US DOLLAR SHORTAGE
Over the last 4 years, the Chinese currency (the Yuan/Renminbi) has been remarkably stable against the Russian Ruble. For example, if you owned 100 Rubles in that timeframe, it will always buy you about 10 Yuan.
During this period, the Yuan has followed an unstable course against the US Dollar. There was a notable period of marked strength against the USD in early 2017. However, that was an unusual event. Overall, the course has been downward and that downward course has accelerated over the last 18 months.
The Yuan is now at around 7 to the USD. In other words, you will need seven Yuan to buy a single USD. Or, looked at another way, 100 Yuan will only buy you fourteen US Dollars. And 100 US Dollars will buy you about 700 Yuan.
So the Yuan has steadily become more devalued against the USD in the timeframe under consideration and especially so in the last 18 months. Trump would scream “currency manipulation”. However, this steady devaluation is no real surprise when you understand that we live in a US Dollar world empire where other nations must continually find US Dollars outside the US for trade settlements and capital allocation. And, because of this, many currencies have been slowly becoming more devalued against the US Dollar strength in the last 4 years. This is indicative of strong demand for US Dollars outside the US and, perhaps, a relative lack of supply.
In fact, this strong demand for US Dollars from other nations has been evident since October 2014. The US Dollar Index is a good way to look at this phenomenon and it has risen by 22% in that time frame.
This strong demand for US Dollars from the world outside the US is becoming a problem for everyone, including the United States. If the US Dollar continues to strengthen, it will cause more and more CPI dis-inflation and deflation inside the US. This will weaken the US financial system eventually because official interest rates must steadily decline and decline towards Zero.
There is a proxy to watch the health of the US Financial sector. It is the ETF traded in New York under the code XLF and it is a way of investing in the large bank sector in the US. The ETF has been steadily rising since March 2009, the peak of the 2008/2009 Global Banking Fraud Crisis. But over the last 18 months, it has struggled to rise and has generally traded sideways to down. It is still 10% below its peak in late January 2018. That indicates some significant investor resistance in regard to the big US banks.
The thing to note is this. The last 18 months have manifested two things. A lack of investor interest in large US banks and a steady decline in the Yuan/US Dollar exchange rate.
In other words, US Dollar strength is now America’s biggest economic problem.
The rest of the world is simply getting on with it and that means that they are looking for ways around the US Dollar strength problem. The Trump “trade war” with China is speeding their resolve. Russia announced recently that it is going to issue Yuan denominated Bonds for the first time later this year. It will be listed on the Moscow Stock Exchange. This is a big step. It will encourage China to begin investing heavily in Russian Government Bonds and this will help fund the expansion of the Russian economy.
China is Russia’s biggest customer for Russian oil and gas. And China is Russia’s largest trading partner. So, it makes good sense for China to invest in Russia especially if it can do so in Yuan denominated investments. And vice versa. Russia has been steadily decreasing its US Dollar denominated investments in recent years and increasing its Yuan denominated foreign exchange reserves.
Together, China and Russia have a combined GDP of about US$ 16 Trillion (compared to the US economy of $ 20 Trillion). If measured in PPP (Purchasing Power Parity) the combined Russia/China economy is the largest on Earth and is already 30% bigger than the US economy.
If you add India into this combined PPP view, the China/Russia/India economy is TWICE the size of the US economy. Yes — you read that right — TWICE as big.
So, the tide is turning and US Dollar strength is the key to understanding this. Trillions of US Dollars exist outside of US borders but the current volume is not enough to satisfy global demand for trade settlement and capital allocation requirements.
The largest economy on Earth has had enough of this game (and the other games being played). They have decided to move on into the future. That future will not come quickly but it will come. Of that, BOOM is in no doubt.
CHINA IMPORT INDICATORS
BOOM’s key indicators of Chinese trade with the outside world continue to strengthen every week. There is no sign of weakness.
China is simply getting on with it and amassing a vast array of natural resources to fuel its domestic consumer based economy and the future consumerist economies of the Belt and Road nations.
CHINA DROPS THE RRR
China’s central bank announced at the end of last week that it is dropping its RRR in the banking system by 0.5 %. RRR stands for the commercial banking sector’s Reserve Ratio Requirement. A decrease in this ratio reduces the amount of reserves that Chinese commercial banks must have in order to continue creating credit money. In other words, it will result in about 900 Billion Yuan of extra credit money being released into the Chinese economy. And in a central command economy, that will happen quickly.
Some say that this means the Chinese economy is “struggling”, “requires stimulus” and is “evidence of weakness”. The assumption is that Trump’s trade war is the cause. False assumptions usually result in false conclusions.
There is another way of looking at this. When a human being requires three meals a day, an observer from Mars with no deep understanding of why humans eat could say that it is clearly “struggling”, “requires stimulus” and is “evidence of weakness”.
And they would be wrong if they were witnessing a teenager who is training extra hard for an athletic event, in full health and burning large amounts of energy in doing so.
BOOM would suggest watching the rate of change of the food supply to the teenager as the best leading indicator of future activity.
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.
EMAIL: gerry [@] boomfinanceandeconomics.com
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.”
Disclaimer: All content is presented for educational and/or entertainment purposes only. Under no circumstances should it be mistaken for professional investment advice, nor is it at all intended to be taken as such. The commentary and other contents simply reflect the opinion of the authors alone on the current and future status of the markets and various economies. It is subject to error and change withoutpresence of a link to a website does not indicate approval or endorsement of that web site or any services, products, or opinions that may be offered by them.
Neither the information nor any opinion expressed constitutes a solicitation to buy or sell any securities nor investments. Do NOT ever purchase any security or investment without doing your own and sufficient research. Neither BOOM Finance andnor any of its principals or contributors are under any obligation to update or keep current the information contained herein. The principals and related parties may at times have positions in the securities or investments referred to and may make purchases or sales of these securities and investments while this site is live. The analysis contained is based on both technical and fundamental research.
Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.
Disclosure: We accept no advertising or compensation, and have no material connection to any products, brands, topics or companies mentioned anywhere on the site.
Fair Use Notice: This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of issues of economic and social significance. We believe this constitutes a ‘fair use’ of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit. If you wish to use copyrighted material from this site for purposes of your own that go beyond ‘fair use’, you must obtain permission from the copyright owner.