BOOM as at 16th June 2019

THE MINI BOT

BOOM has written quite a lot over the years about the methods that governments could use in future (or right now in many cases) to boost CPI inflation, GDP transaction volume and velocity of money. The methods include increased deficit spending, encouragement of cash for transactions, financial transactions taxes, establishing State owned commercial banks, encouragement of the community owned banking sector, encouragement of local currencies and the encouragement of bond issuance and bond-like securities by the private commercial sector (to complement bank loans) especially in regard to building or re-building infrastructure. All of these can stimulate inflation as bank loan creation volumes continue to stall.

Italy has recently moved strongly towards establishing a local, time limited parallel currency. It is reportedly planned to be a Promissory Note issued by the Government and accepted by the Government in payment of taxes. The Notes will be issued in denominations equivalent to the Euro and will carry an Expiry Date. Presumably, it will be used by the Treasury department to pay for services and goods rendered to the government. It has been reported that the Italian Parliament has passed the legislation unanimously in early June. It is called the Mini BOT.

Apparently, Mario Draghi (who is Italian), the head of the European Central Bank, is not happy about this. He has been reported as saying “Mini-BOTs are either money and then they are illegal, or they are debt and then the stock of debt goes up. I don’t think there is a third possibility.” A second currency would be illegal under EU law and a debt instrument would increase the total level of Government debt which is already above the parameters set by the EU.

BOOM has often written about what is required to call something a currency. The major test is general acceptance. Currencies spring from communal approval and acceptance. This means that the payment method is accepted everywhere by merchants to settle transactions. And if a currency is an official national currency, then it goes beyond that to the point where merchants cannot refuse to accept the currency (except with certain restrictions set by law in some nations).

So, will the Mini BOT be a currency or not? BOOM does not think so as the plan is to not enforce acceptance by merchants. They will apparently have the option of refusal.

So is the Mini BOT a form of debt? BOOM does not think so. It is not a bank loan and it is not a bond issuance. It is issued by the Government and retrieved by the Government — so how can it be a debt? BOOM suggests that Mario Draghi should think carefully here.

The leader of the Lega Party, Matteo Salvini, recently said “I don’t govern a country on its knees”. This was clearly directed to the members of the EU Commission in Brussels. Some people regard the 28 members of the Commission as being unelected dictators of the European Union. The European Parliament does not vote to appoint them as individuals.

Salvini knows this and he knows that a nation cannot negotiate effectively from a position of weakness. He watched on as Greece was dominated and essentially ignored during the “negotiations” it had with the EU during the Greek “debt crisis”. He has won a great victory in the recent European Parliamentary elections and it would not surprise BOOM to see him take Italy to a General Election soon to win support for the Mini BOT.

Having lived in Italy for some years, BOOM would expect that to be well received by the Italian people. BOOM has never heard any Italian vocally support their move to use the Euro as the national currency. Most appear to be vehemently opposed to the Euro and will vote in a heartbeat to establish a parallel system such as Salvini is planning.

This will all get very interesting ………… soon.

PRODUCTIVITY
WHO IS WINNING? WHO IS LOSING?

The OECD defines Multifactor Productivity (MFP) as “the overall efficiency with which labour and capital inputs are used together in the production process. Changes in MFP reflect the effects of changes in management practices, brand names, organizational change, general knowledge, network effects, spillovers from production factors, adjustment costs, economies of scale, the effects of imperfect competition and measurement errors. In simple terms therefore, if labor and capital inputs remained unchanged between two periods, any changes in output would reflect changes in MFP.”

So if we look at the 36 nations in the OECD — the Organization for Economic Cooperation and Development, which nations currently have the highest Multifactor Productivity?

The latest data dates from the end of 2017. There are some surprises. Korea, Finland and Canada had the highest MFP that year and New Zealand had the lowest. It might surprise readers to learn that manufacturing powerhouse of Germany had the steepest decline rate. This may (or may not) be the reason why Germany’s GDP growth has dropped alarmingly since 2017 and is now struggling to stay out of recession (persistent negative GDP growth).

But, interestingly, Finland’s GDP Growth rate has also been in decline since a peak in 2017 so its high Productivity did not have the effect of protecting it against such a decline. The exact same thing has happened to South Korea with its GDP Growth rate now plunging towards recession.

BOOM’s conclusion? Whatever is causing the current global GDP growth slowdown appears powerful enough to overcome good Productivity levels. BOOM has often referred to the dis-inflationary forces of aging demographics, rapid and hidden technological change and low energy costs. These powerful forces seem to be strong enough to overwhelm even the most productive economies.

So what can governments do? Let’s look again at the first paragraph of this editorial — BOOM has written quite a lot over the years about the methods that governments could use in future (or right now in many cases) to boost CPI inflation, GDP transaction volume and velocity of money. The methods include increased deficit spending, encouragement of cash for transactions, financial transactions taxes, establishing State owned commercial banks, encouragement of the community owned banking sector, encouragement of local currencies and the encouragement of bond issuance and bond-like securities by the private commercial sector (to complement bank loans) especially in regard to building or re-building infrastructure. All of these can stimulate inflation as bank loan creation volumes continue to stall.

VISA AND BLOCKCHAIN

VISA helps settle about US$ 11 Trillion of transactions globally each year in over 200 nations using 3.3 Billion cards. It can already do 65,000 transaction messages per second using current technology. However, it is now moving towards adopting distributed ledger technology DLT (Blockchain technology) to help banks and other large financial institutions to settle large trades. This market is apparently worth $125 Trillion annually. The use of Blockchain technology should result in lower costs and faster speeds to complete these transactions.

Blockchains are just data bases at the end of the day. Don’t get carried away with the “buzz” associated with this word. VISA will almost certainly be using a totally private Blockchain data base here and this won’t involve the use of so-called “crypto-currencies” such as Bitcoin.

The Blockchain technology they used is IBM’s Hyperledger Fabric which uses Linux. IBM seems to be winning the race here against other private Blockchain technologies.

FACEBOOK LIBRA

BOOM has written about private Stablecoins in the past and has indicated that they will be the future bridge between the world of national digital currencies known as Fiat and the world of private, immutable, transaction registration data bases (blockchains, DAGS and Holochains).

Facebook is moving into this world and has established a consortium of companies called the Libra Association. The Libra Stablecoin will mimic a basket of national Fiat currencies. This is presumably similar to the IMF’s SDR — Special Drawing Rights — which is not a currency, it is an accounting device. Private Stablecoins are similar — they are accounting devices.

Facebook has registered a company called Libra Networks LLC in Geneva, Switzerland. There is an excellent article in BOOM this week describing this development in detail. BOOM suggests you read it if you are interested in the future.

The link is here —
https://www.theblockcrypto.com/2019/06/14/facebooks-cryptocurrency-partners-revealed-we-obtained-the-entire-list-of-inaugural-backers/

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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Return to the BOOM Main Website –  BOOM Finance and Economics at  http://boomfinanceandeconomics.com/

EMAIL: gerry [@] boomfinanceandeconomics.com

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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

Watch this short 15 minutes video and learn as Professor Richard Werner brilliantly explains how the banking system and financial sector really work.

https://www.youtube.com/watch?v=EC0G7pY4wREhttp://

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”.

Youtube Video —  https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-in-the-modern-economy-an-introduction

and

https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

Paper:  Money in the Modern Economy  PDF —  CLICK HERE

Quarterly Bulletins Index

http://www.bankofengland.co.uk/publications/Pages/quarterlybulletin/2014/qb14q1.aspx

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).”

Reference: https://www.bundesbank.de/Redaktion/EN/Topics/2017/2017_04_25_how_money_is_created.html

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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MOLS Denmark

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