Inflation in the United States has become the public enemy of all people, and the price changes that are closely related to it are the most stressful.
Yao Rui, associate professor of finance at Brooke College of the City University of New York, said that inflation is now the public enemy of the United States. Currently, the inflation rate in the United States has reached over 9%.
The Federal Reserve (Fed) will take two methods to control inflation: the first is to increase short-term interest rates, which are said to be raised above the inflation rate, to 3.5% by the end of this year; the second is to shrink the balance sheet (QT), which reduces the amount of money put into it. The Fed will implement it in three steps: first shrinking the balance sheet by 45 billion yuan in June; gradually increasing it to 75 billion yuan in July, and finally reaching 95 billion yuan in September.
★Reducing the supply of U.S. dollars prompts a decline in consumption
He said that in addition to the above measures, the Federal Reserve will also adjust the amount of U.S. dollars in an attempt to reduce people's consumption. He said that with less total investment, prices in the stock market, bond market and real estate market will definitely fall. Initially there was a price but no market, and then the market fell. He said that if the Fed really raised short-term interest rates above the inflation rate, the U.S. economy would decline, but it would have no choice. It can only quickly raise short-term interest rates on the one hand and hope that market demand will decline and inflation will fall on the other.
Yao Rui said that in the past, the Federal Reserve purchased Treasury bonds from the Treasury Department, but instead of taking them back after they expired, they exchanged new money for old money, while also increasing the purchase of new bonds. Through this method, the Federal Reserve will issue an additional 100 billion yuan to the market every month. This purchase of new bonds was stopped in March this year.
He said that the Federal Reserve has two main tasks: one is to control prices; the other is to protect employment. Now, with wages suddenly rising, people are faced with a choice: quit or work? Many people are not used to going to work. He analyzed that the stock market will decline in the next two years, and people will still have to go back to work.
The sudden high inflation in the United States is related to the United States’ long-term monetary and fiscal policies. He said that after the outbreak of the new crown epidemic in the United States, the Federal Reserve used monetary policy and lowered interest rates from 2% to 0%. This is actually another round of monetary easing. He said that the Fed not only lowered short-term interest rates to zero, but also controlled long-term interest rates to achieve full control. He said that in the first half of 2021, the interest rate on the 10-year Treasury bond was held at a little more than 1%.
At the same time, the Treasury Department also adopted a new fiscal policy to send money directly to the American people. Spam issuance of currency will cause the price of financial products to rise. In the past, the loan interest rate was 2.7%, while the inflation rate was only 2%. "The cost of obtaining a loan was very low." Therefore, people rushed to get loans.
Low interest rates caused the stock market to skyrocket, and Tesla and other stocks rose astonishingly.
★ Years of low interest rates and no inflation
Low interest rates have affected product pricing in the financial market. Low interest rates caused both bond and stock prices to rise, with high-tech stocks rising the most. Some high-tech companies, such as Tesla, , Facebook, , etc., originally do not make money, but their stock prices are very high. At the same time, many virtual currencies have also come out. In addition to the earliest Bitcoin, there are also Ethereum , Dogecoin , etc. Moreover, many people speculate on these virtual currencies, mainly because there is no holding cost .
He said that in 2008, the subprime mortgage crisis broke out in the United States and the economy was affected. The Federal Reserve (Fed) used monetary easing (QE) for the first time, not only reducing short-term interest rates to zero, but also injecting hundreds of billions of funds into the market every month. Surprisingly, inflation did not occur. As a result, the Federal Reserve tasted the benefits and continued to use it for more than ten years. Seeing that the United States has implemented zero interest rates, the economy is improving, and inflation is not high, other countries have followed suit. Austria even issued 100-year government bonds. However, this approach is unsustainable.
Inflation will begin in the United States from the second half of 2021. By the beginning of this year, the inflation rate exceeded 8%. The Fed had no choice but to continue raising interest rates. He said that if the loan interest rate is zero, you will actually be using future money today at no additional cost. As a result, the U.S. stock market and real estate market have been rising year after year, and these items have become overvalued.
Yao Rui said that unlike previous inflations, the inflation in the United States this time is mainly due to poor logistics, resulting in insufficient supply.People's demand has not increased, but the goods are abroad and there are transportation problems. He said that now the federal government is just handing out money. Money is not used for innovation, but for market hype.
He said that the new crown epidemic has caused a huge increase in U.S. spending. The federal government cannot collect so much money through taxes, so it can only borrow money from outside the country. Because borrowing money requires interest, the federal government can only borrow new money to pay back old money. This is a Ponzi scheme . If the federal government stops sending money, the market will collapse.
Federal Reserve Chairman Jerome Powell (left) and Treasury Secretary Yellen (right) admitted that it was a misjudgment to think that inflation is temporary.
★The price cycle will continue to rise.
Prices have a self-cyclical process and gradually increase. As soon as the price is increased, there will be a wave of price increases. For example, if the price of goods increases, employees will demand a wage increase. If they don't get a raise, they won't come. After raising wages, the boss will increase the selling price of finished products. In addition, the Russia-Ukraine war is also one of the influencing factors, causing energy prices to rise. Due to increased costs, there are now no importers or exporters.
He said that over the past 20 years, the inflation rate in the United States has remained around 2%, which is related to the cheap daily necessities provided by China. In 2001, after China joined the World Trade Organization (WTO), it participated in the world's division of labor and became the world's factory. Moreover, China used the foreign exchange earned from exports to purchase U.S. Treasury bonds. He said that because labor costs in Southeast Asia are lower than in China, China's past cost advantage disappeared a few years ago.
Even if they are under the pressure of soaring costs, some industries will find it difficult to increase prices and must find ways to absorb it on their own.
Prices in the United States will continue to rise until 2023. He said that if the price of energy and fertilizer doubled, the price of food would also rise. In some places, rents have risen even more. In Miami, rents have increased by 42%, but the landlord is only willing to sign a one-year contract. He said this is a problem faced by all countries in the world.
Guo Yafu, president of New York Tianjiao Fund Management Company, also said that the main cause of inflation this time is quite special, which is that product supply cannot keep up, causing prices to rise. He said that after the outbreak of the new crown epidemic, the economy was closed and production and transportation could not keep up. Therefore, Fed Chairman Jerome Powell and Treasury Secretary Yellen have always insisted on the temporary theory of inflation. They believe that when economic activities return to normal, inflation will naturally return to normal.
He said that not only did inflation not fall, but it went higher and higher. After the Russia-Ukraine war broke out in February this year, due to concerns about supply interruptions, prices of oil, natural gas, grain, nickel, zinc and other bulk commodities soared, adding fuel to the scorching inflation fire. Ball and Yellen later Everyone admits that the previous temporary theory of inflation was a misjudgment.
Yao Rui said that if the Federal Reserve starts to shrink its balance sheet in 2021, the inflation rate will not be so high. The Fed is taking action now, it's already too late. Even if the Fed lowers the inflation rate to 5%, the benefits will not be felt until next year. If the interest rate on the ten-year Treasury bond is raised to 6%, it will be a huge burden on the U.S. government and companies.
High inflation and high prices have impacted people's livelihood, making it even worse for low-income groups. A new discount supermarket opened in Santa Rosa, California, and people rushed to buy it.
★The government has a hard time paying off its debts
Yao Rui said that Ball was appointed by former President Trump. When inflation rose in the first half of 2021, he thought he could not be re-elected, so he did not raise interest rates and wanted his successor to come. Do. In March 2022, President Biden still nominated him for re-election as chairman of the Federal Reserve Board, and he began to deal with inflation.
This time, the Federal Reserve will first raise short-term interest rates, the first increase by 0.5 percentage points, and the second increase by 0.75 percentage points. The Federal Reserve's plan is for U.S. short-term interest rates to reach 3.5% by the end of this year. However, the Federal Reserve has said that it will raise interest rates above the inflation rate." Yao Rui said that the U.S. government can also increase supply and ease supply chain tensions, but the Federal Reserve does not have this power.
He said that if interest rates continue to rise, stocks and real estate will fall, and people will feel that their assets have shrunk, they will become poorer, and they will have psychological pressure. This is the wealth effect, which will have an impact on consumption.Household consumption is determined by income and assets, namely properties and stocks. The positive impact of rising housing prices on consumption is called the housing wealth effect, while the positive impact of stock appreciation on consumption is called the financial wealth effect.
Higher interest rates will cause a ripple effect that won't be seen until the following year. I estimate that if the short-term interest rate is 3.5% and the long-term interest rate is 3%, the U.S. economic recession will come. Yao Rui said that now, the 10-year Treasury bond interest rate is 3.5%. If the short-term interest rate is raised to 8%, inflation can be suppressed. If it expands, the Federal Reserve will be embarrassed.
Yao Rui said that low-income families are the most sensitive to inflation. They have low incomes and no savings. For example, he said that some low-income families can only spend 150 yuan a month on gas expenses, but now the price of gas has gone up. In the past, the extra money could last for a month, but now it can only be used for half a month. If wages cannot keep up and they lose transportation, they will lose their jobs.
According to economic principles, if interest rates are raised, companies will go bankrupt in large numbers and the number of unemployed will increase. The current unemployment rate is 4%. He said that general loans require an additional three percentage points on top of the base interest rate. The current basic interest rate is 3%. If you add the actual interest rate, the interest rate reaches 6%.
He said that if loan interest rates reached 8%, financial markets would be severely hit. For example, if the interest rate rises to 3.25%, the stock market will fall, the price of Bitcoin will fall below 20,000 yuan, and the stock price of real estate companies will drop by one-third. Now, there are a bunch of houses on the market that are staying on the market for extended periods of time. I estimate that in the future, the housing market will see zero transactions and falling housing prices.
Biden hopes to implement loose monetary policy . He said that the blame is now being placed on Russia for invading Ukraine. Biden believes that inflation will occur in mid-2021 and has nothing to do with me. All parties are shirking responsibility. He estimates that the federal government will have to pay off its debt in the next ten years and life will not be easy.
Yao Wuquan, CEO of SogoTrade, an online brokerage company, said that media reports indicate that stock god Buffett has purchased shares of Citibank . Although banks can earn profits by issuing loans, they also face greater risks. For example, if loan interest rates increase, borrowers will face greater pressure. Once they lose their jobs, they cannot repay their loans, the bank cannot receive repayments, and the bad debt ratio increases, affecting the bank's profits.
He said that despite inflation, many industries are unable to increase prices. For example, , Apple, and cannot increase the price of the iPhone. Once the price increases, people will not necessarily change their mobile phones. He believes that supply chains around the world are broken, and coupled with the Russia-Ukraine war, the world has been thrown into chaos and will not be able to recover in the next few years.
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