**Preface** Regarding the question of whether the Federal Reserve will cut interest rates in September and by how much, we are aware that the capital markets such as the U.S. stock market, real estate, bonds, and pension funds have undergone deep adjustments in their price trends over the past six months.
In conjunction with the "Sam Rule" triggered by non-farm employment data falling below the average of the past 12 months for three consecutive months, and the core inflation rate consistently falling below market expectations for several months, I believe the probability of a 25 basis point interest rate cut in the dollar is over 50%.
Taking the overall price trend of yen assets as a reference, from the corresponding changes in indicators such as the Nikkei index, Japanese government bond yields, yen interest rates, and the Japan-U.S. currency exchange rate, we can conclude that the global economic situation has been in a liquidity trap for a long time.
If this situation continues, it will inevitably trigger a debt repayment crisis in Japan and the Eurozone, and transmit to the global financial system, causing a chain reaction in the trading and circulation markets of major asset classes, including dollar assets, in the main capital markets of countries around the world.
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The internal fragility risk of the financial system will spread to the real business markets of the world's major economies.
Although a dollar interest rate cut can alleviate the negative effects of the liquidity trap to some extent, it poses a risk of bursting the asset bubble within its territory.
During the last round of dollar interest rate hikes, liquidity anchored by the dollar from around the world all flowed back to its territory for industrial investment or purchase of financial products.
If this round of interest rate cuts triggers uncontrollable risks, leading to a sharp decline in the production ratio of enterprises, the return on investment for investors, and the total factor productivity, then these funds will shrink significantly, liquidity will also tighten, leading to a deeper and all-round liquidity trap, which is an "ace" level existence in the financial crisis.
Looking at past financial crises, they are all inseparable from the liquidity trap, but this time it is different from the essence of the financial crisis in the past, especially fundamentally different from the financial crisis in 2008.
This financial crisis is more similar to the global economic depression of 1929 and the great stagflation in Europe and America in the 1970s: First, according to Mises and Schumpeter's business technology innovation cycle theory, similar to the domestic situation, the global economic situation is also in the era background of "new and old momentum conversion"; second, according to Merrill Lynch's investment clock and Kondratiev cycle theory, combined with the industrial revolution causing the economy to present cyclical depression and prosperity alternately, this round of financial crisis is more like a combination of the Great Depression and the Great Stagflation, rather than an economic crisis caused by cyclical recessions like the 1997 Asian financial crisis or the 2008 global financial crisis; again, the great power game induces the reshaping of the global order after World War II, leading to an increase in geopolitical conflict risks, which is a new variable that has not been seen in previous changes in the global economic situation.
In summary, once this global financial crisis fully erupts, it will manifest the following three characteristics: complexity, long-term, and confrontation.
Although China is deeply embedded in the global order and the international industrial division of labor system, this global financial crisis will bring some negative external impacts to China to varying degrees.
However, thanks to foreign capital control and the settlement system, even the biggest external factors cannot fundamentally collapse China's economy and the operation of the entire society.
On the contrary, the structural problems generated by the domestic operation system itself are the potential hidden dangers or risk factors that can collapse China's economy.
Since the 1980s, China first formed a system dividend through reform and opening up, formed a technology influx dividend through attracting investment, and formed a scale dividend formed by geography and population to develop the economy, thus accumulating the endowment advantage of production factors.
Secondly, under the guidance of the idea of taking economic construction as the center, by including indicators such as GDP into the performance assessment of local or county-level administrative subjects, and taking the development of low-end manufacturing industry as the focus, a development model of export-oriented manufacturing export as the engine of economic growth was formed.
Then, by cultivating talents in overseas technology or production industries, a test-oriented education model was formed, forming a large number of engineers and talents in related industries.
For the first time, it seized the opportunity of the times to introduce industrial capital from Hong Kong, Macao, and Taiwan to the mainland, and built a "front shop and back factory" operation model.
Then, increase the supply of production factors such as land, labor, and taxes, which is equivalent to a large-scale decentralization, to form a system venture capital model, and lay a solid foundation for the modernization development of China's economy.
In 2001, China officially joined the WTO, marking the beginning of our integration into the global economic and trade order, the global manufacturing industry supply value chain system, and the international high-tech industry division of labor cooperation pattern, and once again seized the opportunity of the times to introduce a large number of foreign capital and enterprises, and vigorously develop the Internet information technology of personal terminals and mobile terminals, and the manufacturing of consumer electronic products, becoming the world's second-largest manufacturing country in related industries.
In 2008, the global financial crisis broke out, ending the momentum of China's economy deeply embedded in the global system, and ushering in the era of debt-driven investment model.
At that time, the four trillion fiscal plan was invested in the real estate commodity housing market and large infrastructure construction projects, taking the real estate market as the engine of domestic economic growth, and forming a "double dragon head" of economic development with the manufacturing export industry.
At the same time, the real estate market became a basic money reservoir, an asset price stabilizer, and an investment target destination.
From 2008 to 2020, China officially entered the golden development period before the Lewis population turning point as described by economist Gu Chaoming.
During this period, China not only became the world's factory, that is, its economic and trade exchanges with most countries or regions in the world ranked first, but also became the "infrastructure crazy devil" at the beginning of the 21st century.
However, with the gradual disappearance of the dividends of the early reform and opening up and the construction of the economic system, and the impact of the global financial crisis on the globalization 2.0 system has not been repaired for a long time, coupled with the marginal utility of the economic growth double engine and infrastructure investment all showing signs of diminishing, in 2014-2015, the capital market dominated by the real estate market and the stock market showed a large decline, and the debt scale dominated by local urban investment platform enterprises just reached the peak at that time.
In order to boost the economy, China implemented a series of measures including supply-side structural reforms from 2016: externally adopting asymmetric competitive means, taking the maintenance of the global order as the main image, successively seizing the market share of low-end manufacturing production and export trade, and increasing efforts to attract foreign capital and enterprises to settle in, and encouraging export industry entities to expand overseas markets; internally suppressing the price of production factors to stabilize the scale cost of the manufacturing export industry.
Especially for the real estate market, carry out the urban renovation and monetary resettlement projects of the second and third-tier cities and counties; for the large infrastructure market, carry out the national infrastructure construction network projects.
In terms of debt monetization, externally solve the problem of tax reduction and fee reduction for export industry entities through local general public budget expenditure and special bond financing; internally, expand the credit scale of the household sector, that is, make them bear personal housing loans, which invisibly increases the debt ratio and leverage ratio of the household sector.
In addition, expand the credit scale of the enterprise sector dominated by real estate developers, that is, also make them bear large loans to increase debt.
In the case of the rise of local urban investment bonds, general bonds, and special bonds, only the bank's asset income has increased significantly, and the local administrative department's income from the transfer of state-owned land has also increased significantly.
Apart from the central administrative body and the public ownership body, almost all social departments are heavily indebted.
Taking state-owned land as the source, including commercial housing, commercial land, industrial infrastructure and other basic social production factors are all significantly overvalued, which not only increases the cost of residents' lives and the cost of business operations, but also has a negative effect on the cost control of the administrative department's social governance and the reduction of the transaction market's institutional barriers.
In 2018, the economic and trade game between the great powers was imminent, causing the manufacturing export industry to be the first to suffer, and the employment positions related to hundreds of millions of people were suddenly reduced, and the expected income decreased, and the first round of liquidity crisis swept through.
Subsequently, the technology field was strangled, and the supply of semiconductor chips was cut off, causing the manufacturing industry to face great uncertainty.
With the real estate and infrastructure market in China driven by debt, over-financialization, administrative intervention, and even overdevelopment waste behavior, the marginal utility of the industry or industry is accelerating, China's economy exposed a series of structural challenges at the beginning of 2019.
However, the global public health crisis that broke out at the beginning of 2020 can be said to temporarily cover up these challenges and problems, and it is also a catalyst for the comprehensive deterioration of the structural problems of the entire economic system.
The crisis has made China's manufacturing exports reach the highest share in the global market, and set a record for the production volume of the supply chain since modern human civilization, but it also made China ignore the long-term risks, and only noticed the existence of the real estate bubble, so it carried out a movement to overturn the three big mountains affecting the survival of residents, including rectifying the supply side of the real estate market, and implemented financing tightening policies such as the three red lines for real estate developers.
Since then, the real estate market has been sluggish, and it has been bottoming out to the present, which has led to a series of structural problems in the economic system, and followed one after another: first, the residents of the existing housing started to repay the loan in advance, and some real estate developers' housing projects were abandoned, which strengthened the upper level's determination to ensure the delivery of the building, and then it was transmitted to the financial institutions, forming a large number of bad debts as the underlying financial products and financing mortgage projects, and then it was transmitted to the capital market dominated by stocks, bonds, and foreign exchange, causing the main source of income for residents, the operating profits of enterprises, and the income from asset operations, as well as the fiscal revenue of local and central administrative bodies, all declined, and the entire society fell into a situation of asset-liability table recession, liquidity trap, and other asset deflation spirals, unable to extricate itself.As of now, among the four major sectors of society, residents face the crisis of not being able to cover their expenses due to pay cuts and layoffs, leading to defaults on mortgages or business loans, credit breaches, and other crises; businesses are caught in a vicious cycle of insolvency, irrational competition, and a significant decline in revenue net profit, return on investment, and input-output ratio, with severe cases facing bankruptcy and asset shrinkage for restructuring to achieve market clearance.
Financial institutions are mired in high costs of disposing of negative assets, widening net interest margins leading to a significant drop in earnings, and insolvency leading to bankruptcy and restructuring in a liquidity crisis.
As for the administrative departments, they are caught in a sovereign credit default crisis due to excessive government debt financing and the inability to repay bonds.
The "three engines" that drive economic growth, manufacturing exports, face the disintegration of the existing global economic integration order, the desire of Western traditional powers to reshape it, and the pursuit of diversification in the supply value chain of manufacturing industries and the diversity of international high-tech division of labor, which are not conducive to China's vigorous development based on the global system, and the realization of the vision or goal of industrial upgrading and economic structural transformation.
In terms of infrastructure investment, it has long shown characteristics of overdevelopment waste, rapid asset depreciation rates, and diminishing marginal utility of industry investment, highlighting phenomena such as credit expansion saturation, investment target scarcity, insufficient production ratio, and a significant decline in net investment return and total factor productivity.
Commercial consumption, including social retail consumption and bulk commodity consumption, also shows signs of excessive depression, reflecting the situation of insufficient effective domestic demand, insufficient resident purchasing power, and overcapacity on the supply side of enterprises.
As for the five major capital markets, including stocks, bonds, exchange rates, futures, and insurance, they all show the objective reality of long-term insufficient effective investment.
Although constrained by the aforementioned factors, it is more due to insufficient improvement of systemic issues facing the entire sovereign entity and the failure to effectively resolve social systemic issues.
In general, China's economy is facing an unprecedented systemic challenge, mainly from economic structural challenges such as the mechanism of transforming basic money in the financial system into substantive credit resources, residents' inability to cover their expenses, businesses' insolvency, and excessive development by administrative entities; social structural challenges such as dual asymmetry between inside and outside the system, urban and rural areas, public and private entities, and the behavior of planned thinking and administrative bureaucracy that is not open and transparent in guiding the distribution of wealth resources; and systemic challenges such as insufficient legalization of market economy and the weakness of modern governance capabilities of sovereign entities and cross-regional multilateral organizations.
The above three major structural challenges related to the operation of the sovereign entity system are caused by resource misallocation, supply and demand imbalance, short-termism, speculative arbitrage, administrative intervention, and the lack of a long-term mechanism for mutual checks and balances among powers.
Of course, in addition to the above three structural challenges faced by the sovereign entity system, China will also face an unprecedented challenge in the future: externally, it is the new Kindleberger trap, and internally, it is the Tassilo trap.
How to avoid falling into these two traps will be a major issue that determines the future direction of China's fate.
As for how to deal with the above systemic challenges, I believe that it is only necessary to go against these causes and practice in the opposite direction.