In the new year, the number of days when domestic stock prices decline due to bad news from the United States is slowly increasing.
A decline in the stock market also adversely affects the economic situation of those who do not invest in stocks.
Even if I try to read some articles on the financial situation in the United States because I am curious, there are many difficult words.
Sometimes the financial market fluctuates because of 'tapering', but now the stock price falls again because of what is called quantitative 'tightening'.
Quantitative easing was also annoying, but what is quantitative 'austerity'?
However, it is highly likely that our economy will be greatly affected by such difficult words this year.
Even if I don’t usually spend a penny or meet a single foreigner, the food I ate today, the clothes I wear, the means of transportation I used, the building I’m in…
None of them have anything to do with the flow of international dollars.
Because today's world is so closely connected.
Despite the performances of BTS, <Squid Game> and Son Heung-min, in terms of 'money flow', the Korean economy is nothing more than a small boat floating in a sea of dollars.
When the sea of dollars gets rough, our lives aboard the Korean ship also suffer.
So, in <Newsship> today, we would like to help you understand some concepts necessary to understand how the 'sea of dollars' works.
In a nutshell, this year, the dollar will end its negligent management and enter the 'belt-tightening' mode.
This is bad news for our economy.
The global economy that almost ran out of money, now worry about money flooding
In the past 15 years, the global economy has gone through several crises, including the subprime mortgage crisis of 2007-2008, the eurozone national debt crisis in 2011, and the COVID-19 crisis in the past two years.
Each time, the flow of money was blocked and a crisis came, and major countries poured astronomical amounts of money to break the blockage.
Some were borrowing and scattering, and others were printing out money they didn't have.
The method was quantitative easing (loosening the amount of money).
From 2008 to recently, the amount of money released by the Federal Reserve, the central bank of the United States, has increased and increased to more than $8 trillion.
(Graph below)
At this time last year, the Wall Street Journal published the following illustration.
People cheer for the money being sown by the inflated dollar giant, but that's not normal by anyone's eyes.
This illustration suggests that the dollar giant will either blow up to its limits or collapse due to the fishy wind.
The fact that countries have printed astronomical amounts of money and sprinkled them is similar to using a lot of poison to save people who are seriously ill.
If you have overcome the crisis, you need to reduce your medications and strengthen your constitution so that you can live without medications.
If a patient continues to depend on drugs and lives without caution, saying that it is worth living when he is weak, the patient will eventually get sick.
So is the economy.
The biggest side effect of 'free money' is that the value of money decreases.
When the value of money declines, relative asset prices such as houses and stocks bubble up and prices rise.
Ultimately, it's a matter of getting money back.
The phrase 'quantitative austerity' means that the US is now reducing the amount of money, but this is not just a US problem.
This is because the dollars printed by the United States flowed around the world and supported the markets of each country.
Although New York City is depicted in the WSJ illustration introduced above, Korea also cheered the green monster spilling dollars.
And now the party is coming to an end.
If we compare it to farming... Quantitative easing, tapering, quantitative tightening
The cycle of 'crisis → releasing money → overcoming → collecting money' can be compared to farming. If the rice paddy floor is cracked due to drought, rice cannot grow. Somehow, we have to draw water and fill the paddy fields. Even when the rice is in full bloom, it is difficult if there is too much water. Farmers adjust the water level by reducing and reapplying water. When the ears are ripe, water must be drained from the rice fields. Otherwise, the roots will rot.
The same is true of getting through the economic crisis by releasing money. The first step in pouring money is quantitative easing. When it is judged that the economy has passed the crisis, the additional supply of money is gradually reduced. This is 'Tapering'. If you look up the meaning of 'tapering' in the English dictionary, it comes out that 'the width becomes narrower and thinner'. Up to this point, the amount has only decreased from before, and the water is still being added. You can think of the step of draining the rice paddy as quantitative tightening.
The fact that the central bank, which implemented quantitative easing, moves toward tapering and quantitative austerity, assumes that the economy has improved considerably. It is like not draining water from the rice paddy even though the ears of rice have not been harvested, and not stopping the medicine even though the condition has not improved. However, in the international financial market, stock prices fluctuate when there is talk of tapering or quantitative tightening. The stock price so far has been inflated beyond the real performance of the real economy, and I think it was because of the excess dollars that the Fed loosened. In the United States, stock prices fell when economic indicators were good, and stock prices rose when economic indicators were bad. This, too, happened because investors feared that the Fed might withdraw money if economic data improved.
The US central bank, the Fed, the biggest player on the poker game of international finance, doesn't want the market to be over-shocked in the process of collecting the dollar. So, the Fed is constantly 'pushing' with the market by word of mouth. Some say that the tapering is going to happen soon, then change the word to delay it, or they say that they will go beyond tapering to quantitative austerity, but they say that they are not doing it right away. This is to mitigate the impact on the world of 'collecting loosed dollars' by allowing other investors to stay on the board for as long as possible. When you see an article about the Fed and say, 'What the hell are you going to do? If you ever think, 'I don't know,' it's because of the Fed's intentions. But, how does the Fed collect money? To explain this, it is necessary to first understand how the money was released.
[Why did you loose money in the first place] 20 years ago America's 'Young-Chul'... Then the bubble burst
From the 90's to the late 2000's, a craze for owning a home swept across the United States.
People borrowed more than they were able to repay.
Banks facilitated this by lending business.
Then, the right to receive money (bonds) was combined and sold as securities.
Investors who know a little bit about finance bought it, and even reassembled these securities to create another derivative and sell it back.
When house prices went up, it was called 'Everybody Happy'.
However, the inflated price does not remain indefinitely.
At some point, the number of people unable to repay their loans began to increase, and house prices began to fall.
The number of 'tin cans' houses, which cannot pay off their debts even if they sell their houses, has surged.
Securities and derivatives based on those debts began to go flat.
This is the 2007 sub-prime mortgage crisis.
A number of famous banks, such as Bear Stearns and Lehman Brothers, which were the cornerstones of Wall Street, flew away at this time.
Even the automakers that symbolize American manufacturing are on the brink of bankruptcy.
Banks have to lend money to the market for the economy to work, but the surviving banks trembled in fear, saying, 'We don't know who it will go to.'
The Fed, the central bank that supplies money to banks, has stepped in.
Low interest rates allowed banks to borrow money.
However, the banks did not take out loans.
Although interest rates were low, he was holding onto only government bonds that would not go bankrupt.
It was also not easy for the US administration to come forward to solve the finances.
The economy is messed up, so less taxes have been collected, debts have already been paid, and 'a company that has been negligent and can't pay back must go bankrupt for capitalism to work properly.
It is because the political opposition that the government should not help was not formidable.
The Fed had to find a new solution to overcome the economic crisis.
That is why quantitative easing was introduced.
[Quantitative Easing] Central banks suck in bonds and put money in the market
The Fed is trying to convince commercial banks.
This conversation would have happened.
(This is a moving picture. Please wait until the bonds and money bags are exchanged.)
From the bank's point of view, if the central bank buys the bonds it holds (the debtor may go bankrupt if the economic situation does not improve), the burden will be reduced (easing) and the amount of cash in hand will increase.
In the 2010s, US banks began to actively lend out, and the US economy was able to walk on a path of recovery.
At this time, the Fed did not pay the money already in the vault as bond prices, but created money that was not there and gave it to the banks.
Instead of distributing real paper money by turning the Mint's rotary press more, it only increased the balance electronically in the accounts of private banks opened at the Fed. )' used a lot of metaphorical expressions.
Metaphors such as 'spraying money in the air with a helicopter' were also frequently used.
The Fed did not stop there, but bought high-quality US government-issued bonds that were circulating in the open market.
Institutional investors such as banks say, 'Government bonds are safer than stocks or other risky assets even if the interest rates are low.'
By lowering the expected rate of return when buying bonds, it encourages them to invest in higher-risk, higher-return sectors.
These activities are collectively referred to as 'quantitative easing' (QE for short).
[A more kind and detailed explanation] Why is money released in the market when the central bank buys bonds?
If the central bank buys bonds issued by the government, such as government bonds, why is money released into the market?
The simplest way to understand it is to think of it as a commodity such as red bean bread instead of bonds.
What if the central bank buys 1 billion won worth of red bean bread?
There are 10 billion won in the market.
What if the money wasn't originally in the central bank vault, but freshly printed out to buy red bean buns?
New funds are being supplied to the market.
Isn't it easy?
Now, it's time to put the bond in the place of the red bean bread and think about it.
A 'bond' is a document in which A borrows money from B and writes how much interest and principal it will pay back by when.
If A is a company, it is called a corporate bond, and if A is a government, it is called a government bond.
Institutions that make big money also buy stocks, but manage large chunks of money in bonds.
Let's say that a US Treasury bond with a face value of $1 million is issued with a 10-year maturity and an interest rate of 2%.
The investor who bought the bond could then earn $200,000 in interest over 10 years at $20,000 a year.
A simple calculation comes out that if you buy this bond and hold it fully for 10 years, you can get a 20% return.
But, what if the demand for government bonds increases for some reason?
(Usually, when the private economy is thought to be unstable, investors' money is poured into government bonds for safety. The government is less likely to go bankrupt than private companies.) When demand increases, the price rises, just like red bean bread or bonds.
In the market, the following situation occurs.
Suppose you win the competition and buy this Treasury bond at $1.2 million above its initial face value. The 2% annual interest rate and 10-year maturity are imprinted on the bond from the beginning, so it does not change. The return you can expect from holding this bond to maturity then drops to around 16% instead of 20%. The numerator is still, but as the denominator increases, the fraction decreases.
Then other investors will be worried. Should bond prices rise and yields have fallen, but should you buy government bonds because they are safe, or should you invest in stocks or businesses that have a higher risk than government bonds but yield higher returns? The Fed's purpose is to push up bond prices, not to make more money by investing in bonds, so it continues to buy bonds regardless of yields falling. If this continues, you will invest in stocks or businesses that can expect returns of 5% or 10% or more per year rather than 2% annual Treasury bonds. The Fed, the central bank of the United States, bought government bonds from the market to achieve this effect.
The Fed's quantitative easing also had the effect of allowing the US government to spend more money. Let's go back to the case we assumed earlier. The U.S. government doesn't have to promise 20% interest over 10 years to borrow $1 million the next time it issues a bond. The rate of return used in the market is 16.66% ($200,000/$12 million), so you just have to say that you want to pay that much interest. Now, the government can borrow money from the private sector and execute its finances at a lower cost than before.
If we go one step further, the central bank will print new bonds to buy bonds issued by the government.
When the government issues bonds to the market, it is a concept that the government borrows excess funds from the market.
If done properly, the government can draw money from the private sector and use it where it is absolutely necessary to revitalize the national economy.
However, issuing too many government bonds can have the side effect of putting too much money in the government's pockets from the private sector.
Then, in the private sector, as money becomes precious, the value of money (= interest rate) rises.
It hurts people who seek money from the private sector to invest or start a business.
Then, there is a way for the central bank, not the private sector, to create new money to buy bonds issued by the government.
There is no need to bother with the fortress as it is a world where money is created by simply clicking on a computer without the need for laboriously using pulp and ink.
If the government purchases services and products from private companies with the money thus raised and distributes welfare benefits, the supply of money to the private economy can increase significantly.
(Again, it comes with side effects.)
[I heard this saying] What does 'the Fed's balance sheet shrink' mean?
In articles dealing with the central bank's role and the flow of money, the phrase 'the Fed is trying to shrink its balance sheet' appears frequently. This is an abbreviation of trying to reduce 'assets' on the balance sheet.
If the various tactics of quantitative easing were used to release money, the Fed's pockets would be full of bonds. bond is something. The right to receive money was made into a deed. The money I will receive is recorded as 'assets' in the accounting books (balance sheet, balance sheet). In other words, when the Fed says it will reduce its balance sheet assets, it means it will reduce the bonds it has bought and piled up. Why did the Fed buy bonds? I bought it to free money from the private sector. In other words, as much money as the bond price is going out to the private economy. When the Fed "shrinks its balance sheet," it means it sucks money back. It's an important graph, so let's look at it again.
This graph shows how much assets (money received, bonds) have grown on the Fed's balance sheet since the subprime mortgage crisis.
Once in 2012, once in 2018, it declines a little and then rises vertically from 2020.
It is a sign of buying bonds and releasing money (quantitative easing) to prevent businesses and self-employed people from going bankrupt and people losing their homes due to the COVID-19 lockdown.
Quantitative tightening is the process of bringing money sent out as bond prices into the Fed's pockets.
The quickest way is to get your money back now without reinvesting the maturity extension for bonds that have returned to maturity.
A more aggressive method is to sell bonds with remaining maturities on the market.
The money is then absorbed by the value of the bond and returned to the Fed's pocket.
When the supply of bonds increases in the market, bond prices fall, and the opposite effect occurs as described above. Therefore, those who want to borrow money by issuing bonds from now on must promise a higher interest rate.
Borrowing money will become burdensome and asset bubbles will become difficult to sustain.
This is the effect the Fed intends to “tighten the dollar’s belt”.
However, if a big hand such as the Federal Reserve pours out bond volumes, it can cause a big shock by causing a plunge in bond prices and a surge in interest rates in the market, so watch the situation carefully.
Everything is a matter of degree.
It's time to tighten the belt of dollar supply
Currently, the Fed is weighing in on a variety of cards that will raise money, from different methods of quantitative austerity to higher interest rates overall.
This is because, as everyone has already experienced, the side effects of too much free money - overheating the asset market, polarization, etc. - are formidable.
Another megaton level economic crisis may come in the future, but in order to overcome another crisis, the US central bank needs to collect some money now that the situation has improved.
The problem is with other countries that have benefited from cheap dollars.
More than $8 trillion of money released since 2008 has flowed into various parts of the world, serving as a nourishment and tonic for each country's economy.
The 'country' includes Korea as well.
Now that the Fed has changed its policy direction, the dollar will gradually return to the US or move to a place with higher interest rates.
It is likely to be a troubled year for most countries due to the depreciating dollar and the depreciating domestic currency.
In addition, the currency swaps between Korea and the United States and Japan have ended.
If you go to a fishing village with a large difference in tides, boats that used to catch fish when the tide came in were trapped in the tidal flats at low tide and couldn't move.
It doesn't matter if you know the low tide and try to rest according to it, but if you don't know it, you're out of luck.
Are you reading accurately how the Korean ship, which was fishing in the dollar sea, rises and flies?
What should I do?
This is a question that has nothing to do with your account.
[Composition: Senior Correspondent Lee Hyun-sik (D Content Production Committee member), Reporter Seon-i Jang / Designer: Ha-eun Myung, Jung-ha Park]