But Sheng Songcheng, a counselor at the Shanghai municipal government and a professor at CEIBS, disagrees. In an interview with time finance on the afternoon of March 24, he said that the world will not move towards the great depression. Interest rate reduction and quantitative easing may not completely solve the economic recession, but they can avoid liquidity panic and prevent the economy from falling into the great depression. This is one of the biggest lessons and most valuable experiences the Federal Reserve has learned from the great depression and the subprime mortgage crisis.
Sheng Songcheng believes that the great depression in 1930s has a lot to do with the improper economic decision-making of Hoover government, but at present, the policies of the Federal Reserve and the United States government are trying to stimulate the economy, and history will not repeat. The Feds response has been very quick and its approach is basically right. The expansion of the Federal Reserve can greatly reduce the negative feedback cycle of economic and financial shocks.
Sheng Songcheng, counselor of Shanghai Municipal Peoples government and professor of CEIBS
The great depression will not happen again
Time finance: on March 24, the French finance minister said: the situation is very similar to that of the great depression in 1929. Its possible that we are facing a great depression, not a recession, in 1931, not in 2009, Jin Chengyu, a lifelong professor of economics at the London School of political economy, said in an interview. It is possible to face a loss of 40 per cent of the output of large countries, rather than 5 per cent. Do you think the world will go to the great depression?
Sheng Songcheng: I dont think it will lead to the great depression.
When the Great Depression happened in 1931, the government lacked the experience to deal with it, and the inappropriate economic policies resulted in the great depression. At that time, the economic thought that dominated the world was small government and big market, and the government should not intervene. Therefore, the Hoover government in the United States not only did not release water, but also tightened money and credit, which caused credit tension and liquidity contraction in the United States, and finally led to the great depression.
Its not the same now. The U.S. government and the Federal Reserve already know how to deal with the economic crisis. Although interest rate cut and quantitative easing may not completely solve the economic recession, they can avoid liquidity panic and prevent the economy from falling into the great depression, which is also one of the biggest lessons and the most valuable experience of the Federal Reserve from the great depression and the subprime mortgage crisis.
In the 2008 financial crisis, the disaster came from the financial system. And this time its different. The U.S. financial system is sound, and no major financial institution has major risks. The crisis is due to the direct impact of the epidemic on the economy, not the financial system. Therefore, the Federal Reserve supports the development of real economy through finance.
Recently, the Federal Reserve issued various positive stimulus policies, such as returning to the era of zero interest rate, launching $700 billion quantitative easing program, reducing the deposit reserve ratio of thousands of banks to 0, purchasing $75 billion of treasury bonds and $50 billion of institutional mortgage-backed securities every day this week, and even using the unprecedented helicopter money policy to directly Find gold for individuals, etc. These policies are to pull up the economy from both supply and demand.
Time finance: so you dont agree with the French finance ministers judgment that the situation is very similar to that of the great depression in 1929?
Sheng Songcheng: looking back on the characteristics of the great depression: the first lasted for a long time. From 1929 to 1933, it was four years in a row until 1936 that the economy recovered to its pre crisis level.
Second, it has a deep impact on the economy. The unemployment rate in the United States is as high as 30%. In some European countries, the unemployment rate is more than 50%. Even many people dont know. At that time, millions of people died of starvation in Europe.
Third, the Great Depression almost spread all over the world and became the fuse of the Second World War. Without the great depression, Hitler might not have been able to get on stage. Even if Hitler came to power, the economy of Britain and France would have been very strong, but the Great Depression depressed the economy of Britain and France. So without the great depression, World War II would not have happened.
Lets take a look at the current situation: first, the United States has experience in how to control the economic crisis; second, unlike in the 1930s, the information transparency and transmission speed are 50 to 100 times faster than before. In a few seconds or a minute, the world knows what happened to the epidemic situation and financial market; third, the development of science and technology, such as the new infrastructure proposed by China, with new technology Technology replaces traditional industries and promotes economic stability in many ways. All this suggests that the economy will not fall back into the same state as the great depression.
Of course, the impact of this epidemic on the economy is very serious, affecting the whole world, but I think the impact is still short-term and may last for half a year or more.
The Fed has not been kidnapped by trump
Time finance and Economics: Although the United States Agency has made a series of rescue plans, the circuit breaker has occurred four times in 10 days, and the effectiveness of the Federal Reserves rescue policy has been questioned. Whats your opinion?
Sheng Songcheng: can we assume that if there is no two interest rate cuts from the Federal Reserve, it may not be just four times of fusing, maybe eight times? Well, the great depression may really be coming. Can history assume?
Times finance and Economics: history cant be assumed, but can we review it?
Sheng Songcheng: I think the Feds response is very rapid, and its approach is basically right. Although the Fed has made mistakes in the expected management of this round of monetary easing, the action itself has its own logic.
In the United States, the interaction of the epidemic with economy and finance may make it fall into a spiral downward cycle. The adjustment of the capital market in the United States is more intense, so the monetary policy is more radical.
Time finance: how to understand the logic of the Federal Reserve?
Sheng Songcheng: from a series of policy measures launched by the Federal Reserve, the core is to provide credit availability and prevent short-term shocks from turning into long-term recessions, which is to some extent the same as the corporate rescue and liquidity support measures taken in the early stage of the outbreak in China.
From March 2 to March 16, the Dow Jones industrial index of the United States dropped more than 20%, experienced four circuit breakers, and other foreign stock markets also fell sharply, Comex gold fell 3.33%. On March 18, the dollar index broke the 100 mark for the first time since April 2017.
The impact of the epidemic is becoming more and more intense, causing great damage to the economy. The valuation of US stocks was already at a high level. The recent collapse of asset prices was fundamentally determined by the economic and financial situation, presenting a typical liquidity stampede. Therefore, the action of the Federal Reserve should be sooner rather than later.
The financial market and the real economy in the United States are closely related. Financial shocks will impact residents and enterprises in the opposite direction, forming a spiral response. At present, there is a risk of accelerating the spread of the epidemic in the United States, and the negative feedback cycle of economic and financial shocks is difficult to break.
First, the impact of the epidemic caught up with the peak of US stock valuations, so the decline in US stocks in addition to reflecting the impact of the epidemic has also accelerated the liquidation of asset price bubbles that have been accumulating for a long time. Second, American stock is an important carrier of American residents wealth. Once the U.S. stock market appears systematic panic stampede and sell-off, the wealth of residents will shrink sharply, and then reduce the consumption ability of residents and the investment ability of enterprises. This further increases the risk of short-term shocks turning into long-term recessions.
The expansion of the Federal Reserve can greatly reduce the negative feedback cycle of economic and financial shocks. In order to maintain full employment and economic stability, the Federal Reserve provides liquidity support to enterprises and financial markets, so as to prevent the epidemic from short-term impact to long-term recession.
Time finance and Economics: but some people think that the intensive and radical rescue measures of the Federal Reserve exceeded market expectations, which was more or less kidnapped by the trump government. What do you think?
Sheng Songcheng: first of all, the Feds response is so fast that even President trump may not have expected it. Its said that trump put pressure on it, which cant be the case. Trump put the most pressure on the fed not now, but a month or two ago. At that time, the Fed was unmoved. Why did it act suddenly? So its not trumps pressure.
Second, the Fed is not chairman Powell has the final say. There are 13 people in the Federal Reserve 12 + 1 (the Federal Reserve System is composed of the Federal Reserve Committee in Washington, D.C., and 12 regional Federal Reserve Banks in major cities across the country). If most members of the Federal Reserve object, the policy will not be adopted. Every major policy needs to be voted on. If it is not more consistent, it cannot be passed.
Chinas exports will be affected
Times finance and Economics: the Federal Reserve keeps upgrading its stimulus measures to prevent the financial crisis to the maximum extent with zero interest rate and unlimited QE. Do you think the Fed will use the policy of negative interest rate?
Sheng Songcheng: at present, the U.S. has cut interest rates close to zero, but it is difficult to move towards negative interest rates. The use space of the Feds price tools has indeed narrowed, while there is still a large space for quantitative tools.
After 700 billion quantitative easing, the balance sheet of the Federal Reserve can reach 5 trillion US dollars, only accounting for about 23% of the GDP of the United States. At the same time, considering that the growth rate of core PCE in the United States is only 1.6% year-on-year, inflation will further decline after the impact of the epidemic and the decline of oil price. In theory, there is still room for the Federal Reserve to expand its balance sheet.
It is worth noting that the Fed also cancelled the default interest rate of the discount window this time, which increased the flexibility of existing expansion actions. Through the discount window, the Fed can provide emergency liquidity support to banks. If banks are willing to borrow money from the fed through the discount window, the scale of the Feds expansion may be more than $700bn.
Recently, the Federal Reserve opened unlimited QE to buy corporate bonds directly, also to ensure the availability of credit. The Fed has a lot of bullets and doesnt run out of tools.
Time finance and Economics: will China cut interest rates when the global central bank starts to cut interest rates?
Sheng Songcheng: inflation was also taken into account when formulating a domestic policy to hedge the epidemic more than a month ago. The price index is relatively high, so the government has not used more radical means.
At present, the development of the epidemic situation in the world is synchronous with that in the United States, while the epidemic situation in China has been under control, and the growth in Wuhan has been zero. How should we go about our next monetary policy, whether we will cut interest rates, etc. should be based on our own domestic situation.
At present, the global economy is moving towards liquidity, while China still adheres to the routine. The advantage of the routine is that there will be less sequelae. I suggest that interest rates should be cut and further easing should be carried out.
Times finance and Economics: under the impact of the epidemic, what is the impact of the economic recession on China and how to deal with it?
Sheng Songcheng: first, the domestic supply chain may be affected. Second, the biggest impact is on exports. According to the expenditure method, GDP includes investment, consumption and net export. This years external environment is complex, and the contribution of net exports to Chinas GDP is hard to guarantee.
Consumption in the first quarter of China was greatly impacted by the epidemic. As peoples income declines, the impact on consumption will be transmitted to the next quarter. But the government is already taking a series of measures to boost consumption, including consumer bonds and tax cuts.
Chinas fiscal deficit rate is the lowest among the major countries, and 99% of Chinas debt is held domestically, of which medium and long-term treasury bonds account for a large proportion, while short-term treasury bonds account for a relatively small proportion. Chinas economic development is far faster than other major countries, so the risk of fiscal deficit is actually relatively low.
With the support of active fiscal policy and flexible and moderate monetary policy, the growth rate of infrastructure investment is expected to pick up significantly this year, and investment will play an important role in the economic growth in 2020.
Source: time finance Author: Yu Siyi editor in charge: Wang Xiaowu Gu NF