INTEREST RATES TO FALL IN AUSTRALIA
CENTRAL BANKERS WRONG AGAIN
The central bank in Australia is called the Reserve Bank. They have recently noted (at last) that CPI inflation is no longer a threat to the economy and have given indications that they will drop the key overnight interest rate in early June to a record low. Maybe they have been reading BOOM?
BOOM has consistently written about the new economic paradigm of low economic growth, low CPI inflation and low interest rates in the advanced economies. But most central bankers in those economies persist in regarding themselves as “inflation fighters”. This error in perception has actually been damaging to those economies because interest rate settings have been too high for too long. The fact is that central bankers have a very big influence upon economic expectations and if they are consistently wrong in their assessments of the present and the future, then those errors in judgement will feed into the economy.
Most economists say that central bankers only affect the short term interest rates. But that is not true. If short term interest rates are rising or persistently forecast to rise or persistently not lowered due to an incorrect perception of a future “inflation threat”, then all the settings of yield in new sovereign bond issuances will be distorted in an upwards direction. The steepness of the sovereign yield curve will be exaggerated. Over time as the “inflation threat” does not materialize, the secondary market for those bonds will manifest these errors and the market will become distorted by buyers seeking the exaggerated yields. Thus, the whole sovereign yield curve will start to progressively move downwards and will approach flatness (or inversion) because of this distorted search for yield.
This is what has happened over the last 12 months in the yield curves for sovereign bonds in the US, Japan, Germany, France, the UK, China, India, Hong Kong, South Korea, Singapore, Thailand, Canada and Australia. BOOM has closely looked at all of those sovereign bond yield curves and they have all undergone the same 12 month journey to lower and lower yields.
Only one conclusion can be reached from such an analysis — ALL of those central bankers got it wrong 12 months ago. ALL of them overestimated the “threat of future inflation”. ALL of them set their key benchmark rates too high. And, as a result, ALL of them created distorted yield curves as governments set their new bond yields at unsustainably high levels.
Can BOOM suggest to the central bankers that they hire him and sack all of their “expert” economists?
These central bankers do not watch the impact of demographic change. They do not watch the dynamics of energy supply. And they do not understand the deflationary impact of technology which can be exponential.
Robotization is a good example. Robots can be programmed to make other robots. Robots making robots making robots. Who would have thunk it? And, with the advent of the Internet of Things, many robots will soon be engaged in communicating with other robots. More and more efficiency should be the natural outcome and there is simply no way that this dynamic can be CPI inflationary. Thus, it must be disinflationary or deflationary. Lower and lower relative energy costs and aging demographics have similar effects and those effects can be similarly exponential (they feed on themselves).
Dis-inflation is the lowering of inflation rates. Deflation is negative inflation rates.
CASH IS THE ANSWER (ONE OF THEM)
What is one way that governments can counter these three enemies of CPI inflation? After all, they cannot raise energy prices, they cannot change an aging demographic and they cannot reduce the impact of technology.
One answer lies in increasing the issuance of sovereign money — notes and coins. Governments must encourage their citizens to use notes and coins in more and more transactions. This increase in the issuance and use of fresh new sovereign money will counter the current tendency towards lower rates of money supply from credit creation (bank loans). The central bankers will not like this suggestion because their client commercial banks will scream in pain as their majority role in money supply creation is reduced. Governments must oppose their central bankers in this situation. It is clear that central banks can reduce CPI inflation but they cannot boost it.
Yes — it seems odd that CASH must become KING again — but not in an investment sense. It must become King again in regard to settling transactions. Governments and central bankers must begin to understand this dynamic of money supply. The longer they delay, the worse the CPI dis-inflation and deflation will become.
BOOM has other suggestions for governments to assist in fighting dis-inflation and deflation. The ball is really in their court. The central bankers cannot help here because clearly they do not understand what is happening. They got it all wrong in 2008, they got it all wrong over the last 12 months and they have no clue about what to do next. They can only be a hindrance.
BOOM will patiently await calls from governments. But he will not hold his breath. The “expert” economists there (and inside the central banks) will not give up their cushy jobs and high salaries easily.
TESLA SHARES FALL 9.67%
Tesla shares ended down 9.67% last week. They fell below US$ 200 for the first time since December 2017. This is causing significant anxiety to Tesla shareholders because every buyer since December 2017 is now faced with a capital loss. There appears to be some technical support for the shares around $ 180 but if they fall below that level, the anxiety will grow.
The shares began their journey as public shares in July 2010 at $ 19 per share. They rose strongly in May 2013 to above $ 50 and then proceeded steadily to levels around $ 388 during 2017 and 2018. They fell as low as $ 186 last week which represents a 52% decline from the highs.
The company CEO recently said that they would run out of cash within 10 months if they did not cut costs dramatically. And last week, Tesla reduced the base prices of its newly upgraded Model S and Model X vehicles by $ 2,000 – $ 3,000. So the company is following a strategy of reduced revenue and reduced costs. This may work as long as sales rise significantly but car buyers may be wary of buying cars from a company which is struggling to survive. A grim self fulfilling future can be constructed this way by any company that deals in consumer confidence.
A take-over by a larger car company may be the answer. But it is not clear who may be interested in rescuing the situation. The market capitalization (valuation) of Tesla is now at $ 33.8 Billion. Not many other car companies will want to buy at that price.
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.”
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