Covid struck the world in December 2019, and from 2020 onwards the whole world sank into a pandemic in which millions died. But instead of fighting the pandemic properly, political agents around the world made use of it to their advantage and to further their own power. Since the start of Covid, the US has been printing money in the name of helping the citizens. In fact 3/4 of the world USD money supply was printed out in the past 2 years.
With the USD printed out, US went on a shopping spree. Stock markets, houses and grocery prices etc have all went up as a result of new funds injected. With this money, US used their increasingly worthless money to exchange for actual resources, goods and services overseas. To counter this, countries all over the world began printing money too, resulting in inflation everywhere.
2 years after spamming money around the world, the Fed claimed that inflation is strong and that it hurts the economy. To counter the effects of inflation they will be gradually pushing for an increase in interest rates, as what we see now. Theory states that when the interest rate goes up, people reduce their borrowing and spending, as it is now more costly to spend and more worth it to save. A low interest rate indicates a low cost of capital, boosting spending in areas from consumer goods to the stock market to the property market. Think of the cost of capital this way: It is the amount you have to spend to use the resource that is money. For example, if I set up a retail shop, I need to rent a shop space. The monthly rental is the cost I have to pay for the shop. Similarly, the interest is the cost of capital (money) that I am using, be it for my business or investment. Many businesses rely heavily on borrowed capital to maintain the flow of operations.
One very good example are the property developers, who usually actually do not have the money to fund the whole construction project by themselves. Instead, they started off with customers’ deposits, get the construction partly done, then collect more money in phases to support the building works. During this time, they also borrowed heavily from banks till the end of the construction phase, where they collect the remaining payment from the customers to repay the banks. This is why some property developers give a certain discount if the customers pay off the whole house right off at the start, and this is why you see some property developers go bust and left the construction hanging if the economy is not doing well. Based on the above, if you are buying a property which has not yet completed construction, do go for more reputable companies. They may charge a premium for that, but compared to the smaller companies, these big companies usually have a higher probability of getting things done. Take it as a paying an insurance for getting the whole base protected.
Before we talk about the affairs of the big countries, let us talk about the common man first. During the Covid period (not that it has already ended now), the Fed
printed gave out a lot of money and cut down the interest rate to near 0, stimulating spending. With the extra money on hand and low interest rates, people began to borrow to invest in the various markets. We see that everywhere including the stock market, the crypto market and the property market went up to record prices. When a pandemic struck, instead of plunging the world into a recession, we see a situation of a seemingly booming economy until the Fed says they have to hike interest rates.
Everything suddenly became more expensive as people now has more money to spend. Though people lost their jobs, the markets go up. Though the economy should have suffered, the markets hit record highs. Though production has been heavily crippled, people spend more than ever. But that is only on the surface. In reality, people are suffering from the cost of inflation, seeing their savings and salaries drop in value, and unable to afford the daily necessities.
Assume now you are a common man who managed to get a house for $800,000 with a 25 year housing loan of $500,000 at an initial interest rate of 1%. We can break it down to you paying $1884.36 per month. Now if you are earning $4000 a month, this is definitely something manageable. But with an increase in interest rate to 4% as what we can expect now, for the same loan amount you will need to pay $2639.18, about a 40% increase in expenditure just to pay for the interest rate. At this time, a very significant portion of your monthly payment is not going into reducing your debt, but to maintaining your debt (paying the interests).
The above example is only a small amount of a $800,000 house. There are people who go for multi-million dollar houses. There are people who borrowed heavily to invest or to set up a business. At the common man’s level and using housing as an example, when one cannot pay off the debt, their property will be auctioned out at a cheaper price to whoever is willing to take over the house. Those who have the money and are prepared for it will go in and sweep cheap houses at this time. We now magnify this kind of situation beyond the common man, to the company and the national level.
At a national level, after a period of inflation and when Fed’s interest rates start to go up like what is happening now, capital all over the world will flow back to the US to take advantage of the higher interest rate. Assuming both countries have about the same interest rate, people generally still prefer to park their assets in the US over other countries due to their reputable freedom and protection. When this happens, stock market around the world will crash as people withdraw their investments, which we have already seen it happening. People withdraw their investments because it is much more expensive to maintain the borrowed capital in the financial markets and now more worthwhile to save with the US.
To counter this, interest rates of countries all over the world will also go up in an attempt to keep the capital in the country. While the big monies may still prefer to move to the US, the common man will not move their assets around that easily and generally prefer their home country instead due to the convenience. As mentioned above, the financial markets will fall and many companies especially the likes of property developers will be affected. Then comes the critical aspect. Once the share prices of the companies or the companies themselves fall one by one, US will come back another round with their capital which flowed back and sweep up core resources, effectively placing a stronger control of that country.
But now that everybody knows this, other countries with their resources and experts will also not sit by watching their country get taken over so easily. What does China (rival of US) and Japan (ally of US) do? They sell US treasuries. They dumped US bonds into the market, causing the yield of the treasuries to go higher.
What impact does this have? When China and Japan sell US treasuries in such a big volume, the treasuries’ yield increases. This means more cost for the US to collect back and consolidate their capital. At the same time China and Japan takes in foreign currencies in exchange for the US treasuries they sold, beefing up their foreign reserves which could be used to stabilise or even increase their currency exchange rate. As US is an importing country, the increase in exchange rates of Japan and especially China will cost their goods to be more expensive, making the inflation of US even worse. After the Fed increases interest rates, USD goes up against other countries’ exchange rate. When that happens, US can import goods cheaper, clamping down their inflation even more but at the expense of other countries, which they are trying to counter.
This article was originally prepared and written till the above line. With the recent events, I have decided to add in the parts below.
With the assassination of Abe Shinzo, the ex-Prime Minister of Japan and the actual ruler of Japan, people’s confidence in Japan has took a short term plunge. Capital flowed out of Japan and we see that certain stock markets in the world has risen up, meaning capital has flowed into that particular country. There is no proof as to who masterminded the assassination, and there will be no proof. Any finger-pointing will only lead to baseless accusations. But one thing is for certain – there is a country who benefitted most from it. It is definitely not China or Russia, which Abe Shinzo tried to get friendly with.
Let us look at a few other examples:
- 5 July 2022 – The sudden death of Mohammad Barkindo, Secretary-General of OPEC (Organization of the Petroleum Exporting Countries), which expanded into OPEC+ under his term of which Russia is a member. OPEC had repeatedly refused to increase oil supply to bring down the oil prices, which will harm Russia the most. Russia is naturally happy with the current oil prices, especially now when trade sanctions affect Russia greatly.
- 7 July 2022 – The resignation of Boris Johnson, Prime Minister of the United Kingdom, after half his cabinet abandoned him. Also known as British’s Donald Trump, he is a close ally of ex-US President Donald Trump.
- 8 July 2022 – The assassination of Abe Shinzo, who not only wants to be close to China, but to make Japan a fully independent country with its own military.
Of course, when top level decisions are made, it is seldom made with only one objective in mind. Any decision will have multiple consequences thought through and pushed forward. When we look at events, we have to see beyond the surface. Who benefit from it the most? Who got harmed the most? Once we get these down, it is easier to see the underlying logic and to see the truth.
Politics affect economics, which in turn affects the lives of the everyday citizens. Understanding the current affairs of the world and being able to see through to the truth allows us to know what to expect as we journey towards financial freedom. We have no power to influence politics, neither do we have the ability to determine what economic policies to take. But we certainly can move our little assets and protect it accordingly, or better still, to make use of the opportunities given to make a gain out of it.
Reality is dirty. It is ugly. We do not want to be like that, but we have to accept that this is the world we live in. Life is not a fairytale. Think critically, find out the truth, then act accordingly to the opportunities given to you.