China's Money Supply Surpasses US: Inflation Risks?

It is widely acknowledged that the sovereign currencies of our country and the United States are the only two fiat currencies with the largest issuance and remaining sovereign credit globally.

Looking solely at the broad money supply, also known as M2, as of 2019, the United States had $16 trillion, which is 75% of its Gross Domestic Product (GDP) — with the U.S. GDP for 2019 being $21 trillion. In contrast, China had $27 trillion, which is nearly 200% of its GDP — with China's GDP for 2019 being $15 trillion.

Clearly, the issuance of our country's sovereign currency exceeds that of the U.S. dollar. However, when considering the per capita currency holdings and the amount of currency in circulation in the market, our currency may not necessarily be greater than the U.S. dollar. The main reasons are as follows:

1. Although both are sovereign currencies, they correspond to different national conditions.

The sovereign currencies of our country and the U.S. are issued by their respective national authorities to circulate first in their own domestic transaction markets. However, the objective attributes of the two are different. The U.S. dollar has the status of a global transaction settlement currency, while our currency currently does not have this status and attribute. The vast majority of it circulates domestically and cannot circulate freely on a global scale like the U.S. dollar. Therefore, the situations corresponding to the two cannot be unified in terms of supply, which leads to the situation where, although the issuance of our country's sovereign currency is higher than the U.S. dollar, the circulation and holdings are not as much as the U.S. dollar.

2. Although both are anchored to asset value, the supply and demand sides are different.

U.S. dollar assets have investment value attributes. To be more valuable than other currency assets, the issuance of the U.S. dollar compared to other currencies must be smaller, fully reflecting relative scarcity. Moreover, the demand side for the U.S. dollar is mainly in the financial services industry. Wall Street can export financial capital to the world precisely because the value of the U.S. dollar and its assets are relatively high.

In contrast, our country's currency assets generally only have fixed investment attributes. Coupled with the factor of not being a global transaction system settlement currency, our country must develop itself with industrial capital as the supply side, leading to the continuous expansion of the money supply. However, it cannot form an export of global industrial capital, thus resulting in a situation where the demand side for currency is mainly domestic.

3. Although both are among the currencies with the second-largest issuance, the consequences are different.

Considering the above two points, although the U.S. dollar has a large issuance volume, the corresponding national conditions are based on U.S. dollar hegemony, which can circulate in the global capital market. Thanks to the export of financial capital, a series of risks such as hyperinflation, a decline in purchasing power, and the collapse of sovereign credit are much smaller.Contrary to the situation in other countries, the issuance of our sovereign currency is high, but the holding and circulation volumes are not large enough. Due to the drawbacks of industrial capital accumulation, such as oversupply of production and insufficient effective demand, there is a significant risk of excessive currency issuance.

Therefore, it is true that the issuance volume of the Chinese yuan is larger than that of the US dollar, but the per capita holding volume and market circulation volume are both less than that of the US dollar.

The United States can print a large amount of money in the short term, and it is highly unlikely to cause inflation for three reasons:

1. By using statistical methods to reduce the inflation rate.

Technically, indicators that are not highly correlated with the inflation rate but will affect the long-term inflation level as a whole are removed, and only indicators related to the short term and closely related to the standard of living of residents, such as retail sales of consumer goods, are counted. Therefore, even if actual inflation occurs, it can be improved through the correction and adjustment of statistical methods, which is nominal inflation.

The reason for the emergence of nominal inflation is to restrict the arbitrary issuance of currency by monetary issuing institutions with the right to coinage, to raise the devaluation of currency circulating in the entire society, and to greatly reduce the transaction attributes, thereby avoiding the outbreak of hyperinflation. However, the problem is that nominal inflation is also a man-made product, and combined with the adjustment of statistical methods, it actually cannot restrict the arbitrary issuance of currency by issuing institutions. The Federal Reserve of the United States has been playing a game between suppressing inflation and seeking rent for power for hundreds of years.

2. Relying on the financial supply side, guide currency liquidity into the capital market and the demand side of the real economy.

The financial structure of the United States determines the characteristics of the industrial structure. Although it is also a mixed financial industry as a whole, since the subprime mortgage crisis in 2007 and the financial crisis in 2008, the United States has made it clearer that the mixed financial industry is partial, and has also promoted the separation of commercial and investment industries with financial attributes in the financial structure. This makes the guidance of liquidity by monetary policy and the financial system more smooth, that is, it can guide liquidity to the capital market, serving the respective demand sides of finance and the real economy.

3. Relying on the US dollar hegemony and US financial hegemony.

Due to the characteristics of the US dollar as the world's currency and the most important settlement currency in the international transaction system such as oil trade, its issuance determines the rise or fall of asset values anchored by the US dollar, which is equivalent to charging a huge seigniorage to traders who settle transactions in the global system with the US dollar. This move can transfer the inflation effect and risks caused by the arbitrary issuance of liquidity in the United States to foreign countries, that is, the external international transaction system, effectively alleviating its domestic inflation situation.Additionally, the United States can use aid to Europe to achieve the goal of eliminating excessive money supply, after all, the European debt crisis is a bottomless pit. If there is a concern about inflation, the excess money supply can be used to alleviate European debt.

Therefore, the United States can print a large amount of money without causing inflation in the short term for the following reasons:

Statistical methods will adjust indicators and data related to the inflation rate;

Relying on the financial supply side, liquidity is directed into the capital market and the demand side of the real economy;

By relying on the dollar hegemony and the financial hegemony of the United States, domestic inflation can be transferred to the international trading system, or the debt situation of itself or other developed economies can be alleviated.

Affected by this epidemic, the United States had to print money.

The Federal Reserve, in response to the impact of this epidemic, wants to revive the economy by adopting an unlimited quantitative easing monetary policy. So far, it has released trillions of dollars in liquidity, mainly injected into the capital market to suppress the spread of panic, such as before the implementation of this policy, the global financial market was in a state of wailing, the U.S. stock market experienced four circuit breakers in ten days, futures oil fell to a negative value, and the wealth accumulated globally in the past was reduced by more than half.

In order to prevent the economy from continuing to deteriorate, the Federal Reserve expands its balance sheet to print money in the hope of temporarily stepping out of the quagmire, raising asset prices, and restoring confidence in economic growth.

Affected by monetary easing, domestic risks in the United States are prominent.

Such a policy of monetary easing is beneficial in the short term, but it is not a good thing for the long-term debt risk in the United States. First, the federal government's debt is towering, and its department's debt ratio has exceeded the gross national product, reaching about 110%.Even though the might of American financial and dollar hegemony still prevails, and can continue for several more years by leveraging power to rent, there is no doubt that the credit of the dollar will experience continuous devaluation. At that time, excluding the possibility of implementing digital currencies, the over-issuance of currency will inevitably consume the value of dollar assets. The trend will inevitably lead to the end of dollar hegemony.

Furthermore, the debt of the non-financial corporate sector in the United States is also astonishingly high. It's clear that the United States has implemented the largest tax cut policy in history, so the business environment should not be that bad, right?

However, corporate debt is not for solving revenue problems, but for using debt to leverage the capital market, causing the stock price index to rise, and then achieving profits through dividends.

This is also a major reason for the acceleration of the hollowing out of American industries. If the over-issuance of currency leads to an increasingly large scale of corporate debt, it will not only be full of corporate debt default risks in the future but also increase the risk of the stock market bubble bursting.

The impact of the United States' money printing on other countries.

In the short term, the impact of U.S. money printing on other countries is mainly external and externally driven. The impact of pure externality, such as stock market fluctuations and exchange rate depreciation, is due to the devaluation of the dollar, the appreciation of other countries' fiat currencies, and thus the decline in related exchange rates;

Externally driven impacts include the domestic monetary policy also showing a loose state under the encouragement of the United States' loose monetary policy, lowering interest rates and reserve requirements, interest rates falling, and monetary liquidity flooding, to prevent social deflation and falling into a liquidity trap.

In the long term, the asset value of the global financial market will undoubtedly be greatly discounted, and the increase in currency transaction volume will lead to the shrinkage of the real economy. For our country, the shrinkage of industrial capital is a highly probable event.