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Having just finished reading the history of U.S. stock market circuit breakers, I am now starting to see many European and American countries launching a "money printing press war."
The money distribution mode was launched. On the afternoon of the 16th local time, the Italian cabinet held a meeting and passed economic relief measures totaling 25 billion euros, or about 195 billion yuan, to cope with the impact of the new crown pneumonia epidemic.
On the 18th, Canada launched a super-scale fiscal stimulus policy of 82 billion Canadian dollars.
In addition, British Prime Minister Johnson also emphasized at the regular press conference on the COVID-19 outbreak last Tuesday that the British government will do its utmost to help businesses overcome difficulties. British Chancellor of the Exchequer Sunak announced that the government will provide 330 billion pounds in loan assistance. For small businesses that are not covered by insurance, the government will provide each with a subsidy of 25,000 pounds. In addition, in order to reduce the risk of bankruptcy and reduce economic pressure during special periods, affected individuals and businesses may be allowed to postpone or reduce loan repayments for 3 months.
Beijing time, March 19th, according to reports from two senior administration officials and a Treasury Department fact sheet, White House officials are working with congressional Republicans to develop an emergency stimulus plan that could send two $1,000 checks to many Americans and invest $300 billion to help small businesses avoid large-scale layoffs.
On the evening of March 23, the Federal Reserve launched unlimited and bottomless QE. The Federal Reserve announced a series of new plans to help the market, including unlimited bond purchases to keep borrowing costs low, and plans to ensure that credit flows to businesses and state and local governments. The Federal Reserve announced that it will purchase $75 billion in Treasury bonds and $50 billion in agency mortgage-backed securities (MBS) every day this week, and the daily and regular repo rate quotation rates will be reset to 0%. In addition, the Federal Reserve said it will soon announce a "Main Street Business Lending Program" to support small and medium-sized enterprise loans, supplement the measures of the Federal Small Business Administration, and establish two new liquidity tools for corporate bonds.
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The "money distribution plans" of many European and American countries are dizzying. Governments with ample funds can use the money in the treasury for emergency response, but governments with debts may have to borrow money to distribute money. At present, if the requirements are followed, large-scale over-issuance of currency will become possible. Will over-issuance by borrowing money trigger a situation similar to the "European debt crisis"? What changes will the Bitcoin market usher in after inflation?
In this regard, Golden Finance exclusively interviewed Johnson, chief analyst of TokenInsight, William, chief researcher of OKEx Research, and Chu Kang, founder of Benrui Capital, to hear their interpretation of the current situation.
The value of Bitcoin will eventually emerge
Johnson, chief analyst of TokenInsight, pointed out to Golden Finance: Due to the economic impact caused by the spread of the global virus, the printing presses of various countries will inevitably lead to a large amount of currency over-issuance. The unlimited QE announced by the United States is to let the world pay to save the United States. This aid plan is unprecedented. Large-scale economic inflation will be directly manifested in countries and regions with poor credit ratings, but not necessarily in other regions. It depends on other monetary or economic policies in each place. This market cycle is the key to testing the value of Bitcoin. We believe that the value of Bitcoin will eventually be revealed in this process.
Due to the global economic downturn and market uncertainty, the government borrowed money to rescue the market (QE) as a product of the 2008 financial crisis. We believe that although various countries are now announcing various forms of QE, if there is really a "European debt crisis", there must be some explosive points before market structural problems appear. This still needs to be observed later.
However, the "flooding" policy of many countries is unprecedented. Currently, all countries are trying to inject confidence into the market through QE and other means to support the current economic and market development, but the current "flooding" is very limited. Under the premise of the "flooding" policy, central banks of various countries may have to provide more extensive and diverse fiscal stimulus to achieve the ideal effect of the policy. In the future, more attention needs to be paid to the market to interpret the impact of "flooding" on various countries and regions, and even on the Bitcoin market.
Bitcoin is not yet a true “safe haven asset”
William, chief researcher of OKEx Research, further pointed out to Golden Finance that starting the "printing machine" to release money, causing the growth rate of currency supply to exceed the economic growth rate, is a kind of currency over-issuance. Friedman has a famous saying: "Inflation is always and everywhere a monetary phenomenon." Currency over-issuance will definitely lead to inflation, but monetary policy has a certain time lag, and liquidity needs to be injected into the market through the monetary transmission mechanism, rather than directly injecting liquidity in a "helicopter money" style. For example, Friedman's statistics on historical data found that it takes an average of 6 to 9 months for monetary growth to cause changes in nominal income; after nominal income and output are affected, it takes an average of another 6 to 9 months for prices to be affected. So inflation will definitely happen, but the time of occurrence and the mildness of inflation still need to be considered from many factors.
The result of inflation is, of course, an increase in the price of goods denominated in that currency. Currently, the world uses the US dollar as the main unit of measurement, so in the long run, not only will the price of Bitcoin rise, but the prices of global commodities, stocks, and bonds will also rise.
The value analysis of Bitcoin in investment is not very meaningful. At least, Bitcoin is not a "safe-haven asset" in the true sense. It is illogical to deduce Bitcoin's "safe-haven attribute" from inflation caused by excessive money supply. Preventing inflation and hedging are two different concepts. People do not hold monetary assets, but gold, Moutai, and real estate, which can also prevent inflation. Why must they choose Bitcoin and face high risks? In fact, we are more concerned with the value of economics: the idea of "code is law" in encrypted digital currency is worth learning from. A country's central bank can create legal digital currency. In order to prevent political intervention and abuse of monetary policy, a single rule of monetary policy is written into the issuance mechanism of digital currency. This not only avoids inflation caused by the depreciation of credit currency, but also maintains the need for normal economic growth.
QE policy has strong effects and great side effects. Regarding the current "flooding" policy of many countries, William, chief researcher of OKEx Research, said that the benefit of fiscal policy is that it is more targeted. In addition to government investment in infrastructure and medical facilities, the fiscal policy we are familiar with also includes tax cuts, issuing consumer coupons or cash to the public to stimulate consumption. Therefore, don't shy away from active fiscal policies because you think they will cause government fiscal deficits. The economic situation we are facing now is not the Internet bubble in 2001 or the subprime mortgage crisis in 2008, but more like the Great Depression in 1931. This is not just a financial crisis. We are currently facing an economic crisis caused by the stagnation of economic activities caused by the epidemic. It is impossible to rely solely on monetary policy. Monetary policy and fiscal policy must be used in combination to prevent the further spread of the economic crisis.
It is unknown whether there will be a "European debt crisis", but it is like a terminally ill patient. We must do our best to treat him, even if we have to borrow money to save his life, rather than arguing whether he can pay it back in the future. If the government does not help now, when the economy slides into the abyss of the Great Depression, the government's fiscal situation will also deteriorate, the deficit will be higher, and there will be no chance to spend money even if you want to.
I once used the production of foie gras to illustrate QE: similar to workers inserting feeding tubes into geese's mouths to force-feed them to obtain higher foie gras production, QE is the central bank buying a large number of bonds in the market to inject liquidity into banking institutions, forcing banks to lend even at zero interest rates or with a reluctance to lend, in order to increase market liquidity. Of course, this slightly cruel metaphor also reflects the characteristics of QE: strong efficacy and serious side effects.
Is unlimited QE effective? Doing so can indeed enhance the liquidity of the interbank market, especially since the Federal Reserve included commercial mortgage-backed securities in its purchase scope in yesterday's statement, which is equivalent to changing the role of the central bank from "lender of last resort" to "buyer of last resort". In theory, banks can issue mortgage loans at will regardless of risks, and the risks can be fully covered by the central bank. In addition, on March 17, the Federal Reserve restarted the Commercial Paper Funding Facility (CPFF), bypassing banks to directly provide liquidity to corporate loans. This can indeed solve the problem of banks' reluctance to lend, reduce financing costs, and ease the pressure on companies to repay debts. But the question is, can unlimited QE solve the following two problems:
Fund liquidity crisis: This liquidity crisis is structural. Funds in the market are facing huge pressure of redemption and margin call, and liquidity is in short supply. However, the Volcker Rule stipulates that banks cannot lend directly to private funds, but can only do repurchases. In the context of a sharp drop in financial markets and shrinking prices of various assets, it is questionable how much money funds can borrow in the repurchase market. Unlimited QE cannot solve this problem in the short term.
Can unlimited QE really solve this crisis? We know that the root cause of this crisis is the worsening epidemic and the market panic caused by the plunge in oil prices. The worsening epidemic has caused economic production to come to a standstill, dealing a heavy blow to the consumer services industry. The non-financial corporate sector in the United States has issued a large number of low-rated corporate bonds under the low interest rates and QE policies in the past decade, and is generally insolvent. On the other hand, the plunge in oil prices has hit global oil companies, especially shale oil companies in the United States. The issuance of bonds by U.S. energy companies accounts for 14% of the U.S. high-yield bond market. Therefore, the plunge in oil prices has led to a sharp increase in concerns about U.S. corporate debt defaults.
Through the above analysis, unlimited QE is more like "treating the symptoms instead of the cause", just like a person who is sick and bedridden, and the diagnosis is that he eats too little and is malnourished, so he is fed more food and injected with more nutrients. The problem is that economic production activities have stagnated. Even if more money is printed, people still cannot return to work, there are no orders and new investment plans, so the mortgage securities repurchase and commercial paper funding mechanism (CPFF) are also useless and have little effect, and the market panic will continue. Therefore, the correct approach of the government should be to introduce more active measures to control the worsening of the epidemic and resume economic production activities as soon as possible.
Large-scale QE in many countries may lay the groundwork for a global financial crisis. Chu Kang, founder of Benrui Capital, believes that the phenomenon of excessive money supply does exist, because the current rescue plans of the US and other governments will greatly lead to an overdraft of government credit, and the most effective way is to issue more money. The Fed and other government agencies are doing this to ease the rapid collapse of market credit. Currently, the US government's financial assistance to companies alone has reached 4 trillion US dollars, which is the total scale of the three QEs in the subprime mortgage crisis. Three of the unconventional tools used in the subprime mortgage crisis have been activated, and the remaining ones have not been activated because they played a limited role in the subprime mortgage crisis. The possibility of large-scale economic inflation is relatively high.
If the U.S. dollar depreciates significantly, the value of safe-haven assets such as gold will immediately become apparent. Whether Bitcoin will show its value in this process depends on whether the market regards it as a safe-haven asset. As the volume of Bitcoin is still relatively small, the logic of whether it is a safe-haven asset or a risky asset is constantly being proven.
The biggest impact of excessive issuance of government bonds is that it leads to high government fiscal deficits and excessive overdraft of national credit, which will greatly affect the rating of government bonds and the willingness to buy in the debt market. The large-scale spread and impact of the "European debt crisis" is caused by economic integration, and the impact of independent sovereign countries such as the United States on other independent sovereign countries will not, in theory, spread directly like the euro zone, but it cannot be ruled out that they will be affected by its fluctuations. QE policies certainly have their role in stabilizing the market and enhancing market liquidity, but the scale of easing needs to be controlled. Large-scale QE in many countries may lay the groundwork for a global financial crisis. (Golden Finance) |
