93.9% IMF FORECASTS WRONG
CURIOUSER AND CURIOUSER
Last week, BOOM looked at the recent IMF forecasts for economic growth. Regular readers will know that BOOM does not have a very high regard for the economists employed by that august institution from Washington DC and their forecasts. You see, they are famous for getting their forecasts wrong. And not just once. They get them wrong over and over and over again. At least they are consistent.
They recently cut their Global economic growth forecast to 3.3% (down from 3.5%) while they raised their forecast for China’s growth from 6.2% to 6.3%. And they cut their US forecast to 2.3% (from 2.5%).
Gita Gopinath, who recently became the IMF’s chief economist, said “this is a delicate moment” at a press briefing in Washington. She must be aware of her predecessors horrendous track record.
From a Bloomberg article on April 10th — “a Bloomberg analysis of more than 3,200 same-year country forecasts published each spring since 1999 found a wide variation in the direction and magnitude of errors. In 6.1 percent of cases, the IMF was within a 0.1 percentage-point margin of error. The rest of the time, its forecasts underestimated GDP growth in 56 percent of cases and overestimated it in 44 percent.”
In other words, 93.9 percent of the IMF’s forecasts have been wrong and the average forecast miss was by 2 %. Those a BIG numbers. So why do the mainstream media give such prominence to IMF forecasts? And why are we not all laughing at any utterances from Christine Lagarde, the CEO, as she parades around at international meetings trailing her famous scarf behind her? BOOM cannot answer these questions. Readers must make up their own minds.
Lagarde, by the way, is a French lawyer and politician who worked in Washington DC as a 17 year old. She was an intern at the U.S. Capitol as Representative William Cohen’s congressional assistant, helping him correspond with French-speaking constituents during the Watergate hearings. One may well ask, how come she became CEO of the IMF 38 years later?
If you Google the IMF for news items, you will find thousands of doom and gloom articles. They are always issuing economic “warnings”. And yet their forecasting ability is clearly atrocious.
There are many mysteries in economics and BOOM is constantly surprised to see anyone pay serious attention to anything coming from the two Headquarters at 700 19th Street, N.W., Washington, D.C. and 1900 Pennsylvania Ave NW, Washington, DC. They call these “Headquarters 1” and “Headquarters 2” — a peculiar thing to do. BOOM is not aware of many other institutions that admit to be duel headed beasts.
In ancient Greek mythology, there was a two headed monster dog called Orthrus that guarded the gates of Hades and is often depicted as having a snakes tail. Hades is a word often used to describe Hell.
As that well known economic commentator, Alice in Wonderland, once said “It just gets curiouser and curiouser”.
ITALY TAKES OVER CENTRAL BANK?
Some extraordinary reports coming from Italy last week. These reports were initially brought to our attention by a Wall Street Journal article on April 3rd titled — “Italy’s Populists Covet Central Bank and Its Gold — Blaming the institution for the woes of ordinary Italians, lawmakers pursue a takeover”.
The Italian Parliament is considering legislation to force a take-over of the Italian Central Bank and then the return of its gold to its rightful owners. Who might the rightful owners be? The people of Italy.
So what are the details? The ruling coalition of the 5-Star Movement and the League parties proposed two bills that have apparently put a large cat amongst the pigeons. One draft law may, reportedly, oblige the central bank’s owners to sell their shares to the Italian Treasury at prices from the 1930s, while the second law is set to declare Italian national citizens to be the owners of the Bank of Italy’s reserves (including their large cache of gold).
“The gold belongs to the Italians, not to the bankers. We are ready to battle everywhere in Italy and to bring Italians to the streets if necessary,” said Giorgia Meloni, leader of the Brothers of Italy opposition party, as quoted by the Wall Street Journal.
The Bank of Italy, which holds 2,534 metric tons of gold worth some $102 billion, is of course currently fully independent with their decision-making processes totally separate from the government. Cynics would suggest otherwise.
The coalition government fully supports public ownership of the gold reserves, and the draft law apparently has a good chance of being approved. But when it comes to nationalizing the central bank, 5 Star reportedly backs the measure, while its coalition partner, the League, is still hesitating.
The central bank is known as the Bank of Italy, regulated by National and European law. It is owned by a consortium of individual Italian banks. So it is effectively a private institution. On its website, it describes itself as a “public law institution” which is a rather curious phrase. There are 121 shareholder institutions in total and 300,000 shares on issue.
The capital of the Bank of Italy is set at €7,500,000,000 in registered shares with a unitary nominal value, established by law, of €25,000. Shares may be held by banks and insurance and re-insurance firms, legally registered and with head office in Italy. The net profit is distributed as follows:
⦁ to ordinary reserves, up to a maximum of 20 per cent of net profit,
⦁ to shareholders that owned their shares at the end of the fortieth day before the first notice convening the shareholders’ meeting, up to a maximum of 6 per cent of capital,
⦁ to special reserves and provisions, up to a maximum of 20 per cent of net profit, and
⦁ to the State, the remaining sum.
So The People of Italy effectively get the crumbs. And the banks receive up to 6 % return on their capital annually.
Most central banks on the globe are now publicly owned by their governments with some exceptions. The trend of nationalizing central banks started in 1935.
Nationalization was pursued progressively by many governments after the economic collapse in the early 1930’s known as the Great Depression.
The first central bank to be nationalized was the Reserve Bank of New Zealand and the last central bank to be nationalized was the Austrian National Bank as recently as 2010. The remaining privately owned central banks can now be found in Belgium, Greece, Japan, South Africa, Switzerland and Turkey. The Bank of Italy and the 12 Federal Reserve Banks in the US allow shareholding by commercial banks only.
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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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.”
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