WHAT IS REALLY HAPPENING IN THE US ECONOMY?
The numbers are in and they are not good for Mr D Trump. The US economy slowed and exports fell in the second quarter of this year. This does not sound like they are “winning the trade war” with China as easily as Trump boasted when it started. And it does not reflect the optimism about the strength of the economy that emanates persistently from the White House.
So how bad were the numbers for the US economy over the period April to June?
United States GDP growth slowed to just 2 % annualized. It was 3.2% a year ago. Exports fell by 5.7 %, after a 4.1 % increase in the first quarter. That is almost a 10% turnaround in exports within 3 months. And imports were flat. So the US economy was in a clear slow down mode.
Why is this so? BOOM’s answer — the Federal Government deficit spending program appears to have stalled from March to June. And if that is the real force behind the US economy since Trump took office, as BOOM has frequently pointed out, then the slow down in the second quarter should be reflected in their Federal Debt numbers.
BOOM watches the daily Debt to the Penny information produced by the US Federal Treasury very closely and that information shows clearly that the total of Federal Government Debt did not grow over the 3 months to end of June this year. In fact, it fell (ever so slightly) from US$ 22.027 Trillion on the first day of April to $ 22.023 Trillion on the last day of June.
Let’s put that fall into perspective.
On the day that Trump took office on 20th January 2017, the total debt stood at $ 19.947 Trillion. It is simple arithmetic to calculate the increase in debt that has occurred since then. The increase was $ 2.076 Trillion in just 2 and a half years to the end of June 2019. But the first extra Trillion was spent by mid March 2018 and the second Trillion was spent by the end of January this year. Since end of January, the increase in total debt slowed considerably especially during the second quarter. So the slowing in GDP Growth in the second quarter is understandable.
These numbers are the best way to watch what the US Government is actually doing in regard to its spending program on a daily basis. The official budget deficit numbers are not as reliable an indicator as the Debt to the Penny numbers.
The government has to bridge the gap between spending and taxation revenue on a daily basis and it does this by managing its bond program. The daily “Debt to the Penny” numbers show that process in acute detail.
This begs the question — what has happened since the end of the second quarter on June 30th? Answer — the total debt has increased by $ 586 Billion to the current date 28th September. The number is well over half a Trillion Dollars spent in just the last 3 months. A staggering increase in such a short period of time.
BOOM can confidently predict that the US GDP Growth figures for the third quarter will show a big surge upwards when the official numbers are released later this year. And bear in mind, if that rate of spending increase continues for another 9 months then the Federal Government will have spent $ 2 TRILLION in just one year to keep the pot boiling.
BOOM has often said since Trump took office that the US private sector is moribund and that US GDP growth is almost totally dependent upon US Federal Government spending. The numbers support this hypothesis. This is certainly NOT a triumph of Capitalism.
This will continue as far as the eye can see because there is lots and lots of demand for US Treasury Bonds. But the US economy is actually on life support. Why? Because deficit spending does not increase the fresh new money supply in an economy. It is a good stop gap measure when needed and is certainly valid policy but persistent economic growth in the private sector will not occur until the supply of fresh new credit money increases relative to the total volume of government bond issuance.
So what is happening in regard to Private Debt to GDP? Surprise, surprise, it has been falling steadily since 2010 from 213 % of GDP to 196 %.
If private debt creation does not increase, the revelation here is that the US will eventually have to create a lot of new Sovereign money ASAP and inject it into the economy. The best way to do that would be through BOOM’s Quantitative Boosting method (as BOOM has explained over the last few weeks). That would allow the deficit funds currently being used by the Government to prop up the whole economy to be put to more productive work in the real economy, in the private sector.
In fact, Quantitatve BOOSTING is needed in all the advanced economies of the planet, not just in the USA.
ARE CRYPTO “CURRENCIES” SOVEREIGN MONEY?
The so called Crypto “currencies” such as Bitcoin, Ethereum, Litecoin, Bitcoin Cash, Bitcoin SV etc (there are thousands of them) are not sovereign. They do not emanate from a Nation State, so they cannot be sovereign money. And they do not emanate from credit contracts (bank loans) so they cannot be credit money either.
So what are they? They are packets of digital code not much different to an email. They can also be described as digital commodities. You can use any commodity to buy things in special situations but that does not make it a currency. It is a barter trade.
The Crypto “currencies” are usually created with a fixed final supply and with no mechanism for destruction. In this sense, they are “rare” commodities and clearly not currencies. Currencies have a variable, theoretically unlimited supply and a limited life span. They are accepted generally everywhere in a nation state and they are the only means by which to pay Federal Government taxation liabilities.
Credit money created as bank loans by commercial banks are national currency but are not sovereign money.
The rationale for the Crypto “currencies” emanates from the Austrian school of economic theory. That theory is all about the need for a currency to be “backed” (such as by gold reserves), being in short supply and thus “precious” and being of a permanent, immortal state so that it can be “saved” and managed by a committee of all powerful (and presumably brilliant) Austrian economists. Groan.
The Crypto “currency” world has fallen for this theory hook, line and sinker. BOOM cannot see how they can individually fail to fall and fall and fall in US Dollar price until they really are rendered “priceless” by the market.
Bitcoin has been taking a beating lately. It has fallen from US$ 13,000 in July to just below $ 8,000 last Friday 27th September. That is a fall in purchasing power of about 38% in just 3 short months. If this continues until the end of the year, Bitcoin will be in big trouble as a “store of wealth” and its rationale as a “currency” will have taken quite a beating.
Que sera, sera.
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/
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
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.“
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).”
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