Wealth

How the global economy will land

  In 2004, the round of interest rate hikes by the Federal Reserve that punctured the U.S. real estate bubble and partially caused the global financial crisis in 2008 had just started, and the market was also expecting a “soft landing” for the economy. Ben Bernanke, the award winner, visualized the effect of monetary policy on the economy in his speech, and compared it to the gas pedal and brake of a car. Thinking that monetary policy decision-making is similar to driving a car, you can raise interest rates when inflation is high, and cut interest rates in time when the economy cools down, and it is extremely difficult to guide the economy to a smooth “soft landing”. The “throttle” was reduced to the bottom, and the long quantitative easing experiment began.
  At present, standing at the end of the Federal Reserve’s first major interest rate hike cycle since the 2008 financial crisis, how the global economy will “land” has once again sparked heated discussions. After the 2008 crisis, a book titled “This Time Is Different: 800 Years of Financial Crisis History” was once a hot seller. As one of the books recommended by my entry-level mentor, after reading it in a hurry, I found that what it actually wanted to express was : In fact, it is the same every time, just as the laws of economics will work every time. Standing at the high point of the first round of US dollar interest rate hikes since the financial crisis in 2008, at least from the perspective of visible risks, the following three aspects are worthy of vigilance: First
  , the inhibitory effect of high interest rates on the economy. Going back to Bernanke’s analogy about monetary policy and the car, the conclusion is: if this analogy holds true, then the speed of the economic car does not depend on the strength of the gas pedal like an ordinary car, but depends on the expected Average pedal pressure throughout the trip. Here the role of expectations and financial market pricing is highlighted. In his narration, he took the yield of treasury bonds as an example. The interest rate curve pricing given by the world’s most in-depth U.S. treasury bond market is the most valuable proxy indicator for expectations. The U.S. recession probability model can determine the probability that the U.S. economy will fall into recession in the future. The higher the probability, the higher the success of past recession predictions. The probability of recession until November 2023 is 47.31%, which is higher than all three recessions since 1990. In February 2008, the highest point of that round of recession probability was only 41.71%. Applying the metaphor of the water warming duck prophet, the recent layoffs of major US financial and technology companies seem to convey a sense of impending storms.
  Second, geopolitical risks. For example, the Russia-Ukraine conflict, a short-term conflict predicted by military observers and financial markets in early 2022, is now at risk of being prolonged, meaning that its threats to global energy supplies, food supplies and globalization are deepening rather than eliminated. In addition, Sino-US relations, climate change, population aging, etc. will exert influence on the global economy from outside the economic system. Although the global geopolitical risk index has fallen from the highest point since the outbreak of the Russia-Ukraine conflict, it is still as high as 99.6, which is significantly higher than the average level since the 2008 financial crisis.
  Third, anti-globalization. Globalization can give full play to the comparative advantages of different countries and lead to a more reasonable regional allocation of resources. The “Pareto improvement” that conforms to the economic definition has been an important driving force for global economic growth in the past 20 years. If this definition is accepted, then, for whatever reason, a reduction in the possibility of optimizing the allocation of resources on a global scale will lead to a loss of global economic growth.
  In addition, according to the economic outlook reports released by the International Monetary Fund, the World Bank, and the OECD in 2022, more risk factors mentioned include: global inflation, the Chinese economy, the new crown epidemic, a strong US dollar, and capital outflows.
  Compared to the last rate hike cycle before the financial crisis in 2008: when the upper end of the target range for the federal funds rate was 5.25%, the upper end of the target range for the federal funds rate is now 4.75% (February 2023) and is likely to rise in the first half of 2023 to 5%; despite the slowdown in interest rate hikes, the probability of a recession calculated by the New York Fed is still rising, and the probability of a recession by November 2023 is 47.31%, which is higher than in February 2008, the highest point of that round of recession probability ( 41.71%); the geopolitical risk index is 99.6 (January 2023) vs. 94.49 (September 2007); the economic policy uncertainty index is 343.68 (November 2022) vs. 93.1 (September 2007). Standing at the moment, considering the European Central Bank and the Bank of England, which will soon keep up with the pace of interest rate hikes, and the Bank of Japan, which may give up the easing, I hope this time is really different.

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