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Chapter 5 Who Directs Economic Activities (1)
Excess Liquidity - "When the water is full, it overflows"

In fact, compared with the meaning and function of money, the law of currency circulation is more elusive.It is also this methodical and unpredictable currency circulation that makes the economy sometimes prosperous, and sometimes lifeless or even close to collapse.Then start from "liquidity" to understand the laws of currency operation in the economy.

In 2008, China's economy experienced a relatively high inflation rate.Regarding its causes, there is a voice that inflation is caused by excess liquidity, and excess liquidity is caused by too much capital inflow.Under the normal international monetary order, large capital inflows may be mainly attributable to distortions in domestic currency prices.However, under the unconventional environment of the sharp depreciation of the US dollar and the capital outflow caused by the Wall Street subprime mortgage crisis, what actually exposed was the problem of excess global liquidity.

What does liquidity mean here?
The so-called liquidity generally refers to the liquidity of the entire macro economy, and refers to the amount of money in the economic system.The performance of fluidity is flow, just like water, where the terrain is low, the water will flow there.As for money, it will flow wherever it can make a profit: the real estate market is hot to the real estate market, the stock market is hot to the stock market, the futures is hot to the futures, the foreign exchange market is profitable to the foreign exchange market, and the gold market is hot to the gold market.Excess liquidity refers to excessive money supply, and these excess funds need to find investment outlets, so there will be investment, economic overheating, and even the risk of inflation.

Generally speaking, the reason for liquidity is more money.Why is there more money? For the country, there is a large deposit balance, which is usually caused by a trade surplus.If there is too much water in the pool, it will inevitably overflow.Therefore, the root of China's excess liquidity comes from China's ever-increasing trade surplus. Export companies continue to exchange the recovered US dollars to the country, and the country has to continue to inject RMB into the economic system, which has caused more and more water in the pool. The phenomenon.

For the world, China is an emerging market, and it is profitable to flow water to China.This is also one of the reasons for excess liquidity.

In fact, excess liquidity (Excess Liquidity) has become an important feature of the Chinese economy and even the global economy.Liquidity is worldwide, and economic globalization is also a reason for promoting liquidity. In recent years, the continuous reduction of interest rates in the United States is an important reason for global excess liquidity.

When foreign capital flows into a country, the exchange rate of the country's currency rises.If the central bank does not want the exchange rate to rise, it can only exchange the inflowing foreign currency on the basis of the original exchange rate by issuing additional domestic currency, resulting in an increase in foreign exchange reserves and a passive increase in the amount of money, resulting in excess liquidity.The main manifestations of excess liquidity are the excessive increase in the amount of money, the flood of funds in the banking system, and low interest rates.

If regulation measures are not adopted to recover excess liquidity, then the ending of this story can only be that it will either cause overheating investment in the real economy and inflation; or promote asset prices such as the property market and stock market, and form bubbles that will damage the overall economy.or both at the same time.

In general macroeconomic analysis, excess liquidity is used to specifically refer to a monetary phenomenon.The European Central Bank defines excess liquidity as the deviation of the real money stock from the expected equilibrium level.The expected equilibrium level of the money stock corresponds to the desired price level.When money is oversupplied, the expected equilibrium money stock does not change. At this time, there is no general and continuous rise in prices.However, since the real money stock has exceeded the desired level, the price level may generally rise, thereby causing inflation.There is a certain time lag in between.If the central bank was able to control money issuance at this time and bring the real money stock back to the expected equilibrium level, then a generalized and sustained increase in the price level may not have occurred.On the contrary, there may be a general and continuous rise in the price level.

Monetary Aggregate: How much is needed to "feed"

Then how do we know, to what extent will the liquidity not be excessive?How much currency is reasonable?
Dai Genyou, the former director of the Monetary Policy Department of the People's Bank of China, once made a vivid analogy to the question of whether the money supply is tight: If there are forty meals and forty students, if the distribution is even, it is just right. A student can eat enough.This is a good metaphor - use food to illustrate the supply and demand of social funds.Controlling the total amount of money in circulation and maintaining a basic balance with aggregate demand is the responsibility of the department under Dagan's leadership.Therefore, if the demand of the market is met, it means that the total amount of currency released has reached the expected goal.

The monetary aggregate plays an important role in the formulation of a country's monetary policy and macroeconomic decision-making. Therefore, the scientific measurement of the monetary aggregate has important theoretical value and practical significance.

"The End of Western Economics" said: In the absence of additional currency, an economic system composed of residents and manufacturers cannot increase savings.That is, the increase in national savings = the increase in household savings + the increase in manufacturers' savings = the amount of money issued. If there is no additional currency, the increase in national savings is 0.In other words, the total amount of savings = the total amount of money.This truth is actually not difficult to understand.Just like adding up the water in two pools, the total amount must be equal to the sum of the water in the two pools.If you don't add a new amount of water, it is impossible to increase the total amount.Because money flow is also a kind of material flow, which obeys the law of conservation of mass.The difference is that if the water is not in this pool, it must be in that pool, but the total amount will not change.Where does money come from?From the monetary authority, it is logical that the increase in savings is equal to the increase in money in the same period.

How, then, does the monetary aggregate increase?

Money increment is actually the manifestation of economic aggregate.While the economy grows, it is necessary to expand the currency supply, otherwise it will limit the growth rate of the economy.The actual demand is determined by one's own total wealth, production capacity and production volume.For example, if a person wants to buy a house, he must have a certain amount of savings, production capacity and production capacity. This production capacity and production capacity are reflected in work capacity and workload.For example, if a person wants to take out a loan to set up a factory, he must have a certain amount of available wealth. The larger the amount of available wealth, the more money he can borrow in theory.So the same principle is magnified to the macroeconomic environment, as well.If a country's productivity increases and its production volume increases, then along with its economic growth, the total amount of money will inevitably rise.

Money Growth and the Business Cycle

From 1981 to 1982, the total production of goods and services in the US economy declined, and the unemployment rate rose to more than 10%. After 1982, the economy began to expand rapidly, and by 1989, the unemployment rate had dropped to 5%. The eight-year economic expansion ended in 1990, and the unemployment rate rose above 8%.The bottom of the economy appeared in 1991, but the subsequent economic recovery was the longest in American history, and the unemployment rate basically fluctuated around 2001%. After March [-], there was a relatively mild economic downturn, and the unemployment rate rose to [-]%.

Why did the U.S. economy expand from 1982 to 1900, contract from 1990 to 1991, grow rapidly from 1991 to 2001, and contract again after 2001?This is actually an economic cycle.In this process of ups and downs, currency has played an important role.

We must first understand what is a business cycle.

Business cycle, also known as business cycle and business cycle, refers to a phenomenon in which economic expansion and economic contraction alternate and recur periodically in economic operation.It is the fluctuation of gross national output, total income and total employment, and the alternation or cyclical fluctuation of national income or overall economic activity expansion and contraction.In the past, it was divided into four stages: prosperity, recession, depression and recovery, and now it is generally called the four stages of recession, trough, expansion and peak.

Economic fluctuations are characterized by generalized and contemporaneous expansions and contractions of many components of the economy, usually lasting 2 to 10 years.In modern macroeconomics, business cycles occur when actual GDP rises or falls relative to potential GDP.Every economic cycle can be divided into two phases, rising and falling.The rising phase is also called a boom, and the highest point is called a pinnacle.However, the peak is also a turning point for the economy to turn from prosperity to decline, after which the economy enters a downward phase, that is, a recession.When the recession is severe, the economy enters a depression, and the lowest point of the recession is called the trough.Of course, the bottom is also a turning point when the economy turns from recession to prosperity, after which the economy enters an upward phase.The economy goes from one peak to another peak, or from one trough to another trough, which is a complete economic cycle.The definition of business cycle in modern economics is based on the change of economic growth rate, which refers to the alternating process of rising and falling growth rate.

The expansion phase of economic cycle fluctuations is a season of increasingly active macroeconomic and market environments.At this time, the market demand is strong, orders are full, products sell well, production rises, and capital turnover is flexible.The supply, production, and sales of enterprises, as well as people, money, and materials are all relatively easy to arrange.Enterprises are in a more relaxed and favorable external environment.

The contraction phase of economic cycle fluctuations is the season when the macroeconomic environment and market environment are becoming increasingly tightened.At this time, market demand is weak, orders are insufficient, goods are unsalable, production is declining, and capital turnover is not smooth.Enterprises will encounter many difficulties in terms of supply, production, sales and personnel, finance and materials.Enterprises are in a relatively harsh external environment.The recession of the economy is both destructive and "automatic".In the economic recession, some enterprises went bankrupt and withdrew from the business world;This is the survival rule of "survival of the fittest" under the market economy.

Every recession is accompanied by a decline in the growth rate of money.In fact, since the 20th century, the decline in the growth rate of money before every recession shows that changes in the money supply are one of the driving forces of economic cycle fluctuations.The monetarist school of thought believes that in the initial stage of the economy, the growth of money will stimulate the aggregate demand of society.At this time, the social unemployment rate is lower than the natural unemployment rate, which will lead to an increase in wage levels and promote an increase in aggregate supply.At this time, the economy returns to the natural level of total output, so prices rise.If the money supply continues to increase, then this process will not stop, the price level will become higher and higher, inflation will occur, and the economy will turn from rising to falling.The analysis of the monetarist school shows that severe inflation must be caused by a high growth rate of the money supply.

However, a recession does not follow a decline in the rate of money growth.To be precise, after a recession occurs, the growth rate of the currency begins to naturally decline.There is not much difference between the Keynesian and monetarist schools on the role of money growth in the business cycle.

How the 'invisible hand' regulates currencies

According to the Bible "Old Testament - Book of Believe", Belshazzar, the king of Babylon, was holding a feast in the palace, when he suddenly showed a hand and wrote three mysterious words on the palace wall: Mini, Tickler, Piles.Everyone was puzzled.The prophet Daniel said: "You are blaspheming the gods. For the second time, God released a hand and wrote these words. It means: 'Mini'-your kingdom has come to an end,'Tekle'-you Nothing in the scales, 'Piles'—your kingdom is about to fall apart."

Inspired by this, Adam Smith proposed the principle of "invisible hand". In 1787, Adam Smith went to London to meet his faithful believer, the famous Prime Minister Peter in British history.Smith was the last to arrive at the meeting place, and when he entered the house, everyone rose to welcome him."Sit down, gentlemen," said Smith.Pete replied: "No, you sit down, we sit down again, we are all your students." The reason why everyone respected Smith was that the principle of "invisible hand" proposed by Smith was regarded as the most important thing by celebrities from all walks of life at that time. classic.Even now, Smith's views remain central to modern economics.

In 1776, the British economist Adam Smith put forward a classic proposition in "The Wealth of Nations", which originally meant that individuals only consider their own interests in economic life and are driven by the "invisible hand", that is, through the division of labor and The role of the market can achieve the goal of national prosperity.Later, the "invisible hand" became a metaphor for the perfect competition model of capitalism.The main features of this model are private ownership, everyone for himself, free access to market information, free competition, and no government intervention.

More intuitively, the "invisible hand" means that under normal circumstances, the market will maintain its healthy operation with its internal mechanism.It is mainly based on the principle of rational economic man in market economic activities and the rational choice governed by the principle of rational economic man.These choices gradually form the price mechanism, supply and demand mechanism and competition mechanism in the market economy.These mechanisms are like an invisible hand, dominating everyone in the dark, consciously operating in accordance with the laws of the market.When the market is in disorder, this invisible hand will control the main body of economic activities and return to a stable track, that is, the spontaneous adjustment of the market.In currency markets and financial activities, the invisible hand of market regulation also plays an important role.

(End of this chapter)