By lowering and raising interest rates, the United States can easily reap the wealth of many countries.
Since 1974, the United States has reaped the benefits three times in a row around the world, first in Latin American countries, then in Japan, and finally in Southeast Asia.
The harvest depends on the dollar tide.
The dollar tide, that is, the flow pattern brought about by the dollar interest rate cuts and hikes, is very much like a tide, and it is an artificially created tide.
Looking back at history, it can be said that behind almost every global financial crisis there is the shadow of the Fed’s interest rate hike.
So why can the dollar hegemony remain stable?
Can the United States repay all the debt it has borrowed?
The scale of this debt is getting bigger and bigger. Will it collapse or default in the end?
Next, I will talk about this topic here.
The logic behind the Fed's rate hike:
Inflationary pressures: When the economy is overheating and inflation rises above the Fed's target level, the Fed may raise interest rates to slow economic activity and reduce inflationary pressures.
Possible impacts of the Fed's interest rate hike:
Rising borrowing costs: Borrowing costs for businesses and individuals will increase, which could dampen investment and consumption.
Stock market volatility: Higher interest rates could affect the stock market as investors may shift funds from stocks to bonds in search of higher fixed income.
Currency value: The U.S. dollar is likely to appreciate as higher interest rates attract foreign investors to buy U.S. dollar assets.
Global impact: A stronger dollar could weigh on the currencies and economies of other countries, especially those with large amounts of dollar-denominated debt.
The logic behind the Fed’s rate cut:
Slowing Economic Growth: When economic growth slows and unemployment rises, the Federal Reserve may lower interest rates to stimulate economic activity.
Responding to a crisis: During an economic crisis or financial market turmoil, the Fed may quickly cut interest rates to provide liquidity and stabilize markets.
Precautionary measures: The Fed may take precautionary interest rate cuts if it foresees the risk of an economic slowdown.
Possible impacts of the Fed’s rate cut:
Lower borrowing costs: Lower interest rates reduce loan costs for businesses and individuals, stimulating investment and consumption.
Stock Market Reaction: A rate cut could boost the stock market as investors may seek out higher-return stock investments.
Currency value: The U.S. dollar is likely to depreciate as lower interest rates make dollar assets less attractive to foreign investors.
Global impact: Rate cuts may increase global liquidity, but they may also lead to currency depreciation and capital outflows in other countries.
The Fed's policy decisions take into account a variety of economic indicators and global economic conditions. Its decision-making process is complex and constantly changing. It may also be affected by other factors, such as policy expectations, market sentiment, political events, etc.
Economic Growth: During an economic expansion, the Federal Reserve may gradually raise interest rates to prevent overheating and potential asset bubbles.
Normalization of Monetary Policy: After a prolonged period of low interest rates, the Federal Reserve is likely to raise interest rates to return monetary policy to more normal levels.
Internal debt is not a debt
First of all, everyone should understand:
The burden of foreign debt is a real risk, while domestic debt is risk-free. It can be said that domestic debt is not a debt at all.
Simply put, when a debt is calculated in local currency, we can call it domestic debt.
Domestic debt is essentially a seigniorage°, a tax paid by those who are willing to believe in the credit of the currency. Domestic debt does not need to be repaid.
At this point, some people may not understand.
Why does foreign debt denominated in foreign currency bring real risks, but local currency debt basically does not cause problems?
Because once you borrow foreign currency debt, you must use foreign currency to repay the debt. In other words, if you don't have this foreign currency, you won't be able to repay the debt when the time comes.
We can review and see whether the same scenario has been followed every time a financial crisis occurred in various regions since the internationalization of the US dollar.
Initially, after the Federal Reserve began to flood the global market with money, cheap US dollar hot money began to flow into a certain region or country on a large scale.
Part of this influx of hot money has flowed into local construction in the form of US dollar debt, promoting local economic development.
In addition to the money used for construction, another part of the hot US dollar money will be used for asset price speculation after flowing in, continuously pushing up the local asset price bubble.
When the asset price bubble reaches a certain level and the Federal Reserve begins to tighten monetary policy, international speculators will take action.
They will use various means to consume the foreign exchange reserves of this country or region, and use public opinion to exaggerate local risks and cause panic.
Under the panic effect, everyone will frantically exchange dollars.
The foreign exchange reserves of this country or region will soon be exhausted.
The accompanying result is that the local currency will depreciate sharply or even collapse against the US dollar, and the asset price bubble will burst.
It can be said that every time the United States created a financial crisis through monetary tightening, it initially tried to create panic and consume the other party's foreign exchange reserves.
When the other party's foreign exchange reserves are insufficient, some means will be used to trigger a panic run on the bank, followed by a collapse of the exchange rate and asset prices.
At this time, US dollar capital can intervene cheaply and use US dollars to buy up the country's high-quality assets denominated in its own currency.
The main reason why these countries encountered crises and went bankrupt is that they borrowed foreign debts in US dollars.
Because foreign debt can bring serious consequences, U.S. law also has a series of regulations on foreign debt issues.
The United States can confiscate assets and debts held by foreign governments and private individuals, that is, refuse to repay foreign debts. However, realistically speaking, the possibility of this happening in the future is very small, or basically impossible, because since the dollar became the world currency, the concept of foreign debt no longer exists for the United States. It must be emphasized here that the most important event in the 20th century was not the "First World War" and the "Second World War", nor the disintegration of the Soviet Union, but the decoupling of the dollar from gold and its re-linking with oil.
From that day on, a true financial empire was born, the entire human race was incorporated into the US financial system, and the global hegemony of the US dollar was established from this time.
You should know that all US debts are currently denominated in US dollars.
U.S. debt is also local currency debt. Do you think it is more like domestic debt or foreign debt?
Because of this, we can also draw a conclusion here that for a long time in the future, the United States will definitely not have the so-called debt problem that everyone is worried about, because the U.S. debt does not need to be repaid at all.
The so-called debt problem can only occur if the scale of U.S. debt becomes so large that the U.S. cannot even pay the interest.
The severity of the external debt problem
At this point, many people may still not understand why the problems caused by foreign debt are so serious. It will be easy to understand if we use the history of the Asian financial crisis in 1997 to explain. Since the US dollar became an international currency, the Federal Reserve has become the world's central bank in a de facto sense. The trend of the US dollar index is based on the flow direction of international capital. A decline is equivalent to releasing water, and a rise is equivalent to closing the gate and reducing liquidity.
Every ups and downs means the process of shearing the sheep.
Shearing is achieved through the rapid flow of capital.
The biggest harm caused by the rapid flow of capital is the sharp fluctuation of asset prices. The wealth represented by land, industrial capacity and infrastructure will not and cannot be transferred, but after countries in debt crisis are asked to open their doors, they will be attacked by US dollar capital to buy at the bottom.
From 1984 to 1995, the US dollar index began to enter a downward cycle.
A large amount of US dollars was released by the Federal Reserve and poured into Southeast Asia, which had the most promising economy at the time.
We know that one characteristic of rapid economic development is that it requires spending money on construction.
Because of the rapid development, money is needed everywhere at this stage.
Where does the money usually come from?
It mainly comes from the savings of domestic residents. If domestic savings are not enough, we have to choose to raise funds from abroad.
In other words, the money for development and construction must either be borrowed from the country's own people or from foreign investors.
In the early stages of development of most countries, the people were very poor and had no money in their pockets.
Therefore, borrowing money from richer countries (such as the United States) for development has become one of their few options.
If the Federal Reserve also floods the market with money, causing the dollar to enter a downward cycle, the dollar will usually also enter a cycle of interest rate cuts and depreciation.
At this stage, for countries that need money for development, it is obviously more cost-effective to borrow foreign debt from the United States than to borrow money from their own people.
The reason is simple. On the one hand, the Fed's monetary easing has resulted in ample external funds, leading to lower interest rates on dollar debts during this period. On the other hand, the Fed's monetary easing has caused the dollar to depreciate, and the currencies of these borrowing countries have appreciated, and they can also earn from the exchange rate difference.
Everyone should be able to understand why the interest rate is very low, because the interest rate represents the price of currency.
This price is roughly positively correlated with the GDP growth rate, that is, the demand for money caused by the ability to create physical wealth.
Developed countries have usually entered a mature stage, and their GDP growth rate is bound to be slower than that of developing countries, so interest rates will be relatively lower.
How is the exchange rate difference earned? Because the Federal Reserve has opened the floodgates and the US dollar has entered a cycle of depreciation and interest rate cuts.
This means that the debtor countries' dollar debts will be reduced objectively due to the appreciation of their own currencies, as there will be an exchange rate difference.
For example, if the exchange rate between the US dollar and the Thai baht is 1:20, then if you borrow 1 US dollar from the United States, you need to pay back 1 US dollar in your own currency.
Later, due to the depreciation of the US dollar, the exchange rate of US dollar to Thai baht became 1:15.
At this time, if you calculate the debt in your own currency, you only need to pay back 15 Thai baht to the United States.
During this period of dollar decline caused by the Federal Reserve's monetary easing, not only can you borrow dollar debt at a low interest rate for construction, but if you don't use it, after deducting the interest, you can also earn a few Thai baht in exchange rate differences.
The Thais calculated the same thing back then.
Unfortunately, the final result was nothing.
After experiencing the 10-year downward cycle of the US dollar, these Southeast Asian countries have grown fat and accumulated huge physical assets.
Starting in 1995, the US dollar index began to reverse.
Because the U.S. dollar has entered the first cycle of interest rate hikes, it is time to start reaping the benefits.
In summary:
The underlying logic of the Fed's rate hikes and cuts is mainly centered around two major macroeconomic goals: stabilizing prices (controlling inflation) and promoting maximum employment. These operations are based on its statutory duties, namely the "dual mission": one is to control inflation and keep it at around 2%; the other is to protect employment. The Fed achieves these goals by adjusting the federal funds rate, which is the overnight lending rate for loans between banks. The purpose of raising interest rates is usually to curb inflation, reduce the risk of overheating of the economy, and avoid asset price bubbles. When inflation is too high, the Fed may raise interest rates, making borrowing costs higher, thereby reducing consumption and investment, reducing the money supply, and helping to control price increases. Rate cuts usually occur when economic growth slows or inflation is below the target level. The purpose is to stimulate economic growth and investment by reducing borrowing costs and promote improvements in the job market. The Fed's policies are also affected by external factors, such as global economic conditions and fluctuations in financial markets. In some cases, the Fed may adopt non-traditional monetary policy tools such as quantitative easing (QE) or balance sheet reduction to further influence the economy. The Fed's policy decisions take into account current economic data, inflation expectations, labor market conditions, and the stability of financial markets. Federal Reserve officials determine the appropriate monetary policy stance based on economic models, historical experience, and forecasts of future economic trends.
