Global Financial Storm Hits Officially

Preface

Recently, both the financial community and the broader public opinion sphere have been closely and passionately following the topic of whether the U.S. economy will experience a recession.

Will the U.S. economy enter a recession, and what are the causes of this potential downturn?

Let's first examine the non-farm employment and unemployment rate data released by the U.S. Bureau of Labor Statistics in July. In the eyes of market investors, neither of these figures met expectations, and the core inflation rate (PCE) also failed to drop to the anticipated level.

The expected value for non-farm employment data in July was 4%. However, the actual data fell short of this mark; the unemployment rate was 4.3%, higher than the expected value of 4.1%. This triggered the "Sam Rule," which suggests that within the next 12 months, the U.S. is bound to show signs of a general economic recession.

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In light of this situation, the U.S. dollar index has recently plummeted, Treasury bond yields have soared, and the three major U.S. stock indices have suffered severe declines. The U.S. stock market's "Seven Sisters," led by Nvidia, Microsoft, Apple, and Intel, have lost trillions of dollars in market value to date. This has also affected the Asia-Pacific stock markets, with Japan triggering a circuit breaker mechanism, leading to a market value plunge of over 10%. Stock markets in South Korea, Thailand, Indonesia, and Vietnam have also experienced不同程度的 declines.

Faced with such a strong indication of an economic recession, the Federal Reserve may consider lowering interest rates sooner than expected.

As indicated in an article I wrote previously, a reduction in U.S. interest rates would not only be of no benefit to our country but could also enable it to harvest our country's industrial capital deployed overseas.

Furthermore, although the outflow of U.S. dollar liquidity to the other side of the ocean has led to a devaluation of its domestic asset values, it could strengthen the value of overseas U.S. dollar assets or harvest higher-quality investment targets.

Speaking of this, it is necessary to refute the recent online views that the U.S. fears external forces harvesting or bottom-fishing its major asset classes:Based on the construction of a global order and the basic interests of the underlying plate, it has long established and perfected a comprehensive risk control system for the US dollar capital and financial system, which can be divided into three major categories. The first category is aimed at allies with converging political values, such as the Eurozone, Japan, Switzerland, Chile, etc. The second category is aimed at long-term partners with shared interests, such as Saudi Arabia, Mexico, Poland, etc. The third category is aimed at potential competitors or ideological adversaries, such as Iran, North Korea, Russia, etc.

With this risk control system in place, the United States can fully open its investment doors to welcome venture capital from all over the world.

01

Let me first answer a question from a netizen: If our country's sovereign credit is the best in the world, that is, it has the sufficient conditions for the internationalization of sovereign currency, then why has it not yet exited from the control measures on capital and foreign exchange, and abolished the system of buying and selling foreign exchange?

The reason is that we also have a risk control system for the inflow and outflow of capital. It is necessary to achieve the "localization" of our own financial system through the means of controlling capital and foreign exchange, that is, to form a "dual-track system" in the actual level of capital transaction market.

The advantage of doing so is naturally to block external forces from harvesting and bottom-fishing domestic assets, but the disadvantage is that it always needs to introduce foreign capital to compensate for the negative effects brought by the "Laski-Keynes" syndrome.

Why is it said that when the US economy is in recession, it is the time for it to harvest large-scale assets around the world, including our country?

Firstly, the US dollar interest rate hike is not for harvesting.

The triggering factor is nothing more than the past excessive currency issuance, which needs to stabilize the fund interest rate and Treasury bond yield; there is a large amount of investment demand in the local area, such as the rise of new technology paradigms, or the transfer and even reflow of manufacturing industries back to the local area, which needs to use interest rate hikes to trace back the liquidity of the US dollar, in order to promote local financing.

And the US dollar interest rate cut is not because the local area cannot bear the repayment pressure brought by high interest rates, but more because most investment projects in the local area show signs of asset bubble. In order to transfer risks and resolve bubbles, and to create a larger economic scale effect for new technology paradigms, it is necessary to cover the costs of R&D and other institutional inputs with social benefits, so it starts to cut interest rates, allowing the asset transactions it forms to fully flow into the global market.The recession of the U.S. economy is merely the final operational window period, during which policy momentum can be ramped up to achieve a decisive blow.

Secondly, given the discounting of power of the U.S. dollar hegemony, it has the least information entropy within the global financial market system, meaning the least difference in transactional information, thus knowing when to lie low and when to strike.

Furthermore, as the saying goes, "train soldiers for a thousand days, use them for a day," it has already leveraged the structural advantages within the global system to unilaterally suppress our country in finance and technology sectors. Despite achieving some success, it is still waiting for the right moment, guiding by the situation, leveraging others' strength, and going with the flow.

In summary, when the U.S. economy is in a recession that urgently requires interest rate cuts, it is the time to sound the charge to harvest global major assets, including those of our country.

02

Now, how does the other side of the ocean use our country's market "dual-track system" to achieve the goal of harvesting our assets?

Firstly, it uses its position and capabilities as the leader of the global economic integration order, the global manufacturing industry supply value chain pattern, and the international trade division of labor cooperation system to accelerate the transfer of mid-to-low-end manufacturing industry chains out of our country, thereby weakening our country's industrial manufacturing and production capacity output supply side capabilities.

Unless in wartime, our country has the organizational mobilization ability to normalize special situations, but the sole criterion for having modern rule of law society governance capabilities is the efficiency of daily social operation.

In addition, although the U.S. domestic manufacturing industry accounts for only 16% of the global market share, it is the "leader" of the manufacturing supply chain, and the total amount of substantial rights and interests it can control and generate actually accounts for more than half of the global market share. For example, productive services are considered a high-end manufacturing technology spillover or extension and even an important part, but they are calculated into the service industry market share.

Moreover, in previous domestic manufacturing investments, the proportion of U.S. capital may reach 20%. In this case, its transfer of production capacity to other regions will inevitably weaken our country's industrial manufacturing's global market share and output capacity. Even if this factor is excluded, with 50% VS 30%, it seems that our chances of winning are quite challenging.Secondly, based on reality, due to the Mundell-Fleming impossible trinity principle, domestic assets have transactional exclusivity for overseas capital, hence in the eyes of overseas capital, domestic assets do not fall within the category of high-quality investment targets.

Even if some assets are indeed exceptionally high-quality, the other side of the ocean will leverage its status as the main market for international trade and finance, the world's largest consumer demand market, to not authoritatively recognize the value of our sovereign major asset classes, and will long-term suppress their trading value in the main overseas capital operations and transaction platforms.

The reason is that our financial risk control mechanisms have caused substantial damage to the stability of their capital investments, and both sides cannot reach a mutual trust principle for sovereign asset transactions, hence they will take legislative or administrative measures to prevent the liquidity of dollar asset returns from making large-scale investments in our country.

In other words, they neither bottom-fish nor give us the opportunity to strengthen the value of our assets.

Furthermore, the other side of the ocean uses its hegemonic discount form constituted by elements such as the global market system, business ecosystem, technological industry resources, and financial circulation platforms, and according to the technological innovation cycle theory of Mises-Schumpeter, the current top-level of our country, through long-term government bond financing, that is, overdrawing sovereign credit, to make large-scale investments in new quality productive forces, namely the high-tech industry field, due to the two reasons mentioned earlier, thus unable to form an economic scale effect in the global main market and achieve social application popularization, leading to total factor productivity (TFP) being insufficient to make the economic natural growth rate high enough to cover the institutional input costs, thus inevitably falling into a vicious cycle of economic system such as overcapacity and insufficient domestic demand.

At that time, dollar funds will take the opportunity to acquire and merge a large number of high-tech production supply facilities and equipment resources from our country overseas.

At that time, we will be unable to use funds above a certain scale due to excessive overdrawing of sovereign credit financing in the early stage, coupled with blurred bureaucratic rights and responsibilities, non-transparent rights execution processes, administrative will dominated by planned thinking, and the system of centralized social management decision-making, which prevents the top level from implementing multi-goal tasks, that is, only single-goal tasks can be achieved, losing one when gaining another, unable to have both, so only limited resources can be concentrated on solving the scientific research breakthrough issues in the field of "neck-kicking technology", and for strategies such as the construction of a unified production factor market, livelihood welfare guarantees, improvement of urban residents' income, and expansion of domestic demand and rural revitalization, it is highly likely that they can only stay at the planning level, or will be unable to truly implement them for a long time.

However, these strategies are the key to whether the economic internal cycle can be built, and if they only stay at this level, it will eliminate the possibility of curbing the other side of the ocean from harvesting our country's assets through economic endogeneity.

03

After analyzing the general methods of the other side of the ocean to harvest our country's sovereign assets, I believe that the strongest financial storm in history is officially sweeping the world.Originally within the US dollar interest rate hike cycle, the main categories of assets in countries around the world have encountered a situation of shrinkage, and the investment target famine in the entire society has lasted for many years.

Looking at the US dollar about to enter the interest rate reduction cycle, it is because almost half of the world's economic fundamentals have fallen into the severe situation of high interest rates, high inflation, high debt, high leverage, and low growth, which is called "four highs and one low". Although interest rate reduction can quench thirst in the short term, it will worsen the following three major issues over time: fiscal deficits, private debt, and asset bubbles.

Firstly, governments of countries around the world have been expanding fiscal spending in the past few years to cope with the negative impacts brought by the pandemic and the interest rate hikes of the US dollar. Some countries' finances have long been insufficient and have always been in a deficit state.

In the past few years, with the sluggish global economic growth, the fiscal deficit ratios of governments in various countries have all expanded.

For example, the United States released as much as 7.5 trillion US dollars in liquidity through unlimited quantitative easing in 2020-2021. Although it was correctly injected into the grassroots people and small and medium-sized enterprises, helping them to repair their balance sheets and cross the interest rate cycle, it has allowed the high interest rate hike cycle to be maintained until now. However, the expansion of the federal government's debt scale has reached as high as 35 trillion US dollars, and its proportion of GDP has exceeded 130%. How to resolve such a huge debt is indeed a headache, and it has become the sword of Damocles hanging over the heads of global market investors, and it is also the Achilles' heel for the US economy to achieve high-quality growth in the future.

Take another example, the fiscal deficit ratios of governments in various countries in the eurozone have all exceeded 100% of their GDP ratios. Due to the impact of the European debt crisis and the Russia-Ukraine war, the economic setbacks suffered by Europe in these years are at least two to three times more than other regions.

The most effective and direct response is to expand the fiscal spending of various countries, which is almost a motion that can be passed at every European Parliament, but there is no clue on how to resolve the huge debt it generates and how to turn the fiscal deficit into a surplus.

In addition, as a haven for asset risk aversion in developed countries, Japan has the highest macro debt ratio and leverage ratio in the world.

Due to the maintenance of the yield curve control policy and as the earliest country to implement quantitative easing and negative interest rates, its government can freely issue government bonds, and the central bank is responsible for purchasing government bonds.The play of passing from the left hand to the right hand has led to an astonishing debt-to-GDP ratio of over 200% for the Japanese central government, pushing the macro debt ratio to around 400%, which is truly daunting.

Now that the U.S. economy is beginning to decline and the dollar is about to enter a period of interest rate cuts, I believe that the fiscal deficits of countries around the world will not only fail to improve effectively but will also continue to expand due to this wave of tactics similar to "coupons," leading them to increase fiscal spending until they reach a state of insolvency or insolvency.

Recently, the British House of Commons announced that its government has officially entered a state of bankruptcy. More and more countries will follow the once-mighty British Empire, either struggling with national bankruptcy or simply lying flat, waiting for the tide of sovereign credit defaults.

Secondly, the levels of private debt and asset bubbleization in countries around the world should not be underestimated.

Even during the pandemic, many developed countries or regions followed the U.S. example by distributing cash subsidies to the grassroots population and small and medium-sized enterprises, helping them to weather the liquidity crisis. However, this did not lead to a sustainable mechanism in the long term. Some countries or regions stopped after one or two distributions, causing the cost of living for the people to rise rapidly in the short term. Yet, due to high inflation and various lending rates, they have to bear more cost expenditures than before.

With the global economy in a downturn and unable to increase labor income, most people, facing no significant increase in primary and secondary income distribution, have no choice but to expand debt and add leverage to maintain basic living expenses.

Over time, the public has become heavily indebted, with a sharp deterioration in financial conditions, even reaching a point where income does not cover expenses. Coupled with the current global financial storm, it will inevitably lead to a wave of corporate layoffs and unemployment, causing the funds available for debt repayment to break instantly, resulting in a large number of overdue and default situations, creating a large amount of bad debts, non-performing loans, and stagnant accounts for banks.

As for the asset bubbleization in countries around the world, it has also shown an increasingly severe trend in recent years.

Let me give a few examples and everyone will understand: cities like London, Los Angeles, New York, Tokyo, Seoul, and even Ho Chi Minh City in Vietnam have seen real estate prices in their core areas surge from relatively low levels a few years ago to more than 70% higher today, with rental yields exceeding those of the four major first-tier cities in the country. It's as if there's a sense of parallel time and space. The domestic real estate market has been in a downward channel in recent years due to regulatory policies such as the "three red lines," while the overseas real estate market has been exceptionally hot. For example, the U.S. has raised the federal funds rate to 5.5%, resulting in mortgage rates as high as around 8%, yet the rental housing market remains booming, not dampening investors' enthusiasm.

However, this will inevitably lead to a significant accumulation of asset bubbles.Over the past three years, stock markets around the world, led by the three major U.S. stock indices, have shown an upward trend reminiscent of the "One-Finger Zen" technique. This includes the "Seven Sisters" of U.S. technology stocks, stock markets in Japan and South Korea, emerging markets such as Vietnam and India, and even the stock index of our precious island once set a record for a single-day surge.

Looking at the stock performance related to artificial intelligence and the metaverse, it is also enviable. Even the growth of digital currencies like Bitcoin and Ethereum is quite pleasing.

In the past three years, countries around the world have benefited from the huge liquidity brought by quantitative easing policies, and the subsequent domestic asset prices have skyrocketed to the level of inflation, also accumulating a sufficiently large asset bubble.

Now, as the U.S. economy begins to decline and approaches the time when the dollar is about to cut interest rates, these asset bubbles are being burst one after another:

Tokyo's core real estate prices have fallen by about 15% from their peak, the Nikkei index fell by more than 13% on August 5, and the stock market conditions in countries around the world have turned into a green scene.

However, this is just the beginning.

In the coming weeks, asset bubbles in countries around the world will be burst, the strongest financial storm in history will officially sweep the globe, and a grand play of mean reversion will officially begin.

Next, how should our country deal with this strongest financial storm in history that is sweeping the globe?

In addition to trying to prevent the other side of the ocean from harvesting our country's assets, it is also necessary to provide precise treatment for the "Laski-Keynes" syndrome, that is, to transform from the control theory thought that the "visible hand" must control the "invisible hand" without interference, to the information theory thought that focuses on Hayek's spontaneous expansion order. After that, only two things need to be done, which are reform and decentralization.

In conclusion,In summary, signs of a general economic downturn have begun to emerge in the United States. Although the duration will not be long, it is sufficient to trigger the strongest financial storm in history, which is now officially sweeping across the globe.

Our country's major assets are the first targets to be harvested. Looking to the future, the bugle call to harvest high-quality assets from countries around the world across the ocean has already resounded through the sky, and its ambition is well-known to all.