BOOM as at 1st September 2019

QUANTITATIVE BOOSTING — QB NOT QE — GOVERNMENT DEBT EXPLAINED — DEBT TO GDP RATIO — GERMANY REGULATES CRYPTO — CRAIG WRIGHT FINED — SATOSHI REVEALED? — FAKE GOLD

QUANTITATIVE BOOSTING — QB NOT QE

The major central banks of the US, the European Union and Australia have all indicated a move towards further Quantitative Easing. As BOOM explained last week, this will not help their economies much as central banks can only buy assets. They cannot inject fresh new money straight into the economy as expenditure on goods and services.

But Governments can do that.  Using Quantitative Boosting, a central bank could on-loan funds raised as loans from their client commercial banks to the Treasury department and the department can then buy goods and services with that fresh new money over and above their usual expenditure funded by taxation revenues.

THAT is what governments need to do to stimulate their economies quickly. Economic activity is principally related to transactions in goods and services. Employment will rise, wages will rise, taxation levels can be reduced and the whole economy will benefit, not just the prices of assets.

How long will it take for governments of the advanced economies to wake up and adopt Quantitative Boosting?

Alternatively, governments can do this without the aid of the central bank by issuing more Cash — much more CASH.

GOVERNMENT DEBT EXPLAINED

In regard to debt, there is much complexity. Too many people refer to debt as if it is just one thing — when it is not. For example, a government issuing a bond to investors is very, very different to a bank issuing a loan to a private borrower.

These “debts” are very different indeed. It is not accurate to refer to them as if both are exactly the same phenomenon.

In regard to Government Bond Issuance –

1.        The Government is essentially immortal
2.        No new money is created when a Bond is issued (the money invested is already in existence)
3.        Because no new money is created, there is no CPI Inflation risk
4.        There is no Collateral offered (or expected by the investor)
5.        There is effectively no risk of Default (Global sovereign bond default risk is currently just 0.3% in toto)

In regard to a Bank Loan —

1.        The Borrower is not immortal
2.        New money is created by the bank when a credit contract is created (see below for evidence).
3.        The new money expands the Money Supply so it tends to create CPI Inflation.
4.        Collateral is most often sought by the bank to “secure” the debt.
5.        There is an ever present risk of loan default (which is why the bank seeks collateral).

So these two forms of “debt” are almost the exact mirror image of each other in their internal dynamics. It is very misleading to refer to them both with the exact same word.

DEBT TO GDP RATIO

Another example of using the term “debt” in a mis-leading way is in regard to mainstream economists’ constant reference to Government “Debt to GDP ratios”.

Putting aside the fact that Government bond issuance is very different to other forms of debt, conventional economists continually compare total government debt to just one year of GDP. That is not helpful because it would make a lot more sense to compare total Government debt to fifteen or twenty years of total GDP.

Why? Because the maturity average for a Government’s Bond issuance program may be fifteen to twenty years.

So a Government “Debt to GDP” Ratio of 100 % as is so often stated becomes just 5 %.  Let’s look at the US situation —

$ 22 Trillion/$ 22 Trillion  = 100 %        (Total Government Debt/One Year of GDP)

$ 22 Trillion/$ 440 Trillion = 5 %           (Total Govt Debt/20 Years of GDP — not so bad after all)

Then there is the matter of domestic government “debt” and foreign government “debt”.

For example, US Government debt is comprised of foreign government holders and domestic holders. Foreign government holders own $ 6.2 Trillion of the $ 22 Trillion total, which is almost 30% of the total.

Intra-governmental holdings are $ 5.87 trillion. If we net that out to Zero because the government owes it to itself, then total US government debt falls to about $ 16 Trillion.

If we then take away the foreign debt, the result is about $ 10 Trillion of Government Debt owed to private domestic investors — most of whom are pension funds, banks and investment funds.

Thus, the truer state of affairs is this — about $ 10 Trillion of US government debt is held by the US private sector. Thus, the US Government Domestic “Debt to GDP ratio” over 20 years is really just 2.27% ($10 Trillion/$440 Trillion).

That doesn’t sound so scary, does it?

GERMANY REGULATES CRYPTO

Germany last week cracked down hard on the world of Crypto. They implemented the 5th European Union Anti Money Laundering Law (AMLD 5). Crypto asset custody and trading will now require a license granted by the German regulator BaFin. These hurdles apply to all companies holding or trading crypto assets such as Bitcoin and Ethereum, from custody providers to crypto exchanges.

The German government is concerned about the growth in use of Crypto’s in regard to money laundering by crime gangs and in funding terrorism. This regulation is long overdue in BOOM’s opinion. Fraud has also been a major problem and that will be curtailed significantly.

Crypto asset custody and trading on online exchanges will now be regarded as a financial service and will, therefore, require the authorization of BaFin, the German Federal Financial Supervisory Authority.

This is the beginning of the end for the Crypto Crime Scene that involved anyone issuing pieces of data in a packet and calling them “currencies” and “coins” when they were not and never could be. That was a major Fraud committed on a global scale.

The Crypto world can now move on to trade Utility Tokens and Asset Tokens with the certainty provided by regulation. Inter-mediary devices called Stablecoins will link the world of Tokens to fiat national currencies.

Bravo Germany (!)

CRAIG WRIGHT FINED — SATOSHI REVEALED?

Staying on the topic of Crypto, last week a court in the US ruled against the Australian Craig Wright who may be Satoshi Nakamoto, the Bitcoin Santa Claus.

Essentially, the court ruled that Mr Wright must hand over half of his Bitcoins to the estate of his former partner, Dave Kleiman. There is speculation that this could amount to over US$ 4 Billion worth of Bitcoins at a Bitcoin price in excess of US$ 10,000.

The main question remaining is this — how many Bitcoins does Craig Wright possess or have access to?

If he is Satoshi Nakamoto, then it could be well in excess of $ 4 Billion worth. If he is not Satoshi Nakamoto, then the value may be considerably lower.

This saga will be interesting to watch as it unfolds because there is a lot of argument in the Crypto world about whether or not Craig Wright is, in fact, Satoshi Nakamoto, the founder of the Bitcoin blockchain.

FAKE GOLD

There were media reports last week of fake Gold bars being found in some bank vault collections. In fact, there were reports of over 1,000 such fake bars.

BOOM has warned readers before of this aspect of the physical Gold market. The old Latin term “Caveat Emptor” springs to mind here — Let the Buyer Beware.

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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.
 

CLICK HERE FOR PODCASTS:   OUR BRAVE NEW ECONOMIC WORLD

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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