Popular Science: Looking at the history of currency development from the perspective of USDT additional issuance
Editor's Note: This article comes fromPento Speculation Road, reprinted by Odaily with authorization.
Editor's Note: This article comes from
Pento Speculation Road
, reprinted by Odaily with authorization.
Recently, many friends in the currency circle have noticed the "crazy" additional issuance of USDT. At present, the market value of USDT has expanded by more than 7 billion U.S. dollars, and it is already the fourth largest digital currency in market value after BTC, ETH, and XRP. The media is also constantly tracking the market value of USDT. For example, there are more reports on USDT and Tether.
Tether's "printing money" business has made many people envious. The recent slightly exaggerated speed of printing money has aroused many people's concerns, thinking that USDT has a high probability of "thunderstorm". As a stable currency in the currency circle, USDT has been growing in market value since its invention. In order to allow friends and fans to independently think about the use, value and prospects of USDT as a currency. Let me introduce how currency is created in the fiat currency system. To get to the bottom of the matter, everyone is clear about the mechanism and path of printing money, which can help to understand the issuance and consequences of USDT more objectively and dialectically.
The core of modern finance is credit. Since the gold standard was abandoned, credit creation and derivatives based on assets as collateral are the basic paradigm for the expansion of the fiat currency system. This article focuses on how central banks create money, which is the root of all money - how base money is created. In order to facilitate the explanation of the "principle" of printing money, I use simplified examples for analogy and analysis, and discard complicated calculations and details.
Assume that the smallest unit of the economy - an average household balance sheet is as follows:
The family's net assets are 3 million, total assets are 6.5 million, and liabilities are 3.5 million. How can households expand their balance sheets? There are two main approaches:
1. Mortgage the assets and continue to borrow money.
For example, remortgage the current 5 million house (of course, you can also use stocks, wealth management, insurance and other financial assets as collateral, but the bank may not accept it), assuming that the mortgage rate is 40%, you can immediately borrow another 2 million. The balance sheet quickly swelled to 8.5 million
2. Work hard to increase your income
After 3 years of hard work, the family has added $500,000 in cash, assuming the market value of the house and financial assets remain unchanged. At this time, the total assets are 7 million, and the liabilities are still 3 million.
Judging from the two expansion modes of the smallest economic unit, the efficiency and scale of money creation by relying on hard work obviously cannot meet the speed and requirements of economic development. The central bank of a country has only a few buildings and thousands of employees. Apart from paying wages with a small amount of money, its own net assets are negligible and do not create wealth. Then how does it "print" trillions of money every day to meet the needs of the economy.
Let's take the balance sheet of the People's Bank of China as an example to analyze
According to the balance sheet downloaded from the central bank website in March 2020, its balance sheet is currently 36.5 trillion yuan.
There are two main items under the asset item:
Foreign exchange in foreign assets and claims on other depository corporations are new monetary instruments such as the Medium-term Lending Facility (MLF), the Standing Lending Facility (SLF) and the Pledge Supplementary Loan (PSL).
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The once strong foreign exchange reserves peaked in 2015
But in 2015, capital began to flow out. In order to cope with the passive reduction of the base currency caused by the loss of foreign exchange reserves, the People's Bank of China created the "medium-term lending facility" (MLF), the "standing lending facility" (SLF) and the "mortgage supplementary loan". ” (PSL) to provide the base currency. Relying on foreign exchange to issue base currency, the central bank creates money passively, and the amount of issuance depends mainly on the size of the foreign exchange surplus. Relying on new monetary tools to "print" money, the central bank is very active in creating money. From 2010 to 2020, the ratio of "claims on other depository companies" to total assets increased from 3.1% to 30.9%. Group friends in mainland China estimate that they have clearly felt inflation in all aspects since 2015. The soaring housing prices and the formation of bullish beliefs are the best evidence.
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The decline in foreign exchange reserves, the central bank continues to expand its balance sheet by relying on new monetary tools
MLF, SLF, and PSL may seem like fancy terms, but the mechanism is actually very simple: After the commercial bank submits a part of its financial assets as collateral, it will issue a loan to the commercial bank. Is it the same as the routine of expanding the balance sheet of the family above? It's just that the main body has now become a commercial bank.
Here I would like to add that China's monetary policy mainly relies on commercial banks to conduct monetary transmission, mainly because the current financing method is still an indirect financing model based on loans.
At the beginning, the requirements for collateral were relatively strict, and only central government bonds (national bonds) and financial bonds of policy banks could be used as eligible collateral. Later, for political considerations or economic growth goals, the central bank gradually relaxed the qualification restrictions on collateral. Taking the Medium-term Lending Facility (MLF) as an example, in June 2018, the eligible collaterals accepted include:
Small and micro enterprises, green and "three rural" financial bonds not lower than AA
AA+, AA-rated corporate credit bonds (bonds involving small and micro enterprises and green economy are preferred)
With such loose collateral requirements, almost all credit bonds & loans held by commercial banks can be used as collateral to borrow money from the central bank, and the money borrowed is the "liability" in the central bank's balance sheet, that is, " Print" money, note that this money is the base currency.
To give an extreme example, suppose China Merchants Bank has just issued 100 billion loans to small and medium-sized enterprises, then it can immediately use the 100 billion loans as collateral to borrow another 50 billion from the central bank. Invisibly, the financial system will immediately increase by 5 billion billion base currency. After the 50 billion expires, new loans will be used as collateral, and the cycle will continue.
From the above two pictures, we can see that although the foreign exchange reserves have dropped to 30,000 US dollars, the size of the central bank’s balance sheet is still growing, relying on these new monetary policy tools, and the expansion of broad money M2 is even more unstoppable.
The scale of broad money M2 continues to expand rapidly
For new monetary tools, if the collateral is limited to treasury bonds and high-grade financial institution bonds, then money creation can easily reach the upper limit. Once the general small and micro loans and credit bonds are relaxed, the central bank will have more "collateral" to print money, which is equivalent to direct loans to enterprises and individuals. The central bank has assumed a large credit risk for commercial banks to a certain extent. After all Treasury bonds and high-grade financial bonds will not default.
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Three rounds of QE operations by the Federal Reserve during the last round of financial crisis
In recent years, the world has been plagued by sluggish economic development. Traditional interest rate cuts and lower deposit reserve ratios have long since failed. Countries have launched many new monetary tools to expand the credit of the whole society. This time the Fed’s extreme operation of the new crown pneumonia epidemic: buying various assets on a large scale to provide liquidity for the repurchase and bill markets, basically bottoming out the prices of all credit market assets except the stock market, and the scale of buying is not set. upper limit. The radical approach of the central bank has caused widespread doubts about its independence and credit risk. For example, the large-scale purchase of government bonds has made the central bank a fiscal deficit payer, and the purchase of corporate bonds and junk bonds has made the central bank pay for the operating risks of enterprises.
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This round of epidemic, the Fed's balance sheet expanded by 2 trillion US dollars a month
Credit creation generally involves reciprocal real economic activities, such as a bank granting a loan, and the bank’s asset column will have additional loan assets. After the company gets the money, it will build a factory to buy equipment, produce products and sell them, and repay the loan in the future. Therefore, as long as credit expansion is synchronized with economic activities, inflation will basically not occur. However, the modern financial system is becoming more and more endogenous, that is, relying on various collaterals to continuously create money to circulate in the financial system, causing the scale of broad money to continue to expand, and the increase in asset prices far exceeds the economic growth rate. Later, I will share an article introducing broad money derived from base currency, and analyze the relationship between China's real estate market and the high M2.
