BANKS CREATE FRESH NEW MONEY OUT OF THIN AIR — BANKS DON’T TAKE DEPOSITS — BANKS DON’T MAKE LOANS
Over the last few days, BOOM has witnessed bankers in Australia talking about their “rising cost of funds”. They have said “we have to borrow our funds overseas. If our cost of funds goes up with rising international interest rates, then we will have to raise interest rates on our home mortgages”. “We will have to pass on our increased cost of capital to our customers”.
The mainstream financial media simply allow this to pass without comment because they presume it is a valid statement. (No research done, of course).
BOOM has seen this narrative perpetrated by bankers and “expert” economic commentators ad nauseum over the years. So let’s look at one of the big Aussie bank balance sheets to see what is really happening.
Banks loan money and when they do so, those loans are recorded as “assets” on their balance sheet. So to examine the claim that banks “borrow their funds and loan them on”, it is a rather simple matter to look at the dollar volume of financial liabilities on their balance sheets and compare that number to the dollar volume of their loan assets (their loan book).
That bank had approximately A$ 700 Billion of loans listed on its balance sheet as an asset at the end of financial year 2017. Most of that bank’s liabilities were “deposits” of $ 500 Billion plus “debt issues” of $ 150 Billion.
So — let’s think hard about those numbers. The bank has borrowed $ 150 Billion and has a loan book of $ 700 Billion. So their actual net borrowings described as “debt issues” of $ 150 Billion amount to about 22% of their loan book. What do I mean when I refer to net borrowings? The bank also owes $ 500 Billion to its depositors (arguably at call). But if all the depositors withdrew their deposits, the bank’s liabilities would suddenly decrease by that amount. So the bank’s net borrowings are actually just $ 168 Billion which is equivalent to just 22% of the size of their loan book. If their “cost of borrowing” increases, how can they justify passing on that cost to every variable interest rate loan?
The analysis gets worse if you take into consideration that much of the bank’s $ 150 Billion of borrowings is actually being used as working capital. Working capital is not loaned on. It is used in running the day-to-day operational costs of the bank. So — let’s assume that half of their net borrowings is used in working capital (it’s probably much more). That leaves their borrowings at just 11% of their loan book.
Again, BOOM asks the obvious question — if their “cost of borrowing” increases, how can they justify passing on that full cost to every variable interest rate loan?
The real answer is that they can’t. And there is another consideration to make here. Banks actually create money out of thin air when they make a loan. They don’t borrow it.
The other intriguing thing to understand is that most of their deposit funds were initially created as bank loans. The resultant funds wind up as customer deposits and eventually they spread out across the entire banking sector. So that $ 500 Billion of deposits referred to above was actually created in the past by the banking sector as a whole as fresh new money when they created loans of equal amount (note – the sector — not the individual bank).
Don’t believe me? The confusion arises from how and when fresh new money is created as new loans versus old money that has already been in existence for some time and which exists as deposits. Money is born when a loan is made, it lives as deposits during its working life and it dies when a loan is finally paid off or if a loan is defaulted upon.
Just read what the most authoritative world expert says —
On 25th April 2017, the central bank of Germany, the Bundesbank, released a statement on this matter —
“In terms of volume, the majority of the money supply is made up of book money, which is created through transactions between banks and domestic customers. Sight deposits are an example of book money: sight deposits are created when a bank settles transactions with a customer, ie it grants a credit, say, or purchases an asset and credits the corresponding amount to the customer’s bank account in return. This means that banks can create book money just by making an accounting entry”
According to the Bundesbank’s economists, “this refutes a popular misconception that banks act simply as intermediaries at the time of lending – i.e. that banks can only grant credit using funds placed with them previously as deposits by other customers”.
Still don’t believe me? Let’s see what the UK central bank says.
From the Bank of England Quarterly Bulletin Q1 2014 —
“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”
“Most money in the modern economy is in the form of bank deposits, which are created by commercial banks themselves”.
WHY do bankers and “expert” finance analysts continue to perpetrate the idea that banks borrow funds from external sources and then loan those funds on?
BOOM does not accuse them of being deliberately misleading. The fact is that they simply do not understand the actual processes of banking. It’s hard to grasp that a banker earning about $ 10 – 20 Million may not fully understand banking.
BANKS CREATE FRESH NEW MONEY OUT OF THIN AIR
THERE IS NO SUCH THING AS A DEPOSIT
BANKS PURCHASE SECURITIES, THEY DON’T MAKE LOANS
BANKS DON’T TAKE DEPOSITS, BANKS DON’T MAKE LOANS
Watch this short 15 minutes video and learn as Professor Richard Werner brilliantly explains how the banking system and financial sector really work.
The Federal Reserve (America’s central bank) prefers to watch the Core PCE inflation indicator. This has now reached the Fed’s magic number of 2.0% for the first time in over 6 years. That will make the Fed happy as they have desperately wanted CPI inflation to appear and take hold in the American economy since the Global Financial Crisis in 2008.
ZERO OIL TESLA
BOOM saw a number plate recently on a new Tesla motor car. It said “Zero Oil“. The driver was obviously proud to be driving in a morally superior vehicle. But, unfortunately, the claim does not stack up to even the most rudimentary logic.
For instance, the car’s batteries need to be manufactured and re-charged. In most cases, that recharging will take place from the convenient base load, coal fired power station. OK — it’s not an oil fired power station so, strictly speaking, the car is still “Zero Oil”. But let’s think again.
The coal fired power station was built using trucks, steel, aluminium, iron ore, blast furnaces, bricks, mortar and concrete. ALL of those materials were created using oil as the base energy supply. Without oil, the trucks would not run. The mining equipment involved in mining the iron ore would not run. The ships that ship the iron ore would not run. The blast furnaces in China would not run. And all of those individual machines involved in all those processes were made of steel and aluminium. Blast furnaces, steel mills and aluminium factories must run 24 hours a day, 365 days a year. They are certainly not Zero Oil. And neither is the resultant power station even if it is generating power from wind or solar power. Why? Because wind turbines and solar panels need all those blast furnaces, mines, ships, trucks, steel mills and aluminium factories to engage 24 hours a day 365 days a year in order to manufacture their components.
It gets worse.
The Tesla car is made up of rubber wheels, silicon, cobalt batteries, steel, aluminium, plastic, electrical cables and glass. All of those components also need blast furnaces, mines, ships, trucks, steel mills and aluminium factories to engage 24 hours a day 365 days a year in order to manufacture their components.
And none of those can run without the base energy source that creates all of this industrial magic — Oil.
So — “Zero Oil” is an extraordinary claim indeed. NOTHING that comes from our highly industrialized economies comes without oil. And, if you think about it, that includes all the services that are provided in an advanced economy.
This concept is called Embedded Energy or Embodied Energy. Let’s look at Appropedia — the “sustainability Wiki” — for a definition.
Embedded energy, also known as embodied energy, is defined as the Energy that was used in the work of making a product. Embodied energy attempts to measure the total of all the energy necessary for an entire product Lifecycle. This lifecycle includes raw material extraction, transport, manufacture, assembly, installation, disassembly, deconstruction and/or decomposition.
ANOTHER DAY ANOTHER CURRENCY COLLAPSE
INTEREST RATE SETTING AT 60%
Argentina has just raised its key interest rate to 60% in a bid to stop attacks on its crashing currency. The code for the Argentinian currency is ARS. So the quip is “the arse just fell out of the ARS”. However, the stock market surged upwards 16.6% over the last week as Argentinians prudently grabbed assets rather than holding savings in cash. Their government has requested a $ 50 Billion assistance loan from the IMF and they have massively raised their key interest rate. The next policy lever to pull here in these situations is the establishment of capital controls.
Turkey is doing none of that. Their President is standing defiant against attacks on his currency. He refuses to raise interest rates, he will not approach the IMF and he will not impose capital controls. The Turkish Lira has been under some pressure again lately but it has been reasonably resilient over the last week. The Turkish stock market is also holding position quite well with strong buyer support in evidence during the week and the Turkish Bond market is also showing remarkable resilience.
So Turkey may defy the financial markets here. And if so, it will be a historic victory in Geo-political and financial terms. The financial world as we have known it since 1944 will have changed irrevocably.
Emerging nation stock markets around the globe are almost all showing resilience here as BOOM predicted might happen. You may recall BOOM stating on 20th August — “It is early days but BOOM is now looking for a positive response from global stockmarkets especially in China, Hong Kong and the so-called “emerging” markets as evidence for a return to certainty in global growth.”
In economics, things work until they don’t.
Until next week ………… Make your own conclusions, do your own research.
BOOM does not offer investment advice.
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PRICE PULSE DOMINANCE CHANGES DURING LAST WEEK Ended 2nd September 2018:
1. TRIM TABS US FLOAT — Changed to UP Arrow Dominant
NOTE — RED ARROWS INDICATE BOOM PRICE PULSE DOMINANCE in the present moment (as indicated by the date of the chart and taking into account the 3 year time frame shown). The charts are now arranged in PRICE PULSE RED ARROW DOMINANCE. NOTE: All Charts are WEEKLY Charts over the last 3 YEARS time frame. Arrows indicate PAST price action (not future). No predictions are implied from past action.
Comments refer to past PRICE PULSE (Red Arrow DOMINANCE) over the last 3 years, the week ended 2nd September 2018. You can RIGHT CLICK a chart and OPEN in a New Tab. Make your own conclusions, do your own research. BOOM does not offer investment advice.
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NOTABLE PRICE PULSE CHANGES OVER THE LAST WEEK ENDED 2nd September 2018:-
1. TRIM TABS US FLOAT — Changed to UP Arrow Dominant
PRICE PULSE RISING — (RED ARROW UP DOMINANCE)
# TRIM TABS US FLOAT — UP Arrow Dominant
# US HIGH GRADE CORP BONDS (LQD) — UP Arrow Dominant
# US INFLATION PROTECTED BOND PRICES — UP Arrow Dominant
# US UTILITIES STOCKS — UP Arrow Dominant
# AGGREGATE US BOND PRICES (BND) — UP Arrow Dominant
# US LONG BOND PRICE (TLT) — UP Arrow Dominant
# RWR (US Real Estate REIT Fund) — UP Arrow DominanT
# AUSSIE ALL ORDS INDEX — UP Arrow Dominant
# INDIAN STOCKS — UP Arrow Dominant
# VALE STOCK (Iron Ore) — UP Arrow Dominant
# US BIOTECHNOLOGY INDEX — UP Arrow Dominant
# WEST TEXAS OIL PRICE — UP Arrow Dominant
# US DOW STOCK INDEX — UP Arrow Dominant
# RUSSELL 2000 INDEX — UP Arrow Dominant
# US TRANSPORT INDEX — UP Arrow Dominant
# US INSIDER SENTIMENT (KNOW) — UP Arrow Dominant
# NASDAQ COMP INDEX — UP Arrow Dominant
# US JUNK BOND PRICES — UP Arrow Dominant
# US 3 MTH T BILL YIELD — UP Arrow Dominant
# LIBOR — UP Arrow Dominant
# FRANCE STOCKS — UP Arrow Dominant
PRICE PULSE FALLING — (RED ARROW DOWN DOMINANCE)
# TED SPREAD — DOWN Arrow Dominant
# GOLD PRICE (in Aus Dollars) — DOWN Arrow Dominant
# COPPER PRICE — DOWN Arrow Dominant
# INDUSTRIAL METALS ETF (DBB) — DOWN Arrow Dominant
# YUAN (AGAINST USD) ETF — DOWN Arrow Dominant
# HANG SENG — DOWN Arrow Dominant
# GOLD PRICE in USD —DOWN Arrow Dominant
# SOUTH KOREA STOCKS — DOWN Arrow Dominant
# SINGAPORE STOCKS — DOWN Arrow Dominant
# THAI SETI INDEX — DOWN Arrow Dominant
# AUSSIE DOLLAR AGAINST US DOLLAR — DOWN Arrow Dominant
# CANADIAN DOLLAR AGAINST USD — DOWN Arrow Dominant
# BRAZIL STOCK INDEX — DOWN Arrow Dominant
# ARGENTINA STOCKS — DOWN Arrow Dominant
# BRITISH POUND AGAINST USD — DOWN Arrow Dominant
# NOMURA HOLDINGS — DOWN Arrow Dominant
# EURO (AGAINST $US) — DOWN Arrow Dominant
# SWISS FRANC (AGAINST $US) — DOWN Arrow Dominant
# PLATINUM PRICE — DOWN Arrow Dominant
# SHANGHAI STOCKS — DOWN Arrow Dominant
# PALLADIUM PRICE — DOWN Arrow Dominant
# BITCOIN INDEX $NYXBT — DOWN Arrow Dominant
# DEUTSCHE BANK SHARES — DOWN Arrow Dominant
# FOOD INPUT PRICES (DBA) — DOWN Arrow Dominant
# EURODOLLAR INDEX ($XED) — DOWN Arrow Dominant
# COMMODITIES INDEX (USCI) — DOWN Arrow Dominant
PRICE PULSE UNCERTAIN NON-DOMINANCE OF RED ARROW –
# SWISS STOCKS — Changed to No Arrow Dominant
# TAIWAN STOCKS — NO Arrow Dominant
# DENMARK STOCKS — NO Arrow Dominant
# YEN (AGAINST $US) — NO Arrow Dominant
# JAPAN NIKKEI STOCKS — NO Arrow Dominant
# RUSSIAN RTSI STOCK INDEX — NO Arrow Dominant
# COAL ETF (KOL) — NO Arrow Dominant
# FVL — VALUE LINE — NO Arrow Dominant
# US KBW BANK INDEX — NO Arrow Dominant
# NATURAL GAS (SPOT PRICE) — NO Arrow Dominant
# GERMAN DAX — NO Arrow Dominant
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