Special | Pan Xiangdong
Editor's note
On September 27, the natural gas pipelines "North Stream No. 1" and "North Stream No. 2" connecting Russia in Europe were partially damaged in the Danish waters, causing a huge shock in the capital market. Will the European energy crisis caused by the Russian-Ukrainian conflict re-enactment of the 2012 European debt crisis? How can the ECB achieve market assistance in the euro zone with inconsistent fiscal policy? Adding , Fed to shrink currency, will a financial crisis break out in Europe? "Red Weekly" specially invited Dr. Pan Xiangdong, chief economist of Qilu Research Institute, to give the latest interpretation of this.
As the US dollar continues to evolve, for some relatively fragile economies , the possibility of a crisis in the future will become greater and greater. Just like people are always broken by the "last bun", a certain "last straw" appears, and the crisis will follow. In economic terms, financial markets exhibit typical nonlinear characteristics.
Global liquidity tightens, funds are easy to withdraw
"Turkish South Indian and Mediterranean" five economies may fall into exchange rate crisis
Financial crisis is generally manifested in the sharp deterioration of most financial indicators in the financial field, such as bank runs, large-scale bankruptcy of financial institutions, stock market plummeted, currency depreciation significantly, and debt repayment difficulties.
From the 1980s to the 1990s, East Asia's economy developed rapidly, which was called the "East Asian miracle". As the US dollar emerged from its strength in the 1990s, some funds began to withdraw from Southeast Asia, and eventually evolved into the "Southeast Asian Financial Crisis".
The Fed receives currencies to increase instability in the global financial system, and there is no doubt. At the same time, whether an economy will experience a financial crisis needs to be understood, and the internal structure of the economy is analyzed from the perspectives of exchange rate, debt, stock market and other crises.
is the top few global trading currencies: US dollar, euro , pound, yen and renminbi. In fact, I am not worried that they will experience an exchange rate crisis because they have enough tools to calm the fluctuations in the foreign exchange market.
But for some developed economies with relatively small economic size, such as South Korea, and some developing economies with relatively large economic size, the exchange rate is free to float, such as India, Brazil , South Africa, Russia, Argentina , Mexico , Turkey , Thailand, Vietnam, etc., in emerging economies, once the foreign exchange market is in crisis, it lacks enough tools and strength to curb severe fluctuations.
From the perspective of short-term liabilities , Türkiye, Argentina, South Africa, Indonesian , Mexico and Vietnam are under great pressure. Judging from the trade deficit of , the above-mentioned top five countries, except in 2020, are all trade deficit countries in other times.
combines the two. If the US dollar continues to be strong in the future, an exchange rate crisis in the five economies, Türkiye, Argentina, South Africa, Indonesia and Mexico, is a high probability event. Currently, Türkiye's inflation rate is 80%, while Argentina is 78.5%, which is on the verge of collapse.
"Lender Last" is converted to "Purchaser Last"
Why don't investors worry about a crisis in Japan and the United States?
The rise in interest rates will undoubtedly increase the pressure on real estate, stock markets and bond markets. But this concern may be redundant since the Fed and the central bank of changed from the "lender of last" to the "purchaser of last" role.
When Japan experienced continuous deflation, the Bank of Japan launched a rate cut, followed by quantitative easing, and then negative interest rate , and finally went straight to become a trader.
At the end of November 2020, the Bank of Japan surpassed the Japanese government's pension investment fund for the first time, becoming the largest shareholder in the Japanese stock market. The total holdings of have exceeded US$430 billion. As a strong buyer, the Bank of Japan's purchases came out, pushing the Japanese stock market to become one of the world's most powerful markets in 2020. rose by to 45%, and there was no impact of the new crown epidemic at all.
From the perspective of Japan's debt holder structure, 46.8% is held by the Bank of Japan, and overseas investors account for only 7.6%. Even if overseas investors are worried about the Japanese government's high leverage ratio, they will not be able to make trouble in its bond market - most of the bargaining chips are in the hands of Japanese institutions and citizens. What’s more important is that once the financial market risks are exposed, the Bank of Japan will immediately rescue you. As long as the market has demand, the Bank of Japan can provide liquidity uncontrollably.
The subprime mortgage crisis occurred in 2008, and the Federal Reserve embarked on the road of quantitative easing. In 2020, the new crown pneumonia epidemic occurred around the world, and economic activities in many countries declined rapidly, and panic began to occur in the financial market. The Federal Reserve followed the Bank of Japan and went directly to become the "last buyer" of the market. With the support of the Federal Reserve, the US stock market has continuously hit new highs after a brief adjustment, and the financial market cannot see the impact of the new crown epidemic on the economy.
market has stabilized, but the Fed's balance sheet has expanded rapidly. In 2007, the Fed's base currency injection volume was US$822.9 billion. By the end of 2021, the base currency injection volume reached US$6.4 trillion, an increase of nearly 8 times.
Investors seem to no longer worry about liquidity depletion in the financial market - if a crisis occurs, they will start the machine and print money immediately. Therefore, this time, even when the yield on the US 10-year Treasury bonds continued to hit new highs and the US stock market fell to varying degrees, investors in the market still did not panic.
With the final guarantee from central banks in developed economies, who will still worry about another financial crisis?
The problem is that if the central bank prints money, the financial crisis can be solved once and for all, then why has the central bank been sticking to the "lender of last resort" since its birth?
"is a medicine with three parts poison". Since the Bank of Japan came to buy stocks, the flexibility of the market has gradually decreased.
continues to open the gates to the market, and the credit of the US dollar and the yen will be slowly eroded. When it accumulates to a certain point, it may collapse. At that time, we have no means to deal with it, and can only watch the collapse of the credit system. But for the moment, it seems that it is still far from this step! Because there is no currency that can replace them yet!
Russia-Ukraine conflict affects European industrial chain
Energy crisis intensifies multinational companies moving away from Europe
Since both the Federal Reserve and the Bank of Japan can achieve market stability by changing roles, the ECB can also achieve it, and the pace of past operations has also followed the Federal Reserve.
But after the conflict between Russia and Ukraine caused the European energy crisis, European "right-wing" forces began to rise. This time, the Italian brothers' election victory, which will reveal the weakness of the EU : With the euro zone where fiscal inconsistent, how can the ECB achieve market assistance? European debt crisis in 2012 may happen again?
To make matters worse, on September 27, the natural gas pipeline "North Stream 1 and 2" connecting Russia in Europe was partially damaged in the Danish waters. Judging from the known situation, the pipeline repair will take at least more than a month. This winter, Europe may face no Russian natural gas available!
In order to preserve the gas use of residents, it is estimated that many industrial production will face suspension. Comparing Europe's energy consumption structure and its past dependence on Russian energy, we can know why the world is worried about this winter in Europe.
In 2021, 33.47% of Europe's energy consumption relies on oil and 24.95% on natural gas, and the two account for 58.42% together. Except for Norway and the Netherlands, , , Europe relies more on imports, with nearly 30% of oil and 33% of natural gas imported from Russia.
The biggest impact of the Russian-Ukrainian conflict is the European industrial chain. Europe has strong comparative advantages in mid-to-high-end manufacturing, but the manufacturing industry relies on raw materials and energy. It used to rely mainly on Russia, and its geographical proximity has low transportation costs.The war is currently continuing and transportation pipelines are damaged. Faced with energy shortages, many multinational companies will move out of Europe. The Southeast Asian financial crisis in 1997 led to many manufacturing companies moving to my country where the exchange rate is relatively safe.
From the three major global industrial chains - Europe, East Asia and North America, the East Asia industrial chain can accept Russian natural gas and oil, which is relatively less harmful. North America is the net export of natural gas and oil in region, and rising prices can also increase revenue. But Europe is different, energy supply may only be shut down. Global aluminum giant Hydru claims that due to energy reasons, after September, the company will completely close all smelters in Slovakia after . Germany's Lech Steel Plant has announced an indefinite suspension of production.
Central Bank cannot print money out of thin air to become a European weakness
rate hike Increase government debt repayment pressure to curb economic activity
When high leverage and high inflation coexist, the financial market is actually very fragile. At any time, the spread of panic may cause the liquidity of the financial market to dry up. The subprime mortgage crisis in 2008 and the European debt crisis in 2012 are still fresh in memory.
But the problem is that after experiencing the European debt crisis, except for Ireland , the leverage ratio of other economies has not declined in recent years, but has continued to rise, especially in Italy, where the leverage ratio of government departments has repeatedly hit new highs.
In 2012, in order to cope with the outbreak of debt crisis, the EU carried out a series of reforms. For example, the EU and the International Monetary Fund established the European Financial Stability Mechanism and European Financial Stability Fund , with the purpose of providing financial assistance to EU countries to defend European financial stability.
The central bank has changed from a "lender last" to a "buyer last", which needs to be accompanied by "fiscal monetization", that is, MMT, because the central bank cannot print money out of thin air, and every cent of assets corresponds to every cent of liability! The European Central Bank is willing to provide help, and the key is that fiscal coordination must be coordinated simultaneously.
Before the outbreak of the European debt crisis, although the eurozone was established, the finances were decided by each member state. This led to a country like Italy. The prime minister did not have much to repay the people when he came to power, so he made a deficit and expanded welfare. Once the economy is bad and fiscal revenue and expenditure are difficult, we have to find member states to continue issuing bonds. Other economies that are thrifty will naturally not agree, and politicians are embarrassed to spend their own nationals' sweat on the people of other countries.
After the outbreak of the European debt crisis in 2012, other major EU economies, such as Germany and France, could only provide help on the one hand, but the other side also required the rescued economies to abide by fiscal discipline and stop doing the same thing as eating the food for the first time.
Judging from the government leverage ratio in the past decade, this constraint seems to be of little effect. But now Europe is facing an energy crisis and is forced to adopt a strategy of hikes under inflationary pressure. The energy crisis itself will increase the economic downturn, and tightening the currency will lead to an upward trend in bond yields, which will increase the government's debt repayment pressure. At the same time, interest rate hikes will also inhibit the activity of the economy and lead to a decrease in fiscal and tax revenue. The overlapping of the two is likely to trigger a debt crisis again at a certain point in time.
But if the crisis is triggered again this time, the rescue will not be as easy as last time. Because of Italy and other countries, the "right-wing" forces began to manage the country. In the "pro-European" and "Brexit" tug-of-war, who is willing to rescue a "opposition"?
Therefore, with the emergence of the "right-wing" forces in some European countries, the energy crisis triggered by the Russian-Ukrainian conflict will, on the one hand, lead to "stagflation" in the European economy and the euro will weaken; on the other hand, it will also trigger debt crises in some European economies with high government debt, and may even lead to a "European financial crisis."
(The author is the chief economist of Qilu Research Institute and a Ph.D. in economics. This article has been published in "Red Weekly" on October 1. The views in the article only represent the author's personal opinion and do not represent the position of "Red Weekly". Investment is risky, so investment should be cautious!)
#Expectations of interest rate hikes have heated up again, and US stocks have fallen sharply# #Shanghai Index fell below 3,000 points during the session#
