BOOM as at 7th October 2019

PAYPAL LEAVES LIBRA

During last week, BOOM was asked twice about the prospects of Facebook’s so-called global “currency” project, the Libra. The people asking the question seemed to have no real understanding of the dynamics of currencies. They just seemed to blindly believe that Facebook deserved an audience for its proposal because it was a large American company.

BOOM’s answer was the same to both questioners — “The Libra has a 1% chance of succeeding and a 99% chance of failure. Currencies cannot be imposed upon a population by a private enterprise, no matter how big or how ambitious. Why? Because currencies in modern economies erupt from social contracts being generally accepted by all groups in a society to settle trade and to such an extent that the major governing body will then accept them as settlement for the payment of taxes.”

Such an answer generated a blank stare from both questioners. Why? Because they have never really thought previously about the creation (and destruction) of money, the different types of money, how money becomes a currency, the role of social contracts, general acceptance of evolved currencies or the means by which the payment of taxes can be effected.

BOOM often says this is similar to mis-understanding the complex subject of water chemistry. Most people believe that they have an understanding of water chemistry because they have been drinking it all their life. When pressed on the subject , they will usually say something like “it’s just H2O isn’t it?” At that juncture, BOOM usually refers them to a number of chemistry websites written by Professors of Chemistry that discuss the hugely complex subject that is the chemistry of water. It soon becomes clear to them that they have a very poor understanding of the extremely complex chemistry of water.

In both conversations about Libra, BOOM said “I expect that one of the payment companies involved will soon pull out and then the whole idea of Libra as a possible currency alternative will be put under enormous strain”. That is exactly what happened on Friday last week. Paypal announced that they were pulling out of the Libra project.

BOOM has previously reported opposition to the Facebook Libra project from the Presidents of both the United States and France, the US Federal Reserve, the US Treasury Department, the US House of Representatives Committee on Financial Services, the US Subcommittee on Investor Protection, Entrepreneurship and Capital Markets; the US Subcommittee on Housing, Community Development and Insurance; the US Subcommittee on Oversight and Investigations and the US Task Force on Financial Technology. Others that have expressed their opposition include the German federal government whose finance minister said “We will not allow private companies’ to issue currency” and also the Chinese government.

In late June, BOOM wrote about Libra in an editorial and concluded — “BOOM suggests that Facebook return this project to the drawing board where it should remain. It appears clear to BOOM that Libra can never be a global currency because it’s design is faulty. This is the exact same reason why Bitcoin and other so-called “crypto-currencies” and “alt coins” can never be global currencies either. They cannot and should not be imposed upon the people without representation.”

So, is this enough to kill off the Facebook Libra “alternative global currency? BOOM is inclined to think that this is the beginning of the end for it.

STOCK MARKET FALLS

Last week, there were large falls on many stock markets. Yet again, the purveyers of DOOM announced the “end of the financial world as we know it”. But BOOM quickly looked for confirmation in the markets for commodities, currencies, precious metals and bonds. Such confirmation was not to be found. So, yet again, it appears to be a false alarm.

Of course, the DOOM merchants never look deeply into the dynamics of other markets. They prefer to paint a negative picture and exclaim “buy Gold”, “sell stocks”, “panic now”, “the US Dollar will fall”. On and on the DOOM circus goes. The theme never varies. Thousands of newsletters, books and conferences generate sales for the industry of DOOM.

This is all very confusing for the average person who is trying to understand the complex world they live in. The mainstream media does not help. It simply trades in fear and anxiety which means that it does not inform.

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/

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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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