BOOM as at 15th September 2019

A BIG WEEK
US RATES NOT IMPORTANT
RUSSIAN ECONOMY STRONG

Last week was a big week in regard to financial markets and macroeconomics. These were the notable events —

1. China removed its foreign investment limits — encouraging capital inflow
2. France rejected the Libra — the so-called “Crypto-currency” planned by Facebook
3. Mario Draghi opened the money flood gates of the European Central Bank
4. And BOOM’s key indicators of Chinese import activity rose yet again, suggesting continued strength in the Chinese economy

We must not forget that during the previous week China lowered the RRR for its commercial banks, the Reserve Ratio Requirement. This should allow for more credit money to be created as bank loans, boosting their domestic economy.

BOOM noted a few other events in the financial markets last week. The desperate desire to buy US Treasury Bonds declined rather significantly while the Gold price weakened, as did the Silver price. Ten Year Bond Yields have been rising for 2 weeks in Germany, Australia, Japan, Sweden, The Netherlands, Norway, France and the UK. So investors are perhaps leaving the Bond market, selling out. Taken as a whole, this seems to indicate that the nervous money has decided to move away from safe havens for the time being. Consequently, we may be seeing a move back to “Risk On” in many of the stock markets of the world.

Why has this happened? It looks likely that the so-called “Trade War” with China may be over. And BOOM will declare a winner. You can guess that it is not Donald Trump. The world is tiring of his ego, his penchant for government by Twitter, his threats, his belligerence and his inability to work with others. The Europeans, in particular, have clearly decided that they can move into the future without the over-bearing relationship with the US. They are looking East — towards the Belt and Road Project. China beckons and so does Russia and India. That is where the biggest economy on Earth will continue to grow.

Last week, BOOM pointed out that the combined economy of China, India and Russia is already TWICE as big as the US economy when measured on a PPP basis. PPP stands for Purchasing Power Parity. And that is the way to really understand what “bang you are getting for your buck” inside an economy.

We are coached to measure economic activity in terms of the US Dollar. But this gives a distorted view of the world. Why is this? Because we live in a US Dollar Dominant world. That dominance was imposed on the world in July 1944 at the Bretton Woods Agreement in New Hampshire where the allies opposed to Germany, Italy and Japan agreed (with the exception of the USSR) to accept a new money system where the US Dollar would reign supreme. The World bank and the IMF were established at the same time as supportive international institutions to this new arrangement.

In 1971, this all changed to some degree as Nixon removed the US Dollar link to Gold. And lately, it is changing again as the biggest economy on Earth moves slowly but surely away from US Dollar Dominance. China, Russia and India are expected to continue on this path as their economies grow into the future. The Shanghai Cooperation Agreement nations will all move in sync to this new paradigm.

If Western Europe becomes more and more unwilling to bend to the will of the US and Turkey continues to reject US dominance then the Geo-political situation that has existed since the end of the Second World War will have ended. Eventually, the US will retreat and remove its armies from Germany and Poland and retire back behind its borders.

US RATES NOT IMPORTANT

Next week, the FOMC Committee of the US Federal Reserve (central bank) meets and will decide whether or not to drop their key interest rate. BOOM is not concerned about their decision. If they lower the official rate, then the US economy will presumably benefit. If they stay on hold, then that will be interpreted as strength in the US economy. So BOOM is sanguine about the outcome of the meeting. The recent economic events in Europe and China are much more significant to the planet as a whole.

Other central banks meeting next week include the UK, Japan and China. The overnight interest rate in Zimbabwe is now 70 %. This is aimed at quelling the CPI inflation rate which is currently 175 %. It looks like Zimbabwe is heading back towards another bout of Hyper-inflation (currency collapse). The more things change, the more they stay the same.

RUSSIAN ECONOMY STRONG

The Russian Finance Minister announced last week that his nation will no longer issue Bonds denominated in US Dollars for the rest of 2019 and all of 2020. They will issue Bonds denominated in Euro and Chinese Yuan. That is a notable announcement.

It is also worth noting that Russia’s total debt levels are now actually lower than its total liquid assets held by the federal government and regional authorities.

The Russian stock market is also looking very strong. Russia’s unemployment rate is low at 4.5% and its 10 year Bond yield is falling persistently. Meanwhile, its GDP is growing steadily while CPI inflation is falling.

No one thought that the Russian economy would be a stellar achiever after so much turmoil over the last 20 years. But it looks like it has weathered the many storms and is settling nicely into a prosperous rhythm.

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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EMAIL: gerry [@] boomfinanceandeconomics.com

Return to the BOOM Main Website –  BOOM Finance and Economics at  http://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”.

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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MOLS Denmark

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