MARIO VERSUS DONALD
TOPSY MEET TURVY
Last week BOOM pointed out that Mario Draghi, the Italian Head of the European Central Bank should think more carefully about Italy’s proposed “parallel currency”, the Mini-Bot. Why?
Because BOOM could not see how the Mini Bot could possibly be a currency and was certainly not a debt. And Mario thought that those were the only two alternatives. However, BOOM could see other possibilities. The Mini BOT in its proposed form is clearly not a currency and clearly not a debt but it is a clever new form of money — issued by the Government, linked to the Euro in purchasing power, retrieved by the Government as payment for taxes and limited by a time expiry date. If it gets implemented, it will speed up the Velocity of Money as the number of GDP transactions increase while the Money Supply (new money created as bank loans) stays (relatively) stagnant.
Meanwhile, last week, Mario was taken on by another sparring partner, none other than The Donald Trump, otherwise known as the US President. As per usual, The Donald took the position of victim. “America is the Victim” he cried. “They (all of them) are always taking advantage of us” is his now well known position when conducting international “diplomacy”. It’s called an inferiority complex — “Make America a Victim Again” — MAVA.
Trump on Twitter — “Mario Draghi just announced more stimulus could come, which immediately dropped the euro against the dollar, making it unfairly easier for them to compete against the USA. They have been getting away with this for years, along with China and others.”
He was accusing Mario of manipulating the Euro downwards against the US Dollar. Mario had indicated that the European Central Bank might just lower short term EU interest rates even further in the near future and may also go back to an aggressive asset purchasing policy, otherwise known as Quantitative Easing.
The result of Mario’s comments was to cause European Government Bond yields to drop sharply. If you now invest in Irish Government bonds for a 10 year period, you will earn 0.208 % annually. That may shock you but it is 100 times greater than the Austrian 10 year bond yield which is now 0.002 %. Then there is the 10 year bond yield in Denmark to consider. It is Negative 0.221 % and in the economic powerhouse called Germany, their 10 year bond yield is now Negative 0.281 %. On Wednesday, it fell to Negative 0.329 %.
Investors are so desperate to buy German and Danish 10 year government bonds for safety that they are willing to earn negative rates of interest. They have driven the prices sky high and thus, the yields have collapsed.
In Switzerland, the desperation is even worse, with buyers forcing the 10 year yield to Negative 0.486 %. Yes — you read that right. Don’t adjust your glasses. Investors are desperately trying to buy Swiss Franc denominated government bonds and if those investors are foreign, then they are effectively forcing the Swiss Franc currency UP. At the exact same time, the Swiss National Bank (the central bank) is buying assets in foreign lands in huge quantities in an on-going bid to drive the Swiss Franc currency DOWN.
As they say in America, go figure. Welcome to the Brave New Economic World. Where Turvy is Topsy and Topsy is probably Turvy.
THE EURO FALLING
BUT NOT SO SIMPLE
TURVY MEET TOPSY
The top figure in any fraction is called the Numerator and the bottom figure is called the Denominator. So in three quarters 3/4, the 3 is the Numerator and the 4 is the Denominator.
If looked at as the Numerator in the comparison, Euro/US DOllar, the Euro has been falling against the US Dollar since 2008 — over 10 years. It has fallen against the Dollar by about 30% in that time. So Donald would say — “ya see, they are driving the Euro down”.
But it is not as simple as that. Prior to that fall, if again taken as the Numerator, the Euro rose by 94% against the US Dollar from the year 2000 to 2008.
If you put the US Dollar as the Numerator, it has risen by 44% against the Euro since 2008. Perhaps Donald should scream “ya see, we are driving our currency up”.
Foreign currencies are measured against themselves. It is really a game of relativities, not absolutes.
It makes more sense to compare them over time on a purchasing power parity. There is a way to do this called the Big Mac Index. That index compares over time the cost of buying a Big Mac.
According to that index, the Euro has fallen by 17% since 2000 in a raw sense. There are only three currencies that have risen against the US Dollar in that time frame and they are the Swiss Franc, the Norwegian Krona and the Swedish Krona.
But, if you take into account changes in GDP over time since 2000, the numbers are quite different. The Euro is now 2.6% overvalued compared to the year 2000. The Swiss Franc is just 0.9% over valued and the Swedish Krona is now 11% overvalued while the Norwegian Krona is 7.2% undervalued. Purchasing power and GDP numbers make a huge difference to the perception of price. As Warren Buffett has reportedly said “Price is what you pay and Value is what you get”.
It’s not so simple, comparing currencies. It is a complex matter. But The Donald should know that because he has described himself as an “extremely stable genius”.
Thankfully, that seemed to be the case last Friday when he refused to order an attack on Iran because it would have killed 150 Iranian citizens. BOOM applauds that decision. The Donald gets some things right.
We live in a complex world.
TOPSY MEET TURVY, TURVY MEET TOPSY
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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