The United States has raised interest rates four times this year, and the federal funds rate has increased from 0%-0.25% to 3%-3.25%, which is the largest interest rate level since the subprime mortgage financial crisis in 2008, and there is still hope of continuing interest rate hikes.
We all have a concept, that is, the United States' interest rate hike is cutting the global leeks. This is not only a fact, but also a financial principle. The Chinese Ministry of Foreign Affairs has also condemned the United States' interest rate hikes in this way. So has this behavior hurt the United States itself?
The answer is yes. Since it has side effects on the United States itself, why should we raise interest rates? This article will talk about this logical relationship.
1. The benefits of the US interest rate hike to the US
USD is a global currency and the main settlement currency of international trade . Even if China is the world's largest trading country and the largest trading currency in more than 100 countries and regions, the proportion of RMB in international settlement is less than 3%. From this point, we can know the position of the US dollar in global settlement.
Simply put, if countries around the world want to buy things internationally, they have to settle in US dollars, so each country will significantly reserve US dollars. When the United States raises interest rates, it means that the United States' risk-free interest rate has increased significantly. For example, the interest rate of the United States' 10-year Treasury bond has exceeded 4%. Treasury bonds are extremely low-risk investments, and the yield on the treasury bond has always been considered a risk-free rate of return.
When the risk-free rate of return is so high, it will attract global US dollar capital to flow back to the United States. Because by putting US dollars in the United States, just eating interest will have high interest rates, and the United States will attract a large amount of US dollars to flow back, which will bring abundant funds.
corresponds to the outflow of US dollars in other countries. On the one hand, this will lead to a decline in domestic asset prices or even plummeting, and at the same time, it will lead to a sharp depreciation of the local currency. At this time, you have to buy goods internationally, which is equivalent to a sharp rise in the price, because your currency has depreciated, and your domestic US dollars has outflowed. If you want to obtain the US dollar, you have to exchange more local currency, or use more commodities to export. If it is the former, it means that you have to issue a lot of local currency in China, but the negative effect is that the domestic inflation is high. If it is the latter, then more goods have to be exported in exchange for US dollars.
This process is essentially a decline in asset prices in this country. If it is not easy to understand, then you can understand that your house suddenly dropped by 50%. Do you think about what impact this will have on you? Of course it is a harvest of your wealth.
So on the other hand, there are those who are harvesting wealth, and the United States is naturally the party that reaps wealth. The US dollar appreciates significantly against the background of interest rate hikes. The dollar index has risen 16% this year, and has risen 6% last year, which means the US dollar has appreciated 23% since last year.
USD is an international settlement currency. The appreciation of the US dollar means that Americans use USD to lower prices when purchasing goods internationally. From the perspective of the United States, shopping from the world is naturally equivalent to reducing prices at this time, so this can naturally help reduce domestic inflation.
If the United States uses capital to acquire core assets at this time, the price will be quite low. This way of playing has been playing in the past few decades and has been having a lot of fun. In the past , the Soviet Union collapsed , the currencies of various independent countries depreciated significantly, and the asset prices shrank significantly. How many core assets of former Soviet countries were purchased with the US dollar in their hands? The United States has been taking dividends for more than ten years in this feast.
2. What are the side effects of interest rate hikes in the United States on the United States?
The US rate hike also has side effects on itself, because the United States has over-issued too many currencies after the epidemic, and this over-issued currency is essentially through issuing treasury bonds. The current US Treasury bonds have suddenly become 31 trillion US dollars, while at the end of 2019 it was 23 trillion US dollars, an increase of 8 trillion US dollars in just three years since the epidemic.
Treasury bonds are the country's debt, and interest was also paid at that time. However, in the past two years, since the interest rate was close to zero, although many new treasury bonds were added, the overall interest expenditure did not increase but fell because of the low interest rate. This logic should be easy to understand. For example, the original interest rate was 2%, and the debt was 100 million yuan, so the annual interest expenditure was 2 million yuan. However, if 200 million new debt was added now, but the interest rate was only 0.5%, then the annual interest rate was only 1 million. Although the scale of the debt increased significantly, the interest expenditure was less.
This is why the United States first lowered interest rates to zero after the epidemic, and then implemented unlimited QE. But now inflation is high and interest rates have to be raised.
interest rate hikes have side effects, and interest expenses have increased. Although the old bonds in the past were old interest rates, the new bonds were new interest rates. Moreover, some of the old bonds in the past were due, and bonds need to be reissued, which will increase the overall debt interest expense.
Think about it, $31 trillion, if the interest rate is 1%, then the annual interest expenditure is $310 billion, if the interest rate is 3%, then the annual interest expenditure is $930 billion, and the annual fiscal revenue of the United States is only $4 trillion.
The US Treasury Department announced that the net interest expenditure in 2020 and 2021 will be around US$340 billion, and after a sharp interest rate hike this year, the interest expenditure on Treasury bonds will definitely increase significantly.
The current balance point is where it reaches. The United States will not be able to withstand the specific balance point. Only professionals can calculate the specific balance point, but this trend is approaching, which is what the United States is worried about.
So, when OPEC decided to cut production by 2 million barrels per day, the United States was angry and extremely angry, and US President Biden expressed concern and disappointment about this. Because this is likely to cause the newly reduced oil prices to rise again, it means that the inflation that has just been alleviated in the United States may rise again.
Then the positive effect brought by the US rate hike is weakened, which means that the time to bear negative effects will become longer. I am also competing for endurance in the United States. The United States wants to recover. There are only a few large economies in the world, EU , Russia, China, after gnawing on China for several years, I have tried all my strength, but China is full of iron, Americans have collapsed, and they can't even gnaw a piece of meat.
Although Russia has a small scale in size, it has many resources. According to Americans' own calculations, Russia's resources value is around 10 billion US dollars. The EU's GDP is similar to China and has a deep accumulation. Based on the principle of "dead fellow Taoists, and immortality", the United States does not mind using European allies to recover its health.
The United States has tried hard to incite the EU to sanction Russia's energy, which has led to several times higher prices of natural gas and electricity in the EU. The cold winter is coming, and the people of the EU will feel an unprecedented chill this winter. In this case, the "North Stream", a natural gas transmission pipeline from Russia to the EU, was actually blown up. It completely cut off the idea of easing with Russia, let alone the environmental harm this would bring.
But at the same time, the United States purchased a large number of energy and other resources from Russia, and then the United States said it would become a support for European energy. This reselling business made the United States a big profit. The essence is to suck blood on Europeans, but it doesn't matter. One is willing to fight and the other is willing to be beaten, and others are not able to say anything.
Now everyone is having a hard time, and they are all enduring, who will fall down first? Who can survive to the end? It is highly likely that the EU will fall first, so who can survive until the end? Tell me.
