Source: Li Jianqiu’s world (id:lijianqiudeshijie)
The Federal Reserve began to shrink its balance sheet on June 1, reducing its holdings by $47.5 billion a month.
Explain what a contraction is. Note that the contraction I mentioned refers to the contraction of the Federal Reserve, that is, the contraction of the central bank, not the contraction of the commercial banks.
This is a balance sheet of the central bank
This is the latest data. You can go to the official website of the people’s Bank of China and click Statistics – 2022 Statistics – overview of monetary statistics – balance sheet of monetary authority to view it.
As shown in the figure, the balance sheet of the central bank is different from that of ordinary institutions. The balance sheet of the central bank is: total assets = total liabilities, but there is no “owner’s equity” of other commercial banks. The reason why there is no such balance sheet is because money is printed by the central bank. The central bank manages the printing and issuance of money, does not absorb deposits, and the central bank itself has no shareholders, so there is no owner’s equity.
Paper money is a kind of bond proof and an IOU. The money issued by the central bank is equivalent to the liabilities of the central bank.
If you want to increase liabilities, print more money and buy assets.
If you want to reduce your liabilities, sell off your assets and get back your money.
Debt reduction is the so-called reduction of the balance sheet. When debt is reduced, the central bank takes back the money and the money flowing in the market is reduced. Therefore, it belongs to tightening policy.
When the central bank shrinks its balance sheet by selling assets to recover money, there will be less money in the market, but there will be more assets, and the asset price will fall. As the asset price falls, if the assets want to be sold, the interest rate must be raised.
If the interest rate of an asset increases, the interest rate that will be transmitted to the whole market will increase, attracting money purchase, and there will be less money in the market.
At present, the amount of idle funds in the United States is too large. According to JPMorgan Chase estimates, if it is to be completely eliminated, it will need to continue until 2027. Of course, the Federal Reserve cannot continue until 2027, otherwise the economy will collapse directly. At present, the U.S. stock market has fallen a lot. If it is further tightened, the U.S. stock market will fall even more.
We should have made greater efforts to shrink the balance sheet, but at present, inflation, the US dollar and US stocks cannot be fully guaranteed.
What is more terrifying is that the housing prices in the United States are high. Americans buy houses differently from China. China has a 30% down payment, and the down payment can only be broken down after the house price drops by 30%.
However, when buying a house in the United States, according to the data of the American Real Estate Association, the average down payment ratio is 12%, the down payment ratio for buyers aged 22 to 30 is only 6%, the average down payment ratio for buyers aged 31 to 40 is 10%, and the minimum down payment ratio allowed by traditional American loan institutions is 3%, while VA loan, a loan project guaranteed by the government for veterans, allows zero down payment for house purchase.
What does that mean?
This means that as long as the house price in the United States drops by 12%, many people will directly clear the down payment. If it continues to fall after clearing, the bank will ask the buyer to supplement the mortgage. If it cannot be supplemented, it will take back the house and take it to auction, further increasing the supply of houses in the market. The house price continues to fall, and then it will explode in a chain.
Therefore, the task of the Federal Reserve this time is extremely arduous: they need to tighten to reduce inflation, but they should not tighten too much to prevent the collapse of the stock market and housing market. When they reach a transition point, that is, the transition point of easing inflation and economic contraction, they must immediately reverse the policy. This is not an ordinary high test for the Federal Reserve.
The core is to control inflation. As long as inflation continues, the policy can be relaxed.
It is also because of this that we can see this news on Reuters:
US trade officials say all options in China’s tariff review are on the table
The US Deputy Trade Representative Sarah Bianchi said on Thursday that the Biden administration was considering “all options” because it was reviewing potential changes in US tariffs on Chinese imports, including tariff reductions and new trade surveys, to shift the focus to strategic issues with Beijing.
Look at the news of JPMorgan Chase today:
Jamiedimon said that the U.S. economy will face a “hurricane” and “the hurricane is on our way,” said the CEO of JPMorgan Chase. “We don’t know if this is a small storm or a super storm, Sandy. You’d better cheer up.
The current economic difficulties are evident. If we continue to maintain the Sino-U.S. struggle, there is a high probability that we will lose ground. Of course, this may be a periodic pause in the struggle.
We are not looking at this, but at other countries.
This is mainly because after I wrote about Vietnam real estate last time, some fans asked me about investing in Vietnam, and some friends said about investing in India.
At present, neither of these two places is suitable for investment. I have already talked about Vietnam. For those who have not read it, please see the previous post. Let’s talk about India alone.
India’s problem may be more difficult than Vietnam’s. This is India’s current foreign exchange reserves:
India’s foreign exchange fell for 10 weeks.
Meanwhile, the Indian Rupee continued to fall against the US dollar:
Even the Adani group, which has a special position in India, also saw a stock sell-off:
India’s problems are more complicated than those of China and Vietnam.
China and Vietnam are both trade surplus countries. Although Vietnam’s surplus is much less than that of China, it is still a surplus country. India is a deficit country. Without continuous foreign investment, India’s foreign exchange will have great problems.
At present, there are many single moths in India, such as P2P, which has long been driven out by China.
This is P2P in India:
What “the Central Bank of India registers” and what “provides investors with up to 30% return” are everywhere in India.
Such loans have existed in India for a long time. In the past, mobile payment in India was underdeveloped. Although there were bad debts, it did not spread to the whole country. Now, mobile phones are popular in India. Almost every mobile phone has similar online loans, P2P and so on.
Alas, this is the reason why it is difficult to create another China.
If the manufacturing industry is not done well, it should be concentrated in finance.
If you can’t climb, you should learn to run. If you don’t fall down, you will get a ghost?
Some time ago, the Chinese Internet has been advocating that “Indian unicorns have surpassed China”. Let’s take a look at the real situation.
In April, there was no new Unicorn company in India. By may, some Unicorn companies had had huge problems.
For example: meesho, an e-commerce company, was originally fighting with Amazon. Softbank and fidelity invested a lot of money in it, but now it is in trouble. This company burns $45million a month.
Paytm, known as “Alipay in India”, fell by 27% just after its debut. Due to the divestment of Tencent and Alibaba, paytm has fallen miserably.
Zomato, a delivery company, and nykaa, a beauty retailer, are also cutting more than half of their profits.
China’s financial market once had the so-called “tuyere pigs”, with small yellow cars and small white cars everywhere, and the stock market exploded in the past 15 years.
We all know what happened in the next few years.
As for things like P2P, when it was cleaned up, inflation was far from as high as it is now. It can be said that the tightening in previous years left room for today, otherwise it would be difficult to breathe.
Even many people in China felt extremely painful when they reduced leverage. What about India? What is better in India than in China?
India still has a trade deficit. At present, India’s foreign debt is US $614.9 billion and its foreign exchange reserves are US $597.509 billion. The foreign exchange reserves can not cover the foreign debt. Of course, it is nothing if it is short-term. After all, the foreign debt does not need to be paid off at one time, but it will certainly restrict India’s economic policy.
If the shares of such special companies as Adani group are to be sold off, what about others?
Tencent and Ali both withdrew their capital from India. Think about why they withdrew their capital.
For those who still hope to invest in India or Vietnam, I can only say that you must be cautious recently.