Author: brother Mao, this article is reproduced under the authorization of the official account brother Mao’s vision (id:maogeshijue).
Since the beginning of this year, although the Federal Reserve has adopted a very hawkish monetary tightening policy since March, the US inflation index has remained high.
In May, the CPI index of the United States rose by 8.6% year-on-year, which not only exceeded the market expectation (8.2%), but also reached a new high again.
Compared with the United States, the euro zone is not optimistic. The inflation rate in the euro zone rose to 8.1% in May from 7.4% in April, much higher than the 7.7% predicted by the outside world, breaking the highest record since the establishment of the euro zone in 1999.
Now let’s discuss an important question: Why did the United States have such serious inflation?
Many people simply attribute the inflation in the United States to the printing of money by the Federal Reserve. In fact, this is not true.
Although the Federal Reserve has issued trillions of dollars in excess since 2020, the United States is a bit special. Even a large number of dollars will not necessarily bring inflation.
First, the US dollar is a global currency, and the cost of excess currency can be passed on to the world.
In 2020, the total import and export volume of the United States was 3839.18 billion US dollars, of which the import volume of the United States was 2407.55 billion US dollars and the export volume was 1431.64 billion US dollars, that is to say, the trade deficit of the United States was about 1trillion US dollars.
In 2021, the total foreign trade volume of the United States will be 4614.6 billion US dollars, and the deficit will also reach 1097.7 billion US dollars.
Over the past two years, the United States has exported US $2trillion through its trade deficit.
Second, although American consumers get a lot of dollars, because of the epidemic, most of the cash is converted into savings rather than consumption.
Third, after the outbreak of the U.S. epidemic, after a short decline in U.S. stocks, under the support of the Federal Reserve’s unlimited easing, U.S. stocks rose all the way. The Dow Jones index rose from 18213 points to 36952 points, more than doubling the increase, but also hitting a record high.
To sum up, although the Federal Reserve prints a lot of money, these currencies are actually diverted to three channels – trade deficit output currency, bank savings and capital market. Over issued money has not entered the consumer market, so the Federal Reserve’s printing of money is not the cause of the explosion of US inflation.
So what is the cause of US inflation?
Trend chart of US inflation index (January 2021 may 2022)
It is clear that the US inflation index has soared since 2021.
So what happens in the United States after March 2021?
Let’s start with a piece of news.
(source: Beijing News)
The century congestion of American ports was a symptom of the supply chain crisis in the United States at that time. This supply chain crisis swept from the port to the entire domestic supply chain in the United States, and a large number of living materials were deposited in all links of logistics, which directly led to empty shelves in American terminal supermarkets and soaring prices.
Therefore, the soaring inflation index since last March was caused by the US supply chain crisis, which is a manifestation of the US government’s poor governance ability.
In the face of inflation caused by the supply chain crisis, the Federal Reserve had no choice. Monetary policy could not solve a series of logistics problems, such as port congestion and the lack of truck drivers. Therefore, at that time, the Federal Reserve could only lie with its nose pinched, claiming that US inflation was a “temporary phenomenon”.
The reason is very simple, because solving the inflation problem is one of the two major functions of the Federal Reserve (the other is employment). The US inflation is out of control, and theoretically the Federal Reserve should take action.
However, the Federal Reserve is very clear that the current inflation problem is not a monetary phenomenon. Even if monetary tightening policy is adopted, inflation cannot be solved. If the cause of inflation is directly pointed out, it will expose the incompetence of Biden administration, which will lead to disputes between the two parties.
The Fed does not want to get into the trouble of partisanship, so it can only lie to find an excuse for monetary policy to remain unchanged.
In November, 2021, the US inflation index exceeded 5%. The Fed had to turn into a hawk in monetary policy. However, at this time, the hawk of the Fed was only lip service (claiming that it would raise interest rates in March, 2022).
In fact, the Federal Reserve left Biden administration a five month window to face the challenge of the Federal Reserve’s interest rate hike and monetary tightening.
The fatal mistake made by the Biden administration
The Biden Administration chose to fight in the conflict between Russia and Ukraine!
This was a fatal mistake made by the Biden administration.
Since 2021, the situation in eastern Ukraine has become increasingly tense. Ukraine mobilized troops to launch a fierce attack in the Donbas region, and a large number of ethnic Russians fled to Russia. Russia began to assemble troops on the border of eastern Ukraine and issued repeated warnings to the Ukrainian authorities.
Of course, the situation in Wudong can create panic in Europe, let European hedge funds flow into the United States, and take over the market for U.S. stocks after the Federal Reserve raises interest rates, but any coin has another side. With the tension in Wudong, international oil prices begin to rise.
Supply chain problems and the rise in international commodity prices have triggered inflation in the United States, and led to inflation in most countries around the world.
Therefore, although the Federal Reserve adopted an exceptionally tough monetary policy (raising interest rates by 50 basis points) after March, the US inflation index remains high.
Global inflation, why can China be spared
Writing here, some people may wonder why China can survive the global inflation – our CPI index in May was only 2.1%.
Here are several reasons. Let’s talk about them one by one.
China is a market economy with characteristics. It implements a state-owned monopoly management system for basic products related to the national economy and the people’s livelihood, and the state has a strong control over the prices of such products.
1. Food. The self-sufficiency rate of staple grain is more than 93%. Domestic grain prices have formed their own system. The State formulates a grain price system according to domestic demand. China’s grain prices have been linked upside down with international grain for a long time, and there has even been the phenomenon of smuggling domestic grain for export.
The country takes a long-term view and reserves a large amount of grain early – according to the estimation of the U.S. Department of agriculture, by the middle of 2022, China will have 69% of the world’s corn reserves, 60% of the world’s rice reserves and 51% of the world’s wheat reserves.
2. Oil and gas. China’s dependence on foreign oil is relatively high, but there are also two special factors. One is that after the outbreak of the war between Russia and Ukraine, China insisted on maintaining “normal trade” with Russia, importing a large number of relatively cheap oil and natural gas from Russia, driving down the import cost.
China’s domestic oil and gas are monopolized by state-owned enterprises, and energy prices are regulated by the state. At a critical moment, the state can instruct state-owned enterprises to control energy prices (oil, natural gas, electricity).
Here is a comparison of energy prices between China and the United States.
On June 6 local time, AAA data showed that the average gasoline price in the United States reached a new record of $4.865/gallon (about 8.7 yuan / liter), and the oil price at some gas stations was even close to $10. Since Biden took office, the gasoline price at American gas stations has more than doubled.
Affected by the sharp rise in international natural gas prices (about 40% of the electricity in the United States is generated by burning natural gas), since the outbreak of the Russian Ukrainian war, the electricity prices in the United States have risen by 15%. Of course, electricity prices in Europe have already doubled several times.
What about China?
Although we are also faced with the impact of the sharp rise in the price of imported oil, the national gasoline price has increased by about 50% from January 2021 to now, about half of the increase in the United States, and the price of electricity has remained basically unchanged.
3. China has a complete range of industries, and all industrial products can be produced. The strong industrial manufacturing capacity has kept the price of China’s industrial products at a low level in the world.
The United States is a big country in agriculture and energy. American agricultural products and energy are not only completely self-sufficient, but also can be exported in large quantities. Why does the sharp rise in international energy and food prices have a greater impact on American prices than China?
This is the disadvantage of the American complete market economic system.
The United States is a complete market economy, and both the energy industry and the agricultural industry operate in a market-oriented manner. Therefore, although the agricultural products and energy in the United States can be fully self-sufficient, the agricultural industry and energy prices are fully linked to the international prices. The international energy prices and agricultural product prices will rise sharply, and the domestic prices will also rise sharply (if the domestic energy and agricultural product prices are lower than the international prices, the capitalists will not hesitate to sell these products abroad).
In addition, the US manufacturing industry is hollow, and a large number of basic industrial products are dependent on imports (especially imports from China). During the trump period, a trade war was launched against China, imposing a 25% tariff on Chinese goods, further pushing up us prices.
Note: the EU inflation explosion is mainly caused by the conflict between Russia and Ukraine. One is to increase the price of international bulk products, and the other is to impose sanctions on Russia, which has caused great damage to the EU manufacturing industry (energy, chemical industry, natural gas processing industry, manufacturing industry relying on Russian minerals and timber). The superposition of the two has also led the EU to the ditch by the pig teammate of the United States.
Biden broke a good hand
After the COVID-19, the Federal Reserve tried its best to print money and directly expand its balance sheet by more than $5trillion. Although this is a very irresponsible act for the world, it has benefited the United States a lot. American families and businesses have sufficient cash, which has laid a good foundation for the economic recovery of the United States after the epidemic.
US household saving rate reaches a new high
In may2022, American household savings exceeded debt for the first time. This savings can be converted into huge consumption after the epidemic. Therefore, the market was full of confidence in the economic recovery of the United States after the epidemic.
In the world economic outlook (WEO) last October, the IMF estimated that the US economic growth in 2022 was expected to reach 5.2%, 0.3 percentage points higher than the previous forecast.
However, on January 25 this year, due to the rising inflation index, the IMF sharply reduced the US economic growth in 2022 by 1.2 percentage points to 4%, the largest reduction among all developed economies.
On January 11, the World Bank predicted that the economic growth of the United States was similar to that of the International Monetary Fund. It predicted that the economic growth of the United States would be 3.7% in 2022.
However, by June 7, the world bank had significantly lowered its forecast for the economic growth of the United States this year. It predicted that the economic growth of the United States this year would be 2.5% (4.3% in China). In the whole developed countries and regions, the U.S. economy had the largest reduction.
In fact, high inflation has caused serious problems for us consumption.
According to US media reports, the initial value of the University of Michigan consumer confidence index fell from 65.2 in April to 59.1 in early May, the lowest level since August 2011.
However, the iconic automobile consumption in the United States has begun to collapse. From January to April 2022, the automobile consumption in the United States decreased by 19% year-on-year. In May, the automobile consumption decreased by 29% year-on-year again, which is almost a cliff like decline.
Therefore, if the Biden administration can not quickly solve the inflation problem, the United States is likely to fall into a serious economic crisis – first stagflation, then the great depression.
What should I do?
There are probably two ways for the Biden administration to solve the problem of inflation: one is to knock down the price of international bulk products, especially oil, and the other is to abolish the tariffs imposed on Chinese goods.
But these two methods are fraught with difficulties. Let’s take them one by one.
The first is to beat down the price of international bulk products, especially oil. Specifically, there are three ways:
One is OPEC increasing production;
An end to the war between Russia and Ukraine;
One is to release Iranian oil;
These three methods are very difficult.
OPEC increases production?
Increasing investment in oil production capacity is a huge expenditure, but the current sharp rise in energy prices is not caused by energy shortage, but by geopolitical conflicts, which is very uncertain.
If the future geopolitical conflicts are resolved, OPEC’s investment in increasing oil production will suffer huge losses. On the contrary, OPEC can also enjoy the dividend of rising energy prices without increasing production (at present, the market value of Saudi Aramco has surpassed Apple).
Therefore, OPEC has no incentive to increase production. The recent OPEC agreement on increasing production from June to July will “substantially increase” 0.7% of the oil.
You are right. The oil that OPEC plans to increase production is less than 1%.
End the war between Russia and Ukraine?
This is an option, but it is easier to start a war than to end it.
On the one hand, it is difficult for the west to fully meet Russia’s demands; On the other hand, the ZELINSKY team has its own demands (admitting defeat, secession and peace are basically sentenced to political death). In addition, the actor team has strong activity ability. Recently, it even prepared to win over Poland with the temptation of territory.
The EU’s appeal is to end the war between Russia and Ukraine in the summer, so that it can strive for a relatively decent condition. Once the war drags on to autumn and winter, due to the increased dependence on Russian oil and gas and the long duration of high inflation, the EU may kneel down directly at that time.
Therefore, the EU is now striving to end the war in the summer. The recent introduction of the most severe sanctions against Russia (cutting Russian oil purchases by 90% by the end of 2022) is the last bet of the EU.
The United States has also changed its language. Biden said that Ukraine decides the affairs of Ukraine (in the past, it supported Ukraine to fight until the end).
But when the Russian Ukrainian war will end is highly variable.
Let’s look at a picture.
Battlefield situation map of Wudong region
Please pay attention to the blue line above. This is the oil pipeline from Russia to Europe via Ukraine.
There are two types of Russian oil pipelines to Europe. One is the offshore pipeline, namely Beixi line 1 and line 2. Now Beixi line 2 has been stopped for political reasons, leaving Beixi line 1 still in use.
Ukraine is the most important land-based oil pipeline for Europe. Russia must fully control this pipeline in order to compete with the EU with energy weapons.
Therefore, the above blue pipeline through Ukraine must be fully controlled by Russia, otherwise Ukraine may make a big fuss by mastering Russia’s oil pipeline to the EU in the future.
At present, the main force of the Russian army is still fighting in the Donbas region. Even if it wins the Donbas region, it must eat Odessa in the future, so that it can control all oil pipelines through Ukraine.
In addition, eating Odessa can also turn Ukraine into a landlocked country without a port to sea. In the future, Ukraine’s grain exports will also depend on Russia.
However, according to the current battlefield progress, the Russian army has not even besieged Odessa. It is estimated that there will be a long time to eat Odessa. There is little hope of ending the war in the summer.
Release Iranian oil?
The main obstacle to the lifting of sanctions against Iran is that it is difficult to deal with Israel and Saudi Arabia. If the United States is not satisfied, it will not be able to offer a chip to reach an Iranian nuclear agreement.
Recently, the United States instigated Greece to seize an Iranian oil tanker, hoping to use this as a bargaining chip to force Iran to make concessions. Unexpectedly, Iran was very tough and instead seized two Greek oil tankers. The United States attempted to go bankrupt again.
This resistance is also great.
From the standpoint of the Biden administration, the most ideal situation is that China and the United States will cancel the tariff increase at the same time. If the United States only cancels it unilaterally, it will not only be difficult to account for the domestic conservative forces and public opinion, but also be very humiliating internationally.
Recently, the US trade unions sent a joint letter to the Biden administration, claiming that if the Biden administration cancels the tariffs imposed on Chinese goods, the US trade unions will call on workers to vote for the Republican Party in the mid-term elections.
Why do American trade unions oppose the Biden administration to abolish the tariffs imposed on Chinese goods?
This is also the political legacy left by Trump’s administration.
When trump imposed tariffs on Chinese goods, he trumpeted that this would promote the return of manufacturing to the United States and provide more jobs for American workers.
Although the later facts proved that this statement was nonsense, American workers believed it. Therefore, after Biden administration announced that it would consider canceling the tariffs imposed on Chinese goods, it caused panic among the bottom workers in the United States that this would lead to further loss of their jobs. Therefore, there was a unified action by the United States trade union organizations.
This makes Biden very difficult.
In order to solve the obstacles of trade union organization, it is necessary to solicit more strong domestic assistance. At this time, it is more important for China to cancel the tariffs imposed on American goods (to benefit American exporters to China).
However, China has an advantage over the United States in trade. The unilateral cancellation by the United States is welcome. If both sides cancel at the same time, the United States needs to make more concessions.
Therefore, the US has been playing the Taiwan card and the ASEAN card since March, hoping to put pressure on the Chinese side. As a result, under a series of tit for tat struggles on the part of the Chinese side, all US actions failed——
First, ASEAN leaders openly mocked the US side and announced that they would not choose sides between China and the United States;
Second, the US State Department website quietly added back the deleted statement of “not supporting Taiwan independence”.
Frustrated Biden team
On June 6, the Russian television website today quoted an article in the US “politico” as saying that at a time when the Biden administration seems unable to solve a series of challenges sweeping the country, the morale of US President Joe Biden and his White House staff is plummeting.
The article listed many problems, including soaring global inflation, rising fuel prices, Russia’s offensive against Ukraine, the possible resurgence of the pandemic, the right to abortion and the failure of Congress to pass comprehensive gun legislation. “President Joe Biden and his aides are increasingly disappointed that they are unable to turn things around in the face of many challenges that could overwhelm the government,” he wrote
The article quoted Adriana Elrod, a senior assistant of Biden’s transition team, as saying: “he (Biden) has lost control of many things, and we are frustrated.”
In fact, I can understand the dilemma of Biden administration.
The United States today is very similar to the Qing Dynasty in the late 19th century.
It is difficult for an empire to be a papersmith even if it is on the decline. The empire is suffering from internal and external troubles. It is burning everywhere. It wants to maintain paperwork, but it is constrained everywhere. People have nowhere to start. In the end, they can do nothing but watch the situation deteriorate step by step.
This makes it difficult for the rulers not to lose heart.
This was the case in the late Qing Dynasty, and the same is true in the United States today.
Finally, say a few more words.
This is a world of stock game and a worse era.
At present, only two countries are qualified to play chess in the global game, China and the United States (even the European Union);
Compared with China and the United States, we have difficulties, and the United States is even more difficult;
Although the comprehensive national strength of the United States is stronger than that of China, there are too many constraints inside and outside the United States, and it is difficult for the United States to concentrate on dealing with China because of the intertwining of various vested interest groups. A United States dancing in shackles is not worthy of fear.
Our supply chain crisis was caused by the epidemic in Shanghai, but we solved this problem within three months, while the supply chain crisis in the United States was caused by the lazy government and the low ability of social governance. It has not been solved for a year.
The sluggish consumption in China is mainly caused by the poor flow of people caused by the epidemic and the transformation of real estate, which can be made up by the expansion of government expenditure; However, the sluggish consumption in the United States is the result of geopolitical arch fire everywhere. Finally, it lifted a stone and hit itself in the foot. On the one hand, it led to high inflation and suppressed consumption. Now no effective solution has been found.
We have well controlled inflation, so we have more tools in our toolbox to boost the economy.
High inflation and sluggish consumption in the United States have put the Federal Reserve in a dilemma. Not only has it actually fallen into the crisis of stagflation, but it may fall into the crisis of the great depression in the future.
Therefore, it is reasonable to believe that China will survive this difficult period ahead of the United States and take the lead in realizing economic recovery.
This article is reproduced under the authorization of official account brother Mao’s vision (id:maogeshijue).