To fight inflation, starting in March 2022, the Fed raised interest rates by up to 525 basis points 11 consecutive times in history, very rarely.
The Fed's continued interest rate hikes have caused a series of problems in countries around the world. In China, the US dollar index rose and the interest rate differential between China and the United States widened due to the continuous interest rate hike in the United States, which led to a large appreciation of the US dollar against the yuan. USD/CNY has also risen from around 6.30 last year to 7.31 currently, and the RMB has depreciated by about 13% against the US dollar.
At the same time, the continued interest rate hike in the United States and the strength of the US dollar index have also triggered a series of problems such as increased adjustment pressure on the Hong Kong stock market and pressure on RMB assets.
But at the same time, the rise in interest rates in the United States has also brought a series of serious shocks to the United States itself: including a historic plunge in US Treasury bonds, serious losses to financial institutions, real estate sales hitting a new low in recent years, rising debt risks and banking risks, and a sharp increase in fiscal deficits.
The US interest rate hike has already caused a series of serious shocks to the United States itself
1. The collapse of US Treasury bonds: Affected by factors such as the continued interest rate hike by the Federal Reserve and the rise in US debt risks, US Treasury interest rates continued to rise and hit a new high in recent years, and as of October 6, 2023, the US 30-year Treasury bond yield rose to 5.04%, the highest level since 2007; The yield on the 10-year Treasury note exceeded 4.88%, the highest since 2007.
On October 6, Bank of America Global Research said in a report that the yield of 30-year US Treasury bonds fell by 50% from peak to trough, and US bonds are ushering in the "largest bond bear market in history".
2. Serious losses of US financial institutions: At present, the scale of US Treasury bonds has exceeded 33.5 trillion US dollars, and more than 70% of US Treasury bonds are held by various US financial institutions and individual investors. The collapse of U.S. debt has caused huge losses for many financial institutions in the United States. Deutsche Bank estimates that soaring yields on U.S. Treasuries will add $140 billion to U.S. banks' unrealized losses, which are likely to exceed $700 billion in the third quarter of this year.
The Fed, the largest purchaser of U.S. Treasury bonds, has also suffered large losses recently, according to media reports such as Sina Finance, according to recent data released by the Fed, the Fed's losses have exceeded the $100 billion mark, and the losses may widen further before the deficit ends. Like many commercial banks, the Fed has considerable unrealized losses, and market analysts believe that if all bonds held by the Fed are calculated at market value, the Fed's book losses will further increase significantly.
In addition to U.S. commercial banks and the Federal Reserve, U.S. individuals and other financial institution investors, U.S. pension funds, also hold a large amount of U.S. Treasury bonds, which will also have significant losses. The collapse of U.S. Treasury bonds has caused heavy losses to U.S. financial institutions and individual investors.
If the United States continues to raise interest rates, triggering a continuous rise in U.S. bond yields, it will further decline U.S. Treasuries and may spill over into the U.S. corporate bond market, triggering larger losses. According to the Securities Industry and Financial Markets Association, U.S. corporate bond issuance balances reached $10 trillion at the end of September 2021, about 30% more than at the end of 2015, at the beginning of the last interest rate hike cycle.
3. U.S. mortgage rates soared, U.S. home sales hit a new low in recent years: According to data recently released by the American Mortgage Bankers Association (MBA), the interest rate of the 30-year fixed-rate mortgage contract rose to 7.67% in the week ended October 6. The average interest rate on a 30-year mortgage today is more than twice as high as it was 2 years ago, when interest rates were less than 3%. This means that the cost of repaying loans for U.S. homebuyers has nearly doubled.
High U.S. mortgage rates have begun to have a noticeable negative impact on the U.S. housing market, with U.S. real estate brokerage Redfin estimating that total U.S. home sales in 2023 will be around 4.1 million units, which would be the lowest since the 2008 subprime mortgage crisis.
In addition, due to the heavy debt of the United States, rising interest rate hikes have increased the interest cost of US government Treasury bonds, resulting in a sharp increase in the US government's fiscal deficit and increased demand for borrowing and issuance, falling into a vicious debt cycle.
The relatively conspicuous GDP data and the strength of US stocks mask many problems in the United States
According to data released by the US Department of Commerce, from 2020 to 2022, the US GDP growth rate is -2.8%, 5.9% and 2.2%, respectively.
But according to numerous figures, most Americans earn less than they did three years ago. According to the latest study of the Federal Reserve's household finances, for all but the richest 20% of U.S. households, the other 80% of U.S. households had lower bank deposits and other liquid assets in June this year than they were in March 2020 (adjusted for inflation), according to Sina Finance.
According to the U.S. Census Bureau's latest annual report on income, poverty and Medicare coverage, the median household income in the United States was $74,580 in 2022 and $76,330 in 2021, a decrease of 2.3%, the largest decline since 2010.
It was also the third consecutive year that household incomes in the United States had declined, a phenomenon that usually occurs during recessions, such as the global financial crisis, the bursting of the dot-com bubble, and the recession of the early 1990s. Meanwhile, the national poverty rate soared to 12.4 percent from 7.8 percent in 2021.
Since the beginning of this year, various key economic data in the United States have been contradictory and frequently revised after release, and while GDP has grown, electricity generation and household income in the United States have declined, raising questions. In any case, even if the GDP data in the United States are true, GDP growth is accompanied by a decline in household income, and this so-called growth is also very low-quality growth.
The strength of the US stock market is largely driven by the Federal Reserve's past extremely accommodative monetary policy and the rise of a very small number of leading US technology stocks. After the outbreak of the new crown pneumonia epidemic, in order to stimulate the economy, the United States introduced a large-scale economic stimulus bill. In the year from March 2020 to March 2021 alone, the Fed disbursed nearly $5 trillion. On January 20, 2021, after Biden took office, the United States announced a $2 trillion infrastructure stimulus package and a $1.8 trillion family subsidy policy.
That is to say, nearly 80% of the banknotes "printed" by the Federal Reserve occurred from 2020 to 2022, and the sky-high amount of money pushed up the price of financial assets in the United States, and the valuation of U.S. stocks was also at a historical high. The relatively conspicuous GDP data and the strength of US stocks mask many problems in the United States.
The mainland has lower sovereign debt risk, better fiscal position than the United States, and higher risk resistance
According to data from China's Ministry of Finance, by the end of 2022, the balance of mainland central government debt was 25.87 trillion yuan, the balance of local government debt was 35.07 trillion yuan, and the balance of national government debt was 60.94 trillion yuan; China's total GDP in 2022 was 121.02 trillion yuan, and the balance of national government debt at the end of 2022 only accounted for 50.36% of the total GDP.
The proportion of mainland government bonds/GDP is only 50.36%, 264% in Japan and 129% in the United States, and more than 100% in other Western countries. The ratio of mainland government debt/GDP is not only much lower than that of Western countries, but also at a very low level among the world's major economies.
At the same time, the mainland's GDP growth rate is also much higher than that of other countries, ranking among the highest in the world, from 1990 to the present, the mainland's GDP growth rate far exceeds that of Western countries such as the United States, Japan and Germany.
In addition, the mainland's fiscal position is also significantly better than that of Western countries such as the United States and Japan. In 2022, the mainland's fiscal deficit will be 2.65 trillion yuan, and the fiscal deficit/GDP ratio will only be about 2.19%, which is also at a low level in the world.
Bloomberg predicts that by 2033, the US fiscal deficit spending will be about 7% of its GDP
The United States currently spends 44 percent of its GDP annually, the same level as it did during World War II. Deficit spending alone is 6% of annual GDP. Bloomberg predicts that by 2033, the US fiscal deficit spending will be about 7% of its GDP.
According to data released by Eurostat, the fiscal deficit of the EU and the eurozone accounted for 3.4% and 3.6% of GDP in 2022, respectively, and Japan's fiscal deficit in recent years has also reached about 9% of GDP.
Therefore, the above factors are combined. The mainland's sovereign debt risk is at a low level in the world, and the risk is controllable. On the whole, the mainland's fiscal situation is healthy and safe, leaving enough room for coping with potential risks and challenges. Compared with Western countries such as the United States, the mainland has a stronger ability to resist risks and is better able to deal with a series of potential risks, including the continued interest rate hike in the United States.
As the side effects of continued interest rate hikes in the United States become more and more obvious, the Fed's monetary policy has been increasingly opposed in the United States and abroad. Recently, the National Association of Homebuilders (NAHB), the American Mortgage Association (MBA) and the American Association of Realtors jointly issued a letter calling on the Fed to stop raising interest rates.
The IMF and other institutions have warned that if the US continues to raise interest rates and cause US Treasury yields to continue to rise, it may trigger a new round of US banking crisis. Dalio, the founder of Bridgewater Fund, the world's largest hedge fund, recently said that he is closely watching the dangerous fiscal situation in the United States because he believes that there will be a debt crisis in the United States and the economy will slow down significantly.
At the same time, the number of opponents of further rate hikes among Fed officials is growing rapidly.