Fed's Aggressive 50-BP Rate Cut: A Strategic Defeat!

The Federal Reserve has cut interest rates!

This rate cut is nothing short of violent, directly slashing by 50 basis points.

Before the Fed's rate cut, many people anticipated a reduction, but few expected the Fed to cut rates by 50 basis points outright.

This magnitude of rate cut can only signify one thing: The United States can't hold on anymore!

The Fed's rate cut is undoubtedly a strategic defeat!

It is not an exaggeration to say that if the United States could still hold on, they would not cut rates.

Why?

Because the previous round of rate hikes by the United States was intended to use the dollar tide to wildly draw the blood of other countries in the world, by drawing liquidity from other nations to achieve the goal of prospering their own economy.

According to the logic of the dollar tide in the past, this round of frantic rate hikes by the Fed would attract a large amount of global dollar liquidity to the United States.

American capital should be eagerly waiting at this moment for a country's economy to collapse, asset prices to plummet, and exchange rates to plummet, and then they would rush in, harvesting cheap assets from other countries in the guise of a "white knight."

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Later, as the United States significantly lowers interest rates, the global economy warms up, and the economies of the relevant countries improve, asset prices rebound, and then the United States earns a fortune from the rise in asset prices and exchange rates of the relevant countries, and then withdraws to fill the holes in their own home, and shares the spoils.

However, times have changed, and the old script doesn't work anymore!

The dollar tide has indeed drawn liquidity from many countries and has indeed plunged many countries into crisis, even leading to long-term wars locally due to irreconcilable contradictions.

Why did the Fed frantically and violently cut rates by 50 basis points?

There are three fundamental reasons: First, the United States' national debt is really unsustainable.

The total scale of U.S. Treasury bonds has already exceeded 35 trillion U.S. dollars in August, with the debt-to-GDP ratio reaching as high as 128%, and the interest alone is more than 1 trillion U.S. dollars per year.

To maintain the normal operation of the economy, the United States is still issuing Treasury bonds at a scale of more than 2 trillion U.S. dollars per year.

If this accumulation continues, the fiscal pressure on the United States will be too great.

Therefore, from the perspective of reducing the pressure of debt interest in the United States, the Fed must cut interest rates as soon as possible, and it has no other choice.

Second, the economic development of the United States can't hold on.

The GDP growth rate of the United States in the first half of 2024 was 2.8%, which is good among developed countries.

But if everyone thinks about the growth rate of U.S. debt, it will be clear that this growth is based on frantic debt issuance.

It can be said without exaggeration that if the United States does not issue debt, the U.S. economy will immediately stall.

However, large-scale debt issuance is a double-edged sword.

Too much debt means more money needs to be repaid.

If high interest rates are maintained, the interest of more than 100 billion U.S. dollars per year must be paid, and no country's government can bear it.

The cost of capital is too high, which is not conducive to economic development, so the United States must relax the money supply to enhance the momentum of economic growth.

Third, the inflation pressure in the United States has indeed eased.

Whether it is the actual situation or the data made by the United States, in short, the inflation rate in the United States has declined rapidly in the past two months, which makes the conditions for the United States to cut interest rates basically available.

Although, under normal circumstances, the policy should at least be slow, waiting for the inflationary pressure to be further released, but the United States can't wait any longer.

If it doesn't cut interest rates, the economy will have a big problem, so the Fed must cut interest rates, and there is no choice.

So, why is the United States' frantic rate cut of 50 basis points a strategic defeat?

The reason why Zhan Hao said this is that there are three fundamental reasons: The first reason: The United States' last round of interest rate hikes did not achieve the strategic goal.

The last round of interest rate hikes in the United States was not initiated by the United States on its own initiative, but was forced to start, because the inflation in the United States was too serious.

Where does the inflation pressure in the United States come from?

The most important reason is the aftermath of the trade war and technology war between the United States and China, coupled with the release of 6 to 7 trillion U.S. dollars of liquidity after the epidemic in the United States.

These funds did not dilute to other countries as in the past, but were mainly hit in the U.S. market, forcing the Fed to start the interest rate hike cycle in advance.

Moreover, in order to amplify the effect of the dollar tide and attract more international capital into the United States, the United States also adopted a crazy interest rate hike model, and the Fed raised interest rates by 50 basis points four times in a row.

These means have not been seen for decades.

Originally, the United States hoped to use the shortest time to raise interest rates to quickly draw blood from other countries and ultimately achieve the goal of quickly harvesting other countries' assets.

However, today's world is obviously no longer the past world where the United States can do whatever it wants.

Although this round of the dollar tide has brought great pressure to all countries, the United States has only harvested its allies, and other countries do not seem to have suffered as much as in the past.

For example, Southeast Asian countries rely on China and there is almost no crisis.

The United States can't harvest at all, and even the Philippines can't cut the leek.

The Philippines also took advantage of provoking China to let the United States bleed a little bit.

All this is because China has become such a large economy in today's world and has become a stabilizer for the world.

Everyone should have noticed what China did when the Fed raised interest rates?

China directly did not raise interest rates, and even reduced the reserve requirement ratio on a large scale, releasing a large amount of liquidity, and these funds are not allowed to enter the real estate field in China.

Where did the money go?

At least some of it has entered the pockets of China's partners through currency swaps and investment trade.

Why did the United States raise interest rates frantically this time, and many countries closely connected with China's economy are fine?

The reason is that China is fine, and they are tied to the big ship of China, of course, they are fine.

Under this situation, the United States has no choice but to turn around and draw blood from Japan, South Korea, and European allies, and even eat a little bit of the national capital of countries like Argentina.

The reason is that they can't catch the big fish, so they can only eat small fish and allies.

Now, the United States has not maintained high interest rates for long, and has found that the blood of other countries is not drawn at all, and it has been severely negatively affected.

Therefore, it has to violently cut interest rates.

The second reason: The United States' last round of interest rate hikes was started under coercion, and this round of interest rate cuts is also started under coercion.

Through the previous content, we should understand that the last round of interest rate hikes in the United States was forced, and it had to raise interest rates fiercely under the background of high inflation without sufficient preparation, but it did not achieve the expected goal.

What about this round of interest rate cuts?

It's almost the same as last time, also because the U.S. government can't bear the sharp increase in debt burden brought by interest rate hikes and has to quickly cut interest rates.

This is also something the United States has to do under coercion.

Imagine, in both cases, they are rushing to the battlefield without being prepared, and the result can be imagined.

Frankly speaking, today's world has a very low tolerance for errors for all countries, even superpowers, so the United States is forced to take measures again without achieving strategic goals, which must mean a strategic defeat for the United States.

The third reason: The strategic goal of the United States' current round of interest rate cuts will still fail.

Since the United States' last round of interest rate hikes and this round of interest rate cuts were not well prepared, the interest rate hike cycle did not achieve the strategic goal, then the next round of interest rate cuts will inevitably be difficult to achieve.

The United States wants to shear the wool of other countries, and it is becoming more and more difficult, and even the wool of allies is not easy to shear!

This strategic defeat has a great impact on the United States.

On the one hand, the pressure of high debt in the United States will become heavier and heavier, because the United States has to increase the scale of debt in order to achieve GDP data, and this risk can only make everyone more and more abandon the dollar in the long term; on the other hand, when the United States further releases liquidity, the world does not need so many dollars, and the inflation pressure in the United States will come again, which is an even bigger dilemma!