With the confirmation of the interest rate cut cycle, the US dollar will face a test. Whether "Fisher's Law" will appear may determine whether QE will come!
This Friday, Powell made it clear in his opening speech at the Jackson Hole conference that the thinking on monetary policy will change in the future. The first interest rate cut is currently scheduled for the FOMC meeting in September.
Dollar reaction:
Although the news basically met market expectations, the risk market is still "enthusiastic" about it. However, the most intuitive and sensitive problem arises: the US dollar is on the verge of falling below 100.
Although I believe that the United States, as the first economy on the blue planet, and the Federal Reserve should have measures to deal with the decline of the US dollar, for the US dollar, this is a relative thread route rather than a directional thread route.
Simply put, whether the US dollar capital can maintain its stabilization line depends not only on how the United States regulates, but also on the actual response of global economies under the expectation of interest rate cuts.
The difference between US dollar and US dollar capital:
The difference lies in the difference between the US dollar and US dollar capital. The US dollar we often talk about is just the US dollar itself, but what really determines the fluctuation of the US dollar value, that is, the US dollar index, comes from US dollar capital.
Only the US dollars involved in transactions can be called US dollar capital, while the US dollars not involved in transactions are basically "silent" capital. If this type of capital loses the support of transactions, it will basically become waste paper, because transactions are the core of value consensus.
Only the US dollars that are actually being traded can be called US dollar capital, and only US dollar capital with high speed and frequency can be called high-energy dollars. This is the fundamental reason why the US dollar has dominated the world throughout history.
Changes in the influence of the US dollar:
US dollar capital generates "energy efficiency" in transactions, and transactions here are basically divided into two major concepts:
1. Foreign exchange transactions. Before 2022, the US dollar accounted for 90% or even higher in global foreign exchange transactions, but since 2022, the proportion has begun to decline.
Of course, this does not rule out the main reason for the return of US dollars due to interest rate hikes, but referring to previous data, we can vaguely see that the proportion of the US dollar in global foreign exchange transactions is significantly decreasing.
Such reduction does not all come from the reflux caused by the US dollar interest rate hike, but more from the expansion of local regional currencies, which have occupied the original share of the US dollar in the global foreign exchange market.
2. Commodity trading. In 2022, the euro's share in global commodity trading has exceeded that of the US dollar. Although the US dollar later overtook it again, we have to admit that the gap between the euro and the US dollar in the share of commodity trading is rapidly narrowing, and even occasionally overtaking it.
Fisher's Law:
When the proportion of the US dollar in foreign exchange transactions and commodity transactions drops sharply, the economic fluctuations caused can be directly tested by applying Fisher's Law.
Fisher's law is also called Fisher's equation, and its formula is: M×V=P×Q,
M: is currency, the basic money supply,
V: is the velocity, the velocity of money circulation,
P: is the price level, which measures the price of goods and services
Q: It is the actual output in the economy, including services and goods.
M×V is money plus circulation velocity, which is what we commonly call capital. M alone can only be called money, not capital.
M×V=P×Q is an identity equation, just like a balance. Any deviation of data from its original track will trigger variables in other data.
If there is a problem with the V speed of the US dollar, it will directly affect the result of M×V, and the result will not be equal to the original P and Q, so the overall data P or Q and M will all change.
Whether Fisher's Law appears may be the key factor in whether QE will appear quickly!
We have been waiting for an interest rate cut. In fact, a rate cut is just a easing point of monetary policy. The real "flooding" and global economic recovery will have to wait for the arrival of real QE.
QE will appear in the economic cycle, but whether it appears early or late depends on the results triggered by Fisher's Law.
Continuing with the above formula, if the US dollar cuts interest rates, causing its foreign exchange trading rate to decline, its proportion to decline, and the proportion of commodity trading to decline year-on-year, then the M×V side will be unbalanced.
If there is no economic intervention at this time, then P and Q on the other side, that is, commodity prices and actual economic output, will begin to shrink in order to keep both constant. Whether it is a decline in commodity prices or a decline in actual economic output, it will bring about the possibility of deflation and economic crisis.
If we intervene in the economy, we can avoid such changes by increasing M on the other side. When V drops, we can increase the base currency supply by issuing M, so that the data of M multiplied by V can be balanced with the other side. The most effective tool for issuing M is QE.
In terms of data, the United States has currently completed its inflation control plan, and inflation has effectively slowed down as expected. It can be seen that the slowdown in inflation comes from the supply side, that is, goods and services.
However, economic health requires balance rather than extremes. Once inflation is effectively reduced and the prices of services and goods fall too quickly, it may trigger deflation, which will have serious consequences for the economy no less than inflation. In fact, for the current situation in the United States, deflation is even more terrifying than inflation.
As the U.S. dollar falls, how can we respond or slow down the gradual loss of influence of the U.S. dollar on the world?
In the previous article, we have used a lot of characters to describe the relationship between the US dollar and US dollar capital, and used Fisher's law to explain the impact if the US dollar falls sharply in the short term.
How to slow down or reduce this impact?
Today is different from the past. The weight of the US dollar and its hegemonic position in the world are further weakening. It is difficult to prevent or reduce the impact of the depreciation of the US dollar through its own economic regulation. As we have said before, the adjustment of the US dollar is not a single thread, but a diversified one.
Internal economic stability is one aspect, but more importantly, externally, it is necessary to ensure that the proportion of the U.S. dollar in the foreign exchange market continues to decline at a slower rate, while ensuring that the proportion of the U.S. dollar in global commodity transactions remains stable. This can effectively slow down the excessive weakening of the U.S. dollar during the interest rate cut cycle.
Therefore, the best way is to release more friendly messages among the US's own allies, and at the same time release friendly attitudes to all parties in the international community, increase trade between the US and many countries, and let allies or other countries actively or forcibly increase their holdings of US dollar foreign exchange reserves. In this way, the stability of the US dollar can be guaranteed as much as possible.
This is what I said a long time ago. I am very worried that the United States will not cut interest rates so quickly, because cutting interest rates means that the United States has actively changed its attitude in its strategy of raising interest rates and consolidating its hegemonic position, and has also actively acknowledged its own "aging."
Of course, nominally a rate cut in September is inevitable, so let's just wait and see. My theory may just be a theory. The economic concept is too big, and the global problems are too big. I can only share a little bit from a small perspective.
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