In September, the Federal Reserve's decision to cut interest rates has been set in stone, but does this mean the end of a suspenseful narrative? Far from it. This pivotal moment appears to signal the beginning of a saga led by the Fed that aims to pressure China into a new version of the "Plaza Accord." Is the renminbi poised to grace the stage of this grand performance, eventually becoming a protagonist? The outcome of this monetary warfare might define the dominant economic strategies and power dynamics of the next decade.
The storyline unfolds with apparent normalcy. On September 6, Fed Chairman Jerome Powell delivered a potent signal that the time for rate cuts has arrived, stating, "The moment for policy adjustment is upon us." With this, the Fed transitioned fully from a hawkish stance to a dovish one, removing the suspense surrounding potential rate cuts. Just three days later, Mary Daly of the San Francisco Fed echoed Powell’s sentiments, suggesting that the time for policy adjustment had indeed come, indicating that there would be no surprises in the upcoming September meetings.
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Finally, the Bureau of Labor Statistics, almost as if in collusion with the Fed, released the non-farm payroll data the Fed had hoped for. The latest figures showed an addition of 142,000 jobs in the U.S. for August, falling short of the anticipated 165,000. However, the critical point of suspense lies in the previous non-farm number of 114,000. A casual comparison suggests that 140,000 exceeds the prior figure, which seems to paint a surprisingly positive picture of the U.S. economy. This narrative, cleverly crafted, suggests economic challenges but is ultimately framed as a 'soft landing'—a situation requiring no drastic intervention from the Fed.
Underlying this narrative is a calculated maneuver. The U.S. is intent on validating its economy's trajectory as a soft landing, which would allow it to reduce inflation while opening the doors for new growth following a period of economic downturn. This strategy has broader implications: enticing economic partners from the East or swaying fence-sitters to pivot towards the U.S. This pursuit reflects a predatory aspect of international relations—wherein the goal seems to be isolating and undermining the world's second-largest economy. In contrast, Chinese culture has historically emphasized coexistence and mutual benefit, while Western beliefs often revolve around the law of the jungle.
But is the U.S. truly positioned for this 'soft landing'?
Understanding the distinction between a soft landing and a hard landing is imperative. The former resembles the smooth descent of an airplane, characterized by gradual economic deceleration without catastrophic collapses of enterprises, surging unemployment, or financial market turmoil. If the U.S. can maintain stable economic forecasts, it would seem unnecessary for the Fed to inject excessive liquidity throughout a recession. A stable supply of money paired with solid economic expectations would help sustain the hegemony of the dollar and encourage long-term capital inflows, simultaneously determining outcomes in the great power contest.
In contrast, a hard landing can be likened to a disastrous crash landing of an aircraft. Financial troubles often stem from monetary issues, as was seen following the COVID-19 pandemic. The U.S. utilized an unprecedented amount of liquidity to stabilize the economy post-COVID, which led to restored consumer spending but ultimately fostered high inflation. Basic commodities, like a dozen eggs, have tripled in price since the pandemic's onset, and medical expenses have escalated dramatically. A recent survey revealed that nearly 40% of Americans have delayed or canceled essential medical services due to cost.
To mitigate inflation and retract excessive liquidity, a straightforward method has typically involved raising interest rates, increasing borrowing costs in banks. The downside, however, is that hastened loan recoveries could precipitate the demise of smaller banks with lower asset quality, creating chaos in financial markets. As the economy nosedives, companies may close en masse, unemployment could spike, and asset prices—such as stocks and real estate—are likely to plummet, further exacerbating liquidity issues, ultimately reversing inflation into deflation.
In brief, a hard landing in this context translates to the U.S. inflicting an economic injury upon itself to manage excess capital flows.
Given the rising tensions and competition between East and West, one must question whether the U.S. would prefer to harm global economies or inflict damage upon itself for the sake of economic stabilization. The Federal Reserve is placing its bets on a high-stake gamble: if the U.S. fails to achieve a soft landing, financial calamity will follow. But can the U.S. truly achieve this balance?
In the 1990s, the U.S. successfully nurtured a 'soft landing' by compelling Japan into signing the Plaza Accord, which directly contributed to Japan's economic downfall, yielding significant financial benefits for Wall Street. This era was characterized by the burgeoning internet revolution, alongside technological advances led by companies like Microsoft, which democratized internet access. Following this, Hollywood's cultural hegemony positioned the U.S. as a global beacon of civilization, realized through a significant cultural dividend.
Yet today's landscape starkly contrasts with that of the 1990s. Unlike the Japanese situation—a nation without sovereignty—China maintains absolute sovereignty. Therefore, the U.S. cannot compel China to enter into a new Plaza Accord. A tangible momentum toward de-dollarization is emerging, with more nations aligning themselves with the BRICS currency framework spearheaded by China and Russia.
Culturally, Hollywood has suffered significant setbacks in recent years, with familiar tropes failing to resonate with audiences. The typical superhero narrative appears stale, leading to viewer fatigue and diminishing the sustainability of Hollywood's cultural exports.
Moreover, the West's inconsistent stance on geopolitical tensions such as those in Ukraine and Gaza has fueled worldwide disillusionment with American democracy. Analyzing financial, technological, and cultural perspectives underscores the significant challenge the U.S. faces in replicating the successful soft landing of the 1990s.
The Federal Reserve's grave miscalculation stems from an underestimation of the current American strength and an unfounded belief in the feasibility of a soft landing. Consequently, they have missed optimal moments for interest rate reductions, often amending monthly employment data to maintain the facade of economic resilience.
Over the past year, the Fed has revised employment figures downward by more than 800,000, creating a cyclical pattern of exceeding expectations one month only to adjust them downward in subsequent months. The longer erroneous conditions persist, the greater the potential harm. As high-interest climates extend, companies increasingly commit to layoffs, as demonstrated by Goldman Sachs’ plan to lay off between 1,300 and 1,800 employees globally across various departments in the coming weeks.
General Motors has also let go of more than a thousand workers, while the former Hollywood giant Paramount has reduced its workforce by 15%. A new wave of financial turbulence appears to be on the horizon, but the Fed seems content to bury its head in the sand, clinging to the notion of a possible soft landing.
Should the U.S. transition from expectations of a soft landing to the stark reality of a hard landing, the Fed's rate cuts would likely revert to vigorous and sudden measures. Such drastic adjustments could easily trigger a new round of dollar oversaturation, undermining America's position in the global economic landscape.
This upcoming depreciation of the dollar could intensify global inflationary pressures, leading to critical questions about China's potential responses. Firstly, the renminbi may seize the moment, with over $2 trillion in unconverted funds residing overseas, making RMB settlements a likely trend amidst ongoing Fed rate cuts.
The recent surge in the renminbi by 3,000 points underscores this shift. As the dollar's international status dwindles, the rise of the renminbi appears imminent. Conversely, we may also witness the dawn of a new era focused on barter systems, where control over manufacturing capacity dictates economic power dynamics.
The U.S. will no longer be able to wield its dollar as a tool to procure cheap goods globally. The days of low prices in America have faded away, and escalating living costs will catalyze dissatisfaction among the populace, potentially redefining the U.S. as an economic outlier.
In contrast, China, with its comprehensive industrial capabilities, is poised to dominate the global landscape in the next three decades, leveraging its manufacturing strengths.
- 2024-06-29
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