Category: Economics

The Interview about the Principles for Changing World Order

by Ray Dalio

Five Factors:

  1. Economy, Debt, Money, Market
  2. Internal Order or Disorder/Conflict
  3. External Order or Disorder (Power Rivalries)
  4. Acts of Nature (Impact of Climates)
  5. Technologies (the advance of productivity)

Cycles Factors, as the below three, generate the cycle. (, are marked by wars. Starting the cycle at the end of WW II.)

  1. Internal Order – Productivity increase
  2. Debt raises relative to Incomes. (Debt is money, and debt means more buying power.) Increase the gaps of wealth, -> Internal Conflicts start to emerge
  3. External Conflict:

Climates, and Technologies (Mans inventiveness, new technologies)

Apply those five factors into the current world.

  • The current Debt Climate condition:

    Currently,

    Private debt sectors (individuals) get more and more indebted.

    Public debt sector take on the debt, and the central bank is supporting that effort.

    On a cyclical basis, total debt relative to GDP continuing to rise near its high.

    Debt service cost (a function of interest rate) increase, and public sector takes the burden.

    Then, Public sector starts to get indebtedness.

    That is the short-term cycle.

The cycle for development, Ray considers there are four stages.

  1. A poor country that has no capital accumulation starts to recognise the poverty.

    Country gets money to get capital formation, and conduct infrastructure (such as build roads). Do not waste that money, and put money into productive uses.

  2. Mentality. As the country getting richer, it still think it is not rich enough, is still poor.

  3. The country keeps getting richer, and start to realise it do not have to work that hard, and start to enjoy the life.

  4. As there are less works, the country gets poor, but still think itself is rich. So start to borrow money.

How to create a portfolio.

  • has a diversified portfolio that is able to absorb risks and unforeseen.

  • The types of assets in the portfolio might include

    1. Inflation index bonds
    2. Gold
    3. Real Rates
    • Avoid the credit risk. (The above three are the government obligations, so less credit risks are there)
    • Such as, we short Inflation index bond and long Gold (we could avoid the credit risks, and diversify the portfolio with certain target)

Club de Paris

The Paris Club (Club de Paris, 巴黎俱乐部) has reached 478 agreements with 102 different debtor countries. Since 1956, the debt treated in the framework of Paris Club agreements amounts to $ 614 billion.

Low-income countries generally do not have access to these markets. The assistance from bilateral and multilateral donors remains vital for them. Non-Paris Club creditors are becoming an increasingly important source of financing for these countries. Yet despite the fact that Paris Club creditors now have to deal with far more complex and diverse debt situations than in 1956, their original principles still stand.

Members

Duty of Members

Ad Hoc Participants & 6 principles

Permanent Members

The 22 Paris Club permanent members are countries with large exposure to other States woldwide and that agree on the main principles and rules of the Paris Club. The claims may be held directly by the government or through its appropriate institutions, especially Export credit agencies. These creditor countries have constantly applied the terms defined in the Paris Club Agreed Minutes to their bilateral claims and have settled any bilateral disputes or arrears with Paris Club countries, if any. The following countries are permanent Paris Club members:

AUSTRALIA
AUSTRIA
BELGIUM
BRAZIL
CANADA
DENMARK
FINLAND
FRANCE
GERMANY
IRELAND
ISRAEL
ITALY
JAPAN
KOREA
NETHERLANDS
NORWAY
RUSSIAN FEDERATION
SPAIN
SWEDEN
SWITZERLAND
UNITED KINGDOM
UNITED STATES OF AMERICA

Ad Hoc Members

Other official creditors can also actively participate in negotiation sessions or in monthly “Tours d’Horizon” discussions, subject to the agreement of permanent members and of the debtor country. When participating in Paris Club discussions, invited creditors act in good faith and abide by the practices described in the table below. The following creditors have participated as creditors in some Paris Club agreements or Tours d’Horizon in an ad hoc manner:

Abu Dhabi
Argentina
China
Czech Republic
India
Kuwait
Mexico
Morocco
New Zealand
Portugal
Saudi Arabia
South Africa * prospective member on 8 July 2022
Trinidad and Tobago
Turkey

Development and History of Paris Club

Early Stage

In 1956, the world economy was emerging from the aftermath of the Second World War. The Bretton Woods institutions were in the early stages of their existence, international capital flows were scarce, and exchange rates were fixed. Few African countries were independent and the world was divided along Cold War lines. Yet there was a strong spirit of international cooperation in the Western world and, when Argentina voiced the need to meet its sovereign creditors to prevent a default, France offered to host an exceptional three-day meeting in Paris that took place from 14 to 16 May 1956.

Dealing with the Debt Crisis (1981-1996)

1981 marked a turning point in Paris Club activity. The number of agreements concluded per year rose to more than ten and even to 24 in 1989. This was the famous “debt crisis” of the 1980s, triggered by Mexico defaulting on its sovereign debt in 1982 and followed by a long period during which many countries negotiated multiple debt agreements with the Paris Club, mainly in sub-Saharan Africa and Latin America, but also in Asia (the Philippines), the Middle East (Egypt and Jordan) and Eastern Europe (Poland, Yugoslavia and Bulgaria). Following the collapse of the Soviet Union in 1992, Russia joined the list of countries that have concluded an agreement with the Paris Club. So by the 1990s, Paris Club activity had become truly international.

Debt Burden Enlarges for some Countries

In 1996, the international financial community realized that the external debt situation of a number of mostly African low-income countries had become extremely difficult. This was the starting point of the Heavily Indebted Poor Countries (HIPC) Initiative.

The HIPC Initiative demonstrated the need for creditors to take a more tailored approach when deciding on debt treatment for debtor countries. Hence in October 2003, Paris Club creditors adopted a new approach to non-HIPCs: the “Evian Approach”.

Evian Approach

General frame of the Evian approach

  1. Analysis the sustability

    When a country approaches the Paris Club, the sustainability of its debt would be examined, before the financing assurances are requested, in coordination with the IMF according to its standard debt sustainability analysis to see whether there might be a sustainability concern in addition to financing needs. Specific attention would be paid to the evolution of debt ratios over time as well as to the debtor country’s economic potential; its efforts to adjust fiscal policy; the existence, durability and magnitude of an external shock; the assumptions and variables underlying the IMF baseline scenario; the debtor’s previous recourse to Paris Club and the likelihood of future recourse. If a sustainability issue is identified, Paris Club creditors will develop their own view on the debt sustainability analysis in close coordination with the IMF.

  2. if face liquidity problem

    For countries who face a liquidity problem but are considered to have sustainable debt going forward, the Paris Club would design debt treatments on the basis of the existing terms. However, Paris Club creditors agreed that the rationale for the eligibility to these terms would be carefully examined, and that all the range built-into the terms including through shorter grace period and maturities, would be used to adapt the debt treatment to the financial situation of the debtor country. Countries with the most serious debt problems will be dealt with more effectively under the new options for debt treatments. For other countries, the most generous implementation of existing terms would only be used when justified.

  3. if not sustainable or need special treatment

    For countries whose debt has been agreed by the IMF and the Paris Club creditor countries to be unsustainable, who are committed to policies that will secure an exit from the Paris Club in the framework of their IMF arrangements, and who will seek comparable treatment from their other external creditors, including the private sector, Paris Club creditors agreed that they would participate in a comprehensive debt treatment. However, according to usual Paris Club practices, eligibility to a comprehensive debt treatment is to be decided on a case-by-case basis.

    In such cases, debt treatment would be delivered according to a specific process designed to maintain a strong link with economic performance and public debt management. The process could have three stages. In the first stage, the country would have a first IMF arrangement and the Paris Club would grant a flow treatment. This stage, whose length could range from one to three years according to the past performance of the debtor country, would enable the debtor country to establish a satisfactory track record in implementing an IMF program and in paying Paris Club creditors. In the second stage, the country would have a second arrangement with the IMF and could receive the first phase of an exit treatment granted by the Paris Club. In the third stage, the Paris Club could complete the exit treatment based on the full implementation of the successor IMF program and a satisfactory payment record with the Paris Club. The country would thus only fully benefit from the exit treatment if it maintains its track record over time.

Data

There data in the website yoy.

Insights

Refer to Horn et al., (2021) figure 9 in page 13, Paris Club seems played important role during 2010s.

tbc

Reference

https://clubdeparis.org/en

Two Approaches for Forecasting Exchange Rate

The first approach is that analysts focus on flows of export and imports to establish what the net trade flows are and how large they are relative to the economy and other, potentially larger financing and investment flows. The approach also considers differences between domestic and foreign inflation rates that relate to the concept of purchasing power parity. Under PPP, the expected percentage change in the exchange rate should equal the difference between inflation rates. The approach also considers the sustainability of current account imbalances, reflecting the difference between national saving and investment.

The second approach is that the analysis focuses on capital flows and the degree of capital mobility. It assumes that capital seeks the highest risk-adjusted return. The expected changes in the exchange rate will reflect the differences in the respective countries’ assets’ characteristics such as relative short-term interest rates, term, credit, equity and liquidity premiums. The approach also considers hot money flows and the fact that exchange rates provide an across the board mechanism for adjusting the relative sizes of each country’s portfolio of assets.

Source by CFA reading materials

Dutch Disease

In Dutch Disease, certain sectors have enormous exports demand, which would drive the demand of currency for that country. Its currency appreciates. However, the rest sectors that may not have such huge amount of exports demand would also have to undergo an appreciation of currency. Export demands for goods and services in the rest sectors would decrease even severe.

The Impact of Balance of Payments Flows

As noted earlier, the parity conditions may be appropriate for assessing fair value for currencies over long horizons, but they are of little use as a real-time gauge of value. There have been many attempts to find a better framework for determining a currency’s short-run or long-run equilibrium value. Let’s now examine the influence of trade and capital flows.

A country’s balance of payments consists of its (1) current account as well as its (2) capital and (3) financial account. The official balance of payments accounts make a distinction between the “capital account” and the “financial account” based on the nature of the assets involved. For simplicity, we will use the term “capital account” here to reflect all investment/financing flows. Loosely speaking, the current account reflects flows in the real economy, which refers to that part of the economy engaged in the actual production of goods and services (as opposed to the financial sector). The capital account reflects financial flows. Decisions about trade flows (the current account) and investment/financing flows (the capital account) are typically made by different entities with different perspectives and motivations. Their decisions are brought into alignment by changes in market prices and/or quantities. One of the key prices—perhaps the key price—in this process is the exchange rate.

Countries that import more than they export will have a negative current account balance and are said to have current account deficits. Those with more exports than imports will have a current account surplus. A country’s current account balance must be matched by an equal and opposite balance in the capital account. Thus, countries with current account deficits must attract funds from abroad in order to pay for the imports (i.e., they must have a capital account surplus).

When discussing the effect of the balance of payments components on a country’s exchange rate, one must distinguish between short-term and intermediate-term influences on the one hand and longer-term influences on the other. Over the long term, countries that run persistent current account deficits (net borrowers) often see their currencies depreciate because they finance their acquisition of imports through the continued use of debt. Similarly, countries that run persistent current account surpluses (net lenders) often see their currencies appreciate over time.

However, investment/financing decisions are usually the dominant factor in determining exchange rate movements, at least in the short to intermediate term. There are four main reasons for this:

  • Prices of real goods and services tend to adjust much more slowly than exchange rates and other asset prices.
  • Production of real goods and services takes time, and demand decisions are subject to substantial inertia. In contrast, liquid financial markets allow virtually instantaneous redirection of financial flows.
  • Current spending/production decisions reflect only purchases/sales of current production, while investment/financing decisions reflect not only the financing of current expenditures but also the reallocation of existing portfolios.
  • Expected exchange rate movements can induce very large short-term capital flows. This tends to make the actualexchange rate very sensitive to the currency views held by owners/managers of liquid assets.

Current Account Imbalances and the Determination of Exchange Rates

Current account trends influence the path of exchange rates over time through several mechanisms:

  • The flow supply/demand channel
  • The portfolio balance channel
  • The debt sustainability channel

Let’s briefly discuss each of these mechanisms next.

The Flow Supply/Demand Channel

The flow supply/demand channel is based on a fairly simple model that focuses on the fact that purchases and sales of internationally traded goods and services require the exchange of domestic and foreign currencies in order to arrange payment for those goods and services. For example, if a country sold more goods and services than it purchased (i.e., the country was running a current account surplus), then the demand for its currency should rise, and vice versa. Such shifts in currency demand should exert upward pressure on the value of the surplus nation’s currency and downward pressure on the value of the deficit nation’s currency.

Hence, countries with persistent current account surpluses should see their currencies appreciate over time, and countries with persistent current account deficits should see their currencies depreciate over time. A logical question, then, would be whether such trends can go on indefinitely. At some point, domestic currency strength should contribute to deterioration in the trade competitiveness of the surplus nation, while domestic currency weakness should contribute to an improvement in the trade competitiveness of the deficit nation. Thus, the exchange rate responses to these surpluses and deficits should eventually help eliminate—in the medium to long run—the source of the initial imbalances.

The amount by which exchange rates must adjust to restore current accounts to balanced positions depends on a number of factors:

  • The initial gap between imports and exports
  • The response of import and export prices to changes in the exchange rate
  • The response of import and export demand to changes in import and export prices

If a country imports significantly more than it exports, export growth would need to far outstrip import growth in percentage terms in order to narrow the current account deficit. A large initial deficit may require a substantial depreciation of the currency to bring about a meaningful correction of the trade imbalance.

A depreciation of a deficit country’s currency should result in an increase in import prices in domestic currency terms and a decrease in export prices in foreign currency terms. However, empirical studies often find limited pass-through effects of exchange rate changes on traded goods prices. For example, many studies have found that for every 1% decline in a currency’s value, import prices rise by only 0.5%—and in some cases by even less—because foreign producers tend to lower their profit margins in an effort to preserve market share. In light of the limited pass-through of exchange rate changes into traded goods prices, the exchange rate adjustment required to narrow a trade imbalance may be far larger than would otherwise be the case.

Many studies have found that the response of import and export demand to changes in traded goods prices is often quite sluggish, and as a result, relatively long lags, lasting several years, can occur between (1) the onset of exchange rate changes, (2) the ultimate adjustment in traded goods prices, and (3) the eventual impact of those price changes on import demand, export demand, and the underlying current account imbalance.

The Portfolio Balance Channel

The second mechanism through which current account trends influence exchange rates is the so-called portfolio balance channel. Current account imbalances shift financial wealth from deficit nations to surplus nations. Countries with trade deficits will finance their trade with increased borrowing. This behaviour may lead to shifts in global asset preferences, which in turn could influence the path of exchange rates. For example, nations running large current account surpluses versus the United States might find that their holdings of US dollar–denominated assets exceed the amount they desire to hold in a portfolio context. Actions they might take to reduce their dollar holdings to desired levels could then have a profound negative impact on the dollar’s value.

“Shifts in Global Asset Preferences” means would alter the components of assets allocation in the portfolio.

The Debt Sustainability Channel

The third mechanism through which current account imbalances can affect exchange rates is the so-called debt sustainability channel. According to this mechanism, there should be some upper limit on the ability of countries to run persistently large current account deficits. If a country runs a large and persistent current account deficit over time, eventually it will experience an untenable rise in debt owed to foreign investors. If such investors believe that the deficit country’s external debt is rising to unsustainable levels, they are likely to reason that a major depreciation of the deficit country’s currency will be required at some point to ensure that the current account deficit narrows significantly and that the external debt stabilises at a level deemed sustainable.

The existence of persistent current account imbalances will tend to alter the market’s notion of what exchange rate level represents the true, long-run equilibrium value. For deficit nations, ever-rising net external debt levels as a percentage of GDP should give rise to steady (but not necessarily smooth) downward revisions in market expectations of the currency’s long-run equilibrium value. For surplus countries, ever-rising net external asset levels as a percentage of GDP should give rise to steady upward revisions of the currency’s long-run equilibrium value. Hence, one would expect currency values to move broadly in line with trends in debt and/or asset accumulation.

Reference

CFA Readings

Why do Banks run?

Assumption

Entrepreneurs borrow from banks to invest in long-term projects. Banks themselves borrow from risk-averse households, who receive endowments every period. Households deposit their initial endowment in banks in return for demandable deposit claims. There is no uncertainty initially about the average quality of a bank’s projects in our model, so the bank’s asset side is not the source of the problem. However, there is uncertainty about household endowments (or equivalently, incomes) over time.

Process

Firstly, households deposit their initial endowments and have an unexpectedly high need to withdraw deposits.

Anticipated prosperity, as well as current adversity, can increase current household demand for consumption goods substantially.

As households withdraw deposits to satisfy consumption needs, banks will have to call in loans to long gestation projects in order to generate the resources to pay them. The real interest rate will rise to equate the household demand for consumption goods and the supply of these goods from terminated projects.

Results

Thus greater consumption demand will lead to higher real rates and more projects being terminated, as well as lower bank net worth. This last effect is because the bank’s loans pay off only in the long run, and thus fall in value as real interest rates rise, while the bank’s liabilities, that is demandable deposits, do not fall in value.

$$Asset = Liability + Equity$$

in the balance sheet, so as to banks. However, the difference is that banks’ assets are loans and liabilities are deposits from households. If the real interest rate increases, which conveys the increase in the discount rate, then the value of assets for banks would decrease (,by the present value of future cash flows). Liability (debts) keeps constant, then the equity of banks is destroyed.

Eventually, if rates rise enough, the bank may have negative net worth and experience runs, which are destructive of value because all manner of projects, including those viable at prevailing interest rates, are terminated.

Solution

How can this tendency towards banking sector fragility be mitigated?

  1. Capital Structure of Banks

One possibility is to alter the structure of banks. Long-term loans’ value is more volatile if the real interest rate fluctuates.

If banks financed themselves with long-term liabilities (in part我国政策行if the bank finances through long-term loans, that means A=D+E, `D is also volatile to the real interest rate changes, and moves in the similar direction as Asset) that fell in value as real interest rates rose, banks would be doubly stable. The bank hedge itself, hedging the assets by bank debts.

Deposits from households do not make banks stable, compared with financing through bank loans, because deposits could be withdrawn.

The authors stated that competition that banks strive for efficiency determines the capital structure of banks. I personally do not understand that idea, so I will leave it here.

P.S.

Diamond and Rajan (2001) 中指出，银行，作为金融中介，的功能是有human capital能量化或者保证depositors withdraw时 borrower能提供足够的liquidity还给lender (depositor)的问题。

  • 2. Government Intervention

The government may have to intervene to pull the economy or consumption back into place. A typical way of doing so is through lower the interest rate.

The paper states that, reducing interest rates drastically when the financial sector is in trouble, but not raising them quickly as the sector recovers could create incentives for banks to seek out more illiquidity than good for the system. Such incentives may have to be offset by raising rates in normal times more than strictly warranted by macroeconomic conditions.

Put differently, reduce in interest rates could encourage banks to increase leverage or fund even more illiquid projects up front. This could make all parties worse off.

Reference

Diamond, D. and Rajan, R. (2009) (w15197) Illiquidity and Interest Rate Policy. Cambridge, MA: National Bureau of Economic Research DOI: 10.3386/w15197.

Diamond and Rajan’s Study about Financial Crisis 2008

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

  1. U.S. financial sectors misallocated resources to real estate.
  2. Commercial and Investment banks had a large proportion of their instruments in their Balance Sheet.
  3. 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

A Great Introduction to the Nobel Prize Econ 2022

Here below is a great article introducing the Nobel Prize in Econ in 2022.

A-Great-Article-about-Nobel-Econ-2022-1Download

Later, I will start a series of studies about the journal articles from those Nobel Prize winners. Hopefully, that would help us understand the current crisis.

Reference

Bernanke, B., Gertler, M. and Gilchrist, S. The Financial Accelerator in a Quantitative Business Cycle Framework.

Diamond, D.W. and Dybvig, P.H. ‘Bank Runs, Deposit Insurance, and Liquidity’. JOURNAL OF POLITICAL ECONOMY, p. 19.

资产回报-宏观经济-利率利差-资本流动-汇率变化

1. 经济增长

自微观至宏观的结构。微观层面，公司的资产价值增长或公司的利润增长，而某行业内多个公司总值或均值的增长带来了行业的增长。同理，行业引申至宏观经济体。本质上是weighted average，而意识上是 多个个体增长 带来整体 增长。逻辑简单。

同时，在经济扩张阶段，企业对loanable fund的需求增加反映在财务上往往是负债增加。企业若需继续扩展则 负债增加带来的风险 需要被 企业增长的预期带来的预期收益冲抵，因为如此，理性投资者才原因承担更高的风险。

P.S. Considering the interest rate and saving, lower real interest rates motivate individuals to consume more and save less. Greater consumption enhances capital/money transferring in the whole economy. We may say that a lower interest rate can not just stimulate the economy in a positive way through increase the desire for investment and consumption, but also smooth the economy by pooling liquidity into the market.

2. 宏观经济体之间

假设两个经济体，A和C。C的经济增长快，市场中对goods, services, factors, labours等各方面的需求高，同时对money的需求高。对 money 的高需求，带来了高成本 – higher interest rate。而A增长相对少，甚至Central Bank需要主动采取措施给降低interest rate来降低loanable fund 的成本，刺激需求。

基于以上大背景。A市场中利率水平低，C市场中利率水平高。

Under Globalization, money flows across countries with low fees and less regulation. Without considering others, money would flow into the market with a higher interest rate, pursuing higher returns. However, sovereign risks, frictions, regulations, etc, would block that path.
在全球化的大背景下，如果假设低fees低监管等限制，money会流入高收益的市场。但是现实中往往并非如此，因为投资者会考虑其他因素，如地缘风险，政策变化等等。

继续之前的例子， C国利率高，money流入C国，对于C国currency的需求大，currency appreciates。C国货币升值后，A国再进口C国商品物料或投资的成本变高。对C国货币的需求又会相对减少。Overall, a Dynamic Equilibrium occurred.

当然，以上为理想情况。现实中USD起到全球主要流通外汇的左右，尤其特殊的意义。且经济情况今非昔比。市场或宏观经济体面临不同的环境：如De-globalisation;

3. 加息的传导渠道

https://mp.weixin.qq.com/s/sInT_p-p9ewRYEbt8MMtmg

Reference

https://mp.weixin.qq.com/s/fs-wMetDFe5HmCl3f8tztA