Xie Guozhong: Deciding The Three Threads Of The 2011 Economic Situation

The first ten years of twenty-first Century will soon be over, and the financial market is ready to end.

The United States is still sparing no effort in fiscal and monetary stimulus to solve the economic plight: high unemployment, high debt and huge financial and trade deficits.

The reason for this is that as long as the economy is maintained, the problem will get smaller and smaller.

The view is that economic problems are like cars breaking down.

If someone pushes a car until it fires on its own, the problem will no longer exist.

In the past twenty years, people think so, that is the reason that led to the 2008 crisis.

Let the problem continue to accumulate until finally, the car can't start at all.

In the past two years, the effect of large-scale stimulus was poor, and the response of Americans was to adopt more stimulus.

This will lead to another crisis, perhaps in the next few years.

The purpose of the US fiscal stimulus is obvious, so that Obama can be re elected in 2012.

Of course, they may achieve their goals.

But if the U.S. economy is to be decent enough to make Obama reelected, there are three conditions: the emerging economies continue to hold inflation and maintain US exports; the sovereign debt crisis in Europe supports the value of the dollar, offset the Fed's quantitative easing, and the price of crude oil will not soar to reduce the effectiveness of the US stimulus policy.

But things may not develop in these directions.

In December, the most important change in the market was the US Treasury bond yield rose by 100 basis points, and the international crude oil price exceeded 90 dollars / barrel.

Such two levels are not enough to trigger another crisis.

In history, the average yield of the 10 - year treasury bonds is close to 6%, which is 3.4% and relatively low.

In 2008, oil prices surged to $150 per barrel.

As long as the yield of treasury bonds has not exceeded the historical average level, the oil price has not reached the high point in 2008, and the Fed has not been panic.

However, the two cases are likely to happen next year.

The market is increasingly inclined to believe that the real purpose of the Fed is to wipe out US debt by means of monetization.

In this case, the Fed encourages the US government, enterprises and families to refinance in the short term, and there is no need to worry about long-term interest rates, because even if the US Treasury market collapses, the Fed will not change its policy.

But if there is a crisis in the US dollar, the Fed may change its policy because it means hyperinflation.

Foreign holdings of US Treasury bonds are still huge.

If foreign investors dumped US Treasuries and fled the US dollar, the Fed probably did not have the guts to act like Russia did in 1998 - through a vicious inflation default.

The dollar has been supported by the European sovereign debt crisis.

Europe is unlikely to solve the crisis in 2011.

In this way, the US dollar will be supported.

The Fed may implement the third round, the fourth round or even more quantitative easing without worrying about the consequences.

The ideal position of the Fed is that the US dollar will gradually depreciate to reflect the high inflation in the US, and the short-term interest rate is much lower than the inflation rate, that is, the negative real interest rate.

If the Federal Reserve can maintain 5% of the negative real interest rate for ten years, the US debt will be reduced by 40%, which will return to the historical average level.

But if Europe can find a solution to its sovereign crisis, such as doubling the relief fund, the dollar may depreciate substantially.

Oil prices will soar.

This is equivalent to a tax increase for us consumers, which will offset the effect of the newly approved fiscal stimulus.

Once the Fed feels that its policies do more harm than good, it may change its policy.

Europe needs to speak clearly about its solution to the euro zone sovereign debt crisis.

Europe is in urgent need of a mechanism similar to the eleventh chapter of the US federal bankruptcy law. The fundamental purpose of the eleventh chapter is to save enterprises from the predicament of insolvency and restore vitality and vitality.

In accordance with the requirements of the eleventh chapter, enterprises will pay part or all of their debts by future earnings, rather than by selling property.

To this end, the eleventh chapter sets out a series of provisions supporting bankruptcy companies to increase the possibility of continued operation.

The efforts of creditors to recover funds have been suspended, and debtor enterprises will stop paying principal and interest until the reorganization plan is put into effect.

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The crux of this method is whether creditors are willing to give up some of their claims.

Because European banks, especially France, Germany and Switzerland, hold large claims in sovereign debt crisis countries, letting them give up fractional credits may lead to a crisis in the banking sector.

Therefore, the two problems must be solved at the same time.

The euro zone is healthier than the US and Japan.

Its balance of payments is good, and the level of state and family debt is lower than that of Britain and America.

Although the decision is slow, it will eventually make a decision.

I am optimistic that the euro zone debt crisis will be resolved in 2011, so that the dollar will suffer a terrible blow.

China is clamoring for inflation, but for the time being, the so-called blow is just a talk.

Recently, the central bank raised the deposit reserve ratio in order to show its determination.

But the central bank is not very good at selling the central bank votes.

Raising the reserve rate is more like a substitute for the central bank, but cheaper, rather than a new way to combat inflation.

Obviously, this quantitative policy is not very effective.

The expansion of credit outside the banking system has made up for the contraction in the system.

It is puzzling why China did not realize this and changed its interest rate policy.

The accuracy of inflation data statistics makes the market doubt China's determination to solve the problem.

If inflation is to be curbed, the purpose is to offset the past growth of money and not to make the debtor suffer because the main liability is state-owned enterprises.

Things in the US, Europe and China illustrate that