BOOM as at 25th August 2019

BUYING GREENLAND

The Donald tried to buy Greenland last week. He got rebuffed by the Queen of Denmark and the people of Greenland. But it was not such a bad idea  ………… read on to find out why.

THE GREAT BULLOO 

If the financial system was being run by an all-seeing, all-wise, immortal and all-powerful being from above (let’s call it THE GREAT BULLOO), it would clearly see that we have a problem with insufficient money creation inside the advanced economies of the planet. And BULLOO would see that we also have a problem with the inadequate supply of Eurodollars (US Dollars outside of the USA).

The problem is that, under our current financial system, we can only create fresh new money conventionally as 1. private debt(often called Bank Money or Credit Money) — via new commercial bank loans to private borrowers — and as 2. Cash, Notes and Coins — (often called Sovereign Money).

There are two other unconventional ways to boost the supply of fresh new money 3.  Quantitative Easing — where the central bank arranges inter-bank loans from its client commercial banks and then spends that money directly on assets such as government bonds, shares and mortgage backed securities either inside its own economy or outside its economy. And 4. Quantitative Boosting — where the central bank again arranges the inter-bank loans but then loans the resultant money to the Treasury department at the government, clearly becoming the government’s banker. The Treasury can then spend that money wherever it wishes — either inside its economy or outside its economy.

Note that in Quantitative Easing, the central bank decides what to buy (and it can only buy assets to hold on its balance sheet). But in Quantitative Boosting, the government decides where to spend the money — on assets (domestic or international), on social services, on infrastructure.

The term “Quantitative Boosting” is hereby invented by BOOM and copyright claimed.

BOOM thinks that it will be the Next Big Thing. Why? Because there is really no limit, the money supply expands, it is CPI inflationary by nature and the government really doesn’t have to pay it back. The central bank can simply hold the debt forever as an asset on its balance sheet and the commercial banks can hold the original inter-bank loans as Reserve Assets forever. Any interest payments can be circulated back through the respective Ledgers as re-imbursements/dividends — in effect, not paid.

But let’s get back to the GREAT BULLOO in the sky concept.

The GREAT BULLOO would also see that the advanced economies have present and future demographics (aging) that are leading to a relative lack of borrowings from banks. And BULLOO would also see that the falling price of energy (relatively) is massively dis-inflationary to the prices of goods and services. BULLOO would also see the impact of rapidly advancing technological change in causing the prices of many goods and services to fall.

BULLOO’s grand view — a planet with the advanced economies affected by slowing economic growth, persistently low CPI inflation rates and very, very low interest rates. And central bankers frozen in the headlights, unable to make a difference, endlessly lowering interest rates without sufficient effect.

The GREAT BULLOO would say “Oh I know what to do — they need more fresh new money supplied as non-interest bearing sovereign money to complement the inadequate amounts of fresh new money being created by commercial bank loan creation”.

And the BULLOO would immediately issue large amounts of fresh new non-interest bearing sovereign money (called CASH) on behalf of the various Governments into the productive sectors of the advanced economies to stimulate prolonged and sustainable economic growth. In other words, the suppliers of labor, goods and services to the Governments would be paid in CASH.

Reference:  Sovereign Money  https://sovereignmoney.site/what-is-sovereign-money

But, because THE GREAT BULLOO does not exist and because the role of cold hard CASH has been seriously diminished due to the use of credit and debit cards, governments (in their great sub-conscious “wisdom”) have instead decided to issue huge amounts of sovereign bonds — at very low or negative interest rates. It’s a worthwhile nudge, sure. But it is not a very good nudge. And, ultimately, it won’t  work.

Applying negative interest rates on $ 16 Trillion of sovereign bonds is innovative but it is not likely to solve  the overall problem. WHY? Because government issued bonds do not increase the supply of fresh new money into an economy. They attract old money for investment with the government — old money that is already in existence. So old money moves from the economy to the government coffers and back again (as the government spends it). Not much different to the taxation system.

The point is this — fresh new sovereign bond Issuance of any kind, even with negative yields attached, does NOT increase the volume of fresh new money in any economy. Bonds are purchased with old money — money that is already in existence inside the economy.

So what should governments do (over and above issuing lots of new bonds)?

CASH CAN BE KING AGAIN

Fresh new CASH is an excellent way to instantly boost the volume of new money in circulation if and when the supply of fresh new money from new bank loan creation (credit money) is in steady, relative decline.

Governments could pay some of their suppliers with fresh new CASH.  Bingo. And they could require some of their taxes to be paid in CASH.

BOOM thinks that this cash injection could eventually be expanded slowly towards 50% of the fresh new money supply. In other words, a volume control system could exist which would complement the commercial bank loan credit money system. That would result in a 50:50 solution to the supply of fresh new money. The ratio could be managed up and down to attain stability in economic activity over the long term.

Zero growth could even be achieved — wth no risk of serious CPI inflation and no risk to the national currency.

Quantitative Easing and Quantitative Boosting can also be used as alternative or complementary money volume control strategies. But they would have to be big — not just $ 4.2 Trillion over 10 years (the US effort during the Global Financial Crisis). That was only a 2 % boost to the total $ 200 Trillion of US economic activity during that decade.

Miniscule. No wonder it didn’t work.

THE MINI-BOT

There is another solution. It is called a Mini-Bot, a clever Italian invention. Remember the Italians? They established our current banking loan system on the streets of Venice in the 15th century so they should know a thing or two about money.

The Mini BOT in its currently proposed form in Italy is clearly not a currency and clearly not a debt. 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.

The Mini-Bot is an excellent idea — and could help a great deal.

But using strategies that increase fresh new money volumes in the economy is a much better methodology.

MORE FRESH NEW MONEY

So — we need to create more new money and we need to put it to work inside our advanced economies. On a grander and more complicated scale, the US Government needs to take more fresh new US Dollars from the central bank and send them offshore to buy assets, goods and services which will boost the volume of Eurodollars in circulation offshore. That would be a Quantitative Boost for the planet.

So — buying Greenland is not such a bad idea. The Donald tried to do that last week and it is actually not such a silly idea as it would have been a Quantitative Boost to the Eurodollar volume. Can you see how?

Designing a new monetary system for the planet is hellishly difficult. BOOM did not have space to get onto how to end US Dollar Dominance (which must also be effected eventually). There is also a key role for Community owned banks in the whole mix.

Oh, by the way, the BULLOO does exist. It is a region in Northern Australia, in the State of Queensland.

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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