This time, the United States has to ask China!

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Author: Rong ping source: official account: Rong Ping (id:rongping898) has been authorized to reprint

We should be able to clearly feel that this round of high inflation in the United States is fierce and lasting. As a result, the Federal Reserve has to resort to continuous and substantial interest rate hikes. This round of interest rate hikes is 25 basis points for the first time and 50 basis points for the second time. This is the first time that the Federal Reserve has raised interest rates by 75 basis points in 28 years.

From the first interest rate hike on March 15 to now, the CPI growth rate in the United States has continued to rise sharply. Why is this round of high inflation in the United States so difficult to control? Even if the Fed takes drastic measures, it will be difficult to control inflation?

This will start with what has happened in the United States in recent years and the changes in the global political and economic pattern.

I believe that the causes of this round of high inflation in the United States are mixed. There are not only factors of excessive currency, but also factors of supply contraction, as well as factors of rising energy prices caused by epidemics and wars. Therefore, we must take multiple measures to control high inflation. In particular, the United States must recognize and correct the mistakes of its past trade policies, and re-establish cooperation with China. Only in this way can inflation be truly contained.

To curb inflation, the Federal Reserve can’t play around!

The first is the excessive issuance of money. In recent years, the Federal Reserve has issued more than half of all the money issued in the past, which means that it will be a difficult and long-term process to recover money. The utility of the Federal Reserve’s interest rate hike and scale reduction will also be greatly reduced due to the excessive amount of money.

The essence of inflation is money surplus, that is, the amount of money issued exceeds the amount of money required by commodity exchanges, thus forming the phenomenon that too much money chases too few goods.


Since the 2008 financial crisis, the Federal Reserve has carried out five rounds of QE monetary release (including qe4 launched in September 2019 to save the money shortage and qe5 launched in March 2020 in COVID-19), with a total scale of $14trillion. Among them, from 2020 to the end of 2021 (that is, since Biden took office), the amount of money issued by the United States has increased by $5.9 trillion, which is an unprecedented amount of money printing. The total dollar supply has increased by 38.6%.

According to the minutes of the Federal Reserve’s interest rate meeting in May, the table will be reduced from June 1, and it plans to reduce its holdings of assets by $47.5 billion per month. Three months later, it plans to reduce its holdings of assets by $95billion per month. With such speed and scale, it will take at least five years to recover the $5.9 trillion that Biden has overpaid since he took office, and it will be at the rate of continuous reduction of $95billion per month. This does not include the amount of money issued in previous rounds of QE.

Excessive US dollars are the root cause of inflation. Since the US dollar has been flooded, even if the Federal Reserve adopts the means of radical interest rate increase or rapid table contraction, it is difficult to achieve the purpose of recovering money and controlling inflation in the short term.

In addition to the recovery difficulties caused by excessive currency issuance, there is also a very important point that the hegemony of the US dollar has been impacted by the recession of the US economy and the increase of the share of other currencies in international settlement. To put it simply, it is the unique hedging function of the US dollar as the world currency, because the excess of the US dollar has been diluted, and because the US economic recession has weakened its attraction to global capital. This is the fundamental reason for the “failure” of the Federal Reserve policy.


Some people will say that the high inflation in the United States has not come down because the policy effect of the Federal Reserve’s interest rate hike has not yet fully emerged. If the interest rate hike continues substantially, the inflation situation in the United States will certainly decline. Indeed, it is undeniable that the policy effect of the Fed’s interest rate hike will undergo a process of quantitative change to qualitative change, and inflation is unlikely to grow for a long time.

However, what I want to say is that in the past, the more money the Federal Reserve issued, the heavier the dose of tightening policy will be. If the interest rate continues to rise substantially, it is likely to have a great impact on the fragile US economy. At that time, the Federal Reserve will fall into the dilemma of controlling inflation and stabilizing growth. Whether the tight monetary policy can be implemented will be a big problem.

Another big problem is that high inflation has not been contained, largely due to the misjudgment of the US government on the inflation situation.

Now, in the face of runaway inflation, the Federal Reserve has turned its anti inflation war from a Blitzkrieg into a protracted war. Until recently, the Federal Reserve and the US government had misjudged the inflation trend and began to admit their mistakes frequently.

US Treasury Secretary Yellen made a rare statement on May 31, admitting that he misjudged the US inflation situation and did not fully understand the impact of inflation on the US economy in the past few months.

Powell also admitted in his previous interview that the Federal Reserve is now subject to more and more external scrutiny due to its slow anti inflation action, and the Federal Reserve could have raised interest rates faster and reduced inflation.


In fact, the Washington Post pointed out this problem before Yellen admitted his mistake. On May 30, the Washington Post sorted out the timeline of runaway inflation in the United States and pointed out that the direct cause of runaway inflation was wrong decision-making.

Imbalance between supply and demand exacerbates inflation

The second is supply contraction. When money overspread meets supply contraction, it is like dry firewood meets a fire, which is bound to ignite the trend of high inflation. Because inflation is originally caused by too much money, if coupled with a shortage of supply, the amount of money required for commodities will be reduced, which will naturally further push up prices.

So how did the contraction in supply that the US economy experienced come about?

The first is the impact of the epidemic. The COVID-19 has impacted major commodity suppliers. On the one hand, the epidemic has impacted the bulk commodity suppliers represented by Brazil and Chile, restricting their supply capacity. On the other hand, the epidemic has had an obvious impact on countries with concentrated manufacturing industries outside China.


Affected by the epidemic, there are many blocking points in the global supply chain. The global port congestion caused by the epidemic has become more and more serious, and the cost of trade and logistics has risen sharply. From the perspective of the United States, as the two most important ports in the United States, Long Beach port and Los Angeles port together account for about 40% of the shipping container throughput of the United States. However, since the outbreak, the operation efficiency of the two ports has been low.

The epidemic has led to a shortage of labour. After the outbreak of the epidemic, the labor participation rate in the United States decreased. As for the reasons for the decline in the labor participation rate, the Federal Reserve pointed out in the monetary policy report released in July 2021 that it mainly included the surge in the number of retirees caused by the epidemic, increased pressure on childcare, and concerns about infection with the virus.

In addition, the energy transformation has exacerbated the supply shortage. After the outbreak of the COVID-19, the global energy supply contracted significantly, and the pace of recovery was relatively slow, and the energy transformation intensified this change.

The second is demand expansion. After the outbreak of the epidemic, on the one hand, the Federal Reserve implemented a looser monetary policy than during the 2008 financial crisis. In march2020, the Federal Reserve reduced the policy interest rate to zero through two emergency interest rate cuts. At the same time, the Federal Reserve began to implement a quantitative easing (QE) program totaling $700billion. Up to now, the asset scale of the Federal Reserve has been close to US $9trillion, double that before the outbreak of the epidemic.

On the other hand, unlike in 2008, the US government launched several rounds of financial rescue plans to directly distribute cash to enterprises and residents. After the outbreak of the COVID-19, the trump administration launched several rounds of economic rescue plans. The amount of the third round of stimulus plan is as high as US $2.2 trillion, including assistance to governments at all levels, schools, unemployed people and industries affected by the epidemic.


In 2021, the Biden government launched the “American rescue plan” worth $1.9 trillion, of which nearly $1trillion directly or indirectly subsidized residents, including providing $1400 subsidies to most Americans and increasing the federal unemployment benefit to $400 / week. This has directly stimulated the consumer demand of American consumers, and further contracted the supply.

The third is sanctions against Russia. Shortly after the outbreak of the war between Russia and Ukraine, the United States and the West imposed nuclear weapon level economic and financial sanctions on Russia. Unexpectedly, the sanctions were unsuccessful, but they were “backfired”. As a direct result, Russia partially cut off its energy supply to Europe, leading to soaring prices in Europe. Major countries, including Germany, France, Italy and the United Kingdom, were attacked by high inflation.

However, the United States has always wanted to reap the benefits of Russia’s reduction of energy supply to Europe. Unexpectedly, the Russian Ukrainian war pushed up the global crude oil price. However, OPEC in the Middle East did not increase production under the pressure of the United States, resulting in the rising crude oil price. The United States has also been attacked by high oil prices, becoming the main driver of high inflation.

As a result of the epidemic, war and the imbalance between supply and demand, the US economy has experienced a supply contraction. This part of the problem is not a problem that the Fed can solve by raising interest rates. Instead, we should increase the supply of goods to stabilize prices. The United States needs to find the core means to control inflation from its own problems. Otherwise, the Fed’s interest rate hike alone will not only be difficult to curb inflation, but may also impact the US economy and eventually force the monetary policy to turn.


Tariff reduction and exemption are almost certain

Finally, trade barriers. Since the trump administration started Sino US trade frictions, the United States has imposed huge tariffs on goods imported from China. At present, these tariffs have been passed on to American consumers. Since the COVID-19, with excellent epidemic prevention and control, China’s production side has taken the lead in recovering, becoming an important source for the United States to fill its commodity demand gap.

According to Moody’s estimates, in Sino US trade, American consumers bear 92.4% of the cost of imposing tariffs on Chinese goods, and only 7.6% of the cost is absorbed by China. The tariffs imposed by the United States on imports from China are passed on to American consumers. It can be seen that trade barriers are an important factor in aggravating US inflation.

There are two factions within the White House on whether to abolish the tariffs imposed on Chinese goods: first, represented by US Treasury Secretary Yellen and Commerce Secretary Raymond, they are in favor of Abolishing Some tariffs on China. They believe that tariff adjustment is good for American enterprises and consumers. Second, represented by Dai Qi, trade representative, Vilsack, Minister of agriculture, and Sullivan, national security adviser to the president, they believe that abolishing tariffs is tantamount to “giving gifts to China”.

One is for the economy and the other is for politics. At present, it seems that the economic group has the upper hand. Because the Biden administration is facing the mid-term elections, and his support rate has dropped sharply due to high inflation and frequent shooting incidents. Now it is about 39%. Therefore, from the perspective of boosting the support rate, the Biden administration can only choose to compromise on tariffs. That is, cooperation with China has become the only choice for the Biden administration.

Polls show that inflation, gasoline prices and the economy are the most important issues that determine how the United States will vote in the mid-term elections this year. The current high inflation level may be difficult to control only by tightening the monetary policy of the Federal Reserve. As the reduction of tariff rate can suppress the inflation trend to a great extent, the Biden government is likely to cancel some or even all of the tariffs imposed on China’s export commodities in order to control inflation.


According to U.S. media reports, former U.S. President trump provoked trade disputes with China during his administration. According to the so-called “article 301”, that is, article 301 of the U.S. Trade Law of 1974, tariffs were imposed on Chinese products exported to the United States worth hundreds of billions of dollars each year. The Biden administration is currently evaluating whether these tariffs should continue to be imposed.

Earlier, US Treasury Secretary Yellen said at a hearing of the house of Representatives’ fund raising Committee on June 8 that the Biden administration was considering adjusting the tariffs imposed by former president trump on Chinese goods, so as to alleviate the current inflation in the United States, which has been at a high level for decades.

Some people may say that if the United States wants to cooperate with China, do we have to cooperate? Some people worry that the US inflation crisis will be transferred to China like the subprime mortgage crisis in 2008, and China will pay for its crisis again?

First of all, it is a win-win situation for China and the United States to reduce tariffs on Chinese goods. There is no problem that China pays for the United States.

In 2008, the United States suffered a liquidity crisis, which led to a sudden cooling of the global economy and a sharp decline in China’s exports. China had no choice but to sacrifice $4trillion. It was only the structural imbalance of foreign demand and domestic demand, which exacerbated the overheating of industries in China’s real estate related industrial chain.


This time, the U.S. wants to reduce tariffs on Chinese exports. In fact, it has lifted the barriers to Chinese exports to the United States, thus stimulating Chinese export enterprises to continue to expand production capacity. China has not experienced structural overheating of investment due to export problems. Therefore, this time, it is not the United States that takes the injection, but China takes the medicine.

Secondly, it is inevitable for the United States to reduce tariffs on Chinese goods, and there is no negative impact on China.

At present, the factions within the US government that oppose tariff reduction and exemption think that this is a “gift to China”. They oppose tariff reduction and exemption of Chinese goods for the purpose of not making China feel better. In fact, it is not in line with the public opinion that people are boiling with anger because of high inflation and hope to introduce effective solutions as soon as possible. In doing so, they are actually standing on the opposite side of the American people, and have played a counterproductive role in easing the pressure of high inflation in the United States.

China has long stated that the essence of China US economic and trade cooperation is mutual benefit and win-win results. There are no winners in trade and tariff wars. The unilateral imposition of tariffs by the United States is not conducive to China, the United States and the world. It is time for the US government to reconsider and abolish these tariffs as soon as possible.


For China, if the United States cancels the additional tariff, it can reduce the cost of export commodities, reduce the burden on export enterprises, and stabilize and boost the basic foreign trade of China’s economy. China is happy to see the US government abolish all tariffs imposed on Chinese goods.

Finally, some people worry that the United States imports Chinese goods on a large scale by printing money. Is this good or bad for China?

In the short term, the US dollar is in the appreciation channel due to the Federal Reserve’s interest rate hike. Under this trend, the US dollar is appreciating, which is beneficial to export enterprises earning foreign exchange.

In the long run, we must gradually bring RMB settlement into the agenda, which will enable us to maintain the stability of currency value and the preservation and appreciation of wealth in international trade as much as possible.

At the end of the article, the author said:

This round of high inflation in the United States was caused by the United States itself. First, the epidemic caused a large number of currencies to be overspread. For example, in 2020, the overspread US dollars accounted for 20% of the total US dollars in the past. Now it is almost impossible to recover these US dollars in a short time. This is also one of the fundamental reasons why it is difficult for the Federal Reserve to control inflation with high-frequency and substantial interest rate hikes.

In addition, the inflation caused by supply contraction and trade barriers is not a problem that the Federal Reserve can solve by raising interest rates. The high-frequency or large-scale interest rate hikes mainly affect the capital contraction and return expectation, but cannot solve the problem of supply side gap.

On the one hand, the epidemic affected the production capacity of supply countries. Except for China, which was less affected by the epidemic, the supply chains of Vietnam, India and other countries were once interrupted; On the other hand, the labor supply in the United States is insufficient due to the discovery of money for consumers. For example, the port is congested due to the shortage of truck drivers. At the same time, the consumer demand is rapidly amplified, resulting in the imbalance between supply and demand and rising prices.

Therefore, if the United States wants to control high inflation, it must also increase the supply of goods. This is mainly in the hands of China’s exports. The disagreement within the Biden administration over whether to reduce or exempt tariffs on imports from China is actually whether the United States should re cooperate with China. This is probably more important than raising interest rates.

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