Learn a little bit of finance every day

Chapter 11 Understanding Macroeconomic Indicators in Life (3)
In 2008, the price of a real estate in a certain city was 2800 yuan per square meter when it opened at the beginning of the year, but no one cared about it at 1800 yuan; A bundle of CM cables was 6000 yuan a few days ago, and only 3000 yuan after a few days; the price of pork for slaughter was still 1.5 yuan a catty at the beginning of the year, and it soon fell to about 90 yuan.

Many people will think that this means that the goal of curbing inflation has been achieved?This is a good thing.actually not.The continuous decline in prices will turn inflation into deflation, and the consequence of severe deflation is that businesses will close down, unemployment will increase, commodity supply will exceed demand, bank bad debts will increase, and the economy will experience a severe recession.

After the devastating economic crisis of the 20s, there was no large-scale investment bubble for decades.By the 30s, when the Great Depression was a thing of the past and was gradually being forgotten in the corner of history, the high price of oil and the resulting inflation worried the world.But suddenly, this situation was completely broken by Japan's violent economic turmoil.At this time, Japan suffered from a severe bubble crisis, and its economy continued to stagnate for more than a decade. What was even more frightening was that the specter of deflation, which had disappeared since the 20s, reappeared.Once again, Japan's history is a wake-up call: Inflation can easily lead to deflation, which can make recessions worse and recovery more difficult.

When the currency in circulation in the market decreases, people's monetary income decreases and their purchasing power increases, which affects the decline in prices and causes deflation.Samuel, the Nobel laureate in economics, defined deflation in this way——"Prices and costs are generally falling, which is deflation."Long-term deflation will inhibit investment and production, leading to higher unemployment and economic recession.

In economic practice, to judge whether a price drop in a certain period is deflation, firstly, whether the consumer price index (CPI) changes from positive to negative; secondly, whether this decline continues beyond a certain time limit.Economists generally believe that when the consumer price index (CPI) falls for two consecutive quarters, it means that deflation has already occurred.Deflation means that prices, wages, interest rates, food, energy and other prices cannot stop falling continuously, and all of them are in a state of oversupply.

Deflation has short-term and long-term effects on economic growth.Moderate deflation is conducive to economic growth.This is because deflation will lead to a decline in long-term interest rates, which is conducive to companies investing in improving equipment and increasing productivity.In a moderately deflationary state, economic expansion can be extended without threatening economic stability.Moreover, if deflation is associated with technological progress and increased efficiency, the decline in price levels and economic growth can promote each other.

And long-term deflation will inhibit investment and production, leading to rising unemployment and economic recession.Because the continuous decline in prices will reduce the profits of producers or even lose money, and then reduce production or stop production; at the same time, it will damage debtors, which in turn will affect production and investment; the reduction in production investment will lead to increased unemployment and reduced income of residents, which will aggravate the insufficient aggregate demand.

From 1929 to 1933, the overall price level of the United States fell for four consecutive years, resulting in the Great Depression. The real GNP fell by 4%, 9.9%, 7.6% and 14.9% respectively within four years, and the unemployment rate rose sharply from 1.9% in 1929. 3.2% by 1933.Deflation is a more dangerous enemy than inflation. Deflation is generally considered to be the harbinger of economic recession. Severe deflation will cause the Great Depression of the economy, which will set the economy back for decades and make it difficult to recover in a long period of time. .No wonder Japanese economists called the deflation that once happened in Japan the "terrible specter of deflation".Many economists draw a conclusion from this: "Deflation will cause much greater damage to the economy than inflation."

Foreign Exchange Reserves: The "Firewall" of Currency Crisis

In Hong Kong, China in August 1998, "the rain is about to come and the building is full of wind".International financial "predators" mobilized huge amounts of funds to attack the Hong Kong dollar, and Hong Kong's pegged exchange rate system was precarious for a while. From August 8th to August 8th, the Hong Kong Special Administrative Region government successively mobilized 14 billion Hong Kong dollars of foreign exchange reserves into the market, and launched a fierce "hand-to-hand battle" with international speculators.The international financial "predator" was hit head-on, and finally returned home. The Hong Kong Special Administrative Region government successfully defended Hong Kong's linked exchange rate system.

It can be seen from the case that the importance of foreign exchange reserves in coping with the financial crisis is self-evident.Foreign exchange reserves are the freely disposable reserve currencies officially held by various countries.A reserve currency is a currency that is generally accepted for international payments.Also known as foreign exchange deposit.Its main purpose is to pay and settle the balance of payments deficit, and it is often used to intervene in the foreign exchange market to maintain the exchange rate of the domestic currency.

The main forms of foreign exchange reserves are government short-term deposits abroad, and other means of payment that can be cashed abroad, such as foreign securities, foreign bank checks, promissory notes, and foreign currency drafts.For a long time after the Second World War, the main currency of the foreign exchange reserves of Western countries was the US dollar, followed by the British pound. After the 70s, German marks, Japanese yen, Swiss francs, French francs, etc. were added.

Broadly speaking, foreign exchange reserves include not only foreign exchange deposits, but also assets denominated in foreign exchange, including cash, gold, and foreign securities.Foreign exchange reserves are an important part of a country's international solvency, and at the same time have an important impact on balancing the balance of payments and stabilizing exchange rates.Having sufficient foreign exchange reserves helps to improve the country's reputation and enhance the country's financial ability to resist risks.

China has been the country with the highest foreign exchange reserves in the world for several consecutive years, and as of early 2009, it had exceeded one trillion US dollars.Back in 2007, it was over $9 billion.There are endless discussions on whether China's foreign exchange reserves are a guarantee or a problem, but people are more puzzled about how such a huge amount of foreign exchange reserves come from?

The increase in foreign exchange reserves mainly came from the surplus in the balance of payments.China's international balance of payments has undergone several major changes over the past several hundred years. From the opening of direct trade between China and Europe in the Ming Dynasty to the eve of the Opium War, China's overall foreign trade balance was a huge trade surplus.After the Opium War, Western powers sold opium to China on a large scale, and China's current account balance turned from a trade surplus that had lasted for hundreds of years to a trade deficit.During this period, until 1949, China's trade surplus was very small, while trade deficit was a frequent phenomenon.Since then, the pressure on the balance of payments has been pressing on the minds of Chinese leaders all the time. In 1985 and 1986, when China's economy and trade were in surplus, the economic balance of payments was in surplus for more than five years. After our country suffered from Western trade sanctions, a deficit appeared.During this period of time, we finally reversed the continuous pattern of my country's regular trade deficit caused by the international West before the Opium War, and returned to the pattern of surplus from the Ming Dynasty to before the Opium War.

Since China's reform and opening up, China's economic development has advanced by leaps and bounds. During this period, one of the most prominent features of China's economic development is that foreign trade has grown faster than national economic growth.The dependence on foreign trade continues to rise to the highest level in the world. China's export-oriented strategy for many years has created the world's largest foreign exchange reserves for China. International organizations believe that China's foreign trade myth is the greatest success story in the era of globalization.

As a symbol of a country's economic and financial strength, foreign exchange reserves are the material basis for making up for the country's balance of payments deficit, stabilizing the country's exchange rate and maintaining its international reputation.For developing countries, it is often necessary to hold foreign exchange reserves higher than the conventional level.Because the economic growth of developing countries often has strong potential demand.China's foreign exchange reserves of more than one trillion yuan is the best example.However, more foreign exchange reserves are not always better, and the rapid expansion of foreign exchange reserves will also have many negative effects on economic development.Excessive foreign exchange reserves mean a waste of resources, and the most important thing is that it will force the central bank to invest too much local currency in order to receive foreign exchange, thus causing inflationary pressure. Inflation that lasted from the second half of 2007 to the second half of 2008 was mainly due to the fact that China's foreign exchange reserves were too large, which caused too much liquidity in the economy.

The inflow of foreign exchange reserves of a certain scale represents the outflow of physical resources of a corresponding scale, which is not conducive to the growth of a country's economy.In addition, most of the foreign exchange reserves of many countries are US dollar assets. If the US dollar depreciates, the country's reserve assets will also shrink severely.At the same time, spread losses are inevitable.

Economists believe that based on China's current demand, the demand for various foreign exchange reserves is around US$6000-7000 billion.Therefore, although foreign exchange reserves can be used to intervene in the foreign exchange market to keep the country's exchange rate stable, it can be said to be a "firewall" for currency crises, but the specific scale should be kept moderate.

Credit economy: a yardstick for evaluating the maturity of a market economy
The China Economic Times once published an article pointing out that the central bank’s ban on “zero down payment” for house purchases is a blow to the development of China’s credit economy.The author Wu Jianzhong wrote in the article:

"With the order of the central bank, the favored 'zero down payment' in the sale of commercial housing was instantly reduced to ashes. Many people who were full of ambition and ready to buy a house suddenly extinguished the 'dream of owning a house'. It is not so much helplessness as a little cruel.

The motivation for canceling "zero down payment" is also very simple: to prevent malicious financial fraud and reduce bank risks. "Since the outbreak of the Asian 'financial crisis', people have turned pale when they talked about 'financial risk'. We should indeed be cautious in our financial steps. But here is a question: in the commercial housing business, there is a little bit' What is the difference between "mortgage loan" after "down payment" and "mortgage loan after zero down payment"? The difference lies in the credit of the buyer.

The author mentioned in the article that "zero down payment" will be an inevitable choice of the market.It is an indisputable fact that the people who can afford to buy a house are a minority after all.This point was fulfilled in 2008 when the real estate market was at a low point, and many real estate projects in Beijing were under the banner of zero down payment.

If the central bank continues to order the abolition of "zero down payment", the article believes that it is tantamount to punching the "soft underbelly of people's credit".The harm it causes is not only those who are going to buy and sell houses, but the normal development of the entire real estate market, and it is also not conducive to the development of the banking industry.If this kind of market method involving the interests of multiple parties is easily stifled because of one party's different "security concept", in the long run, it will not be conducive to the growth of my country's market economy, which is gradually being standardized, into a credit economy.

Why should a market economy become a credit economy?What is credit economy?
Many people say that the essence of a market economy is a credit economy.The meaning of this statement is not understood by many people.

Bruno Hilbrand, an economist of the old historical school in Germany, first proposed the concept of credit economy.Credit economy is developed from the study of money and banking, and it is a form of money economy.Credit is a transaction method of commodity and financial transactions, in which traders realize commodity exchange or currency transfer through the establishment of claims and debts.Hilbrand divided social and economic development into three stages according to the different transaction methods, namely, the natural economic stage with barter exchange as the main method, the monetary economic stage with currency as the medium of exchange, and the credit transaction as the main stage. The dominant credit economy stage.Therefore, the credit economy is an economic phenomenon produced after the commodity economy develops to a certain stage.

There are also transactions in the credit economy, and the volume of credit transactions in the contemporary world is dozens of times larger than the volume of commodity transactions; the supply and demand of credit funds determines the price and interest rate of funds; the circulation of credit funds determines production, distribution, consumption, savings, investment, etc. and all stages of reproduction.With the issuance of credit currency and the in-depth development of financial undertakings, credit economy has become an inseparable part of modern social life.Therefore, the saying that the modern market economy is essentially a credit economy comes from this.

In market economic activities, due to the different production cycles of various departments and enterprises, the turnover of funds is also different, objectively, there are requirements for the purchase and sale of commodities on credit and the loan of funds.Due to the improvement of productivity and the increasing abundance of commodities, the sales of real estate such as houses and durable consumer goods also objectively require the introduction of consumer credit.Under such conditions, the credit relationship has gradually become one of the most common economic relationships in modern economic life.At this time, every department and every link in economic activities is permeated with credit relationship.In the process of social reproduction, any enterprise will inevitably use credit activities to maintain continuous production or expand production.The government issues treasury bills and bonds, borrows from enterprises, individuals or other departments, and also issues loans to the society as a creditor, uses credit relationships to produce public goods, and regulates economic activities.On the one hand, individuals become creditors through bank deposits or purchase of corporate and government bonds, and on the other hand, they also become debtors by obtaining credit through consumer credit and installment payments.These credit relationships are intertwined and become the link connecting all economic activity subjects and all economic links.The more the economy develops, the closer the credit-debt relationship is, and the more credit becomes a necessary condition for the normal operation of the economy. Once it is violated, it will easily lead to debt crisis, credit crisis and economic crisis.In this sense, the modern market economy is essentially a credit economy.

The reason why the essence of the modern market economy should be a credit economy is also reflected in the fact that the market operation mechanism itself contains credit requirements for market players.The law of value requires people to abide by the principles of equivalent exchange, equality and mutual benefit; the law of competition requires people to establish a fair competition concept; the complexity of economic exchanges requires market players to respect contracts and contracts.From buying and selling in the commodity market to borrowing and lending in the capital market, from transactions in the factor market to payments in the securities market, etc., there is no need for voluntariness and repetition to produce the morality that the commercial society needs, that is, business reputation.

Because the market transaction is voluntary, it must be required that the transaction can be carried out only when both parties feel that it is profitable; because the market transaction is repetitive, a certain trader may be fraudulent at a certain moment, but he cannot be in the same place And defrauding the same object at the same time, so out of self-interest maximization and long-term, traders naturally have to form a habit of emphasizing reputation.Only by being trustworthy can market players obtain solid partners, establish a brand image, and expand scale.Under the conditions of a mature market economy, credit has become an indispensable "intangible capital" for every enterprise to gain a foothold in society, and abiding by credit is one of the survival concepts and business awareness that every enterprise should have.It is not an empty concept, but capital, wealth, and competitiveness.A business can borrow money if it lacks funds, but no one will trade with it if it lacks credit.In ancient and modern China and abroad, no one has a long-term foothold because of lack of trust, no enterprise has continued to develop because of lack of trust, and no country has prospered because of lack of trust.

In short, a consensus has been reached on the statement that a market economy can also be called a credit economy.The test of whether an economy has entered a mature market economy depends on whether it has entered a credit economy.The degree of application of credit in the economy has become a benchmark for evaluating the maturity of a market economy.

(End of this chapter)