From "money shortage" to "asset shortage" to "debt shortage"

The “asset shortage” came to an abrupt end and replaced it with “money shortage 2.0” or “debt shortage”. From “more money” to “less money” seems to be only overnight. From "money shortage" to "asset shortage" to "debt shortage", is the money more or less? Where does the money come from? Where have you gone?
A very important tool for macroeconomic research is money. Money is a kind of belief that has been rooted in the heart since its birth and is deeply rooted. Therefore, when we study the flow of money, we actually study where people's beliefs go. Faith is the cornerstone of the entire financial system and economic system. At any time, if the faith is gone, even if there is a stable financial before, the prosperous economy will collapse in an instant. Since the financial crisis in 2007, various relief programs issued by various governments have not been to rebuild people's belief in the economy, but they have not succeeded in the past, ruining and diluting people's belief in the country.
In the second half of 2013, there was a “money shortage” in the interbank market. The interbank market interest rate soared, but the real economic interest rate remained basically stable. In the second half of 2013, the overbooking rate was always 2.1-2.3%, which was historically neutral ( The devaluation is 1.5%, but the "money shortage" is always lingering. After only a lapse of 2 years, the “asset shortage” suddenly appeared in the second half of 2015. All institutions said “more money”, but the interbank market is still in a tight balance. The repo rate has not fallen, many quarters. The point is still difficult to level. Beginning in November 2016, the “asset shortage” came to an abrupt end and replaced it with “money shortage 2.0” or “debt shortage”. From “more money” to “less money” seems to be only overnight. From "money shortage" to "asset shortage" to "debt shortage", is the money more or less? Where does the money come from? Where have you gone?
Under the modern credit system, money is an owe. According to the low-to-high credit of the arrears themselves, the extent to which the debts are recognized and the scope of use are constantly expanding, and the currency thus forms a low-to-high level. We simply indicate the vertical flow of money: gold → Fed base currency → US bank deposits → central bank base currency → broad money → fund/financial share, commercial paper, etc. This is why we often say that, to a certain extent, the Fed is the central bank of central banks, and the US dollar is the base currency of the base currency. Therefore, when we discuss "money shortage" or "money more", we must first determine which level of "money".
For example, the Fed’s last interest rate hike cycle was from June 2004 to June 2006, and the US federal funds target rate was adjusted from 1% to 5.25% in two years. In the same period, the 7-day repurchase weighted interest rate between domestic banks has declined, and the overall price remained at 1-2% in 2005. This divergence is mainly due to our neglect in analyzing liquidity: from the liquidity level of the Fed to the liquidity level of the domestic interbank market, with a layer of liquidity creation of American commercial banks, and the latter through the US international collection. The deficit will flow into China, and foreign exchange will be formed through the settlement of the central bank to inject liquidity into the interbank market.
At the beginning of 2013, the No. 8 document of the China Banking Regulatory Commission imposed restrictions on the proportion of “non-standard” investment in wealth management. Many banks that invested in “non-standard” at that time were to evade supervision and included “non-standard” under the peers in the table. The “non-standard” of currency docking has become a docking of the base currency after entering the interbank industry. It relies on the continuous borrowing of funds between banks to maintain a large “non-standard” asset, resulting in 2013. In the past six months, although the ultra-reserve rate has remained at 2.1-2.3%, the funding is still very “thin”. According to Fisher's currency identity MV=PQ, when the bank's super-storage M is unchanged, “non-standard” joining the inter-bank assets makes Q larger, so the currency circulation speed V must increase.
In the second half of 2015, “asset shortage” began to appear. All institutions are saying “more money”, and “money” here refers to broad money. So the phenomenon we see is that although there is more and more broad money, the interbank market funds are always in a tight balance. The “asset shortage” is mainly due to the reduction of investable assets on the one hand: starting from the second half of 2015, the local government debt is replaced, local government debt is re-introduced, and the growth rate of real estate investment is down, local financing platforms and real estate enterprises do not have financing needs. Big.
On the other hand, the increase in currency: before 2015, the debt financing of the city investment platform relied more on the docking of wealth management funds, the wealth management assets generated the city investment credit, and the debt side generated the wealth management share. However, the share of wealth management has almost no liquidity, so it will not flow again, and it will not form new purchasing power. However, with the issuance of local government bonds, after the financing of the city investment platform was replaced, the local government creditor's rights entered the assets of the bank's balance sheet, and the debtor generated M2 (mostly M1), which has high liquidity and can be continuously changed and chased continuously. More assets, forming new purchasing power. At the same time, due to the lower return on investment in the real economy, it has mainly formed a pursuit of financial assets and real estate, resulting in the currency “de-reality”.
The “debt shortage” that occurred at the end of 2016 and the “money shortage” in 2013 are not at the same level of liquidity. Although the redemption faced by the institution has a certain relationship with the bank's competition for super-storage, it is more likely that the bank may have a strict regulatory trend in its future business such as outsourcing and wealth management. Therefore, the current liquidity tension is caused by the above-mentioned reasons for broad money, and no longer flows to non-bank institutions through subcontracting and financial management.
“Asset shortage” actually means that there are few real interest-earning assets. The currency is vain, and it is changed between financial assets. If it can't drive the growth of actual output, the growth of financial assets can only rely on the Ponzi scheme, which is bound to be shattered. When is the problem?
Let's first look at a hypothetical world without a central bank: assuming that there are only two sectors in the economy – commercial banks and investors, investors initially use their own funds to buy assets (such as stocks, real estate, etc.) and push asset prices up. Then, the assets are pledged to the bank, borrowed from the bank, and continue to purchase assets, thereby driving the rise in asset prices. After the assets have appreciated, they can borrow money from the bank and continue to buy assets.
Exogenous given two constant assumptions: 1. The bank provides credit according to a fixed proportion (less than 100%) of the value of the mortgaged asset; 2. The supply curve of the asset is tilted to the upper right, and the curve itself does not move, that is, the asset price The increase can only be due to the increase in the number of shares purchased, and the increase in prices will not occur because the holders see the rise in assets and reluctant to sell. Then the model can reach equilibrium, because the supply curve inclined obliquely to the upper right requires an increase of 1 yuan for each asset, and the required currency will be more and more, until the bank lending rate cannot reach the amount of money needed to continue to push the asset up. Asset prices will fall. Throughout the process, investors will experience acceleration and leverage, deceleration and leverage, accelerate de-leveraging, slow down and leverage, and finally leverage the bottom, the market is waiting for a new round of leverage. In fact, in the absence of central bank intervention, this cycle will often occur, and each time will make the market clearer.
Now we introduce the central bank: on the one hand, suppose that the central bank can continue to release water and endorse with government credit, allowing banks to provide a higher proportion of credit, even exceeding the upper limit of 100%; on the other hand, investors expect the central bank to release water will lead to asset prices Rising, therefore, instead of giving up the previous judgment on the asset price, starting to reluctantly sell, demanding a higher price, the supply curve of the asset shifts to the left, that is, the higher price does not require more volume (the so-called shrinkage increase) ). Then the model will not converge and there will be no equilibrium results. We will see that the central bank's release of water leads to a risk-free rate of return; the endorsement of the government leads to a narrowing of credit spreads; the expected return on assets leads to investors' increasing leverage, short Buying long, the term spread narrows; the downside of interest rates causes asset prices to rise.
In fact, this is what the developed countries have experienced since 2008. The financial crisis has led investors to leverage, but because the poorer people are more leveraged and more eager to leverage, they will sell their assets at very low prices to repay their debts. The rich are taking the low position. Subsequently, along with the quantitative easing implemented by the Fed, the rich began to enjoy the feast of a new round of asset rise, and the gap between the rich and the poor widened. Currently relative to the lowest point in early 2009: the Nasdaq index rose 250%, the S&P 500 index rose 170%, both far ahead of the pre-crisis level; house prices (after inflation) rose 40%, more than 2006 High point; however, real GDP increased by only 14% during this period; wage income growth was slower, and the actual weekly wage after inflation was only increased by less than 4%.
Before the end of the music, everyone must dance, but when will this end? We believe that if there are some phenomena in the future, it may be a sign of the end:
1. Entity economy inflation is on the rise – the central bank will tighten the currency, but if the currency is only detached from the real economy, chasing financial assets, not going to the real economy, it is difficult for us to see economic stabilization and inflation. Moreover, it can be seen from the recent speeches of Yellen that although the Fed’s interest rate hike is almost a foregone conclusion at the end of 2016, it is mainly to maintain financial stability and leave room for future monetary policy. Moreover, the US economy has been repeated, inflation is also low, and Trump does not want to build a strong dollar. Therefore, we expect the pace of interest rate increase in 2017 to remain sluggish.
2. The volatility of the asset itself is intensified – the rising leverage will increase asset volatility and will cause market preference to fall. Investors demand higher risk compensation, focusing on VIX changes, but they are still low in recent years. Moreover, after Trump was elected, risk assets rose in turn, risk appetite rose sharply, and is now close to the level before the 2007 financial crisis.
3. Investors no longer trust the government's endorsement—selling their own assets, translating their own currencies into other countries' currencies, and capital outflows, but this kind of constraint is more open to small countries' open economy, and has little effect on small countries' closed economies. Of course, investors in the country may eventually choose to hold gold instead of their own currency). For large countries to open economies, the cost may be borne by many countries in the world, and may be rescued by many countries. Moreover, the current situation is that most developed countries' central banks are releasing water.
4. The money is generated, the labor does not produce money, and the gap between the rich and the poor increases. At present, we are seeing the departure of Brexit to Trump, and the failure of the Italian referendum. More and more black swan has become a white swan. It shows that the widening gap between the rich and the poor has caused people’s dissatisfaction in developed countries to accumulate rapidly. , voting is only one kind of expression. Historically, the most serious may lead to revolutions and even wars, and everything is reinstated.
(The author Zhao Bowen: Research Director of Bluestone Asset Management Ltd.)

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