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Recently, the Fed announced a 75 basis point rate hike, which sparked widespread discussion, and there were concerns that the US bond market could experience the "bond market massacre" of 94 years of the last century. Looking back at the 1994 scenario, the plot was as follows: from 1994 to April 1995, the federal funds rate almost doubled, from 3.05% to 6.05%.
After this round of large-scale interest rate hikes, the stock market ushered in a rise. In '94 and '95, the S&P 500 and Dow Jones rose 37% and 42%, respectively. This shows that the reason why the stock market performed well that year was that the annual inflation rate in the United States at that time was only 2.7%. But now, things are very different, inflation has become serious, not only the three major stock indexes have fallen, but also the bond market has seen a massive sell-off.
As interest rates rose sharply and bond prices plummeted until November 1994, when more than $1 trillion disappeared from fixed income markets, most hedging institutions expected the 10-year yield on U.S. Treasuries to exceed 4 percent this year. The rally has been so rapid that even $1 trillion would be hard to fill the cracks in the bond market.
This raises an interesting question: where does the huge amount of capital harvested in the United States go? Both the stock and bond markets are falling, and investing in a high-inflation environment is cautious, so many people choose to keep their money.
One set of data visually reflects this: Over the past two years, savings in the United States have increased by $5 trillion, and according to Barclays, total deposits exceed total loans by $8.5 trillion. This left banks in trouble, deposits increased significantly, loans were not disbursed, and banks' profitability was rather poor. As a result, Bank of America is currently encouraging clients to put their money into relatively stable money market funds.
Wall Street is also considering another plan to invest in emerging market bonds, with a focus on corporate bonds backed by commodity wealth, aimed at earning short-term gains. These investors seem to be very good at harvesting dollars, "looting" money from emerging market countries in wave after wave, and then throwing it back with very little risk.
However, to solve the problem of inflation, the United States will obviously not take other countries into account. As the Fed stated in its half-year report, they will uncompromisingly reduce inflation, and the governors have even made it clear that they may raise interest rates by another 75 basis points next time.
Interestingly, the president of the Atlanta Fed, who previously suggested that a September rate cut might be more appropriate, also changed his stance, publicly stating that he must fight inflation with all his might. If this month's inflation data remains high, interest rates could rise to 2.5% by the time the Fed meets next month. This rhythm will continue through the end of the year and may even rise to 3.5% or 4%.
The harvesting of dollars seems to be intensifying, and more and more countries are affected. From Sri Lanka in South Asia to Zambia in Africa, Pakistan to Egypt, countries have taken a common step – seeking loans from the International Monetary Fund.
In practice, it is not a privilege for the IMF to lend to countries, but IMF support often comes with a series of conditions, including the overhaul of the domestic financial system, the possibility of bankruptcy of some financial institutions, and the purchase of these institutions by foreign companies. Interestingly, however, whenever these conditions are signed, it is usually Wall Street giants who come in and invest.
It is worth mentioning that the harvesting of dollars seems to be difficult to work in China, so they began to try different strategies. In recent years, China has actively developed the Belt and Road Initiative on the international stage and provided loan support to many countries. However, the United States actively promotes that in international forums such as the G20, China should do the same in debt relief. In fact, this is equivalent to China helping other countries while "sending out" the funds, while the United States takes the opportunity to "take away" the funds.
While loans are often used for the development of national economies, in reality, the U.S. economy continues to profit from the dollar's global dominance, which can almost be seen as a way to "steal money." However, China has been relatively cautious in this regard, only helping other countries as much as it can afford. But we must also always be on guard
Be vigilant in order to prevent this "conspiracy" that the United States continues to deduce.
In the current global financial system, the status of the US dollar as the global reserve currency is indisputable. This position allows the United States to easily attract capital inflows, while other countries appear vulnerable to economic risks. However, the actions of the United States have also aroused the concern and apprehension of the international community.
The IMF plays a key role in this process. While the IMF's goal is to help countries cope with financial crises and provide lending support, its lending conditions often require a series of economic reforms. These measures include rectifying the financial system, which could lead to the bankruptcy of some financial institutions, while allowing foreign companies access to the market. However, these conditions actually provide more opportunities for U.S. financial institutions to make more profits in the international market.
As the world's second largest economy, China is actively participating in international economic cooperation and development assistance projects, of which the Belt and Road Initiative is undoubtedly the most eye-catching. By providing loans and support to countries along the Belt and Road, China is strengthening economic cooperation with these countries while also increasing its influence in global affairs. However, the United States has tried to put China under pressure to provide debt relief similar to its own, apparently to safeguard its own economic and financial interests.
As a citizen of China, I am proud of China's pragmatic and prudent international lending policy. Such a policy not only helps other countries, but also helps protect China's national interests. At the same time, we should also recognize that inequalities and injustices in the international financial system persist and that more international cooperation is needed to address them.
Overall, the dollar's global dominance allows the United States to benefit from global capital flows, while other countries face uncertainty in financial markets. However, China, with its prudent and pragmatic international lending policy, offers the world a more balanced and sustainable option. We should support China's active role in international affairs and work with other countries to build a fairer and more stable global financial system. Only through international cooperation and joint efforts can we achieve prosperity and sustainable development of the global economy.
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