Have you ever wondered what you would do if one day, the money in your bank account suddenly became worthless, your retirement money was lost by investment, and your job was replaced by robots?
It sounds like the plot of a science fiction movie, but in fact, these things are quietly happening all around us. In October 2023, the world's two largest economies: the United States and China – both suffered unprecedented financial crises.
The US central bank, the Federal Reserve, made a huge loss for the first time and announced large-scale layoffs; China's social security fund, the world's largest pension administrator, also reported rare investment losses.
These two events have had a huge impact and impact on the global economy and financial markets. So, how do we interpret the reasons and meaning behind these two things? This article will analyze the following three aspects for you:
Why are Feds suffering huge losses and layoffs?
The Federal Reserve is the central bank of the United States, and its main responsibilities are to set monetary policy, maintain financial stability, and provide financial services. The Fed has 12 regional branches, each with its own board of directors and president.
The Fed is not a government agency or a commercial bank, but a separate legal entity. The Fed's income comes primarily from interest income on government bonds and other assets it holds, as well as from lending to commercial banks. The Fed's expenses mainly include operating costs, paper money printing costs, tax payments, etc. The Fed pays its surplus to the U.S. Treasury every year.
So why is the Fed losing so much? The answer: inflation. Inflation refers to the phenomenon of a continuous rise in the general price level, which leads to a decrease in the purchasing power of money. There are many reasons for inflation, the chief of which is the excessive supply of money. The excessive money supply is closely related to the Fed's monetary policy.
Since the outbreak of the coronavirus pandemic in 2020, the Fed has adopted an unprecedented loose monetary policy in response to the recession and financial crisis. Specifically, it has been a drastic reduction in interest rates, the printing of large amounts of money, and large-scale purchases of bonds and other assets.
These measures have allowed the U.S. economy to recover and stimulate to a certain extent, but they have also had a serious consequence: soaring inflation.
According to data released by the US Department of Labor, in October 2023, the US consumer price index (CPI) rose by 8.6% year-on-year, reaching the highest level in nearly 40 years. Among them, the price of energy rose by 28.1%, the price of food also increased by 10.2%, and even the price of housing increased by nearly 9.8%.
This means that the cost of living for Americans has increased dramatically, while their incomes have not increased commensurately. This has led to a decline in Americans' real purchasing power, weaker consumer demand, and slower economic growth.
The impact of inflation on the Fed is also huge. First, inflation reduces the value of bonds and other assets held by the Fed, resulting in a balance sheet loss. Second, inflation makes the Fed's lending rates to commercial banks lower than market rates, resulting in lower loan income.
Third, inflation makes it necessary for the Fed to print more money to meet market demand, which leads to an increase in printing costs. Combining these factors, the Fed recorded its first huge loss in October 2023, reaching $50 billion.
Faced with such a situation, the Fed had to take some emergency measures to mitigate the crisis. The most important of these measures is large-scale layoffs. It is reported that the Fed plans to cut 20% of its total workforce, or about 5,000 people, by the end of 2023. This is the largest layoff in the history of the Fed.
The Fed said this is to reduce operating costs, improve efficiency and adapt to the new economic environment. However, this move has also caused a lot of controversy and doubts. Some people believe that this is the Fed's admission and evasion of its own wrong policy; Some argue that this is the Fed's irresponsibility and disrespect for employees and society; Some people believe that this is the Fed's pessimism and helplessness about the future economic prospects.
Why does China's social security fund lose money?
The China Social Security Fund is a national social security fund established by the Chinese government, whose main responsibility is to maintain and increase the value of pension funds through investment and operation, and provide support for coping with future pension gaps.
The China Social Security Fund is managed by the Social Security Fund Council established under the leadership of the State Council, and its investment scope includes various financial assets such as stocks, bonds, bank deposits, and trust products.
Since its establishment in 2000, China Social Security Fund has maintained a good investment performance and reputation. By the end of 2022, the management scale of China's social security fund reached 2.5 trillion yuan, and the cumulative return on investment was 8.4%.
So, why does China's social security fund lose money? The answer: market volatility. Market volatility refers to the magnitude and frequency of fluctuations in the prices of various types of assets in financial markets. There are many reasons for market volatility, the chief of which is market sentiment. Market sentiment, in turn, is closely related to the global and domestic economic and political situation.
In October 2023, some major events took place both globally and domestically, resulting in a drastic change in market sentiment. These events include:
- A new strike crisis broke out in the United States, which hindered economic recovery, plunged the stock market, and depreciated the dollar.
- The United States and China have a serious confrontation over Taiwan, which has led to a deterioration in relations between the two countries, an escalation of the trade war, and increased geopolitical risks.
- In response to the coronavirus pandemic and carbon neutrality goals, China has adopted a series of regulatory measures, resulting in a slowdown in economic growth, a decline in corporate profits, and exposure to credit risk.
- In the process of strengthening antitrust and data security, China has imposed severe supervision and penalties on some Internet giants, resulting in a sharp decline in technology stocks and a loss of market confidence.
These events have caused violent fluctuations in financial markets both globally and domestically. According to data released by the China Securities Regulatory Commission, in October 2023, the Shanghai Composite Index fell by 12.3%, the Shenzhen Component Index by 15.6%, and the ChiNext Index by 18.9%.
At the same time, the bond market has seen rising interest rates and credit defaults. These market fluctuations had a negative impact on the investment performance of the China Social Security Fund. It is reported that the China Social Security Fund experienced a rare investment loss in October 2023, reaching 20 billion yuan.
In the face of such a situation, the Chinese social security fund did not panic or panic. Instead, it says it's a normal market correction process that doesn't affect its long-term investment strategy and goals. The China Social Security Fund said that it has always adhered to the core concept of value investment, long-term investment as the main direction, and diversification as the basic principle.
It believes that in the midst of market volatility, there are many opportunities for high-quality assets to be undervalued or wrongly killed. Therefore, it will flexibly adjust the portfolio and proportion according to market changes and its own conditions, and timely carry out low absorption and high selling or increase positions and reduce positions.
It also said it has sufficient risk management capabilities and response capabilities to effectively withstand the impact of market volatility and achieve long-term robust investment returns.
What impact and implications do these two things have for us?
From the above analysis, it can be seen that both the Federal Reserve and the Chinese Social Security Fund have suffered financial crises, but their response methods and attitudes are completely different. The Fed took emergency steps to mitigate the crisis, but also exposed its policy missteps and management problems;
China's Social Security Fund has taken prudent measures to deal with the crisis, but has also demonstrated its investment philosophy and capabilities. So, what impact and enlightenment do these two things have for us?
First, we need to recognize that in the era of globalization and digitalization, no country or institution is immune to itself. The global economy and financial markets are interconnected, interdependent and interdependent systems.
Changes in any one region or sector may provoke reactions from other regions or sectors. Therefore, we need to pay attention to the global and domestic economic and political situation, understand the dynamics and trends of the market, and do a good job in predicting and preventing risks.
Second, market volatility is inevitable and regular. Market volatility is the result of a combination of factors such as supply and demand, market sentiment, and policy factors. Market volatility sometimes brings crises and sometimes opportunities.
Market volatility is also characterized by cyclical and phased characteristics. Therefore, we need to remain rational and calm, do not blindly follow the trend or panic selling, but according to our own goals and conditions, formulate reasonable investment plans and strategies.
Finally, market volatility is both a challenge and an opportunity to learn. Market volatility allows us to see our strengths and weaknesses, allows us to test our knowledge and skills, and allows us to improve our judgment and decision-making ability. Therefore, we need to learn from the experience and lessons of other countries or institutions, constantly update our own concepts and methods, and constantly improve our level and quality.