Summary in a sentence: I believe the M2 money has been squandered by banks and major corporations in a relatively inefficient manner.
This is not a new topic. Within the industry, it's termed as "funds circulating aimlessly within the banking system".
To digress a bit, I believe that the overarching direction of any development is determined by the interactions of fundamental factors. Other distractions are merely smokescreens and inconsequential. Take Masayoshi Son's success, for instance. Is it because he's audacious? I think it's more about his world-class grasp of major trends. Perhaps a wake-up call in his teens to learn computer science and English helped him not only to capitalize on Japan's internet bubble but also e-commerce, consumer trends, cloud platforms, and more. Despite notable investment failures like WeWork, Son is famous for his spot-on big-picture assessments.
Another personal observation I'd like to share: the more I see and ponder, the more I believe that societal evolution mirrors individual life cycles. I've yet to find a system that can self-repair and self-improve, hindered perhaps by human selfishness and biological survival needs. Capitalism and socialism, in my eyes, are merely two expressions of the same distribution mechanism, impacted by varying degrees of information asymmetry between the rich (those governing) and the poor (those being governed). After all, human greed is boundless, and no amount of faith, morality, or laws can curtail it when wrongdoing comes at no cost. Every system has flaws, and larger nations have even bigger ones. If human happiness (defined here as absolute happiness) is the goal, achieving it in the U.S. is arguably more challenging than in China. Due to these flaws, some benefit unjustly, exacerbating wealth disparity. This brings me to M2-related flaws.
First, the scenario: The rapid growth of M2 without a corresponding increase in personal savings has been a long-standing issue. It's a predicament akin to the dilemma of safeguarding housing prices versus exchange rates, because it’s unsolvable.
Here are my conclusions:
- The reason M2 grows quickly without reaching the real economy is that the central bank's control over individual banks is limited. Banks lend to corporations that immediately reinvest in the bank's financial products – a classic game-theoretic strategy:
- For banks, in this way, they meet their loan targets, earn interest differentials, and see reduced bad debt ratios (because the bad debt ratio = bad debt / total loan, and this method can improve loan controllability since the banks bought their own products. Also this can alleviate the pressure from residents paying off their mortgages early). It's important to note that only reputable, large corporations get these loans. Smaller businesses lack the scale to engage in this game profitably. Banks might prefer lending to trusted companies that will reinvest in its own products since this will yield better returns compared to the lending to companies that struggles in real-world ventures. This might explain the high growth in financial products reported by many publicly traded companies.
- For companies, especially publicly traded ones, they earn from financial products (usually offering higher returns than loan interest rates), increase their asset base, boost liquidity, and raise investment cash flows. While debt also rises, many corporations have debt ratios over 50%, so this practice might dilute that ratio slightly, indirectly buoying stock prices.
- For the average citizen, there's little impact as this money neither enters nor leaves their pockets.
- If we disregard potential motives like elite figures cashing in before leaving China, the rapid M2 growth might be an attempt to stimulate a languishing real economy. Unfortunately, this strategy has yet again misfired, benefiting those who shouldn't have benefited.
How outrageous is our M2? If I'm not mistaken, its volume equals the combined total of the U.S. and the EU (although the U.S. uses M3 due to some issues with M2 measurements).
So who ends up at a loss in the end? Of course, it's the ordinary people. Because if this circulating money keeps increasing, various listed companies earn more and more, then cash out and leave, further widening the wealth gap. This resembles the concept of real negative interest rates (which refers to, comparing the monthly wage of 60 yuan in 1980 (the average at that time) to the current 6000 yuan (current average, possibly even higher). The purchasing power of the past was more than 20 times that of the current 6000 yuan, meaning for residents, the actual interest rate is negative). If the money in society flows into a large 'reservoir' (previously it was real estate), then the purchasing power of the remaining money (the liquid portion) drastically decreases. We all understand that most of the money in the 'reservoir' cannot be taken out. Not only because there aren't many buyers (meaning extremely poor liquidity), but also because once it's sold, it would directly trigger a systemic economic collapse (because if the money supply suddenly increases by 200%, it could directly leads to 200% inflation).
On a side note, if we discuss in detail, an inflation caused by a 200% increase in money will likely be less than 200%. This is because the impoverished will always spend all their money on essential needs like food, whereas the wealthy might only spend 10% of their money. This leads to a situation where, at the pricing level of essential goods, the current 200% money supply won't increase the prices of these essentials in a similar proportion; it will definitely be less than double the rate. However, in practical terms, social unrest caused by the impoverished possibly not having enough to eat, and the subsequent rise in transaction costs (due to decreased safety, breakdowns in mutual trust, etc.) might also push prices to trend higher. We can look at Turkey's hyperinflation as an example.
In summary, for the aforementioned capital circulation game to persist, two conditions must be met:
- Loan interest rates must remain lower than returns from bank financial products. If too many financial products fail (like last November's bond market crash), companies won't continue borrowing to reinvest in banks.
- The central bank doesn’t interfere.
From what I understand, this game might continue since there haven't been significant incidents yet. Perhaps only a massive financial product collapse will slow down M2's growth.