📘Dancing with the Financial Cycle and the Real Economy
观象🐘
🔁 Financial Cycles and the Real Economy
* 💡 Finance can't live without the real economy—and vice versa. Their relationship is central but still debated.
* 📉🆚📈 The financial cycle (15–20 years) is longer and more volatile than the economic cycle (1–8 years).
* 🏦 The 2008 crisis highlighted the intertwined fates of finance and the real economy.
* 🔍 When these cycles overlap, macro fluctuations get amplified—boom💥 or bust💣.
* 🌐 Financial liberalization over the past 40 years may have increased crisis frequency.
💴 Currency: The Battle of Theories
* ⚖️ Metalism vs Chartalism: Is currency from the market or the state?
* 🪙 Metalism = medium of exchange; 🧾 Chartalism = unit of account & store of value.
* 📈 China’s M2 growth triggers debate on money's role in real activity.
* 📚 Keynes: Money isn’t neutral, especially in the short term. It affects investment and interest rates.
* 🪙 Austrian School: Currency issuance distorts prices & structure.
* 🧠 Digital currency 💻 is a rising frontier—PBOC started research in 2014.
💳 Credit: Fuel or Fire?
* 🔄 Closely linked to currency, credit expansion drives both growth and risk.
* 🏦 Banks are inherently procyclical—credit creation = risk amplification.
* 💣 Seigniorage + distorted incentives = hidden dangers in credit systems.
* 📈 SOEs and high savings contribute to China's credit-fueled financial cycle.
📉 Interest Rates: Price of Money, Pulse of Finance
* 💸 Driven by both central banks and market players.
* ⚖️ Includes: natural rate (equilibrium), liquidity preference, and time preference.
* 🤔 Is the natural rate falling? Debate continues.
* 🧪 Rate liberalization can help—but half-baked reforms invite distortion and risk.
🌫 Shadow Banking: In the Grey Zone
* 🕵️ Grows outside traditional regulation—adds both depth and danger.
* 💼 Includes wealth management, trusts, P2P lending.
* 🪙 Creates “shadow currency” that mimics M2 but dodges regulation.
* 🔁 Amplifies cycles—opaque, risky, but efficient.
* 🧩 Product of innovation and regulation arbitrage—regulators often play catch-up.
🏘 Real Estate: The Leverage Loop
* 🧱 Finance + Property = Feedback loop. Collateral → Credit → Price surge → More credit.
* 🏦 Banks’ exposure to real estate intensifies procyclicality.
* 🎢 Debates on housing bubbles persist. Land is immobile and holds unique value.
* 💰 Local governments rely on land sales → creates fiscal-property-finance entanglement.
💱 Exchange Rates: Currency on the Move
* 💬 RMB strength: hot topic. Exchange rate = price tag between currencies.
* 🏛 “Internal appreciation, external depreciation” = inflation at home, value abroad.
* 🧭 Short-term, medium-term, and long-term forces all shape FX dynamics.
* 🌍 RMB internationalization pushes for appreciation—but beware of one-way bets and hot capital.
🛡 Regulation: Catching Up with Complexity
* 🧩 “Mixed operations” challenge the old siloed supervision models.
* 🧪 Activity-based (functional) regulation is emerging.
* ⚠️ A lack of shared legal/financial understanding = core issue behind financial chaos.
* 🎯 Goals: prevent systemic risk, protect investors, adapt to evolving financial structures.
📚 Overall Insight:
A sweeping, theory-rich look at how currency, credit, rates, real estate, and regulation shape the rhythm of the financial cycle—and its often turbulent dance with the real economy. It blends macro theory, policy debates, and real-world Chinese finance, forming a valuable reference for reform and innovation.
