The Fed’s Dilemma

Author: Liu Jiaolian

BTC continued to fall to 57k overnight. There is no volume to fall, and it is difficult to carry on. It may take some time.

This September may be garbage time until the Fed's interest rate meeting. Why is the Fed struggling to raise or lower interest rates? In the final analysis, this is a dilemma for it.

As we all know, the Fed's public target for regulating monetary policy is the level of domestic price inflation in the United States. But as it recently admitted, it is actually a dual target, or a dual mission: one is inflation, and the other is employment. Inflation should be low, but not too low, and should be kept at a moderate level, that is, about 2%. Employment should not be overheated (lack of people), and unemployment should not be too much (lack of jobs), and should be kept at a moderate level of unemployment.

The starting point of these two goals, publicly stated as controlling prices and full employment, sounds like it is set from the perspective of workers. Sorry, it is actually the opposite. These two goals are completely set on the side of the interests of capitalists. High inflation will push up wages and increase the cost of hiring capital. Only by maintaining moderate unemployment can job seekers fully compete, so that the job market can find the lowest price of labor.

This layer will not be expanded further. The teaching chain will simply break it down and tell you that the Federal Reserve has an open agenda and another hidden agenda, the so-called hidden agenda. Yin and Yang are two inseparable sides of the same coin. This is not a conspiracy theory, or even an open conspiracy theory. There is no so-called "scheme" here. This is a "mechanism". This economic system is designed like this. Just like the car you drive, step on the accelerator, and the four wheels can carry the sedan and run away. To a person who traveled from ancient times, this seems so magical. Is this a conspiracy or an open conspiracy? In fact, it is neither. It's just that this ancient person didn't understand how cars work.

What is the use of understanding this for individuals? At least it can inspire and encourage you to try not to work if you can, and to work hard to be a boss (own capital). Because when you are a boss, the Federal Reserve is helping you.

However, what we want to talk about is not the subtext of the Fed's dual mission, but a deeper hidden agenda.

The dual mission is obviously a pair of self-contradictory, or a pair of mutually hedging goals: to suppress inflation, the economy must be suppressed, which will hit employment, which is inconsistent with full employment; to boost employment, the economy must be overheated, which will push up inflation, which is inconsistent with controlling inflation. But this cannot be called the Fed's dilemma.

The real problem with the Fed's manipulation of monetary policy is that the dual mission is just an excuse or a means. Its real task, or the dilemma it faces now, is what we have long been familiar with: to protect the exchange rate or to protect assets?

To protect the exchange rate is to protect the US dollar from a large-scale depreciation, especially relative to other major international currencies. To protect assets is to protect the US stock market from a collapse, causing a financial collapse and an economic crisis.

Last year, when the teaching chain talked about the serious problems faced by the central bank in the face of the Fed's sharp interest rate hike, the collapse of China's real estate, and the rapid depreciation of the RMB against the US dollar, they were also these two problems: to protect the exchange rate (RMB exchange rate) or to protect assets (such as real estate)? The teaching chain said at the time: to protect the exchange rate, to protect everything; to lose the exchange rate, to lose everything. In fact, this is the simple truth in the military that "if you save the land but lose the people, both the people and the land will be lost; if you save the people but lose the land, both the people and the land will be saved." Therefore, the correct approach is to give up real estate (and A-shares?) and try to protect the RMB.

The difficulty is that you will be scolded for making the right choice, and you need to have a little courage of "I will go even if there are thousands of people". After all, if the housing price falls, those who have houses will feel pain. If the stock market falls, those who have positions will feel pain. If the exchange rate falls, most people will not feel pain, because those who have RMB only spend money domestically, and those who have US dollar assets will feel secretly happy.

The reason why the Federal Reserve is now being roasted on the fire of high interest rates is that if it wants to protect the dollar, maintain high interest rates, or even continue to raise interest rates, it will cause the US economy to decline, the US stock market to collapse, and the financial crisis; and if it wants to protect the US stock market, it must cut interest rates as soon as possible, which is bound to cause the global dollar to flood again, and the dollar will depreciate significantly in both nominal exchange rate and actual purchasing power.

From the perspective of Americans, choose the lesser of two evils. Defending the hegemony of the US dollar at all costs is the strategic choice that truly conforms to the interests of the United States. After all, American programmers earn $100,000 a year, and Chinese programmers earn 100,000 RMB a year. Isn't it the 7:1 exchange rate that supports the former's leisurely life in a big villa? Former Google CEO Schmidt recently gave a speech at Stanford University and complained that American programmers are not working hard for high salaries and only seek work-life balance. What is the cause of this systemic inequality? What if the US dollar exchange rate falls to 1:1? Americans who earn dollars to buy daily necessities all over the world will immediately "downgrade" their living standards to the same level as the Chinese, and will no longer be "superior people".

But from the perspective of the Chinese, why should the Chinese support Americans as superior people from generation to generation? Some Chinese people have worked hard to join the United States and directly upgraded to superior people; but more Chinese people will endure humiliation and bear heavy burdens in order to one day overthrow the dollar so that the Chinese and Americans can truly be on an equal footing.

However, from the chairman of the Federal Reserve, Powell, to the so-called hawkish directors, no one has the willpower to compare with the predecessor Volcker. They are about to make a major strategic mistake of "saving land and losing people, losing people and land".

Originally, the Federal Reserve created the dollar tide in order to withdraw dollars from the world. In this way, the amount of dollars can be controlled to match the global commodity production and circulation, thereby ensuring the strength of the dollar and the exchange rate.

The interest rate hike is only one part of the entire dollar tide. The Federal Reserve has temporarily repatriated global dollars through high interest rates, which has blown up other people's leverage and shrunk global liquidity. At the same time, it has adopted targeted tools to inject countercyclical liquidity into the United States to support its own economy from being blown up by high interest rates. This has objectively created a situation of domestic liquidity overflowing and international liquidity drying up. At the same time, the U.S. Treasury will take the opportunity to issue bonds to absorb this overflowing liquidity.

However, if there is only this link, it will be like drinking poison to quench thirst. The repatriated money will still run away in the future. Whether it is eating high interest rates or making money from the surge in U.S. stocks, when they run away, they will only take away more. The money raised by the new bond issuance will also have to be repaid with principal and interest in the future. In other words, the amount of liquidity absorbed during the interest rate hike cycle will be spit out more in the next short-term debt cycle. By then, the dollar will still depreciate to a greater extent.

Therefore, there must be a next link, that is, after the interest rate hike cycle has exploded other people's leverage, the cycle reversal should be used to guide American capital to go out and buy other people's high-quality assets that have been exploded at a low price. After earning ten times or a hundred times in the easing cycle, the high-level escape and withdrawal will bring back ten times or a hundred times the US dollar profit. This is the real way to recover the excess US dollars and return them to the hands of American capital.

Financial capital wants to make quick money. If it does not rely on financing and borrowing money and not repaying it, then it must rely on buying low and selling high, right? Such a simple truth is understood by even a primary stockholder, but many people insist on pretending to be confused. When you say that American capital wants to buy low and sell high, they say you are a conspiracy theorist.

But why is the Federal Reserve so caught in a dilemma this time?

Because the Chinese do not buy its tricks and block their way to wealth. It raises interest rates to withdraw US dollars, and China lends US dollars to others to close their positions and then replaces them with RMB.

In the past, when the dollar left, all countries were dumbfounded. When exchanging goods between two parties, there is a double contingency problem in economics: you want something, but you don’t have what I want to exchange with me.

Now China can basically sell everything and buy everything, and it has become a hub. If you want to get rid of the dollar and re-network, you don’t have to connect two by two, just plug them into the super hub of China. This becomes a star topology.

Now when the dollar leaves, everyone waves and says goodbye~ 

Do you think the United States will be angry?

What’s more terrible is that if these guys don’t collapse, American capital will not be able to pick up bloody chips.

Friends who have traded in the secondary market know that only leveraged liquidation is a bloody chip.

American investment guru Howard once said that the best way to buy is to buy from people who are desperate to sell.

Who would sell desperately? Isn't it the people who have a leveraged position blown up? He is not only selling desperately, he is simply forced to sell at the worst price.

Why is the US capital still reluctant to take the 3,000-point A-share market? It's because they are all spot party diamond hands, and there are national teams quietly ambushing below 3,000 points. Everyone is looking forward to it, waiting for US capital to "bottom-fish" and pull up, pull up shipments and harvest them. How dare they come?

They are not very brave to raise BTC in a big way at present, and I am afraid it is similar. After more than half a year of washing the market, only the spot party diamond hands who refuse to cut their meat are left. If they come in now, they can't cut others, but they may be cut first.

As long as they cannot complete the harvest in a short-term debt cycle, they have already failed in strategy.

Dear friend, your goal is not to be harvested by them, and you can even harvest them in reverse.

You can definitely win, as long as you have enough strategic patience. Because time is not on their side.

If the Fed does not cut interest rates, it will only accelerate the penetration of RMB. If the Fed cuts interest rates, it will make a strategic mistake. The flooded US dollar will definitely suffer a major depreciation without the winning condition of harvesting and withdrawing, thereby damaging the foundation of the US dollar's credit.

The Art of War by Sun Tzu says that the victorious army wins first and then seeks battle, while the defeated army fights first and then seeks victory.

If the Fed cuts interest rates in September, it will be taking a military risk, which is a typical case of fighting first and then seeking victory, and it will bring serious consequences of strategic failure to the US dollar.

However, it is obvious that the willpower of Fed Chairman Powell and other directors can no longer support the current high interest rates.

When the Fed cuts interest rates and eases, the surging liquidity will push the now hesitant US dollar capital to rush forward regardless of everything.

Read the words of the investment guru above in reverse. The best way to sell is to sell to those who are desperate to buy, and reap your profits from them.