Economic Analysis in One Graph
The economic analysis is all about the study of the currency credibility of a nation under its economic system.
Example of the economic system: a developing and a developed country.
For a developing country, currency credibility comes from regime power.
For a developed country, currency credibility comes from central banks.
The credibility is mainly affected by inflation and debt.
Debt is a sufficient but not necessary condition for inflation.
(At times of economic growth, demand-pull inflation has no bearing on debt)
Question 1: Is Real Estate a Good Hedge Against Hyperinflation?
If the inflation is increased to 50%, the interest rate will also increase.
For mortgagor, it means higher financial burden;
For house owner, it means decreasing purchasing power.
A house worth USD 1M equivalent to HKD 7.78M in 2017.
HK is facing high inflation in 2020.
The house price increased to HKD 10M in 2020; it seems asset appreciation is good because it sounds like the owner is getting richer but what if 20HKD=1USD?
Another example: If real estate were a good hedge against inflation, Venezuelan would buy real estate to hedge inflation.
Question 2: Has deflation appeared in the world economy today?
The global central banks are printing money around the clock. Global inflation is the dominant trend, not deflation.
Question 3: What is the ultimate answer to all economic questions?
There can't be a one-rule-fits-all approach.
Given that gold is priced in U.S. dollars, the most common understanding of Gold-Dollar relationship is the stronger the value of the U.S. dollar, the lower the price of gold. Likewise, the weaker the U.S. dollar, the higher the price of gold. However, this is not always true.
It depends on the world politics and military.
It depends on return ratio.
It depends on the currency credibility.
It depends on the inflation.
It depends on the debt.
Question 4: What is the cause of food shortage?
Domestic currency becomes worthless pieces of paper as a result from the loss of currency credibility.
Food is a lot more credible than "paper".
People would not exchange "paper" with food.
This leads to food shortage.
Even people have quite a lot of the "paper", they cannot buy food.
The explains why the grain superpower Russia faced the food shortage in 2015.
Question 5: How much debt is a serious debt?
It depends on debt/GDP ratio, or more precisely, the interest payment/GDP ratio.
Question 6: Why doesn't Donald Trump start a war in the wake of North Korea's Nuclear Provocation?
It depends on the government debt. (To finance a war, the fiscal deficit would widen.)
Question 7: What are the causes of inflation?
2. Loss of currency credibility (Overissue of paper money)
Question 8: Why is inflation a social phenomenon?
The cost to operate a society is the key.
Example: Social chaos is indicative of high cost to maintain the society due to hyperinflation.
This explains the reason of Venezuela's economic and social crisis.
The lower the social/economic efficiency, the higher the inflation rate will be.
Question 9: What is rate hike / shrinking balance sheet?
It means the improvement of currency credibility.
Question 10: What is quantitative easing?
It means damaging the currency credibility.
Consequence of the loss of currency credibility
1. Shrinking demand
Take Brazil for example:
Over the past years, the economy has been sluggish.
The purchasing power of the Brazilian currency Real is decreasing in terms of US dollars.
The unemployment rate is high.
There is no demand-pull inflation.
According to the Central Bank of Brazil, the inflation rate is 6.29% in 2016.
This kind of inflation is caused by the damage of currency credibility.
People are usually fooled by such a low figure, which is just a number game designed by central banks.
2. Company insolvency
High inflation means high-interest rate.
Persistent high-interest rate stifles the economic growth because manufacturing sectors cannot repay the debt with the profit they make.
3. Vicious cycle