BOOM as at 22nd September 2019

OIL PRICE FALLS BACK
 

BOOM has lost count of the number of articles that were written over the last week predicting that Oil would rise to over US$ 100 and subsequently destroy the global economy. But it didn’t happen. Oil surged to just above US$ 63 a barrel but then quickly fell back into its trading range around $ 58 a barrel.

So much for all the forecasts of Doom. Some of those writers seemed desperate to see stock markets crash and the global economy collapse. Maybe their lives are insufficiently exciting?

BOOM cannot understand this approach being regarded as serious analysis.

EUROPEAN STOCKS SURGING

The German DAX stock market index has been surging upwards for 5 weeks now, despite a sluggish economy.  And the French CAC index is behaving in a similar fashion. So too are the Italian and the Netherlands stock markets along with Spain, Norway, Sweden – ALL RISING STRONGLY.   It looks like European investors have finally realized that European bonds are not worth buying when they yield almost zero returns or negative returns. It is early days but European Capital appears to have made up its mind and decided to invest in the future and the best way to do that is to buy shares. BOOM will watch this dynamic closely over the next month.

BOOM CHINA IMPORT INDICATORS

BOOM’s key indicators of Chinese importation strength continued rising last week.

QUANTITATIVE BOOSTING

Last week, the US central bank, the Federal Reserve, lowered its official interest by 0.25 %.  There was no reaction to this move in the financial markets because everyone expected it. Last week, BOOM wrote a section of the editorial headlined “US RATES NOT IMPORTANT”.  And that was proved correct. Nobody expects that a lowering of the overnight interest rate in the US will make any significant difference to the US or global economic situation.

Now the DOOM and Gloomers are writing that shock, horror, be scared and fearful not because the oil price has risen to $ 100 a barrel (because it hasn’t) but because the US central bank will soon move towards Quantitative Easing, especially after there was some evidence of cash shortage in their banking system mid-week. The truth is that the key message from these “analysts” is to always be anxious and fearful. The rationale for that fear seems to change with the wind — one day it is the oil price, then it is the falling US official interest rate, then it is a temporary cash shortage in the US banking system.

BOOM suggests that fear is not a suitable state in which to make valid observations  and considerations of appropriate action.

In an earlier editorial just 3 short weeks ago, BOOM wrote  — “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.”

Deficit spending does not increase the money supply in an economy. But such CASH can be injected immediately directly into the economy via government expenditures and via taxpayers if the cash is given directly to the people. This is what Australia did during the peak of the Global Financial Crisis 10 years ago and it worked. Brilliantly. Australia suffered no consequences from the Global Crisis.

The advanced economies are faced with a shortage of Sovereign Money. They are way too reliant upon credit money (money created as bank loans). That money dynamic is at the very core of global economic slowdown in the advanced economies. To remedy this imbalance and to stimulate their economies, Governments need to create more Sovereign Money (in its most easily understood form of Cash) and encourage its use and circulation.

In the short term, this is contrary to the interests of the banking sector so they will oppose it but in the long term, this Sovereign Money boost will save it.

BOOM is an advocate of an equal balance in our economies between sovereign money and credit money. Until our politicians wake up to this, we will continue to struggle with poor economic performance.

BOOM calls this Quantitative BOOSTING. It will allow the people (as represented by their governments) to have an equal position in the allocation of fresh new available funds. Under such a system, fresh new money supply volume will become as important a control mechanism as interest rates in controlling CPI inflation.

We must no longer be totally reliant upon the banking sector to create 97 % of our fresh new money supply via the creation of new bank loans. This has served us well in the past. But dis-inflation, deflation, aging demographics, abundant energy and advanced technologies have now changed the economic landscape irrevocably. We must not remain hostage to collateralized debt as the major means to add fuel our money system.
BOOM expects the politicians to eventually see this as the very core of their problem.

One can only hope that this realization will come soon — very soon.

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

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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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