Money Flows Even with Rate Hikes? America's Secret

Despite the Fed raising interest rates and implementing quantitative tightening since 2022, asset markets have shown an upward trend. This indicates that a situation has arisen where the direction of market liquidity cannot be fully explained by the Fed's policies alone. It is pointed out that the intervention of other entities, such as the Treasury, in addition to the Fed, acts as a new variable for liquidity, and the existing Fed-centric method of interpreting liquidity is no longer valid.

The US Treasury utilized reverse repo funds to offset the effects of the Fed's tightening (quantitative tightening). Funds from reverse repo accounts were released into the market, diluting the Fed's tightening effect, which played a role in protecting net liquidity affecting asset markets as much as possible. The Treasury continuously supplied sufficient liquidity to the market by utilizing reverse repo funds.

US government debt increased by $32 trillion from 2006 to 2026, while gross domestic product (GDP) only increased by $19 trillion over the same period. This situation, where the debt growth rate overwhelms the GDP growth rate, is pointed out as the biggest structural risk factor facing the US economy. It is difficult to solve with simple financial policies alone, and an improvement in the productivity of the real economy is essential.

The US government is in a situation where it cannot stop fiscal spending for growth, and to increase GDP, it must pursue a direction of increasing broad money in commercial banks. It is expected to manage long-term interest rates within a certain range to induce private lending and utilize new market stabilization tools such as government bond issuance restructuring and buybacks. Thus, the government will aim to resolve debt through growth.

It is analyzed that this phenomenon actually occurred from 2023 to 2025. The judgment is that the Fed's tightening intensity will not reach a level that would hinder real growth.

The current US economic situation is diagnosed as similar to the period of the Fed-Treasury Accord in the past. Like then, a strategy of simultaneously raising both growth rates and inflation is needed to adjust the government debt-to-GDP ratio through GDP growth. This has aspects similar to past policies of financial repression, and the cooperation between the Fed and the Treasury is expected to be crucial at this time.

Unlike previous administrations, the current US administration has high confidence in the productivity improvement potential of artificial intelligence (AI). Accordingly, the view has emerged that a certain level of inflation is acceptable if the growth rate exceeds the inflation rate. The strategy is to control expected inflation but promote real productivity growth through AI investment to dilute the debt burden. The underlying judgment is that if funds flow into high-growth industries, stronger growth can be driven than inflation.

Federal Reserve Chairman Paul Volcker was able to control inflation with high-interest rate policies in the 1970s because the national debt ratio relative to GDP was relatively low at the time. However, currently, with an excessive national debt burden relative to GDP, raising interest rates can increase the burden of debt repayment and negatively impact GDP growth, leading to a vicious cycle. Due to this difference, it is difficult to implement high-interest rate policies similar to the past, according to analysis.

China now has a one-stop production system in almost all industrial sectors, comparable to the industrial self-reliance of the United States in the 1940s. This structural change suggests the possibility of a China Shock 2.0 that is different from the past.

To solve the massive liquidity and debt problems facing the US economy, a new core industry on a much larger scale than the internet cycle is needed. Artificial intelligence (AI) is identified as the industry that will fulfill that role. AI is expected to absorb the vast liquidity released into the market, prevent the devaluation of currency, and thereby drive real growth and dilute the national debt burden.

The Fed's interest rate hikes or hawkish remarks are interpreted as an intention to control long-term interest rates and expected inflation, rather than to actually reduce liquidity. The analysis suggests that the Fed is merely sending a signal that 'we are managing the market,' and it may not be significantly related to actual market liquidity. The view is that current US authorities are operating according to a carefully crafted script that balances inflation and growth.

While the Federal Reserve (Fed) is raising interest rates and tightening, the Treasury is defending market liquidity through reverse repo funds, adjustments to bond issuance, and buybacks. This suggests that the government and the Fed are not currently seeing eye to eye. Given that major market shocks occurred in the past when the government and the Fed coordinated tightening simultaneously, it is necessary to pay attention to the potential impact on the market if the policy directions of the two institutions align in the future.

To achieve this, it is expected to implement a strategy to dilute government debt with productivity growth by mobilizing various means such as utilizing stablecoins and easing bank regulations. The Treasury appears to be aiming for overall financial market stability by controlling long-term Treasury rates.

For foreign capital inflow and stable won-dollar exchange rates, expanding shareholder returns by Samsung Electronics and SK Hynix, the top two companies by market capitalization in Korea, is essential. Such shareholder-friendly policies can drive the overall re-rating of the Korean stock market, regardless of concerns about the peak-out of corporate profit margins. The analysis suggests that this can lead to a re-rating of the entire KOSPI, beyond just Samsung Electronics and Hynix.

It is suggested that it is necessary to consolidate portfolios around companies that can maintain profit margins even in the current high-interest rate environment. The opinion is that now, when people feel fear, may actually be the optimal time to invest. It recommends selective investment, focusing on clear growth sectors rather than index investing, and emphasizes finding opportunities amidst crises.

Most key figures in the US Treasury and the Fed come from financial institutions, possessing a financial expert's perspective rather than a bureaucratic one. Based on this background, they are more likely to pursue policies aimed at market stability and growth rather than intentionally inducing a recession. The analysis suggests that Washington and the Treasury are aligned in their direction.