In the past few days, the pound has plummeted and the UK Treasury bonds have fallen, which has almost triggered a financial crisis . Then there was news of Credit Suisse going bankrupt, and global financial turmoil was one after another.
USD index strengthened, global currency exchange rate fell, and financial markets were in turmoil. What is this phenomenon?
vaguely, people feel the wind and rain during the 2008 financial crisis, coupled with the decline in the US stock market, bond prices fell.
Another news yesterday was that Credit Suisse had financial problems and might file for bankruptcy. This is one wave after another, there are one in the past, there are now, and there will be another in the next two years.
However, the surge in the US dollar last week also led to the source of the UK, and it was the new British female prime minister who caused trouble.
More than a week ago, the US dollar strengthened again, and it was extremely strong. The US dollar index rose to 114, which is the high since 2002.
those days scared the global foreign exchange market. The yen exchange rate depreciated relatively to 144 yen to 1 US dollar, the euro depreciated to 1.04 euro to 1 US dollar, and the RMB exchange rate also fell to 7.2 RMB to 1 US dollar.
Many people are asking, what's wrong with the RMB? Is China going to be harvested by the United States?
The most popular one is the British pound, and the exchange rate of pound is at least 1.07 US dollars to exchange for 1 pound.
Some netizens may not feel much about seeing the pound falling to this level, because we need to look at the historical exchange rate of the pound. The highest exchange rate price in June last year was US$1.42 to exchange for 1 pound.
goes further, the highest exchange rate in 2007 was USD 2.06 to 1 pound. On the long-term average, it is about USD 1.5-1.6 to 1 pound.
The thing is this:
Last month, Tras won British Prime Minister . After she came to power, she wanted to make drastic reforms to boost the British economy. On Friday, September 23, the UK government introduced the largest tax cut since 1972, eliminating the maximum income tax rate of 45%.
This measure caused the British pound to plummet 4.9% on Monday after the weekend.
In fact, tax cuts may not be a big deal. Some countries have also implemented tax cut policies, such as the United States. Since 2000, the United States has implemented tax cuts since Republican presidents, Bush Jr. and Trump , after taking office.
The problem is that the timing is different and the fate is different. Some policies cannot be imitated. The United States has the hegemony of the dollar, the dollar is the global currency, the United States' fiscal deficit has expanded, and it can also print money to deal with it. Although the pound is the third largest currency in circulation in the world, second only to the US dollar and the euro.
But the payment ratio in global currencies is only 5.89%, which is far from the payment ratio of the US dollar and the euro.
In terms of timing, on September 22, the Bank of England announced that rate hikes 50 basis points, raising the interest rate to 2.25%, in order to suppress the rising inflation in the country. On the other hand, the Federal Reserve raised interest rates by 75 basis points the day before. It is normal for the Bank of England to follow up interest rate hikes, otherwise the money will go to the United States.
This is to prevent the United States from "making money".
However, at this time, Tras introduced the tax reduction policy, and the problem was big.
The main reason is that the Trass Cabinet has not made a statement about where the money comes from. Plus, in addition to the tax cut plan, Tras has proposed temporary measures to deal with energy bills. Where does
come from?
In the past, these Western countries had no money and could print money. However, in an environment of high inflation, it is impossible to print money anymore. Printing money again will only make the problem of inflation more serious. So, Tras completely misled the timing.
The Bank of England also followed up on the second day after the Federal Reserve announced the rate hike. Isn’t it just to curb inflation? Isn’t interest rate hikes a tightening measure?
As a result, Tras will further expand the fiscal budget deficit and continue to make easing. This scares the market.
Why is the market frightened? Because there is still a pension fund issue in the UK.
UK Pension Protection Fund (PPF), at the end of August, was about 1.5 trillion pounds, which was about 1.75 trillion US dollars at the exchange rate at that time, and about 2 trillion US dollars if calculated at last year's exchange rate.
, and the UK's GDP in 2021 last year was about US$3.19 trillion. The size of the UK pension fund is 2/3 of the GDP. With such a huge scale as
, once something goes wrong, it is a real big problem. The price of UK Treasury bonds fell as the Bank of England raises interest rates and rising interest rates. Unfortunately, the British pension fund invests a large amount of funds in British Treasury bonds. Once the price of the Treasury bonds falls, the pension fund will suffer losses. It should also be normal for investment to suffer losses. The problem is that the British pension fund invests in treasury bonds with leverage ratio . Once the price of treasury bonds falls, there may be a situation where margin is recovered.
If the margin cannot be paid on time, it will be forced to close the position. It is said that the British pension fund needs to pay 690 billion yuan in funds.
Due to British Prime Minister Tras' reckless tax cut measures, new bonds will inevitably be issued in the future to raise money. Since debt is borrowing when interest rates are high and government spending is expanded, this will stimulate bond interest rates to rise and bond prices will fall again. The result of the re-sinking bond price of
has caused losses to the British pension fund and has to pay the margin again.
By this time, the British pension fund had to sell the government bonds in its hands. However, selling large amounts of treasury bonds will trigger a continued decline in bond prices, forming a vicious cycle. What is the final result of
? That is, the stock market falls, the bond market falls, and the pound exchange rate also falls, forming a perfect storm.
In just a few days, a financial crisis occurred in the UK asset market, forcing the Bank of England to take action, and announced on September 28 that it would purchase bonds at any necessary scale. This is similar to the Bank of Japan's unrestricted purchase of Japanese government bonds a few months ago.
Bank of Japan is to lower the treasury bond interest rates, continue to carry out quantitative easing, and stimulate Japan's economy.
Bank of England is trying to save the bond market and the UK's stock capital market.
After the Bank of England announced, the UK's 10-year Treasury bond interest rate dropped from its peak of 4.6% to 4.12%. Otherwise, it would be a catastrophe.
In order to pay the margin, British pension funds will have to sell their assets, including bonds, stock markets and real estate markets, which will form a spiral decline in asset prices.
Is this financial turmoil in the UK a case by case? Or will other countries have situations similar to those in the UK next?
The new policy of British Prime Minister Trass is just a straw that triggered the financial crisis and the fuse. Although this was also her own fault. She did not discuss it with the cabinet members in advance, nor did she do the same as the Federal Reserve's style. She first revealed some news to the market, allowing some economists, investment banking, and analysts to express some opinions. On the one hand, she gave the public a channel to clear and vent, and on the other hand, she could also brainstorm.
So Tras can't blame anyone. However, Tras has issued a statement that puts the blame on the British Treasury Secretary. Then let the British Treasury Secretary come forward and cancel some tax cuts.
But on the other hand, it is also considered that Tras is unlucky.
The current global financial environment is when inflation is rising, the Federal Reserve accelerates interest rate hikes, and the United States takes a big scythe to harvest the world.At this critical moment, Tras bumped into him, and of course he was bleeding.
is a bit unpleasant, and people are not smart enough. Britain thinks it is a solid ally of the United States and is also an Anglo-Saxon . However, when the harvesting sickle is held high, it is treated equally and relatives do not recognize it. The sickle cannot recognize anyone.
Details the financial turmoil this year, Japan's exchange rate plummeted, Sri Lanka's countries went bankrupt, and the exchange rates of the euro and the pound fell sharply. In addition, the Russian-Ukraine war has pushed up global energy prices and also pushed up global inflation, and the global perfect financial crisis is taking shape.
and the two major factors that gave birth to this perfect financial storm are inflation, and the other is the Federal Reserve's accelerated interest rate hikes and balance sheet reduction, which is the harvest of the United States.
This time the US dollar harvest is different from the previous few times. The dollar cycle in the past was that the United States itself faced an economic recession, or an economic crisis, so it adopted a loose monetary policy of , with low interest rates or zero interest rates, plus quantitative easing.
Wait until the economic growth recovers, and then adopts a policy of monetary tightening. The Federal Reserve raises interest rates and sounds the clarion call for monetary tightening. The US dollar funds that are scattered overseas have returned to the United States, which also drives some speculative funds or safe-haven funds into the United States.
However, this time, the US economic prosperity did not recover, but was forced to adopt austerity policies due to high inflation.
The last financial crisis occurred in 2008. By December 2015, the Federal Reserve began to raise interest rates, rising all the way to 2.5% in December 2018. It took three years in total from zero interest rate to 2.5%.
But this time, from March this year to September, it was only half a year. The US federal benchmark interest rate rose to 3%~3.25%, which is a rapid rate hike.
Moreover, the Fed's interest rate hike is likely to be only halfway through, and it is expected to break through the 4% interest rate by the end of the year, and may fall between 4% and 5% next year.
The Federal Reserve strongly raises interest rates and reduces its balance sheet, and coupled with the superposition effect of the Russian-Ukrainian war pushing up inflation, the various factors of the financial storm are almost complete.
If the United States continues to cause storms in the Asia-Pacific region next, the global financial market will only be worse.
Conclusion is that the last rate hike cycle may have been halfway through. In 2018, Trump fought a trade war with China. Trump needed the Federal Reserve to lower interest rates to keep the stock market at a high level, so as to accumulate the capital to fight a trade war with China.
That interest rate hike cycle stopped at the 2.5% interest rate rate.
But this time, the Federal Reserve cannot help, because the inflation pressure is too great. It is precisely because of this that the rapid rate hike in the United States this time will not only have a great impact on global finance, but also be difficult to estimate and measure.
Therefore, there must be problems in other countries next.
This is not true. Yesterday's news, Credit Suisse broke out in financial problems and may declare bankruptcy within one month because Credit Suisse's credit default swap (CDS) soared to the level of financial disaster.
may become a replica of the 2008 Lehman burst.
In fact, Credit Suisse 's banking and wealth management platform business is OK, but in terms of investment business, that is, investment banking business is not good, and some scandals have also occurred. Now, Credit Suisse is in a critical juncture and needs to conduct divestitures and asset sales as soon as possible.
problem is coming again. According to the experience of the British pension fund, if the asset price falls again within the past or two months, it will be a disaster for Credit Suisse, and it will not be possible if it goes bankrupt.
This is a completely replica of the Lehman bankruptcy storm in 2008.
Once Credit Suisse goes bankrupt, will it cause a chain reaction like a snowball, causing a new wave of global financial turmoil.
Let's make a conclusion:
This year's inflation + the Russian-Ukrainian war + the Federal Reserve's interest rate hike has caused turmoil in the global financial market.
first, caused US dollar liquidity problems in some countries, and the Sri Lankan government collapsed and the country declared bankruptcy.
second, currencies in many countries around the world fell. Including the Japanese yen, euro, Korean won, pound, Canadian dollar, and Australian dollar, as well as the RMB. However, although the RMB has also fallen to the US dollar, it is rising compared to other major currencies.
This wave of global exchange rate declines, even the yen, traditionally known as a safe haven, has also fallen, and its depreciation has exceeded 25% since the beginning of the year.
plus the euro also fell, and the pound also fell. This means that no major economy in the world can survive the upcoming financial storm or recession.
is the only one that is decoupled from the US dollar. Russian ruble is the only one. However, Russia has Russian problems. Russia, which has been severely sanctioned by the United States and the West, will definitely be affected.
Third, This year's financial turmoil, from Japan, the United Kingdom, to , Switzerland, and then Germany experienced a crisis of industrial chain departure. EU as a whole also faces serious economic threats.
We can see that the problem of Credit Suisse and the problem of British pension funds is the same as the problem of Lehman Brothers 13 years ago, which is facing the same problems as the financial crisis, such as Credit default swaps (CDS), and leverage operations.
So, in the past 13 years, Western countries have not changed much in finance, the difference is just the ratio of leverage .
From here, we can draw a conclusion: China has been rectifying some industries since 2020, including the real estate industry, finance industry, and some network technology industries.
The purpose is to squeeze out some bubbles first, and only then can you overcome the difficulties and have the capital to compete for success in the game of great powers.
In addition, when the epidemic was epidemic in 2020, the United States, Japan and Europe were all engaged in quantitative easing, but China remained silent and retained the ammunition to stimulate the economy when necessary.
Still, in the statement from May last year, the United States will be unable to target China in an economic recession. This day is getting closer and closer. Only those who are well prepared can win in the end. Let's wait and see.
(Author: Yang Feng)
Today's analysis and reasoning ends here. This is the current commentary of Yang Feng in Fengyun World. Thank you for watching. See you next time.
