BOOM as at 30th June 2019

THE FACEBOOK LIBRA GLOBAL CURRENCY — A CORPORATE DREAM?

Facebook released a White Paper last week called the Official Libra White Paper. It stated — the “mission is to enable a simple global currency and financial infrastructure that empowers billions of people.”  Simple?

Of course, Facebook defined itself as a White Knight with a noble quest, coming to the aid of 1.7 Billion people on the planet who have no bank account.

They can see clearly what is wrong with current offerings — “Mass-market usage of existing blockchains and cryptocurrencies has been hindered by their volatility and lack of scalability, which have, so far, made them poor stores of value and mediums of exchange.”

They are promising “a giant leap forward toward a lower-cost, more accessible, more connected global financial system”. But BOOM notes that no comment or analysis is made as whether or not this is desirable for the people on the globe.

They go on to say — “The world truly needs a reliable digital currency and infrastructure that together can deliver on the promise of “the internet of money.”  BOOM asks Why?

This could be interpreted as a direct threat from a group of corporate entities to the US Dollar Empire which is already a digital currency (as are all national currencies). It could also be interpreted as a direct threat to all national currencies.

They then outline key elements of the project as —

“It is built on a secure, scalable, and reliable blockchain; It is backed by a reserve of assets designed to give it intrinsic value; It is governed by the independent Libra Association tasked with evolving the ecosystem.”

In other words, they are going to use a new Blockchain called the Libra Blockchain which will presumably promise to be a better data base management system than the Bitcoin Blockchain, the Ethereum Blockchain and others currently in use.

They are proposing a global “currency” called a Libra and they are promising stability in its price. Each Libra will be backed by a basket of bank deposits and short-term government securities. In other words, the “Libra” will be a Stablecoin backed by the value of the basket of cash and cash-like securities denominated in a range of currencies from “stable and reputable” central banks. This sounds very much like the SDR — Special Drawing Rights basket of currencies used by the IMF as an accounting device.

They acknowledge that the Libra will have to be accepted for use by many people before it can really be called a currency. That is important as general acceptance and use is the hallmark of what defines a currency. A currency cannot be imposed on a society (except by force). It must erupt from the need to solve a social problem and move towards general acceptance.

Facebook says that the Governance of the Libra will be the task of the Libra Association registered in Geneva, an independent, not for profit organization. Founding members of that Association are predominantly corporations — 6 payments industry companies (including Mastercard and VISA), 7 technology companies (including Facebook), 2 telecommunications companies, 4 Blockchain companies, 5 venture capital companies and 4 non-profit organizations. The great majority are US based.  They hope to expand this number to 100 members by 2020.

Facebook has created a subsidiary company called Calibra to “separate” data and “operate services” on top of the Libra network. Not much is mentioned about Calibra in the White Paper which begs the question — is Libra a Trojan Horse and Calibra the invading army? The Libra blockchain will begin as a private blockchain but will (somehow) transition to a public blockchain within 5 years.

Again somehow, the Libra is supposed to have “low inflation” as a feature. This implies a volume control mechanism. A notable feature is that the Libra Association (the governance body based in Geneva) will have the sole power to create Libra and to destroy it. New Libra can only be created with direct backing from an established fiat currency and can only be destroyed when the securities representing the fiat currencies are sold. This means that Libra cannot be created over and above the money supply of accepted fiat currencies, thus it could be interpreted as “non inflationary”. There is no mention of the possibility of credit being created in loans denominated in Libra. Either they have not thought of this …….. or perhaps they have ………..

Since “authorized resellers” will always be able to sell Libra coins to the reserve at a price equal to the value of the basket, the Libra Reserve acts as a “buyer of last resort.”  This means that the Libra Association effectively has some features of a private, global central bank owned by a group of corporations.

“The association will work to establish a geographically distributed and regulated group of global institutional custodians for the reserve.”  Who?

“The association will establish policies and procedures that establish how the association can change the composition of the reserve basket.”  How? And When?

You can read the whole Facebook White Paper here —  https://libra.org/en-US/white-paper/
The word Trust does not appear in it.

BOOM is not a fan of any “global currency” project and that includes Bitcoin and all the other “Alt coins”. BOOM is a fan of many new local, regional currencies circulating inside nations in cooperation with the generally accepted national fiat currencies circulating outside nations. BOOM is also not a fan of single, supra-national currencies that seek to bind a group of nations, such as the EURO.

Please don’t forget that Fees will be extracted from the Libra system — presumably by Calibra, a subsidiary of Facebook — thus making it a giant global taxation system, run by Facebook ………. forever.  Facebook Forever — a Corporate Dream.

Then there is the problem of inadequate asset backing for a corporate “global currency” to run $ 80 Trillion of GDP transactions globally. BOOM suggests that Facebook return this project to the drawing board where it should remain. It appears clear to BOOM that Libra can never be a global currency because its design is faulty. This is the exact same reason why Bitcoin and other so-called “crypto-currencies” and “alt coins” can never be global currencies either. They cannot and should not be imposed upon the people without representation.

We already have a global currency in slow decline called the US Dollar and it is the root cause of much global tension.

SOME HISTORY

The Father of modern Fascism, the Italian dictator Benito Mussolini ruled Italy with an iron fist from 1925 – 1945 and joined Adolf Hitler as an ally in World War Two.  He described fascism as “….. Corporatism because it is a merger of state and corporate power”.

The ultimate corporate dream would be for a group of self appointed, technocratic corporations to govern unanswerable to the people and issue a supra-national, private global currency while collecting taxes and as much personal data from users as possible.

US DOLLAR EMPIRE IN SLOW DECLINE

Some very significant events have taken place around the G20 Meeting of Leaders in Osaka over the last few days. Of course, the mainstream media will report the smiles and handshakes between Putin/Xi Jinping and Trump as if that is all that is happening. But the US Dollar Empire that we have all lived in since July 1944 is slowly being deconstructed by determined nations and that trend accelerated over the last week. Take note.

Russia and China have once again reiterated their commitment to steadily move away from the US Dollar as a trade settlement currency. It was reported yesterday that they have signed an inter-governmental agreement to switch to the Ruble and Yuan currencies in bilateral trade settlements with the aim of moving towards 50 %. In other words, they will use the US Dollar less and less over time until 50% of trades are being paid for by their respective national currencies.

Russia and China have both developed payment gateways that are in direct opposition to the international SWIFT inter-bank payment system based in Belgium but dominated by the US government.  The Russian system is called the System for Transfer of Financial Messages (SPFS) and China’s system is called the Cross-Border Inter-Bank Payments System (CIPS).

Currently 90% of trade settlements between these two nations occur in US Dollars. So a move towards 50% non US Dollar settlements over some years is a very significant dismantling of the US Dollar global domination. Trade between Russia and China is growing rapidly especially in regard to energy and food.

Yesterday, Vladirmir Putin also encouraged all the other BRICS nations to move away from US Dollar settlement. The other BRICS nations are Brazil, India and South Africa. The five nations that make up the BRICS group represent about 50% of the world’s population. China, Russia and India alone make up over 3 Billion people. If you add in the Shanghai Cooperation Agreement nations associated with this group, then almost 90% of the global population is represented.

If 90% of the planet wants to move slowly away from the US Dollar as the primary trade settlement currency, then you can be sure that it will happen. But it will take some considerable time. Why?

The answer lies in availability and convenience. The US Dollar circulates in very large volumes outside the US borders and outside the controls of the US government. BOOM estimates those volumes as approximately US$ 50 Trillion ($ 50,000 Billion). Those external dollars are called Eurodollars, regardless of where they are deposited. And most of those deposits are created when offshore banks create bank loans denominated in US Dollars. Thus, with so many US Dollars available for use in settling trades, that currency is quite simply the most available and convenient to use, especially if the inter-nation trades are facilitated through the SWIFT inter bank payment system in Belgium.

If you look at central bank foreign currency reserves, you will find that about 58% of them are in US Dollars and about 20% are in Euro currency. So the other 22% is held in all the other currencies. When you understand this, you can see that a switch away from predominant US Dollar settlement will take a very long time.

If you look at the trend over recent years, you will find that the US Dollar reserves were just 51% of total central bank reserves in late 2016 and are now 58%. So the prevalence of US Dollar dominance is increasing rapidly. Also, in that time frame, the US Dollar Index has appreciated by about 14% which underscores the reality of dominance that is present in the US Dollar Empire.

You can forget the “US Dollar will soon collapse and Gold/Bitcoin/Libra will rise to replace it” narratives that are all over the Internet. It is not going to happen quickly. In fact, those narratives are arguably well organized dis-information propaganda campaigns aimed at provoking anxiety, fear and uncertainty in their readers to bolster confidence in US Dollar dominance.

OTHER DEVELOPMENTS

Another announcement on Friday was also a rather staggering one in terms of international relations.  Iran announced that the new payment system established by the European Union nations to facilitate trade settlements with Iran, the European financial settlement mechanism known as INSTEX, is now operating and transactions are being conducted.

Also on Friday, it was reported that seven EU countries issued a joint statement stating that they are working with Britain, France, and Germany on establishing trade channels to Iran, using INSTEX.

If these reports are true, then it is clear that the major European allies of the US are ignoring US threats and continuing to establish their own payments channel to bypass SWIFT in dealing with Iran and maintaining the Iran nuclear deal known as the Joint Comprehensive Plan of Action (JCPOA). Last month, the US reportedly threatened to cut nations from the US financial system if they do this.

It appears that, true to well known form, Trump is certainly forcing nations to choose. “If you are not with us, then you are against us”. This strategy works for a bully in the playground or for a crime gang dealing with drug dealers but it is a poor strategy to engage in when the players are determined independent nations and the playground is international trade.

The US must be careful here not to overstep the mark. It has a position of great strength based upon US Dollar dominance in trade due to its availability and convenience but that position may be steadily eroded more quickly if it is only supported by a system of threats.

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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