**: Peking University HSBC PFR
Author: Zhang Wenkui, researcher at the Development Research Center
Recently, the famous economist Professor *** talked about China's economy again, believing that "China's current difficulties are in several aspects, and it should not be difficult to solve them, but the economic theories involved are not so simple." The "one-shot prescription" he gave was that "in addition to not restricting property prices, China's central bank should push the annual inflation rate to about 6 percent as soon as possible, and then adjust it to 4 percent, and then let this 4 percent inflation rate continue until the overall economy has a comprehensive and considerable development." ”
This has caused quite a bit of controversy in academic circles. There is a view that an increase in inflation does not necessarily affect production decisions, while there is a view that raising inflation at the moment will even bring about stagflation. Previously,Zhang Wenkui, a researcher at the Center for Development ResearchWrote an article in the "Peking University Financial Review" and pointed out:
Even though many scholars emphasize that this round of inflation has the same monetary factors as the previous inflation, they have more or less ignored the emergence of some important new characteristics and new laws ...... the formerThere is a huge tension between curbing new inflation and maintaining financial stability and sustaining economic growth. This tension may even make the transition between inflation and deflation elusive, as not only the central bank will shrink its balance sheet, but also the corporate and household sectors, creating what is known as 'balance sheet deflation', bringing inflation and deflation just one step away. Therefore, it is not surprising that at a time when inflation is very serious, there are people who are worried about stagflation or even recession. ”
Even though the "new inflation" is not well understood and studied in the academic community, it is still here and has a profound impact on people's lives. In 2023, the Federal Reserve will continue to implement a policy of raising interest rates to suppress inflation, and its high interest rates have caused fears around the world: higher interest rates and a stronger dollar may trigger a new round of debt crises in developing countries and regions. In this context,The upcoming issue of Peking University Financial Review focuses on the "New World of Interest Rates", trying to objectively review the course of the Federal Reserve's interest rate meeting and the evolution of decision-making, and provide a benign platform for various research and practices in academia, finance and policy. Stay tuned.
This article was published in the 13th issue of Peking University Financial Review.
At the beginning of 2021, very few people were able to see significant global inflation, and many scholars were immersed in Modern Monetary Theory (MMT), arguing that the huge debt and debt monetization policies brought about by the pandemic would not translate into severe inflation. Until the fall and winter of 2021, the US Treasury and the Federal Reserve still considered inflation in the United States to be transitory. In the spring and summer of 2022, not only did inflation run out of control and cause social unrest in some less developed countries, but inflation in the United States and many European countries hit a new high in about four decades. However, there are still many people who blame this round of severe global inflation mainly on the Russia-Ukraine conflict, which is actually unable to distinguish the difference between the causes and causes of severe inflation. Furthermore, even though many scholars emphasize that this round of inflation has the same monetary factors as previous inflation, they have more or less ignored the emergence of some important new characteristics and new laws in the former. The author believes that without in-depth and detailed research on new inflation, it will not only help curb the current round of inflation and put the global economy back on a steady growth track, but may also repeatedly implement some wrong policies in the future, making the global economy more fragile and weak.
The macro model of "carving the boat for the sword" and the "earth-shaking" monetary revolution
Traditional macroeconomics has a relatively clear analytical framework for the relationship between money supply and the product market, and even the relationship between the labor market unemployment rate, whether it is Keynesian theory or monetarist theory, for a long time has its own supporters. However, many of the analyses are actually empirical and are based only on a few decades of experience. Strictly speaking, these are not really theories, but are somewhat similar to "carving a boat for a sword". There are even some economists who believe that the macroeconomic aggregate supply is an illusory and unrealistic concept, which will undoubtedly shake the analytical framework of the aggregate level. Even if the concept of aggregate demand could be based more on monetary delivery, it has more or less the same problem. Therefore, in reality, we can see that energy and food are serious, while many other products have not risen highly. Of course, it is not easy to get a fixed analysis conclusion on the extent and speed to which energy and food will be transmitted to other categories of markets. The service industry accounts for sixty or seventy percent of many economies, which is exactly the sector that the product market theory cannot deal with well, because many service industries are not the best industries, or have a high degree of individualization and closure, not to mention that the boundaries and relationships between the service sector and the industrial sector are not what they used to be under the impact of new technologies such as digital technology and new business formats. In other words, there are many controversies and loopholes in macroeconomics' understanding and measurement of the real economy, as well as the relationship between the real economy and the supply and circulation of money, and the huge structural changes that have taken place in the real economy in the past few decades to the present will only make these controversies and loopholes more obvious. By and large, macroeconomic models still lack a solid microeconomic foundation, making macroeconomic models awkward when the real sector changes dramatically.
The currency itself is also undergoing earth-shaking changes, and it is difficult to measure the amount of money in circulation in the traditional M0, M1, and M2, let alone how to measure the speed of money circulation. It can be said that the innovation of monetary and financial instruments has had a subversive impact on the traditional definition and cognition of money, and not only the monetary instruments of the central bank are increasing day by day, but even many bills and certificates issued by commercial financial institutions and even some industrial and commercial enterprises have the nature of money. In particular, the rise of digital technology and digital business models is far from fully revealing the disruptive significance of traditional currencies. As a result, it has been difficult to analyze important economic indicators, including the inflation rate, using the past money supply and circulation formulas. Zhou Xiaochuan, the former governor of China's central bank, touched on this problem, he revealed that the People's Bank of China said that the research and development of digital currency is to replace M0, but he believes that although such a positioning can avoid the impact on the normal operation of the M1 system, but there is a pipeline connection between M0 and M1, which is approximately equivalent under certain conditions;Whether digital currencies are based on tokens, accounts, or payment instructions, there are interoperability problems in the end. The New York Fed President Williams also said that the development of digital currency and payment technology will undoubtedly change the composition of the Fed's balance sheet, and the development of private money networks and the growth of the crypto market, as well as the expansion of private payment options, will have a profound impact on the traditional financial system. On the whole, the process of monetary change has just begun, or it can be said that a monetary revolution is coming. Even the currency itself will undergo a revolution, so the money delivery, currency circulation, currency payment and settlement, will inevitably undergo a revolution, so it is easy to understand that all kinds of equations involving money and ** in macroeconomics will usher in challenges.
The asset market has become increasingly large and complex, and more and more ordinary people are involved in asset trading and holding activities, which has brought a great impact on the traditional monetarist theory and Keynesian theory. Now, it is difficult to limit total spending to goods and services, and it is difficult to limit the circulation of money to the real economic market. Not only does the purchase of property account for a high proportion of people's total expenses, but the market for insurance products and other investment products, as well as art and entertainment items, as well as various virtual items in the digital age, is growing rapidly. Although the existing currency and ** models also consider the asset market, they are far from sufficient and in-depth, and they cannot measure the linkage between the trend of **asset**, the asset market ** and the product market**. However, ordinary people can already feel that currency will flow between different types of asset markets, as well as between asset markets and product markets, and of course, it will also bring about various huge changes and fluctuations. Importantly, the huge shock of assets** can have a huge impact on many people's wealth, balance sheets, cash flows, and affect their income levels, spending decisions, and living standards. The increasing popularity and flexible use of new currencies such as cryptocurrencies and some types of currencies in the virtual market will further expand and complicate the asset market, and will also impact the past monetary equation. Scholars and ordinary people are concerned about income distribution, and the redistributive effect of asset market volatility can widen the wealth and income gap. Many people may think that assets*** are a good thing because they make people richer, which in turn drives consumer spending and economic growth. But assets are more elusive and prone to huge bumps than commodities, and will encourage the popularity of Ponzi schemes, mergers and acquisitions, and restructuring games, which will have a great impact on people's wealth distribution, and of course affect expectations and inflation, as well as economic growth.
All in all, behind the new inflation, there are various new factors, new trends, and new categories, and the theoretical challenges brought about by them are very huge, which need to be carefully studied by the academic community. It is important to make policy recommendations on how to control current inflation, but it would be somewhat remiss for the academic community to be obsessed with the current policy recommendations and ignore these theoretical challenges and try to make some academic progress.
The balancing policy dilemma in the "risk-backed growth" channel
Even though the "new inflation" is not well understood and studied in the academic community, it is still here and has a profound impact on people's lives. Just when it is difficult for the sector to fully quantify the new inflation, the new inflation will first pick some "seamed eggs" to bite, for example, some assets, some commodities are sharply, or the supply shortage and rise of products with chain pressure, logistics blockage, and production constraints are indicated. Even at this time, many people prefer to use ambiguous language such as "structural inflation" to downplay the harm. But finally, a wide range of products has arrived. This is the case in many countries, both in terms of CPI and PCE.
In the face of this situation, the economic policies of many countries around the world have chosen to raise interest rates aggressively, not only in developing countries that suffer from inflation, but also in the United States and the European Union. The aggressive rate hike policy heralds the end of the era of low interest rate policies of the past few decades and will have significant long-term implications for debt markets and financial markets as a whole. But it is worth digging into the question of whether such a rate hike policy, and the corresponding central bank's balance sheet reduction policy, will it be able to curb this new inflation more quickly and significantly, as policymakers expectedSecond, even if this policy goal can be achieved, what will be the impact on macroeconomic stability, especially medium- and long-term economic growth, such as whether it will lead to stagflation, which is currently talked about a lot, or a new round of financial market turmoil, or a widespread economic downturn or even long-term stagnation?
The reason why we need to ask these two questions is that although new inflation and traditional inflation are both rooted in the excessive issuance of money, they are still very differentAt the same time, the global economic growth model has undergone significant changes compared to the past. One possibility is that the policy of raising interest rates and shrinking the balance sheet will still have a significant restraining effect on the traditional monetary supply and demand expansion, but it will not have much impact on the launch and use of many new financial instruments and new trading toolsIn addition, in the era of globalization of the first chain and the globalization of currency flows, global output can be quickly allocated among different countries and regions, so a country's total output may not be simply affected by its own monetary policyHowever, the international flow of different currencies and exchange rate fluctuations will affect a country's aggregate demand and international purchasing power, and monetary policy cannot relieve the pressure on the first chain. This complex set of relationships will bring great confusion to the policy of raising interest rates and shrinking the balance sheet. Another possibility is that as the global growth model becomes increasingly dependent on debt expansion, rising interest rates and balance sheet shrinkage will put enormous pressure on debt financing costs and debt service capacity, which will shock debt markets and the financial system as a whole, and pose a threat to economic growth, which will counteract policy intentions to curb new inflation. Either way, it means that there is a huge tension between curbing new inflation and maintaining financial stability and sustaining economic growth. This tension may even make the transition between inflation and deflation elusive, as not only the central bank will shrink its balance sheet, but also the corporate and household sectors, creating what is known as 'balance sheet deflation', bringing inflation and deflation just one step away. Therefore, it is not surprising that at a time when inflation is very serious, there are people who are worried about stagflation or even recession.
In the final analysis, new inflation tends to put economic policy choices into a dilemma, and it is necessary to find a balance between suppressing inflation, preventing risks, and maintaining growth. In fact, as early as a few years ago, the International Monetary Organization suggested that the global economy would enter a period of "growth at risk" (or "growth at risk" (GAR). The so-called "risk-bearing growth" refers to the fact that in order to maintain a certain economic growth rate, in order to maintain a certain economic growth rate, it is necessary to take greater financial risks, and inflation may develop in the direction of stagflation or more severe inflation. Although a few years ago, the new inflation was not as obvious as it is now, and the International Monetary Organization did not say much about how to curb inflation, the overall situation and the logic of analysis were the same then and now. In order to achieve economic growth in the midst of "accompanying risks," it is necessary to dance the dance of economic growth amid the growing flame of financial risks. If a situation like Sri Lanka were to emerge in a number of countries, it would have a major impact on global market stability and economic growth.
Indeed, the pandemic has further contributed to the accumulation of debt and money around the world. The global macro leverage ratio rose by 20 percentage points to 215% during the 2008 international financial crisisIn 2020, when the pandemic broke out, it increased by 30 percentage points to 256%, of which the public sector leverage rate reached 99%. China's macro leverage ratio was only 143% in 2008, but it is close to 280% in 2020, and it is expected to jump to 300% in the next few years. Therefore, whether it is other countries or China, they will find a balanced economic policy in the "growth with risk" channel, which is equivalent to driving on a winding mountain road with deep ditches and rockfalls, not only to avoid deep ditches and rockfalls, but also to maintain driving speed. This requires not only a high level of driving skills, but also unprecedented analysis and judgment skills. For example, the United States has raised interest rates intensively and aggressively this year, the inflation rate has not fallen in the short term, and the economic growth rate has been negative for two consecutive quarters, but the labor and employment market is still relatively strong, and the demand side is relatively stable and strong, which makes the classic analytical framework and judgment basis in the past very embarrassing. In China, in the case of explicit debt and ** debt continue to pile up, the CPI does not seem to be very high, but the solvency, financing conditions and liquidity of many places and departments have deteriorated significantly, and the actual economic growth rate seems to deviate abnormally from the potential growth rate, which undoubtedly gives us a lot of problems in policy choice. In such a complex situation, it is likely that it is not only necessary to carefully select among the traditional macro policy tools, but also to move more attention to the supply side, in addition to trying to eliminate the short-term obstacles and important bottlenecks of the first chain and industrial chain, but also to stimulate the vitality and efficiency of the supply side, so that the "denominator" of the supply side can be as big as possible, increase efficiency and improve quality, so that the accumulation of debts, multiple currencies and leakage in economic operation These "molecules" can be gradually diluted and digested. Therefore, for China, if we can overcome the downward pressure on the economy on the one hand, better manage inflation risks and financial risks on the other hand, and prevent "accompanying risks" from evolving into "risks", we will usher in good development prospects.
The choice between neo-voodoo economics and deregulated economics
Of course, in an environment of theoretical challenges and policy dilemmas, it is easier to go further down the road of expanding the deficit and monetizing the deficit, and to use theories such as Modern Monetary Theory to justify and harmless this tendency. But some economists, such as Summers, the former president of Harvard University, have called this theory and the policies it advocates New Voodoo Economics. Although this denunciation is harsh and incomplete, neo-voodoo economics is detrimental to the future of global economic development if it is widespread and long-term in popularity. A better policy trend should be to do a good job of the "denominator" of the supply side through more structural reform policies on the premise of maintaining the tightness and appropriateness of macroeconomic policies and maintaining the basic fiscal and monetary discipline. Many economists have long advocated such policy tendencies based on their research, such as Shriver, a professor of economics at Harvard University, who argues that excessive regulation, especially supply-side entry controls, can seriously damage economic growth. This type of theoretical analysis and policy thinking can be called the economics of deregulation. We should be vigilant enough against neo-voodoo economics and should strive to implement deregulatory economics. This should also be done. In fact, in the past few years, a reform of "delegating power, delegating power, delegating power, delegating power, delegating power, delegating power, delegating power, delegating From 2013 to 2020, nearly 80 million new tax-related market entities have been established in China, and they will pay 38 trillion yuan, more than a quarter of the national tax revenue that year, the "13th Five-Year Plan" period of new tax-related market entities paid a total of more than 78 trillion yuan, which is larger than the scale of new tax cuts and fee reductions in the same period. Moreover, if a market entity drives an average of 8 10 people into employment, their wages can be converted into demand. China's per capita GDP is just over 1$20,000, the gap with developed countries is still very large. As long as we have correct ideas and appropriate policies, we will certainly have good prospects for development in the future.