Original | Liu Jiaolian
The Fed's June interest rate meeting ended overnight. The conclusion was mediocre, in line with market expectations, keeping the federal funds rate unchanged at 525-550. Fed officials conveyed to the market their determination to only cut the rate by 25bp once this year through the dot plot. However, the market still expects two cuts, one in September and the other in December.
Before the meeting, the overly strong US non-farm payrolls data scared the market (see {6.7 Teaching Chain Insider: Friday, a thunderclap!}). Subsequently, BTC ( Bitcoin ) once fell below the 30-day moving average and retreated to around 66k, creating an opportunity to add positions on dips. During the meeting, the unexpectedly easing CPI inflation data reignited market sentiment (see {6.12 Teaching Chain Insider: The truth about the US spot BTC ETF funding side}). BTC surged in response, once returning to $70,000.
As Jiaolian said, Fed Chairman Powell will certainly "pacify" market sentiment at the press conference after the meeting. If it's too hot, pour some cold water; if it's too cold, give some sweet dates. As expected, facing the high market sentiment, Mr. Powell used rhetoric to cool it down, saying that although inflation has eased significantly, it is still too high, and the confidence in inflation easing has not reached the level of enough to cut interest rates. Now no one will take interest rate cuts as basic expectations, and so on.
As a result, BTC retreated again, losing most of its gains and temporarily retreating to below 68k.
The Fed's stubborn insistence on monetary tightening is a gamble that it can win the financial war against China from 2019 to 2023.
The United States, which had personally experienced the Great Depression of 1929-1933, had a thorough understanding of the capitalist production crisis and wanted to use the power of this cyclical crisis to defeat its opponents.
In 1929, the United States was the world's leading industrial country (it surpassed Britain in 1894). In 2019, China is the world's leading manufacturing country (it surpassed the United States in 2010).
The strategy of defeating industrial countries by taking advantage of the economic cycle is openly written in textbooks. The mainstream mode of production in the world today is the capitalist mode of production. Simply put, the capitalist mode of production is a mode of production that produces profits (surplus value) through a wage employment system. Its weakness is that such an economic cycle will naturally move towards deflation. That is, the production capacity is getting bigger and bigger, that is, more and more goods are produced, while the purchasing power is getting smaller and smaller. To put it bluntly, there is less and less money to spend. When a critical point is reached, a "death spiral" like this will appear:
1. There are too many products and insufficient consumption, so the products are forced to reduce prices (loss) or simply cannot be sold. So:
2. Factories reduce production, companies lay off employees, or those who remain in their jobs receive a pay cut. So:
3. A large number of people have reduced income or even no income, so they have even less money to spend. Therefore:
4. The products are even harder to sell, and… (trapped in an endless loop)
There is also a vivid story in our middle school textbooks, which is still fresh in my memory:
The coal miners lost their jobs. In the winter, the house was cold without a fireplace.
The daughter asked her father: "Why don't you light the fireplace?" The father replied: "Because there is no coal at home."
The daughter asked: "Why is there no coal?" The father answered: "Because we have no money to buy coal."
The daughter asked: "Why don't you have money to buy coal?" The father answered: "Because I lost my job."
The daughter asked: Why did Dad lose his job? Dad answered: Because too much coal was produced.
Because there is too much coal, the father and his daughter have no coal to burn for heating. Is it ironic? Reality is so magical.
Jiaolian said in Chapter 10, Episode 40, "The Great Depression" in "The History of Bitcoin" that 2019 seems to be another 1929. (See "Life's Fortune Depends on Kondratieff Waves" on May 22, 2024)
1929, the third Kondratieff depression; 2019, the fifth Kondratieff depression.
Now, a hundred years later, the United States, which has already completed deindustrialization, has become equivalent to having mastered the "Sunflower Manual" and castrated itself. Since it has castrated itself, it has become immune to the deflationary spiral above, and will not fall into the dilemma of pouring milk into the Mississippi River during the Great Depression of 1929-1933. After self-castration, it can also implement "dimensionality reduction strikes" against other producing countries. (Note: The dimensionality reduction strike in Liu Cixin's "The Three-Body Problem" refers to first playing badly without a bottom line, so as to defeat opponents who are embarrassed to break the bottom line.)
Since you are already in an invincible position, the way to defeat an industrial production opponent is simple, which is to find ways to make the opponent's products unsalable, resulting in overcapacity, unsalable goods, factory closures, employee unemployment, and economic collapse.
Therefore, the United States can use the following three combined punches to take advantage of the Kondratieff recession to accelerate the deflationary spiral of the industrial production economic cycle in an attempt to bring China down:
The first move is the "ban" tactic. Raise trade barriers and artificially slow down product sales. Directly intervene politically to prevent Chinese products from being sold to the world's largest consumer market, the United States. Without the consumer market, the massive amount of products produced will be unsalable and companies will go bankrupt. In 2018, President Trump launched a trade war against China. This policy has been continued by the Biden administration to this day.
The second move is the word "tight". Implement monetary tightening and artificially reduce the amount of money. Through the Fed's interest rate hikes and balance sheet reduction, financial warfare is launched, and the trade war is coordinated with each other, so that the world's money is reduced, purchasing power is reduced, and consumption power is reduced, further weakening the world's ability to buy Chinese goods and absorb China's production capacity.
The following chart shows the interest rate trend since the Fed started raising interest rates in 2016. As you can see, there was an accident in the middle: the 2020 epidemic. If it weren't for this accident, perhaps the Fed would have wanted to directly raise interest rates in one go and blow up China.
Finance and industry are in competition with each other in terms of currency. If money stays in the account and earns the high interest rate given by the Federal Reserve, it will not go to the industry to become production capital. At the same time, there will be less money in the market, and consumption will also shrink. Therefore, the Federal Reserve's monetary tightening will cause a double blow to the industry of the producing countries: on the one hand, it will drain the investment from the bottom of the pot; on the other hand, it will cause the goods to be unsalable from the consumption side. With the double blow, companies will lay off employees, go bankrupt, and people will lose their jobs. Consumption will further shrink, and the "death spiral" will be accelerated, and the economy will fall into deflation...
The third move is the "gold" trick. Paying a lot of money to buy off, remote breeding, launching psychological warfare, academic warfare, and public opinion warfare. What determines the victory or defeat of a war is the will of the people. By manipulating thoughts and public opinion, such as bribing experts, media, and popular science KOL to instill the idea of non-resistance in the people (packaging it into "economic freedom" and other rhetoric), concocting misleading concepts such as "overcapacity" (overcapacity is actually a relative concept, more, better, and cheaper have become bad things), in order to coerce national policies and allow the fortress to be breached from the inside.
In the eighth chapter of Journey to the West, it is said, "The Tathagata took out three hoops and handed them to the Bodhisattva, saying, "This treasure is called the 'tightening hoop'. Although there are three of them, they are used differently. I have three spells of 'gold, tight, and forbidden'. ..."
"Today we cheer for the Monkey King, only because the evil fog has come again." Demons and monsters are nothing to be afraid of, for the golden hoop on their heads weighs a thousand pounds.
If 2019-2023 is like 1929-1933, then China today, although deeply mired in deflation, is clearly in much better shape than the United States during the Great Depression.
Now the critical point is getting closer and closer. Will the Fed blow up China and the US win without a fight? Or will China resist the three spells of the gold tightening ban, successfully recover, and get out of deflation, and the Fed will be defeated and turn to a cycle of interest rate cuts and easing? We will wait and see.
The economic base determines the superstructure. The outcome of this arm wrestling match will determine the fortunes of China and the United States, and the East and the West, for the next hundred years (the next one or two Kondratieff cycles).
In Jiaolian's view, China's way out of the predicament is neither the helicopter money of the current Western left to stimulate consumption, digest commodity production capacity, drink poison to quench thirst, and sow the hidden dangers of greater crises in the future; nor is it the laissez-faire of the current Western right, letting leverage fall freely, exploding everything that should explode, scraping the bone to cure the poison, bankrupting enterprises to eliminate production capacity, and then waiting for the economy to slowly repair itself after the explosion.
These two ideas are actually patching around deflation. Just like a person who can’t swim and falls into the water, the former method is to struggle desperately to delay the drowning process, while the latter method is to simply give up and wait until the body sinks to the bottom, and then float up naturally.
No one (economist) has ever thought about why we can't learn to swim in advance?
This is what is called "the person who tied the bell must be the one to untie it."
To break out of the deflationary death spiral trap of the capitalist mode of production, we cannot just patch up the problem of deflation, but we must transform the capitalist mode of production, that is, the mode of production that uses the wage employment system and aims at producing profits.
Or, it can be transformed into a socialist mode of production, still relying on the wage employment system but with the goal of accumulating capital (common capital).
Or, it can be transformed into a communist mode of production that completely abandons the means of wage employment and no longer aims at producing profits. This mode of production may not be achievable at the current level of social productivity, so we will not discuss it for now.
In other words, we can organize large infrastructure projects in a planned way, recruit workers, and distribute money to workers, that is, consumers, in the form of distribution according to work. This is still a wage employment system. However, the difference is that the goal of such projects, or the assessment KPI, is not the profit indicator in the annual financial report, or how much money is made, but the growth and accumulation of capital - common capital, not private capital.
The capital here refers to what Austrian master Mises called "capital goods" or "capital goods", which are special commodities that are opposite to "consumer goods" and "consumer goods" applicable to consumers. For example, a car is a consumer product, while a car production line is a capital product.
Mises used the term "capital" to refer specifically to the monetization (pricing) of capital goods, but we do not use this definition. We certainly know that financial capital and monetary capital are also a type of capital. But we also understand that money is just a number game, not real wealth. If there is no car production line, no matter how much money you have, you cannot make a car.
Of course, Mises believed that socialism could not optimally allocate capital goods because it lacked the guidance of a price system. He believed that capital goods emerged precisely because of the private ownership of the means of production, otherwise there would be no exchange rate or money price. If you limit your vision to the circle (hoop) of the capitalist mode of production, you should agree with some of his views. However, no matter how correct his views are, they cannot help you escape the deflationary death spiral. On the contrary, according to his theory, all you can do is wait to die, and then your body will float up naturally.
But the Chinese people's thinking since ancient times has never been to wait for death. If the sky is broken, we must repair it. If the water is flooded, we must control the water. If the mountain blocks the road, we must move it. If there are too many suns, we must shoot them down.
The opening poem of Journey to the West says: "If you want to know the power of creation, you must read Journey to the West." What is the "power of creation"? It is the skill of immortality.
If a country wants to "be a success", it must be able to navigate the ups and downs of the Kondratieff cycle economically, and stand firm in the forefront of the waves, regardless of the raging waves and the strong winds, and not be beaten to death on the beach by the waves. Surviving through the bull and bear cycles, the boom and bust cycles, will also achieve the "immortality" of the national community.
If you want to survive the cycle, you have to practice good water skills. To jump out of the rules and regulations of today's mainstream economics (capitalist economics), in American terms, it is "think out of the box". So we can draw a counterintuitive conclusion:
The solution to the so-called overcapacity, economic deflation and death spiral is to further expand production capacity.
—— Of course, we need to carefully choose which production capacity to expand. For example, the production capacity of socks and toys does not need to be expanded. What needs to be expanded are the production capacity of missiles, aircraft carriers, drones, high-end chips, aerospace, and new energy...
If you think in reverse and replace the capitalist mode of production with the socialist mode of production, you will find that you can enter the following positive feedback loop:
1. Greater production capacity brings more employment. So:
2. More employment leads to more consumption. So:
3. More consumption leads to more production. So:
4. More production produces more and cheaper goods. So:
5. Cheaper goods stimulate more consumption… (entering a positive cycle)
Moreover, the logic of this model is smooth: more high-quality and low-priced goods allow people to live a better life, rather than the magical reality of the capitalist mode of production where "the more coal there is, the less coal my family can burn".
If the Federal Reserve continues to tighten monetary policy but fails to prevent China from continuing to accumulate productive capital that can produce real wealth, the United States itself will suffer greater "rebound" damage: U.S. debt will send the United States to paradise under continued high interest rates.
(Official account: Liu Jiaolian. Knowledge Planet: reply “Planet” to the official account)
(Disclaimer: The content of this article does not constitute any investment advice. Cryptocurrency is an extremely high-risk product and there is a risk of it returning to zero at any time. Please participate with caution and be responsible for your own actions.)
