Key Takeaways:

The difference between interest rates and currency prices: interest rates are not the price of currency, but the cost of borrowing currency. The price of currency is usually reflected in the exchange rate, which is the ratio of one country's currency to another country's currency.

The Fed's dual mandate: The Fed's primary mission is to control inflation and promote maximum employment. When implementing monetary policy, it needs to balance these two goals.

Types of Inflation: Inflation can be caused by a variety of factors, including demand-pull, cost-push, and import-cost-push. Understanding these types helps analyze the causes of inflation and possible countermeasures.

The Fed's policy tools include: changing the required reserve ratio, adjusting the discount rate, voting by the Federal Open Market Committee (FOMC), and buying and selling U.S. government bonds in the open market.

Countercyclical nature of policies: Governments and central banks often adopt countercyclical policies to smooth economic fluctuations, but this does not mean that the policies are always timely or completely effective.

Observation and delays in policy: Central banks tend to observe economic indicators and may have delays when formulating policies, which means that policy responses may not be immediate.

The relationship between interest rate cuts and exchange rates: interest rate cuts may lead to depreciation of the domestic currency, but this impact will be affected by many factors, including market expectations for economic prospects and the global interest rate environment.

Dynamics of global reserve currencies: The status of the U.S. dollar as the world's main reserve currency may be challenged by other currencies. Understanding the changes in the composition of global foreign exchange reserves helps analyze the relationship between currencies.

The role of BTC and gold as a store of value: When economic uncertainty and geopolitical risks rise, store of value assets such as BTC and gold may be favored.

1️⃣A financial reporter once said:

“If Ben Bernanke at the Fed raises interest rates, the price of money will go up.”

Unfortunately, from an economics perspective,

This kind of statement is completely wrong.

Interest does not represent the price of money.

Interest is not a price that must be paid for the use of money.

Interest is paid for borrowing money.

There is one chapter in the book "Cycle" that I read the least.

05 Government regulation is counter-cyclical. Maybe it’s because this chapter is too short, or maybe I didn’t understand it, or maybe I thought I understood it, so I didn’t pay attention to it.

I reread this chapter today.

Here are some things to note:

First of all, I really need to configure some economics textbooks to read. I refer to "Economic Thinking" and "Principles of Economics". There are many common senses that need to be supplemented.

Another thing is that the context is very important. I had no idea about the Federal Reserve and the U.S. government at first, and I didn’t have enough experience with the market when I was studying before. The benefit of rereading the classics every once in a while is that you can review important knowledge through a period of experience and have a better understanding.

2️⃣ Let’s look at countercyclical regulation. How to adjust

The goal of the central bank (Fed) in managing inflation is not to eliminate it but to control it.

The central bank has two major responsibilities: one is to control inflation, and the other is to stimulate the economy. Therefore, the central bank is somewhat tolerant of inflation.

When we revisit 2021, the Fed believed that the inflation that was then occurring would be “transitory,” which the Fed subsequently defined as temporary, not entrenched, and likely to self-correct. Given enough time, the Fed’s view may prove to be correct.

Inflation could dissipate on its own within three or four years if:

The coronavirus relief money that fueled a surge in consumer spending is running out.

The global supply chain has returned to normal operation.

However, in 2021, the Fed lacked sufficient evidence, so it was forced to initiate an interest rate hike policy.

At the end of 2022, the consensus among market observers shifted to the following view:

Inflation is easing, which will allow the Fed to start cutting interest rates;

Lowering interest rates will either allow the economy to avoid a recession or ensure that any contraction is mild and short-lived.

This optimism sparked a stock market rebound in late 2022 that continues today.

We can clearly see that when facing various signals of inflation in the market, the Fed's attitude towards raising and lowering interest rates is first to observe, and even a little delayed. Howard said that the tools we need to manage the cycle are far from easy.

What tools does the Federal Reserve have to manage inflation?

In "Economic Thinking", several tools commonly used by the Federal Reserve are given.

Changes in the required reserve ratio

Adjust the discount rate

Directly modify the federal funds rate through a vote of the Federal Open Market Committee (FOMC)

Open market purchases and sales of U.S. government bonds

Note that there is a sequence here, from low to high frequency operations, open market buying and selling of U.S. government bonds is a fine-tuning,

3️⃣But there are uncertainties.

As early as February this year, analysts believed that:

The Federal Reserve is likely to cut interest rates in the middle and late part of this year. However, the latest consumption data (the US consumer price index for January this year was released, with an annual increase of 3.1%, exceeding market expectations, and the number of non-farm payrolls in January also hit a record high of 353,000, almost twice the original expectation) indicates that the Federal Reserve is unlikely to cut interest rates, but may raise them instead.

The change in the US dollar interest rate will directly affect the exchange rate between the RMB and the US dollar, exports, and the flow of foreign capital, and thus affect the adjustment of domestic monetary policy in the future.

What we see directly is the interest rate cut/hike of the Federal Reserve.

But our focus is not on these, but on the direct and potential impacts it will bring to us.

Howard listed three possible causes of inflation:

Demand-pull type, cost-push type, import cost-push type,

One thing is certain with a high probability. No matter who is elected as the next president of the United States, the United States will inevitably increase tariffs on China. Harris will continue Biden's policies, and Trump's America First policy has already shown that there will be more trade barriers.

So there is at least one kind of inflation, which is import cost-driven inflation.

Just like the story at the beginning, raising interest rates does not necessarily mean that the currency will appreciate, and vice versa.

The Fed's interest rate cut may not necessarily lead to a depreciation of the US dollar. This depends on the future development of the US economy.

This is mainly due to the global status of the U.S. dollar.

The International Monetary Fund (IMF) published an article on June 11. According to the latest statistics, the US dollar continues to give way to non-traditional currencies in global foreign exchange reserves, but it remains the most important reserve currency.

The current situation is delicate, with an increasing proportion of so-called “non-traditional reserve currencies”, including the Australian dollar, Canadian dollar, Chinese yuan, Korean won, Singapore dollar and Nordic currencies.

Take Europe as an example. The energy problems caused by the conflict between Russia and Ukraine have led Europe to import a large amount of expensive oil from the United States. Europe does not want to be controlled by Russia or the United States. Although they are allies, the behavior of the United States does not seem like an ally to Europe.

In addition, the world has seen the US freeze on Russia's funds. Although the US dollar still accounts for more than 50% of global foreign exchange reserves, it has dropped from 71% in 1999 to 59%.

4️⃣ According to the IMF report, although the proportion of RMB in foreign exchange reserves has increased, it has also stagnated.

Among the non-traditional reserve currencies that have gained market share is the renminbi, which has increased by a quarter of the dollar’s ​​decline. Beijing has been advancing its policy of internationalizing the renminbi on a number of fronts, including developing cross-border payment systems, expanding swap arrangements, and piloting a central bank digital currency. It is therefore interesting that the internationalization of the renminbi, at least as measured by the share of renminbi in countries’ reserves, has shown signs of stagnating. The latest data do not show a further increase in the renminbi’s share of reserve currencies: some observers may suspect that the depreciation of the renminbi in recent quarters has masked an increase in renminbi reserves. However, even adjusting for exchange rate changes, the renminbi’s share of foreign exchange reserves has fallen since 2022.

Let's look at it from another angle. It is inevitable that the Federal Reserve will cut interest rates.

From a global perspective, funds need to avoid risks, and the way to avoid risks is to turn them into value-preserving assets. Without considering interest rate cuts, funds will flow to the country or region where the economic growth rate picks up first.

Considering the uncertainty brought by the interest rate cut, we cut interest rates before the Fed, which may bring benefits to exports.

The People's Bank of China announced an interest rate cut on July 22, 2024, including a reduction in the 7-day reverse repurchase rate, 1-year and 5-year LPR, and SLF rate. This move is aimed at stimulating economic growth, but it also exacerbates the depreciation pressure of the RMB against the US dollar.

As of July 24, the RMB exchange rate against the US dollar fell to 7.2750, the lowest point in the past two weeks. The exchange rate change may indeed be beneficial to exports, but the impact of this fluctuation on exports is still under exploration.

Which assets are more suitable for funds?

Assets that can maintain and increase their value, what are assets that can maintain and increase their value?

There is a passage in the book: In economics, value comes from scarcity. The reason why a commodity is scarce is that

One is because people have a demand for it.

Second, the amount available to people is limited.

For example, BTC and gold are relatively scarce, which is guaranteed by the laws of nature. The Federal Reserve has the ability to ensure the relative scarcity of Federal Reserve Notes and checking deposits, but many people feel that the laws of nature are much more reliable than central banks and governments.