Has everyone heard of a joke? It's about an American who, in 2014, came to China with one million US dollars, spent half a million on a house, and used the remaining half a million for eating, drinking, and having fun. By 2017, when he had almost exhausted his fun, he sold the house, and the housing price had doubled. He left China with one million US dollars, having enjoyed free food and drink for three years.

I don't know if this joke is true, but such operations are quite common in reality. In fact, Americans have also done this a lot, but their purpose is not for eating, drinking, and having fun.

Let's first talk about a premise, which is that the world is in a severe shortage of US dollars. In the past, present, and for a long time in the future.

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When I talked about reform and opening up in the previous article, I mentioned that our country was very, very poor at that time. If we wanted to produce something to exchange with the West, we needed to update our 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 been somewhat alleviated in China, but it has not changed much on a global scale.Even in a large country like ours, one might think we wouldn't need so many US dollars, right? In fact, that's not the case. Many people are still short of US dollars, and a bunch of companies are in debt with US dollar obligations, including many real estate companies in our country that are on the brink of bankruptcy; they also have a lot of US dollar debts.

So, every time the US dollar is flooded, American capitalists get the money and, finding no investment opportunities in the United States, they go to third-world countries to make a fuss. They can invest in building factories or lend to large companies in other countries (charging high interest rates, thus forming arbitrage).

It's like you borrow money from the bank at a 4% interest rate and lend it to others at 7%, collecting a 3% interest margin in between. Well, this kind of thing may seem outrageous, but it's actually very common. People who do business know that you may not be able to get a loan, and you can only borrow from intermediaries, who will charge a brokerage fee.

Has everyone noticed that not long ago, Evergrande had a US dollar bond that was due and couldn't be repaid, causing a lot of trouble. In the end, it was resolved after the working group came in, and they borrowed US dollars from foreign institutions; they can even go to other countries to buy assets, including stocks and real estate.

After developing countries' companies get US dollar debts, they build factories and high-rise buildings. If they only buy houses and stocks, the influx of a large amount of cash will lead to skyrocketing housing prices and stock prices, and prosperity all over the world.

Americans describe this state as a ball, where the music starts, and everyone dances together, creating a spectacular scene. But everyone knows that there is no banquet that does not end. When the music stops, there will inevitably be a mess. If you have seen American financial movies, you should know that the task of the big guys there is to observe various signs at ordinary times, to see when the ball is over, and to leave the field quickly when it is prosperous. After leaving the field, they will have a big disaster.When will the ball end?

There are many situations, most of which are related to "interest rate hikes".

What will happen after the United States raises interest rates?

For example, you are a capitalist who has borrowed hundreds of millions from a U.S. bank and lent it to real estate companies in developing countries. The real estate company takes the money to hire people to buy land and build houses. The company's headquarters recruits a large number of employees, and these people, with their salaries, go crazy with consumption, or simply buy a house. The whole country is thriving, and this kind of borrowing for development is generally called "economic overheating".

In this way, it is extremely lively, but the essence is "debt-driven" or debt illusion. If the debt is due, it can be renewed by borrowing new money, and it can be played continuously. The overall situation is like a fire frying oil, with the engineering projects getting bigger and bigger, the workers' wages getting higher and higher, and the debt getting more and more. As long as the United States does not raise interest rates and shrink the balance sheet, there is no shortage of dollars that can be lent at will, and everyone is making money, so why not.However, these good times cannot last forever. The United States cannot continue to play this way indefinitely; sooner or later, it will have to raise interest rates. Once the U.S. raises interest rates and reduces its balance sheet, the amount of money that can be borrowed will decrease. Developing countries that owe money to the U.S. will also have to pay it back.

You are the CEO of a real estate company, and your company owes money to Americans. They are due to collect it, and they will not renew the loan. The problem is that your company not only has no money now, but all the money is tied up in projects. On paper, you are worth billions, but in reality, it is all "book assets." When it comes to repaying the money urgently, you simply cannot get it out.

At this point, you only have two options.

First, you try every possible means to raise money everywhere. If you can borrow U.S. dollars, that's great. If not, you borrow your country's currency and then exchange it for U.S. dollars. The problem is that at this moment, everyone's situation is more or less the same, and everyone is in a hurry 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 buy U.S. dollars, making the U.S. dollars increasingly expensive and the exchange rate continuously rising.

If you cannot gather enough, then it's another path, a familiar term to everyone, called "default."Not repaying debts is a serious matter 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 meant they could not repay the money owed to the West and had to apply for an extension (not a refusal to repay, but a delay). This led to a sharp devaluation of the Russian ruble, and Russian companies had to borrow money from the West at an interest rate of 100%. That is, if they borrowed 10,000, they had to repay 20,000, with no room for negotiation. Many Russian companies rely on imported equipment from abroad and cannot do without the US dollar 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 bonds were due and they couldn't repay them, a working group quickly stepped in to resolve the issue. If the US dollar bonds exploded, it would be very dangerous, not only for them but also for a bunch of Chinese enterprises that would suffer together.

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

When the US dollar cuts interest rates and expands its balance sheet, it is often during an economic crisis when the market is in a slump, and assets are cheap and sold at a discount. After the US dollar comes in, it can acquire these cheap assets, and asset prices begin to rise. Others will follow suit, and by the time the US dollar wants to leave, asset prices have already been pushed very high, and they can cash out at a high position. It's a bit like the American mentioned above, who came to China with a million dollars, enjoyed life for a few years, and left with even more money.

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 converted into RMB for circulation. If the US dollar leaves, there will be less RMB. If you are a business owner in urgent need of a loan, you may not be able to get it at this time, and it may lead to bankruptcy.Now everyone understands how terrifying the U.S. dollar interest rate hikes and balance sheet reduction are, right? They can abruptly interrupt the development path of a developing country, leaving unfinished buildings everywhere, and a mess everywhere after the dollar leaves. What's more tragic is that the withdrawal of the dollar also takes away everyone's confidence. After the confidence is gone, many wealthy people in many countries simply sell their houses and exchange them for dollars to leave together, resulting in further economic contraction.

Understanding these, you can actually understand why our country 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 be in a crisis when they ask you to repay it one day.

So now, does the world just let the dollar do evil?

Yes, and no.

In recent years, there is indeed no way, who needs the dollar, the country gets the dollar, just like you get the RMB, can consume, develop, and even save lives. Don't look at Russia, they challenge the United States all day long, they pay the Chechens to fight, still in dollars, and then buy the equipment needed for mining, still in dollars.Facing this situation, we can only respond to challenges as they come, gradually developing our own strength and credibility. It's similar to the transition of hegemony between the US and the UK. When our power surpasses theirs significantly and our currency becomes more widely accepted globally, people will naturally start to abandon the US dollar. However, this process will take a very, very long time. This is also why we repeatedly emphasize the importance of "great power composure," because we indeed need to maintain our composure.