GERMAN ECONOMY MAY BE CONTRACTING
German industrial production in November dropped by 1.9% from the previous month and this was the third consecutive month of falls in industrial production according to Germany’s Federal Statistics Office. That one-month drop translated to a seasonally adjusted drop of 4.7% from the same month a year earlier.
This should not surprise BOOM readers. On 17th December, BOOM wrote — “Significant falls in Real GDP growth have occurred recently in Australia, Germany, France, Japan, Sweden, Switzerland and Italy.” On that date, BOOM went on to explain harsh economic reality.
“Australia’s GDP growth dropped to 0.3 % for the September quarter and its forecast annual growth dropped from 3.5 % to 2.8 %. Germany’s GDP growth for the September quarter was negative -0.2 %. France’s GDP growth for that quarter was 0.4 % with annual growth falling to 1.4 % and that was before the Yellow Vest demonstrations which will certainly cause another drop in growth for the December quarter. Another negative number was delivered in Japan for the September quarter with the GDP falling to negative – 0.6 %. Their annual growth rate is now officially at Zero. Italy’s September quarter GDP growth rate was negative -0.1 %. Sweden’s was negative -0.2 % and Switzerland’s was negative -0.2 %.”
US GOVERNMENT DEBT
BOOM NOT WORRIED
Total US Government Debt now totals almost $ 22 Trillion. In fact, the exact number on 10th January was $ 21,917,603,881,288.34 (yes it can be calculated to the last 34 cents). Many observers seem very worried about this for reasons that don’t make much sense often citing “inflation risk” and “currency collapse” as possible threats to the US economy. Is BOOM currently worried by this figure and these possibilities? The answer is No.
Of the US Total Government Debt, $ 5.8 Trillion is debt called “Intra-Governmental Holdings”. Intra-governmental holdings is money that the government basically owes to itself, because it borrowed the money from itself. So if you are worried about the size of US government debt, you can rest easy because if this number is subtracted from the total, then the Total US Government Debt falls from almost $ 22 Trillion to just $ 16 Trillion. In other words, you can make almost $ 6 Trillion disappear in a heartbeat.
It is very easy to calculate the growth in the US Government’s “debt” (bond issuance program). You can go to the US Treasury website called “Debt to the Penny” to see the debt numbers grow every day. And you can calculate the exact annual budget deficit of the federal government simply by calculating the difference in “Total Debt” over any 12 month period.
Since 11th January 2018 (exactly 12 months), the Total Debt has risen by US$ 1.44 Trillion so that is the government’s actual budget deficit. They are spending $ 1.44 Trillion more per year than they are raising in taxes. The deficit is now 7.4 % of total annual GDP and is currently growing at 7% per annum. That means that the total debt figure will double in just 10 years, by the year 2028. If that happens, total US Government debt will then be around $ 44 Trillion.
Can this continue? Yes — as long as purchasers of US Treasury issued Securities can be found. And if private purchasers cannot be found, then the US central bank can restart another QE program and buy them. There is no real limit to this process except out-of-control CPI inflation and/or currency collapse. And both of those are very, very unlikely in the current circumstances.
America’s current Total Government Debt is approximately 104% of GDP. In Japan, the Total Government Debt is approximately 253 % of GDP. The US is just learning how to play this game even though it has run a federal government deficit almost every year since 1966.
For the last 6 consecutive years, the Bank of Japan (Japan’s central bank) has consistently targeted that their Year-on-Year Core CPI Inflation rate will exceed 2%. In reality, the core CPI rate has struggled to exceed 1% and, for most of that time has stubbornly averaged around 0.5 %. Their currency has moved around a little during that period but remained, on average, around 110 Yen to the US Dollar. Their current inflation target is 1.4% but rumors abound that they will soon reduce their target to just 1.0 %.
In other words, they have desperately tried for years to create core CPI inflation in Japan of just 2% per annum and they have failed (miserably). The US is a very different economy but BOOM suspects that inflation targets will be similarly difficult to achieve there in future. So, if that is the case, then US Government Debt expansion can continue without any real concern for any serious acceleration of CPI inflation.
Currency collapse is equally hard to imagine as the US Dollar is the major currency used in international trade and capital settlements. Thus, it always has a tendency to rise, not fall, in response to global demand.
Another way to look at US Debt is to include private debt. If we do that, then total US debt exceeds $ 70 Trillion which equates to 360% of GDP. Is BOOM worried about that? Well no and yes. BOOM is generally more worried about the rate of increase of certain types of private debt (but not government debt). Why?
BOOM is concerned about private debts that are originated as bank loans and secured by property held as collateral. Speculative borrowing is the concern here. Private debts that are originated as corporate bond issuance are not as concerning because there is no collateral asset held. There is a major difference.
SOME DEBT WORRIES BOOM SOMETIMES
Mortgage Debt Outstanding in the US at the end of September 2018 was approximately $ 15.3 Trillion. $ 13 Trillion of that is housing related. That is the debt that BOOM is potentially worried about, not government debt originated in sovereign bond issuance programs and not corporate debt originated in company bond issuance programs.
Why? Because it is bank loan debt that is collateralized. And if the value of that collateral falls, then loan default risk rises and commercial bank failures may begin to happen. These circumstances may arise in a severe recession when unemployment surges faster than expected. Or they may arise if there has been an uncontrolled increase in fraudulent banking practices resulting in extreme valuations of properties. That is what happened in the global financial crisis of 2007 – 2008 when the US housing market collapsed.
But today, according to Zillow, the median home value in the United States is currently $222,800. United States home values have gone up 7.7% over the past year and Zillow predicts they will rise 6.4% within the next year. Foreclosures may be a factor impacting home values in the next several years but in the United States only 1.2 homes are currently foreclosed per 10,000. That is an incredibly low figure.
With U.S. home values having fallen by more than 20% nationally from their peak in 2007 until their trough in late 2011, many homeowners are still now underwater on their mortgages, meaning they owe more than their home is worth. The percent of United States homeowners underwater on their mortgage is 8.2%.
BOOM concludes that we are not at any crazy peak in US housing prices. So the $ 15.3 Trillion in mortgage debt seems safe (at present). Speculation in house prices seems contained. Please note that commercial and industrial loans of $ 2.2 Trillion are included in that number — collateralized by commercial and industrial real estate. Commercial necessity rules that market, not speculative gambling. Again, no cause for concern.
BIG CRYPTO STORY
There were reports last week that Ethereum Classic blockchain transactional records were altered by a group of miners representing 51% of the mining group. This is a major potential problem with blockchain technology. If 51% of the miners get control, they can alter the historical record of transactions in a chain of blocks. This negates any supposed advantage of the argument for blockchains that says “all transactions are recorded forever and cannot be tampered with”.
Some online exchanges immediately ceased all ethereum classic (ETC) transactions, withdrawals and deposits. One major exchange stated “Due to a potential 51% attack, ETC wallets have been disabled and will not be re-enabled until tomorrow (at the very earliest). We will provide an update when we have a firmer timeline for re-enabling deposits and withdrawals.” The story is slowly unfolding with the truth not clear just yet.
Perhaps as a result, almost the entire Crypto maket has once again been hit by unrelenting sellers. On Thursday and Friday last week, the Bitcoin price plunged over 24 hours below US $ 4,000 towards US $ 3,600. The entire Market Capitalization of the Crypto World is currently holding above $ 100 Billion but if that support base is ever broken, then the entire phenomenon could simply collapse towards Zero.
As BOOM always says “In economics, things work until they don’t”. The same adage applies to the world of finance, even Crypto finance.
BAKKT RAISES $ 182 MILLION
The other big Crypto story last week was in regard to BAKKT and its recent capital raise of $ 182 Million. BAKKT aims to be a completely regulated online exchange for digital assets. The platform aims to offer the first-ever Bitcoin-settled futures contract. Currently available Bitcoin futures contracts are settled in US Dollars at the CME and CBOE exchanges.
There were 12 investors in the capital raise — Boston Consulting Group, CMT Digital, Eagle Seven, Galaxy Digital, Goldfinch Partners, Alan Howard, Horizons Ventures, Intercontinental Exchange, Microsoft’s venture capital arm, M12, Pantera Capital, PayU, the fintech arm of Naspers, and Protocol Ventures.
BAKKT is owned by ICE – Intercontinental Exchange – which also operates the New York Stock Exchange.
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.
Return to the BOOM Main Website – BOOM Finance and Economics at http://boomfinanceandeconomics.com/
EMAIL: gerry [@]
HOW MOST MONEY IS CREATED
BANKS CREATE FRESH NEW MONEY OUT OF THIN AIR
(but they always need a Borrower to do so)
THERE IS NO SUCH THING AS A DEPOSIT
BANKS PURCHASE SECURITIES, THEY DON’T MAKE LOANS
BANKS DON’T TAKE DEPOSITS, THEY BORROW YOUR MONEY
How is Most New Money Created ?
LOANS CREATE DEPOSITS — that is how almost all new money is created in the economy (by commercial banks making loans).
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”.
Quarterly Bulletins Index
Most economists are unaware of this and even ignore the banking & finance sectors in their econometric models.
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”. By the same token, excess central bank reserves are not a necessary precondition for a bank to grant credit (and thus create money).”
The Reserve Bank of Australia (Australia’s central bank) has also contributed to the issue in a speech by Christopher Kent, the Assistant Governor on September 19th 2018.
“…… the vast bulk of broad money consists of bank deposits”
“Money can be created …….. when financial intermediaries make loans”
“In the first instance, the process of money creation requires a willing borrower.”
“It’s also worth emphasizing that the process of money creation is not the result of the actions of any single bank – rather, the banking system as a whole acts to create money.”
PRICE PULSE DOMINANCE CHANGES DURING LAST WEEK Ended 13th January 2019:
1. NATURAL GAS (SPOT PRICE) — Changed to DOWN Arrow Dominant
2. YUAN (AGAINST USD) ETF — Changed to NO Arrow Dominant
3. SINGAPORE STOCKS — Changed to NO 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 13th January 2019. 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.
PLEASE NOTE — Many charts are ETF’s from NY Market (not the base commodity or currency etc). The NY Stock Code is in the Top Left Hand Corner of each chart.
Charts are produced from http://www.stockcharts.com
Return to the BOOM Main Website – BOOM Finance and Economics at http://boomfinanceandeconomics.com/
PRICE PULSE RISING — (RED ARROW UP DOMINANCE)
# GOLD PRICE in USD —Changed to UP Arrow Dominant
# US LONG BOND PRICE (TLT) — UP Arrow Dominant
# AGGREGATE US BOND PRICES (BND) — UP Arrow Dominant
# GOLD PRICE (in Aus Dollars) — UP Arrow Dominant
# INDIAN STOCKS — UP Arrow Dominant
# BRAZIL STOCK INDEX — UP Arrow Dominant
# PALLADIUM PRICE — UP Arrow Dominant
# ARGENTINA STOCKS — UP Arrow Dominant
# US INFLATION PROTECTED BOND PRICES — UP Arrow Dominant
# US UTILITIES STOCKS — UP Arrow Dominant
# VALE STOCK (Iron Ore) — UP Arrow Dominant
# US 3 MTH T BILL YIELD — UP Arrow Dominant
# LIBOR — UP Arrow Dominant
PRICE PULSE FALLING — (RED ARROW DOWN DOMINANCE)
# NATURAL GAS (SPOT PRICE) — DOWN Arrow Dominant
# SWISS STOCKS — DOWN Arrow Dominant
# US DOW STOCK INDEX — DOWN Arrow Dominant
# US BIOTECHNOLOGY INDEX — DOWN Arrow Dominant
# JAPAN STOCKS — DOWN Arrow Dominant
# WEST TEXAS OIL PRICE — DOWN Arrow Dominant
# US TRANSPORT INDEX — DOWN Arrow Dominant
# US INSIDER SENTIMENT (KNOW) — DOWN Arrow Dominant
# SOIL (POTASH ETF) — DOWN Arrow Dominant
# QUAL (Quality ETF) — DOWN Arrow Dominant
# MTUM (Momentum ETF) — DOWN Arrow Dominant
# RUSSELL 2000 INDEX — DOWN Arrow Dominant
# TRIM TABS US FLOAT (TTAC) — DOWN Arrow Dominant
# US HIGH GRADE CORP BONDS (LQD) — DOWN Arrow Dominant
# EMERGING MARKETS ETF (EEM) — DOWN Arrow Dominant
# FINANCIAL SECTOR ETF (XLF) — DOWN Arrow Dominant
# US KBW BANK INDEX — DOWN Arrow Dominant
# NASDAQ COMP INDEX — DOWN Arrow Dominant
# US JUNK BOND PRICES — DOWN Arrow Dominant
# COMMODITIES INDEX (USCI) — DOWN Arrow Dominant
# SWISS FRANC (AGAINST $US) — DOWN Arrow Dominant
# FRANCE STOCKS — DOWN Arrow Dominant
# AUSSIE ALL ORDS INDEX — DOWN Arrow Dominant
# THAI SETI INDEX — DOWN Arrow Dominant
# GERMAN DAX — DOWN Arrow Dominant
# TAIWAN STOCKS — DOWN Arrow Dominant
# FVL — VALUE LINE — DOWN Arrow Dominant
# YEN (AGAINST $US) — DOWN Arrow Dominant
# DENMARK STOCKS — DOWN Arrow Dominant
# COAL ETF (KOL) — DOWN Arrow Dominant
# TED SPREAD — DOWN Arrow Dominant
# COPPER PRICE — DOWN Arrow Dominant
# INDUSTRIAL METALS ETF (DBB) — DOWN Arrow Dominant
# HANG SENG — DOWN Arrow Dominant
# SOUTH KOREA STOCKS — DOWN Arrow Dominant
# AUSSIE DOLLAR AGAINST US DOLLAR — DOWN Arrow Dominant
# CANADIAN DOLLAR AGAINST USD — DOWN Arrow Dominant
# BRITISH POUND AGAINST USD — DOWN Arrow Dominant
# EURO (AGAINST $US) — DOWN Arrow Dominant
# NOMURA HOLDINGS — DOWN Arrow Dominant
# PLATINUM PRICE — DOWN Arrow Dominant
# SHANGHAI STOCKS — 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
PRICE PULSE UNCERTAIN — NON-DOMINANCE OF RED ARROW –
# SINGAPORE STOCKS — NO Arrow Dominant
# YUAN (AGAINST USD) ETF — NO Arrow Dominant
# RWR (US Real Estate REIT Fund) — NO Arrow Dominant
# RUSSIAN RTSI STOCK INDEX — NO Arrow Dominant
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