Original Assistant to the Mayor
Public number Dashu Township Mayor
In the previous article " Will People Step into the Same River Twice: Is Stagflation Coming Again?" In this paper, we analyzed the two main lines of internal economic basic diseases and external supply chain shocks that induce "stagflation".
Keen reader friends have already felt that "this moment is exactly the right moment".
Without further ado, we get to the point: How close are we to stagflation?
Upstream, we're already trying to minimize the impact of external imported inflation.
In 2021, we signed a 25-year comprehensive cooperation agreement with Iran; China and Russia signed a 30-year gas supply agreement in 2014, and in February this year, China and Russia signed a new agreement on crude oil and natural gas, and natural gas exports to China will increase by 10 billion cubic meters to 48 billion cubic meters per year, and china will supply 100 million tons of new oil for a period of 10 years.
These agreements are all for the import of oil and gas in a non-public transaction in the market, in other words, less affected by changes in international oil and gas prices. You know, when the Stagflation in the United States occurred, the cost of oil in the United States increased by more than 3 times.
Although China is not a big oil producer, we have already stood back to back with a big oil and gas resource country. In terms of grain, while ensuring the self-sufficiency of staple grains, we have also actively hoarded surplus grain in the past two years, so that it has been "soured" by foreign media.
From the downstream industrial manufactured goods, as the world's factory, if there is a shortage of supermarkets in various countries in the world, then China's supermarkets must be the last to appear.
The only thing to worry about is the impact of COVID-19 on inflation.
Industrial production is extremely needive of organization and continuity, a factory concentrated outbreak of new crown or repeated employees because of the new crown absent post, then factory production can not be organized. Once we lose production capacity within a year or even a few years due to the epidemic, Western countries led by the United States will definitely take the opportunity to shift their supply chains.
Recovering the economy after lying flat? Doesn't it mean that everything that exists after lying flat still belongs to us, and in the midst of the epidemic, who will produce it, and we will buy high-priced goods from abroad? When lying flat abroad, all kinds of chinese goods can be bought.
The external supply chain cannot be said to be without shocks, but compared with Europe and the United States, our situation is obviously much more optimistic. What we really need to pay attention to and be vigilant about is actually our internal "basic diseases".
The essence of inflation is "more money and less goods". As analyzed earlier, imported inflation has an impact but will not be decisive, our own production capacity is enough, the impact of "goods" is limited, that the biggest impact on us is actually our own currency over-issuance.
China's M2 money supply and M2 ratio to GDP for 2001-2021
Since 2008, in response to the financial crisis, China has launched a 4 trillion yuan bailout plan, and China's money supply has also surged. After that, there was a series of stimulus programs to increase economic growth.
M2 is the money in circulation in the market plus the money in the bank, in other words, the money supply of the whole society.
As you can see, the M2/GDP ratio in the figure has climbed significantly in 2009, and this ratio has been increasing since 2008. This means that the money supply has grown faster than the economy over the years.
With such a rapid rate of money growth, it stands to reason that China's inflation level should be very high. However, although prices are longer, they are not as volatile as in the 80s and 90s.
On the one hand, because our supplies are really abundant, and on the other hand, because a large part of the excess currency flows into real estate, and this one country does not count in the CPI.
China's CPI growth rate
Speaking of this, we have to briefly explain the currency distribution mechanism of the mainland, and understanding this mechanism is also more helpful for us to understand why real estate was a pillar industry in the past.
Mainland individuals and enterprises mainly rely on banks for financing, and in the past, the main personal financial assets were also bank deposits. In this way, for every 100 yuan we deposit, we can theoretically lend 100 yuan; but the central bank stipulates that each bank must retain a part of it in the central bank, and this retention ratio is called the "reserve requirement ratio".
Assuming that the reserve requirement ratio is 20%, it means that you must pay 20 yuan and you can lend 80 yuan. The person who gets the 80 yuan takes the money to spend, such as buying a pair of shoes, and the money goes to the shoe store owner to become his income. The boss then deposited the money in the bank, so that the bank had 180 yuan on its books. At the same time, the bank can take out 80% of the 80 yuan, that is, 64 yuan to lend, and then the new person will deposit the money in the bank, and so on.
How much can the final 100 yuan be derived? After mathematical calculations, you can get 500 yuan. If the reserve requirement ratio is 10%, then 1,000 yuan can be distributed.
The RRR cut is the central bank's reduction of the statutory reserve requirement ratio so that commercial banks can lend more, and credit expansion is the main way for our country to issue more money.
When the level of mainland industry is low, the real estate industry is considered to be an industry with many upstream and downstream related enterprises, such as upstream steel, cement and other building materials, downstream decoration, decoration, home and home appliances, and the economic driving effect is very strong. The distribution of money through the real estate industry through credit expansion can play a role in stimulating the economy.
Our ideal situation would be:
Money is lent out of banks→ encourages buying, house prices have risen→ the income of upstream and downstream employees and property holders in the real estate industry has increased→ the consumer market (wine, clothing, etc.) has prospered → economic growth
However, the reality is gradually becoming:
Money from the bank loan→ encourage to buy a house, house prices rise→ the greater the value of assets, the more loans can be mortgaged→ loan money + frugal money continues to flow into real estate→ house prices continue to rise
The money that originally encouraged consumption and credit issuance should have finally flowed into all walks of life, but now it is idle in the housing market, and the last thing left is the high house price.
In order to stimulate the economy, we over-issue currency and borrow debt to develop, on the one hand, push up the level of residents' debt and form a property bubble; on the other hand, local governments are also borrowing and investing in debt to complete the "GDP championship", forming a large number of local financing platform bonds, that is, hidden urban investment bonds.
Generally speaking, the problem of ordinary local bonds is not large, and the investment projects have relatively strict requirements, stricter audits, and a relatively high margin of safety; the big problem is that before 2018, governments at all levels used their own controlled financing platforms to issue a large amount of "urban investment bonds" (a disguised local bond) in the name of enterprises.
When the government raises funds and gets the money, it is mainly used for infrastructure construction, and this kind of government-driven investment is easy to merge with real estate development:
Because the city is built well, the house can be sold at a high price; if the house is easy to sell, the land is easy to sell; if the land is sold, then the land finance can be sustained, the government can continue to borrow money, and the government can always have money.
What would the ideal situation look like? If the city is built well, it can attract talents and enterprises to come, and the economy will be good; when the economy is prosperous, the tax revenue will be high; when the tax source is sufficient, the government will have money, and it will be able to continue to build cities and continue to attract talents and enterprises.
But it is clear that the money from selling land is fast and abundant; supporting a good business and a good industry is full of uncertainty and a long time.
The cost of land purchase by real estate enterprises will be partially transferred to residents, further increasing the burden of personal debt; government borrowing and investment will in turn push up residents' debt.
These are the two mountains of debt that exist in our national economy. Our country has issued more money through credit expansion, on the one hand, forming a high debt of the government and residents, and on the other hand, forming a big bubble in the property market, which is two sides of the same coin.
But to say that debt-driven, or investment-driven economic development, is not unique to our country, this is what modern countries do, but the forms of currency issuance are different in different countries.
In other words, as long as the demand stimulus is pursued to economic growth, economic development is also destined to form an asset bubble.
If the flood of money is flooded, it will spin around in the property market; and the money printed in the United States is easy to spin in the financial market, especially the stock market - of which the "ChiNext" NASDAQ situation in the United States is the most obvious.
The US NASDAQ index has changed in 10 years, and the annualized yield in the past 10 years can approach 20%
But it is also an asset bubble, and the housing bubble is much more harmful than the stock market bubble.
Buying a house has financial attributes, but buying a house is more demanding, and buying a house is generally the largest expenditure in the life of ordinary people, and it will also squeeze other consumption, so the property bubble will affect the normal life of many people.
People will say: I don't have a house to live in after marriage, I don't feel safe; people don't say: After marriage, you didn't buy Moutai stock, I didn't feel safe.
But there is an end to debt. Once the debt is large to a certain extent, even the most fanatical people will be afraid, what if they can't afford it? Once there is a wave of defaults, it is very easy to cause terrible consequences.
But debt isn't the whole story. Another huge problem with water release is widening the gap between the rich and the poor.
Ideally, money flows into the housing market/stock market, people with money spend it again, and money flows into all walks of life, so that as long as the production capacity of the currency is kept up, everyone's wage income will increase.
But the reality is that the richer the person, the easier it is to borrow money; and human nature is greedy, and people who have money want to make more money. The result is a lot of money in the financial and real estate fields.
The increase in currency issuance should have stimulated the economy to increase everyone's income, but the reality only stimulated the rise of finance and real estate. Who owns finance, real estate and more? Wealthy groups.
People who own assets enjoy the benefits of currency over-issuance, and use their increased income to buy daily necessities that have not increased much in price; ordinary people cannot enjoy the benefits of currency over-issuance, but their income is getting farther and farther away from the house that provides security.
In order to buy a house, it is necessary to shrink clothes and diet, the decline in social consumption stimulates the economy, the more stimulus the assets rise, the more they can not afford to buy a house, and consumption further declines.
To sum it up in more abstract terms, social wealth is unevenly distributed between capital and labor.
The most direct result of this imbalance is to cause the emotions of "lying flat" and "swinging rotten" among young people.
It's not that people don't work hard, but that there are things that no human being can change.
While the COVID-19 pandemic has made the world over-issue money and frenzied to make people rich, more and more people are unemployed and becoming poorer and poorer due to insufficient consumption.
Back to the original question: China may need to be more wary of recessions and depressions than stagflation abroad.
Because of the debt problem, if it cannot be landed gently, it can easily translate into terrible consequences;
Because of the gap between the rich and the poor, the whole society will be absolutely overproduced and the effective demand will be relatively insufficient, and the society will lack economic vitality;
Because of Sino-US friction and de-globalization, we are facing the risk of declining external demand;
And the new economic growth points have not yet been consolidated: 5G, the Internet of Things, new energy, artificial intelligence, digital transformation of traditional industries and other new growth points are still on the road.
If the crisis is coming, it is not so much like the Great Stagflation of 1973 as it is somewhat similar to the Great Depression of 1929.
But organic in danger. Every crisis is a process of imbalance and rebalancing of economic interests and resources.
The equilibrium here includes both domestic and international rebalancing.
China, whose economy has performed so well during the epidemic, is facing the problems of debt and the gap between rich and poor, and the rest of the world is not immune.
However, our performance is not the same as that of the United States and Europe, and the problem of stagflation in Europe and the United States will be more prominent. In this possible crisis, the competition is who can survive to the end and who can dominate the international rebalancing.
But until then, we still have to focus on the domestic market.
Our opportunity lies in ensuring that the manufacturing industry is established in the first place to achieve a fair distribution of economic benefits within the country.
Afterword: The domestic problems are finished, but it is still not the whole story.
There is an imbalance of distribution at home, and there is also an imbalance of distribution in the international order. The domestic cake should be cut well, but the international countries should also open up the living space for all the Chinese people:
The international order of cake cutting has changed, which is equivalent to us making the cake bigger.
In the next part, we will continue to analyze the situation of stagflation abroad, and have a brief chat about what ordinary people should do that readers and friends care about.