U.S. Rate Cut Impact Timing: East Asia Faces Financial Crisis Risks?
The market is indeed going crazy with cash printing! And we also need to see which country is printing the most.
Recently, we have witnessed China and the United States competing fiercely to inject capital into their respective markets. Here, China's A-shares are visibly surging!
What has the central bank done?
Let's first talk about the actions taken by the central bank recently, which included lowering the seven-day reverse repurchase policy rate, and soon afterward, the MLF rate was cut from 2.3% to 2%, freeing up a total of 300 billion yuan in liquidity. It is also expected that deposit rates and LPR rates will follow suit and be lowered.
All this is aimed at increasing the circulation of cheap money in the market.
Consider this: such adjustments effectively reduce the cost of funds for banks at a micro level, alleviating the pressure on their net interest margins and protecting their profit space.
In simple terms, if banks are doing well, everyone else can thrive too; if banks falter, then no one will have it easy.
Looking back at history, every time the Federal Reserve starts lowering interest rates, it is often followed by an economic recession, and consecutive cuts of 50 basis points are quite rare.
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If you think the U.S. is thriving without any crisis, that would be quite naive.
Buffett has just sold $860 million worth of American bank stocks. If he sells another 30 million shares, he will be below the 10% rapid disclosure threshold, which feels like he’s clearing his holdings; it's wise for everyone to stay cautious.
Currently, U.S. capital is flowing out in a frenzy, while China must find ways to attract more quality investment.
Let’s delve deeper into the hidden implications behind the Federal Reserve’s interest rate cuts.
We must understand that for over the past forty years, the U.S. has effortlessly reaped substantial benefits by manipulating the rise and fall of the dollar, extracting a global commission through seigniorage, which has continuously improved the quality of life for American citizens.
The U.S. harvesting cycle
This method was indeed effective until March 2022, when the U.S. began raising interest rates, attempting to undermine the Chinese economy to fill its fiscal gaps.
In retrospect, this financial war might be the most significant blow that the U.S. has dealt us in recent years. With the Fed officially cutting rates, it is almost certain that the U.S. will ultimately lose this financial conflict.
However, the failure in the financial war does not mean the end of the struggle between China and the U.S.; perhaps a new round of offensive and defensive skirmishes is about to begin.
Based on past experiences, the Federal Reserve usually takes the lead in rate cuts, considering the expansion of the balance sheet only during particularly severe crises.
For example, when the U.S. was hit by the COVID-19 pandemic in 2020, with the stock market crashing, the Fed quickly initiated QE and began expanding its balance sheet.
However, at this recent meeting, Powell stated they would not stop reducing the balance sheet, continuing this course even as they cut rates, a scenario that is quite rare.
Should the Fed suddenly announce an expansion of the balance sheet, it would signify that a real crisis has arrived.
This latest rate cut is essentially a response to recession concerns, as Jewish capital has not reaped the expected gains during this round of dollar appreciation, thus diminishing the influence of the dollar's fluctuations.
The greatest crisis currently facing the U.S. is that the harvesting effects of dollar fluctuations are not what they used to be.
In the past, every fluctuation of the dollar could ignite major economies through rate hikes or cuts, after which the Fed would cut rates liberally to seize opportunities and acquire quality assets.
However, this time, the fluctuations of the dollar have encountered unprecedented setbacks, and against a backdrop of failed harvesting, U.S. national debt has soared to $35 trillion, with interest expenses exceeding $1 trillion, sufficient to cover two years' worth of military expenditures. The fiscal deficit is nearing $2 trillion, exacerbating the debt and fiscal crises; the U.S. will not easily let go of this situation.
Many remain optimistic about the future. It is essential to recognize that the U.S. is well aware of these dynamics; they would never remain indifferent and may employ various tactics to prevent the repatriation of capital, one of which might be to stir the market, causing those funds and returns to vanish suddenly, leading to substantial losses for new market entrants, making it impossible for them to exit unscathed.
Don’t think I’m trying to scare you; such circumstances have precedent. From 1995 to 1998 during rate cuts, the U.S. once triggered the Asian financial crisis to prevent capital from flowing back; and during the 2007-2008 rate cuts, the U.S. caused a global financial tsunami.
The Southeast Asian crisis
So why is it always East Asia that gets affected?
The reason lies in the fact that if issues arise in East Asia, the surrounding environment in China becomes unstable, deterring capital from freely returning to China, thus providing the U.S. with an opportunity to cut rates without reservations.
While that instance did not yield benefits for the U.S., it doesn't mean they have given up; more importantly, in addition to creating chaos through financial storms, they might also resort to warfare.
This information indicates that Americans have not ceased their machinations. Since trade wars, tech wars, bio-wars, propaganda wars, and financial wars have all proven ineffective, they might opt for direct confrontation.
We cannot underestimate the bottom line of the U.S. because history teaches us that their bottom line is without limits.
We must remain vigilant not only against potential financial risks arising from the U.S. economic decline but also be wary of possible local conflicts that could erupt in the vicinity.
Only by successfully navigating through this turbulent period can we feel genuinely secure. Even once we surpass this period, there are no guarantees that the U.S. will collapse immediately. Based on historical experience, during the 1920s, the dollar was not yet the world's primary currency; it wasn't until after World War II that the dollar replaced the pound sterling as the world’s leader, a transition that took more than twenty years.
Similarly, for the renminbi to replace the dollar, a transitional period will also be needed.
China is at a crucial point in transitioning from a developing country to a developed one, and it is also the fastest-growing stage. During this period, we have proposed the slogan of “national rejuvenation,” which spans economic, military, and cultural domains.
Reflect on this: economically, we have engaged in a financial battle with the U.S. for two decades, and we have started to counterattack; secondly, while we may not yet be number one globally in military terms, within the first island chain, our strength is already substantial enough to contend with any adversary; finally, in cultural aspects, we now command significant overseas narrative power. What we need to do now is wait for the right wind to come!
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