Investment & Finance

Power influence of the FED

(ĐTTCO) - When the US Fed pumps money into the market, other countries as well as the US increase US dollar loans, and as borrowers show collateral, the FED pumps in even more money. This process just goes on until inflation rises, and then the US exports this inflation to other countries.

Illustrative photo.

Illustrative photo.

When this happens, the FED pulls back the money, activating a “sheep shearing” cycle, which falls between eight and thirteen years, depending on economic events and reaction of powerful investors.  

So far, the total amount of government stimulus packages and bailouts in many countries across the globe, both provided and pledged, have reached tens of thousands of billion US dollars. This move is to prevent a possible global recession expected to occur in the aftermath of the Covid-19 pandemic. The US has the largest portion with more than USD 3,000 bn, as of end April. This amount, together with other financial measures, has raised the flow of cash, causing the total national debt of the US to rise to USD 25,000 bn.

When running for President, Mr. Donald Trump always complained that the public debt had increased rapidly during the presidency of Barack Obama. However, after taking office at the Whitehouse, President Donald Trump has had to increase public spending in an effort to maintain the economic growth cycle, and help the US economy to overcome the drastic impact of the ongoing Covid-19 pandemic.

Cycle of impacts

It should be noted that the Covid-19 pandemic has not been the only major cause of the current depression and in making the global economy plummet. Factually, the US-China trade war, uncertainty in the Middle East, and several other problems such as past looming consequences of the 2008 economic crisis, and even the 2000-2001 Enron scandal, are still continuing to have a negative impact on the current economic decline, while the ongoing Covid-19 pandemic is adding more fuel to fire.

The central banks must play the role of rescuers with so many companies now on the brink of bankruptcy, causing them to take urgent action to lower interest rates and pump money into the market to improve cash flow. Yet this is not effective enough because insolvencies and unemployment rates are sky-rocketing, making loans impossible to get, when old debts have not yet been paid back, and goods are lying unsold, resulting in increased inventories. The FED has had to offer substandard loans, which means that some interest is lost when giving the loan, in a move to encourage individuals and businesses to take more loans, thereby promoting more consumption and economic growth.

Everything seemed right at first, but after a while, the economic growth rate was not in line with the money pumping rate, with soaring price of gold, securities and real estate properties. The FED quickly realized that substandard loans had gone too far and were likely to get out of control, and immediately stopped the program and asked commercial banks to pay back the money. Having lent out all the money, commercial banks did not have enough funds to pay back, so they had to sell off their real estate properties and other assets to pay off the debts.

This crisis spread widely and became quite bad. Many people took loans to buy houses, but then the price of the houses went down too low, and they sold off the houses, but the money was not enough to pay off the interest on the loans, so they lost their houses and were rendered homeless.

Financial markets in turmoil

No matter how well the FED carries out its activities of money pumping and pulling back, it has caused a huge financial turmoil. Many investors have gone bankrupt because they do not understand the complicated situations created by the great and super great investors, and they have not been able to adapt to the changing economic situations. The most tragic side is the other side of the bailout which has helped the US to move large parts of its financial difficulties to share with other countries, and export its inflation around the world.

It is all very simple because the US dollar is reserved and paid in the largest amounts all over the world. Therefore, when the US pumps money into the market, other countries take loans in US dollars. When they take loans, by issuing government bonds, and bring them back to their countries, they convert to their national currencies to give loans within their territories. Their people and businesses take loans and use collaterals to secure these loans, and so commercial banks continue to pump money that is already guaranteed by collaterals.

This process just goes on and on and repeats until inflation rises, and then the FED begins to pull back the money, leaving mountains of debt on the rest of the world. Then, the “sheep shearing” cycle is activated. When the Covid-19 pandemic broke out, many people began to realize that most of their properties were under debt. The US dollar is so powerful that every ten years or so a campaign is launched to replace the US dollar, with China recently launching a very active campaign. The “sheep shearing” cycle comes between eight and thirteen years, depending on economic events and reaction of the sheep and the wolves as well as powerful investors.  

Sudden impact of Covid-19

When the FED increases interest rates and tightens cash supply, other countries raise interest rates, and as a new flow of cash cannot be created, large number of properties, like real estate and securities with earlier price hikes, have their prices pulled back to the ground again. For the time being, the pumping of cash this time has been effective since the FED and other Commercial Banks announced stimulus packages. Securities around the world have been soaring, and many markets have taken back most of what they have lost and begun to enter a period of bull market. Gold, USD, government bonds and corporate bonds have been selling like hot cakes. Gold prices have continually set new record highs even though economic figures worldwide have been declining, with lots of insolvencies and unemployment rampant everywhere.

This time, however, everything may go back to ground level again without increased interest rates or tightened supply of cash like before, all because of the unpredictable Covid-19 pandemic outbreak. Though the world is deep in cash, but such cash is mostly deep in debts, with global debts accounting to nearly USD 260,000 bn, and new flow of cash which largely comes from loans or ‘helicopter money’ are mainly intended for survival in order to pay back debts. Additionally, currencies of other countries have lost their value because they have been running around the FED in an attempt to lower the par value of their currencies relative to the US dollar, which causes the US dollar to rise. The Covid-19 pandemic has also put businesses in many financial difficulties, the economy has declined and companies are selling off their assets, while liquidity is being lost everywhere.

Currently, the remaining cash flow may be reserved for hedging before any attack can be launched, at least until the pandemic is contained, and even when other economic sectors run short of cash and valuable properties become very cheap. Figures from the World Gold Council show that Commercial Banks, Investment Funds and major Financial Institutions continued to buy gold till the first quarter of 2020, making gold price hike further, which has now hit an eight-year record high. Therefore, risky properties like securities or real estate will not be beneficial, and though only for a short time, speculators are still stimulated to surf the stock markets.

Translated by Nguyễn Gia

Phan Dung Khanh Director of Investment Advisory Securities, Maybank Kim Eng (MBKE)

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