After 1989, the world seems to have entered the golden age of low inflation and low interest rates, but the average inflation rate is still much higher than that of the fixed exchange rate era (about 2% on average). In recent years, as the growth rate of the global real economy (real productivity) begins to slow down, the possibility of the world entering the era of high inflation and high interest rates increases rapidly. In order to deeply understand the global excess liquidity and speculate on global inflation, interest rates, asset prices and the growth trend of the real economy, we must thoroughly explain the root causes of the current account deficit in the United States.
Second, the widening current account deficit of the United States and its corresponding global dollar assets are the main source of the turmoil in the global financial and monetary system. At the end of 1960s, the global reserve assets were only tens of billions of dollars, and today they have exceeded 5 trillion dollars. Astronomical global dollar assets have spawned "massive" foreign exchange speculation, countless financial derivatives and dazzling financial innovations, which have led to violent fluctuations in global asset prices and huge financial risks that cannot be supervised, which may have a huge impact on the financial systems of various countries at any time. Long-term and in-depth research by Ben Bernanke, chairman of the Federal Reserve, has proved that since 1970s, the frequency of global asset price turbulence and financial and monetary crisis has surpassed all previous generations. The recent subprime mortgage crisis is just another dramatic repetition of the financial crisis, and it will continue. Third, the "borderless financial market" created by the huge dollar assets has plunged the central bank into a kind of "regulatory paradox": on the one hand, the central bank can hardly supervise the global activities of financial institutions, and they can't even understand all kinds of bizarre financial innovations. Even Greenspan admitted: "The global financial market has become so huge, complex and turbulent that the regulatory concept developed in the 20th century has long been useless. In today's world, I really don't see the effect of more government supervision! "
On the other hand, once domestic financial institutions are in trouble, the central bank has to act as a "lender of last resort" to provide help. Financial institutions suffered huge losses because of their unscrupulous participation in global transactions, and the central bank was forced to "pay the bill" for it, but the consequences were borne by the general public. This is the "reverse mechanism" of today's global monetary system: that is, the high-risk innovation activities of global financial institutions lead to the financial crisis, which in turn forces the central bank to issue more money, further exacerbating the global excess liquidity and soaring asset prices, and gestating the next more serious financial and monetary crisis. After the subprime mortgage crisis broke out, Wall Street bosses in Armani suits cried and shouted for the Federal Reserve to cut interest rates and inject capital, which is the most ironic and true portrayal of the global financial and monetary system today!
Fourth, the expanding current account deficit of the United States is becoming the main battlefield of international financial and monetary diplomacy. The main reason for the US government to force the RMB to appreciate is to correct the current account deficit in the United States. This extremely wrong logic, despite repeated denunciations by economists, still lingers. Countries that have accumulated a large amount of dollar assets (not just China) certainly don't want the dollar to depreciate continuously, but the United States, in turn, spares no effort to criticize countries with trade surpluses for "manipulating exchange rates".
Historically, the United States has severely accused Europe and Japan of manipulating exchange rates. Since 2002, the target of blame has been China. Moreover, the US government has invented many inexplicable terms, such as "global imbalance" and "global adjustment responsibility", claiming that RMB appreciation is China's due responsibility to achieve global balance. The weak dollar policy leads to the appreciation of the world's major currencies against the US dollar, and countries with large appreciation in turn accuse countries with small appreciation (for example, Europe has recently begun to severely criticize China). Global exchange rate chaos is likely to evolve into "beggar-thy-neighbor" trade sanctions and protectionism.