This article was published yesterday, but it was not rigorous enough, and many issues that everyone cares about were not clearly explained. Tonight, I had time to rewrite it again. If you are interested, please take a look.

I don't know if you have heard of a joke, which says that an American, in 2014, took 1 million US dollars to China, spent 500,000 US dollars to buy a house, and spent the remaining 500,000 US dollars on eating, drinking, and having fun. By 2017, when he had almost finished playing, he sold the house, and the house price had doubled. He left China with 1 million US dollars, eating and drinking for free for three years.

I don't know if this joke is true, but this kind of operation is very common in reality. In fact, Americans have not done this less, but their purpose is not for eating, drinking, and having fun.

So, when does this happen?

Yes, it usually happens during the process of the United States' interest rate cuts and increases.

Advertisement

Let me give you an example, and you will understand. When the United States is in a period of interest rate cuts, it is very easy to get a loan from the bank. Then many people go to the bank to get a loan and bring this money to invest in developing countries, because there are many opportunities in developing countries, you can invest in factories, and you can also invest in real estate.

After a wave of investment, factories are built, and workers are hired, just like Vietnam now, it's bustling, and everyone starts to think, the economy is so good, should I invest in some real estate?

The house price starts to soar, and the rise in house prices will attract more people to speculate, borrowing more money from the bank, and the house price goes up further. The factory is bustling, and the real estate is thriving.

After a few years, when it reaches its peak, the United States suddenly says it wants to raise interest rates, and the US dollars invested abroad have to return to the United States, so they cash out at a high position, and they have harvested the local area? With 1 million US dollars to a developing country, you may leave with 1.5 million, and there may be nothing better in the world.

When the real estate and other assets of this country fall to the bottom, the next expansion cycle of the US dollar begins, and some people come to invest with US dollars again.Why does this kind of thing happen?

Mainly because the world is in a severe shortage of US dollars. In the past, present, and for a long time in the future.

Originally, this world did not need a currency to trouble everyone every day, because there was no currency at the very beginning of mankind, just barter, you exchange my cotton cloth with your goat, trade is earlier than currency.

But the problem lies in that you need my cotton cloth, but I may not need your goat, so there needs to be an intermediate commodity to solve the problem of demand asymmetry. In history, shells, gold, silver, and copper have all played this role.

Later, it gradually became the Dutch guilder, then the British pound, and now it is the US dollar.

Can we not use the US dollar?

Of course, if Saudi Arabia just needs 10 billion of our industrial products, and we just need 10 billion of Saudi oil, that's completely possible. But where in the world is there such a perfect thing, where the needs of both parties can fit so well. For example, during this period, Russia was sanctioned, and many friends said, in the future, Russia will only import Chinese products, and China will import Russian oil, isn't that okay?

The problem lies here. Russia needs a large amount of mechanical equipment every year, lathes, oil drilling and mining equipment, etc., which are mainly available in Germany, the Netherlands, and the United States. China also imports from them, which is why Russia needs to maintain a certain amount of foreign exchange reserves. Otherwise, when the oil drilling equipment has problems and cannot be maintained, even the oil can't be dug out.

There is a saying like this:

The products on the shelves are from China, the equipment in the factory is from Germany, and the equipment in the laboratory is from the United States.The article discusses that China can produce almost anything in terms of commodities, but still relies on Germany for industrial lathes and equipment, and primarily imports high-end laboratory equipment from the United States. Russia's commodity issues are not significant, but the latter two are more troublesome.

Upon specific investigation, it is found that China can now produce 90% of low-end lathes, 60% of mid-range, but the self-sufficiency rate for high-end is less than 10%, with more than 90% needing to be imported.

The current problem in China is the roughness in processing precision. If each part is slightly off, the final assembly will be a generation behind. Many high-end equipment manufacturers internationally prefer second-hand Japanese products to cheaper Chinese products. Therefore, Russia cannot truly rely solely on China for a long time.

This issue is almost a common problem worldwide. It is impossible to rely solely on one country. You would need to have US dollar reserves, and no amount of money is too much.

As mentioned earlier when discussing reform and opening up, our country was very, very poor at the time. We wanted to produce some commodities to exchange with the West, but we needed to update our production equipment. The problem was that we couldn't produce the equipment ourselves, so we had to buy it from Germany and Japan. However, those countries only accepted US dollars, so we had to sell our domestic oil and rare earth at low prices to exchange for US dollars.

Now, this situation has eased in China, as we have 3 trillion in foreign exchange reserves. However, there has not been much change in other countries around the world.

Even for a major country like ours, you would think we wouldn't need so many US dollars, right? In fact, it's not the case. Everyone still lacks US dollars, and a bunch of companies are in debt with US dollar loans. Even the real estate companies on the brink of bankruptcy in our country also have a lot of US dollar debt. The interest on the loans they borrowed is very high, often reaching 8%.

The routine is consistent with what I mentioned earlier. Every time the US dollar is flooded, American capitalists get the money and, with few investment opportunities in the United States, they go to the third world to make a fuss. They can invest in building factories or lend to Chinese real estate companies for arbitrage.

It's like you borrow money at a 4% interest rate from the bank and lend it to others at 7%, collecting a 3% interest margin in the middle. This kind of thing seems outrageous, but it's actually very common. People who do business know that because you may not be able to get a loan, you can only borrow from middlemen, and they will charge a commission.

Has everyone noticed that not long ago, Evergrande had a US dollar bond that was due and could not be repaid, causing a lot of trouble. Later, it was resolved after the working group entered. Evergrande borrowed US dollars from foreign institutions.Borrowed US dollars were exchanged into RMB at the central bank, and then this money was used to buy land, purchase cement from upstream companies to build houses, and so on. The upstream companies, having sold cement and steel, made a profit, paid their employees' wages and bonuses, and everyone was happy, perhaps even considering buying a house themselves.

In this way, the market was bustling, but the essence of this prosperity was "debt-driven" or "borrowing to invest." Once the debt matures, if one can borrow new to pay off the old, the game can continue indefinitely. The overall market was thriving, with ever-larger construction projects and ever-higher worker wages, and the debt kept piling up.

As long as the US doesn't raise interest rates or shrink its balance sheet, and there's an abundance of US dollars readily available for loans, everyone is making money, so why not?

However, this good life can't last forever. The US can't keep playing this game indefinitely. As the market becomes flooded with US dollars, inflation soars, and sooner or later, interest rates will have to be raised. Once the US raises interest rates and shrinks its balance sheet, it will start demanding repayment from those who owe it money, or it will stop renewing loans when they mature.

Suppose you are the CEO of a real estate company that owes money to Americans, and they want to collect it when it's due, and they won't renew the loan. The problem is that your company not only doesn't have money, but the money is all tied up in projects. On paper, you're worth billions, but in reality, it's all "book assets." You've already spent that money on buying land and hiring people, and when it comes to repaying the debt, you can't come up with the cash.

At this point, you have only two options.

Try every possible means to raise money from everywhere. If you can borrow US dollars, do so; if not, borrow your own country's currency and then exchange it for US dollars at the bank.

The problem is that at this very moment, everyone's situation is similar, and everyone is eager to repay their debts. You want to borrow from others, but they are also preparing to borrow from you. You have to spend much more of your local currency than usual to get US dollars, and the value of the US dollar keeps rising, with the exchange rate continuously increasing.

If you can't gather enough, then there's another path, a well-known term called "default."

Not repaying debts is a big deal in the capitalist world, which can trigger panic in the entire market, leading to a decline in overall credit ratings. Not only will your company not be able to borrow in the future, but other companies will also be affected.Russia experienced a debt default in 1998, which means it was unable to repay its debts to the West and requested an extension (not a refusal to pay, but a postponement). This led to a sharp devaluation of the Russian ruble. For a long time afterward, Russian companies that borrowed money from the West had to pay interest rates of 100%, meaning if they borrowed 10,000, they had to repay 20,000, with no room for negotiation.

You might wonder, why not just not borrow? However, many Russian companies relied on imported equipment from abroad and couldn't do without US dollars for a single day. With interest rates rising to such levels, a large number of Russian companies went bankrupt.

This is also why when Evergrande's US dollar debt was due and they couldn't repay it, a working group quickly stepped in to resolve the issue. If the US dollar debt explodes, it is extremely dangerous, not only for them but also for a bunch of Chinese companies that would suffer together.

This is the effect of the US dollar entering the production process. If the US dollar enters the stock market and real estate market and other asset fields, the logic is similar.

Moreover, when the US dollar enters many countries, it often needs to be exchanged for the local currency first. For example, when entering China, it must be exchanged for the renminbi for circulation. If the US dollar runs away, the renminbi also decreases. If you are a business owner in urgent need of a loan, you may not be able to get it at this time, which could lead to bankruptcy.

Now everyone understands how terrifying the US dollar's interest rate hikes and balance sheet reduction are. They can abruptly interrupt the development path of a developing country, leaving unfinished buildings everywhere, and after the US dollar leaves, the aftermath is even more devastating. What's worse, the withdrawal of the US dollar also takes away everyone's confidence. After losing confidence, many wealthy people in various countries simply sell their houses and leave with the US dollar, resulting in further economic contraction.

The middle-income trap may come from this. A country has some money but is not particularly wealthy, making it the most vulnerable to being plundered by hot money. The essence of many of China's operations over the years is to prevent such an outbreak.

Understanding this, you can actually understand why China has been so active in "deleveraging" in the past two years. The essence of deleveraging is to reduce debt. When you owe less money to others, you won't go bankrupt when they ask you to repay it one day.

Nowadays, companies are interconnected, owing money to each other. It's possible that if a large company can't hold on, all the companies that lent it money will go bankrupt together.

So now, does the world just let the US dollar do evil?Yes, and no.

In recent years, there really isn't much of a way out, as everyone needs dollars. When a country gets dollars, it's like you getting RMB, which can be used for consumption, development, and even for saving lives.

Despite Russia's constant confrontation with the United States, when they wage war against Chechnya, they still pay in dollars. When they purchase equipment needed for mining, it also requires dollars. It's not necessarily that they buy it directly, but they can buy through a third country, but dollars are indispensable. When China provides aid to African countries, it is also in dollars.

It is precisely because the dollar is so important that the United States can manipulate everyone with it.

So, where do these dollars go after the Federal Reserve raises interest rates?

This money was originally released through loans, and when it returns to the United States, it goes into the banks and disappears. Not only do global dollars return to U.S. banks, but some domestic dollars will also return, which reduces the amount of dollars in the market. Americans believe that this can suppress inflation. Of course, raising interest rates is a process, a bit today, a bit tomorrow. If it's raised too much at once, it may cause a big problem.

At that time, Americans will have fewer goods in their hands and buy less. China's export data may further decline, and enterprises may face even greater difficulties. Other countries are similar, so every time interest rates are raised, the whole world is in turmoil.

If other countries don't want the dollars to go back, what can they do?

It's not difficult, countries can also raise interest rates. If the interest you pay is higher, those dollars can make money by staying with you, and they may not go back, or at least they can go back less.

Of course, raising interest rates may not be very effective for some countries. For example, Russia recently raised interest rates to 20%, which is a "desperate rate hike." It still seems to have no effect, because everyone is completely at a loss and just wants to hold hard currency in their hands to prevent it from being inaccessible.In addition, raising interest rates will make it very difficult for business owners, as businesses nowadays are all operating with debt, owing a lot of money to banks, and a large part of their monthly costs is the interest paid to banks. When banks raise interest rates, their operating costs will increase, and coupled with the slump in exports, the situation becomes even more difficult.

Can we lower interest rates instead?

Lowering interest rates will accelerate the outflow of US dollars, and eventually, the country's foreign exchange reserves will be depleted. Turkey did this not long ago, and now its foreign exchange reserves are already negative. Many enterprises urgently need industrial components from the West, but they can't exchange for US dollars from banks, and they may not be able to continue operating. Or they may have to borrow from underground money lenders, which comes at a very high cost. Therefore, Turkish businesses are now facing great difficulties.

Relatively speaking, our country is still very secure, as we have a huge amount of foreign exchange reserves and will not run out of foreign exchange like South Korea did in 1998, unable to repay others and being at their mercy.

At that time, South Korea had no US dollars, facing a massive default. After defaulting, interest rates would soar, so they borrowed money from the World Bank. The World Bank did lend money, but the conditions were extremely harsh, requiring South Korea to open its market and increase the proportion of foreign ownership. It was at that time that most of Samsung's shares were bought by foreign investors.

After the US dollar interest rate hike this time, a large amount of US dollars will be drawn out of China, and there will definitely be fewer RMB in our market. To prevent deflation, our country can lower interest rates to maintain stability. It's okay if some foreign exchange flows out, as we have a large foreign exchange scale.

The scale of monetary easing is crucial. If it is large, it may push up some housing prices and stock prices; if it is small, it will remain the same.

This year will definitely be tough. Everyone can read the government work report, which basically focuses on one thing: stabilizing employment. The economic meeting held the day before yesterday said, "This year, the number of new urban labor forces in need of employment is about 16 million, the highest in many years. The number of college graduates is 10.76 million, the highest in history."

In the past, we always said, "This year is the most difficult year," but with the combination of the pandemic, war-induced energy price increases, and the US dollar interest rate hike, there is no doubt that this year is the most challenging year for China since 2000.

Why is it necessary to maintain a 5.5% economic growth rate? I saw a calculation a few days ago, which said that for every 1% growth rate, it corresponds to 2 million employed people, and 5.5% is 11 million.For what comes next, we can only respond to challenges as they arise, gradually developing our own internal strength and creditworthiness, much like the transition of hegemony between the US and the UK. First, we must not fall, and keep enduring.

When our strength surpasses others by a significant margin, and our currency gains wider recognition around the world, people will naturally start to abandon the US dollar, but this will take a very, very long time.

As mentioned in previous articles, the US became the world's leading power in 1894, surpassing the established power of the UK. However, it wasn't until after 1945, when its currency was backed by gold, that it solidified its position at the top. This was even with the support of war; otherwise, it would have taken even longer.

Moreover, many people have the impression that a strong military will automatically make a currency strong, but this is not necessarily true. Switzerland, for instance, is undoubtedly a small country, yet its currency has had better credit than most major countries over the past century. At the peak of the Soviet Union, people were reluctant to hold its currency, and even within the Soviet Union, the US dollar was much stronger than the ruble, being highly sought after in the black market.

From this, we can see that to surpass the US dollar, on one hand, we need military support, and on the other hand, we must indeed have better credit than the US dollar and not follow its path of devaluation. We must make countries around the world realize that holding the renminbi can be spent just like the US dollar in the past, and that the renminbi will not secretly print more to dilute everyone's wealth. Only then can the renminbi achieve internationalization.

Why did the US dollar bind itself with gold? Wasn't it to promise not to secretly print more? Once people got used to the US dollar, it decoupled from gold.

This path will undoubtedly be very, very long, possibly a series for our lifetime, but the good news is that once it is successful, it will take others many, many years to challenge.

The end of the article. Since you have read this far, if you think it's good, please give it a like.