In-depth: Recently, the cryptocurrency circle has begun to spread the news that the United States will not cut interest rates this year and may even raise interest rates to 8%, leaving the entire cryptocurrency market confused.
What is going on here? Let’s discuss it today.
Recently, I have also read a lot of analysis by big guys, including some very good analysis by @Phyrex_Ni Ni Da and @Trader_S18 T. It may be a bit difficult for Xiaobai to understand. Today I will describe some of my views in a simpler way:
1. First of all, Xiaobai needs to understand the basic common sense:
Interest rate hike: The central bank raises interest rates to curb inflation and control economic overheating.
Interest rate cut: The central bank lowers interest rates to stimulate economic growth and boost consumer investment.
CPI (Consumer Price Index): An indicator that measures changes in the prices of a basket of consumer goods and services and is used to assess the level of inflation.
Second, let me first talk about the source of the news:
Recently, the cryptocurrency circle has begun to spread the news that the United States will not cut interest rates this year, and may even raise interest rates to 8%?
The news mainly comes from the warning issued by Jamie Dimon, CEO of JPMorgan Chase, to the market a few days ago. He believes that due to the excessive spending of the US government, US inflation and interest rates may continue to be higher than market expectations, and he is ready for the Federal Reserve to raise interest rates to 8%.
So some KOLs and media began to amplify the news, and even spread it as "The Federal Reserve announced that the future interest rate will be raised to 8%"
3. Is it credible to raise interest rates to 8%?
On the 9th, the old lady returned home. She was not very happy that the visit did not meet her expectations.
On the 10th, the CEO of JPMorgan Chase, the head of a large chaebol, made a harsh statement that the US dollar is ready to raise interest rates to 8%.
It is not convenient for the US authorities to say such harsh words, and it is not convenient for senior officials of the Federal Reserve to say it either, so they entrust a capital institution that is well-known to everyone but does not represent the official authorities to make the announcement.
The advantage of entrusting someone to do so is that it won't be too embarrassing if the interest rate is lowered after a while.
Leaking information has its benefits. One is a threat, the other is a test. This trick has always been used in the underworld.
As for Dimon's statement about raising interest rates to 8%, whether the market believes it or not, I don't quite believe it, because 8% is too much pressure for American banks, not to mention that the global economy is still in recession.
It is hard to imagine what kind of investment American banks need to make to cover this 8% interest?
The US national debt is close to 35 trillion. At the current 5% interest rate, the interest is 1.75 trillion, while its fiscal revenue is less than 5 trillion, and the interest alone accounts for 35%. Under this circumstance, other military expenditures, medical insurance, and social welfare expenditures will be greatly reduced, and society will inevitably enter a period of turmoil.
If the interest rate rises to 8%, the annual interest will be 2.8 trillion yuan. This is not the last straw that broke the camel's back, but the last big rock. The interest accounts for more than 50% of the fiscal revenue, so there is no need to do anything else.
But there is no smoke without fire, and there is nothing wrong with what the person said. If an ordinary person said this it would be fine, but he is the CEO of JPMorgan Chase, and his statement is definitely not for attention, so it is normal for it to attract everyone's attention.
4. What will happen if the interest rate is raised to 8%?
Below I will describe in a simple way the effects of interest rate hikes on the market and the government.
1. Why do bosses still want to start a company? Many industries, especially the manufacturing industry, have very low net profit margins. For example, Intel, a popular AI giant, only had a net profit margin of 3.09% last year, and SAIC, a Chinese auto giant, only had a net profit margin of 2.76%. So why do we still want to start a company? Why not just convert it into US dollars and deposit it in a US bank? Wouldn't it be great to earn interest without doing anything?
2. Deposit interest rates have soared to more than 8%, so loan interest rates will definitely not be lower than this number. Look at Apple, whose long-term debt exceeds $95 billion, and whose annual interest burden is nearly $8 billion. In this era of high interest rates, how can companies expand and innovate? With high debts, economic development is slow.
3. Deposit and loan interest rates are both high. Why bother spending? Just deposit money in the bank and enjoy the high interest rate. Who would borrow money to buy a car or a house? Forget it. If consumption is frozen, economic growth will naturally be suppressed.
4. What stocks to speculate, what Binance USDT financial management, what investment can earn 8% steadily? Of course, deposit money in American banks. Global funds are flowing to the United States, and the stock markets in non-US dollar markets can only look far behind. Enterprises are heavily in debt, personal consumption power is declining, the economy is like this, what is there to speculate?
5. Now that everyone is saving in US dollars, should American banks laugh or cry? With fewer loans, banks’ income has fallen; and high interest rates have caused interest costs to soar. In the end, they earn less and spend more, which is nothing but eating up all the capital? Another wave of interest rate fluctuations or bank runs could cause banks to go bankrupt.
6. For other countries, if the US raises interest rates, they can only follow the US rate hike to retain capital, but domestic enterprises, banks and individuals will face the above-mentioned problems. If they do not follow, capital will flow out to the US. Our current stagnant stock market is an example. Therefore, raising interest rates is also a means of financial war for US dollar hegemony.
7. In the history of the United States, when President Reagan first came to power, he pushed up interest rates to 20%! Reagan's famous quote at the time was: Since it is necessary to curb inflation as quickly as possible, if I don't do it, who will? If not now, when?
But we must not forget that the 20% interest rate first kept the US economy grounded for 14 months. That was a period when Reagan was on pins and needles. Moreover, the US is no longer the turbulent US of the 70s and 80s.
5. Personal opinion:
The first is the normal possibility: it is just a ghost story, because with such a high return of 8%, let’s not talk about the issue of how high the return is, but whether it can be redeemed and how long it will take to redeem.
The second possibility is extreme: if it wants to fight you, there is really nothing you can do. There is no point in talking to a madman. It can also be called a "financial nuclear war."
In extreme cases, they may have already prepared themselves to pay the price. After all, they will die anyway, so they will have to take a few people with them.
In other words, "Even if my bank goes bankrupt, so what? As long as raising interest rates can bring down the financial systems of other countries (especially China), then it's fine. At worst, I don't need this BL. As long as you still use US dollars, the bankrupt banks can still be saved.
The game has the possibility of continuing. After all, everyone has put 8% of their money in American banks. As the old Chinese saying goes, "You want others' interest, but they want your principal."
Of these two possibilities, the second one would be the second best option.
Therefore, there is still a high probability that the Federal Reserve will cut interest rates this year. It is just a matter of the extent and frequency of the cuts.
6. Why is there no interest rate cut?
The United States is now in a dilemma. It cannot surrender, and it cannot not surrender either.
If the rate is cut:
1. Capital may flow to Europe and China, so that the United States will have supported the Russia-Ukraine war in vain without achieving the expected economic effect, and it may also help the European economy "recover".
2. Inflation could rise sharply and the value of the dollar would fall, which would increase economic pressures in the United States.
3. If the US dollar depreciates and China continues to maintain a stable RMB exchange rate, this may cause Chinese goods to continue to flow into the US market in large quantities, affecting the US trade balance and manufacturing recovery.
4. The depreciation of the US dollar may also lead to a relative strengthening of the Chinese economy and enhance China's global economic status.
5. Low interest rates are an opportunity to relieve pressure for economically troubled countries such as Egypt, Argentina and Brazil, but this is not in the strategic interest of the United States.
If there is no rate cut:
1. The United States is already unable to bear the interest on U.S. debt. So the purpose of Yellen's visit to China two days ago was to sell U.S. debt, reduce the pressure on U.S. debt, and then cut interest rates to achieve a soft landing.
2. High interest rates may further accelerate the hollowing out of the U.S. manufacturing industry and lead to rising unemployment.
3. Major allies of the United States, such as the United Kingdom, Japan and South Korea, are also under economic pressure due to the strong dollar.
4. Still US debt. The interest rate hike has caused the US government to pay a huge amount of interest. Now the printing press alone can no longer solve the problem. It is very likely to trigger a US debt crisis. When the US debt crisis breaks out, the petrodollar system will collapse.
So practicing Tai Chi is the best way now until the election is over.
7. When will the interest rate be cut?
Discussions begin on May 1, June 12, July 31, September 18, November 7 and December 18, 2024.
It is possible that only the November and December meetings will announce rate cuts. Here are the reasons
1. The published CPI does not indicate that inflation has disappeared or decreased, but on the contrary, it indicates that inflation is rising. (On December 12 last year, the price of a barrel of crude oil was $68.50 per barrel, and today it is $85.00 per barrel. In just four months, crude oil prices have risen by 24%. The shock to crude oil prices has not yet been transmitted to the supply chain. This has led to some price increases, but more are on the way. This surge in crude oil prices will maintain inflation at current levels or higher in the coming months. The Federal Reserve is looking for signs of a decline in inflation, but they will not get it) Therefore, the possibility of a rate cut in the first half of 2024 is infinitely close to zero.
2. There is a possibility of a rate cut on July 31 (if the CPI in April is still higher than expected, the possibility of a rate cut is infinitely close to zero)
3. There is no possibility of a rate cut on September 18th. This is because there are only 7 weeks left before the November 5th election. According to polls, Trump may be the winner. A rate cut will harm Trump's interests (in terms of the election), and there is no reason for institutions to offend their future bosses.
4. There will be interest rate cuts on November 17 and December 18. The probability is over 70%.
If the Federal Reserve does not cut interest rates on June 12 and signals that it will not do so in the near future, or perhaps even until the end of the year, the United States could face one of the worst economic outcomes: recession + inflation = stagflation.
Finally: For the cryptocurrency circle, wars and data releases are just excuses found by the market. For most players, when BTC is rising, who cares about interest rate hikes and cuts, what the Federal Reserve said, how many drones Iran launched, and no off-market funds flow in.
However, as old investors and long-term players, we must pay attention to interest rate hikes and cuts. This is the core indicator for us to judge the general trend. At present, delaying the interest rate cut is the biggest positive.
Just like @Trader_S18 T’s point of view: The impact of the Fed’s rate cut and Bitcoin halving is not at the same order of magnitude, at least three levels apart. The Bitcoin halving is just a self-deprecating move by people in the cryptocurrency circle, which can only change the supply and demand relationship of Bitcoin or the cryptocurrency circle. Even so, as the proportion of incremental growth decreases after multiple halvings, the marginal utility will also decrease. But what the Fed changes is the global supply and demand of currency. The additional liquidity from the rate cut can overflow to the cryptocurrency circle to pull up the market.
