Step 6. Securitization Iterate itself.

The slicing and dicing through repeated securitization of the original package of mortgages created very complicated securities. The problems in valuing these securities were not obvious when house prices were rising and defaults were few.

But as the house prices stopped rising and defaults started increasing, the valuation of these securities became very complicated.

2. Why Did Bank hold those instruments?

The key answer is bankers thought those securities were worthwhile investments, despite their risks. Risks were vague and unable to be evaluated.

it is very hard, especially in the case of new products, to tell whether a financial manager is generating true excess returns adjusting for risk, or whether the current returns are simply compensation for a risk that has not yet shown itself but that will eventually materialize.

Several facts manifested the problem.

1. Incentive at the Top

CEOs’ performance is evaluated based in part on the earnings they generate relative to their peers. Peer Pressure, which came from holding financial instruments to increase returns, mutually increased the willingness to hold those financial instruments.

2. Flawed Internal Compensation and Control

The top management wants to maximise the long-term bank value and goals. However, many compensation schemes are paid for short-term risk-adjusted performance. The divergency gave managers an incentive to take risks in the short term.

It is not said that the Risk management team is unaware of such incentives. However, they may be unable to fully control them, because tail risks, by the nature, are hard to quantify before they occur.

3. Short-term Debt

Given the complexity of bank risk-taking, and the potential breakdown in internal control processes, investors would have demanded a very high premium for financing the bank long term. By contrast, they would have been far more willing to hold short-term claims on the bank, since that would give them the option to exit — or get a higher premium — if the bank appeared to be getting into trouble.

In good times, short-term debt seems relatively cheap compared to long-term capital and the costs of illiquidity remote. Markets seem to favor a bank capital structure that is heavy on short-term leverage. In bad times, though, the costs of illiquidity seem to be more salient, while risk-averse (and burnt) bankers are unlikely to take on excessive risk. The markets then encourage a capital structure that is heavy on capital.

4. The Crisis Unfolds

Housing Price decreased, => MBS fall in value and becaome hard to price. Balance sheet destorted, and debt level held, and equity shrinked.

Every parties sold out, drived price down again and again.

Panic (no confidence) spreaded worldwide.

Interbank lendings were forzen as inadequate credits.

5. The `Credit Crunch

Banks were reluctant to lend due to two reasons. One possibility is that they worry about borrower credit risks. A second is that they may worry about having enough liquidity of their own, if their creditor demands funds.

Dealing with the Crunch

Banks still fear threats from illiquidity. Illiquid assets still compose significant portions of banks and non-banl balance sheets. The price of those illiquid assets fluctuated largely, because liquidty asset could be easily exchanged or sold out for cash, but illiquid assets were unable to do so so that price shrinked and damaged the balance sheet. Debts held constant, but assets shrinked, resulting in shrinkage of equity, and increase in leverage and financial burden.

Coins have two sides. Low prices mean not only insolvent, but also tremendous buying opportunity. The pandic manified the expectation of insolvency, plus illiquid market condition made the fact that less money was availab to buy at the price. Selling iterated itself.

CB standed out, provided liquidty to financial institutes.

However, an interesting thing happened. CB’s intervention to lend against all manner of collateral may not be a unmitigated bless, because it may allow weak entities to continue holding illiquid assets.

Possible ways to reduce the overhand

1. Authorities offer to buy illiquid assets through auctions. `This can reverse a freeze in the market caused by distressed entities. Fair value from the aution can be higher than the prevailing market price. 2. government ensures the stability of financial system that holds illiquid assets through the recapitalization of entities that have a realistic possibility of survival. （我国，纳入国有）.

Reference

Diamond, Douglas W. and Rajan, Raghuram G., The Credit Crisis: Conjectures About Causes and Remedies (February 2009). NBER Working Paper No. w14739, Available at SSRN: https://ssrn.com/abstract=1347262

Unemployment Data in the U.S. Labour Market

The statistical data of unemployment rate released last week. 3.5% in September 2022, another lowest level even in history.

The U.S. economy is encountering still hgih level of inflation. To fight the inflation, one of the target of the Fed, the Federal Fund Rate has already been increase to about 3% to 3.25% in order to slow down the economy. However, the unemployment data shows the economy is seemingly continuously heating.

There several reasons explain the over-heated labour market.

Individuals have already overcome the pandemic, and the consumption, especially service, are in high demands. There is even an overshooting of demands for labours.
Many people leave the labour market, and are classified as distressed workers who are not included in the calculation of unemployment rate.
Immigrant policy have changed since the Trump. To increase the employment rate for those “domestic” U.S. citizens, the immigrant policy has been not that friendly. Less low-cost labours inputed into the U.S. economy drives a gap of workers.

The low unemployment rate provides the Fed another inspiration of QT.

After QE

Why QE ?

By QE, the Fed increased the money supply to stimulate the aggregate demand in 2020 and 2021.

$$ Y=C+I+G+NX $$

By QE, more money were dumped into the economy. Two mainly used methods are (1) helicopter drops, and (2) banks/firms repo and CB reverse repo.

What happens after QE ?

1. Individuals got the more money in hands (mainly from Helicopter Drops in 2020) — Consumption increased. In the U.S., people who had SSN and were taxed a year before a certain time point were assured an opportunity of helicopter drops. Those money were highly likely ( and it really is) to transform to real demands in the market, because of the consumption habit in the U.S.

The Fed printed extra money and dumped into the economy. People spent those extra money to buy goods and service. Less Goods and Services were produced domestically in the U.S., while most of them were imported from Mexico, India, Russia, China, Mideast, etc. That is what I discussed before. The U.S. printed money (, which are worthless), and use “nothing” to reap goods and services from all over the world.

The above is one fact. Another is that there are still too much of money in the economy. Too much money chased too little goods. Like Milton Fridman said “Inflation is nothing but a monetary phenomenon”. There were no enough outputs (aggregate supply) to meet the increase in aggregate demand resulted from QE, then inflation surged.

2. Increase in supply of money dragged the interest rate down and thus reduced the financial cost for firms. Investment increased. This case is a bit different. In China, the CB conducted also QE to stimulate the economy especially in the current situation. However, the CB’s conduction is mainly through the Banking System. In this case, money are mainly poured into firms through loans not to individuals. Individuals are hardly able to get low-cost money because on the one hand them may not have enough pledges, and on the other hand people are fear to invest in the real estate, coz the real estate bubbles are in the edge of collapse although the gov is trying to keep the mkt stable.

Pros and Cons are there. Advantages are (1) firms that got the low-cost money are most likely state owned firms. In this case, there are “relative high probability” of safety. (2) firms encounter low financial cost and could have direct impact on infrastructures. Disadvantages are also that (1) money could not be directly given to individuals, no real happiness or utility increase for those family. Family based businesses are still suffering the plunges in demands and undergo bankruptcy. (2) too much money chase too little high-quality assets that can have potential positive expected return or payoffs. Money circulates in the economy, and costs circulates as well to increase. On the one hand there is low efficiency, on the other hand extra money does not contribute to stimulate the economy. Financial System discoodinates.