US vs China : Divergence of Monetary and Fiscal Policies
Tow Super-power Economy Are Moving In Different Directions
From economic data, stock market indexes to personal debts/ loan growth, both US and China are moving in different directions. The US is in a “super-easy and stimulus “ mood that they are moving the two engines of “ Monetary “ and “ Fiscal” stimulus to the max. Both monetarist and Keynesian work hand in hand this time round to re-charge the sluggish economy due to the Covid-19 pandemic. Because of the “ supremacy of USD “, the US can continue to do the unlimited QE and keep printing money and also issuing very low long term treasury bills by selling it to the world, which smaller countries can just dream of. By using the dollar and SWIFT, the US can just sanction anyone or country who they deem as “evil” and challenging their system/belief.
China is winning the digital currency race. Can it unseat the dollar? <source:trtworld.com>
Fed chair Powell floats central bank digital currency and more regulation of cryptocurrencies <source: zdnet.com>
Dollar Supremacy At Risk?
While some maybe thinking that the CBDC( Central Bank Digital Currency) could be a threat to dollar supremacy in the long run, but I think it will still be a very long way to go as world trade and central bank reserve still mainly dominant by dollar and it may take times to challenge this situation. One positive note is that if the future CBDC could bypass the SWIFT ( which is basically controlled by the US ), it may allow the flow of money/ fund freely at a much lower cost.
As we could see from the past few years of action by the US, they are doing and trying to do whatever they could to delay the rising of another “super-power”, from trade war to tech war (now on 5G/ chips), the next could be the “currency war” to maintain the USD supremacy.
Eventually, the truth and reality will set in and market forces will determine the value of the dollar. Exchange rate adjustments in the market reflect variations in the economic performance of each country and facilitate efficient adjustments in the global economy will collapse and require new directions of the world trade/currency settlement.
By then, like what had happened in 1971 on the collapsed of ‘Bretton Wood “ system, the US may just repeatedly say again that :
“The Dollar is our currency, but it is your problem“ – John Connolly, US Secretary to the Treasury – 1971
Back on the economic front, China is in a more cautious mood and doing the “deleveraging “ instead of expanding, from tightening monetary policy to curbing the over-heating housing market.
China: Credit growth limited by deleveraging reform < source:think.ing.com>
There is no right or wrong on both sides as both faces different economic and pandemic-control situations. Each would have to respond to their unique and pressing issues facing their labour market and economic environment.
I think the question and the biggest challenge for the US is how to reverse back the policy and the market’s reaction on tapering the QE or even the increase of interest rate. The market is so “addicted “ to such a super QE and low-interest-rate environment, any news or hints on the tightening will cause a huge reaction from the stock market, like the one in a speech from US Treasury Secretary Ms Yellen recently and she has to come out to clarify on what she said earlier.
“Earlier on the day, Ms Yellen caused a set of hiccups in financial markets when she said that “it may be that interest rates will have to rise somewhat to make sure our economy doesn’t overheat.”
Yellen clarifies remarks that roiled markets, says sees no need for Fed to hike rates <source:Straitstimes.com>
For sure, inflation will be a real threat to the US economy soon in the near future as Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
It will be interesting to see that how the stock market will react by then? when FED starts to reverse their QE and increase interest rate? Maybe the stock market will continue to fly higher after tapering as the “tightening “ effect may have a time lag and money continue to float around different asset classes.
"A picture is worth a thousand words"
5Y M1 Money Supply :
5Y M2 Money Supply :
CHINA (CNY Bil)
US ( USD Bil)
10Y Central Bank Balance-sheet
5Y Housing Price Index YoY Change (%)
10Y Debt To GDP