BOOM as at 13th October 2019

MORE FACEBOOK LIBRA PROBLEMS

In regard to Facebook’s Libra “global currency” project, BOOM wrote last week — “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.”

eBay, Stripe, Visa and Mastercard have now joined Paypal in pulling out of the Libra project. So it seems that the so-called private “global currency” is perhaps dead already?

Or maybe the chances of success have reduced below last week’s estimate.

DOOMSTERS HARD AT WORK

The DOOM merchants have been hard at work yet again. After the US Federal Reserve (the central bank) announced new OMO Open Market Operations of US$ 60 Billion per month last week, the DOOMSTERS immediately  pounced on the announcement interpreting it as proof that “QE has begun again”. QE is Quantitative Easing. The aim was to increase panic and fear in the readers of the myriad DOOM articles.

The Chairman of the Federal Reserve Open Market Committee, Jerome Powell, had tried to prevent this interpretation by stating — “I want to emphasize that growth of our balance sheet for reserve management purposes should in no way be confused with the large-scale asset purchase programs that we deployed after the financial crisis.”

He was at pains to stop such panic commentary calling his extra spending “Quantitative Easing”. And BOOM agrees with him. When the Federal Reserve conducts Open Market Operations to improve liquidity in the banking sector, this is not the same as Quantitative Easing where its aim is to improve liquidity in the Treasury.

The Fed is not buying Trillions of Dollars of long term sovereign bonds to boost the spending of the Treasury here (which is exactly what it did in its QE programs). It is buying $ 60 Billion of short term treasury bills per month. So the activity is aimed at the short end of the Yield Curve (and not the long end). And the cash ends up in the banking sector (to stimulate credit money creation) and not in the economy.

But, regardless of these considerations, the main observations to make are that it is just a drop in the bucket, it cannot be permanent in nature and it won’t have much effect anyway.

As with the Fed QE programs, the amounts are just too small to make a significant impact in the US economy.

Even if the $ 60 Billion per month became permanent (which is impossible), it would still amount to just $ 720 Billion per year in a $ 20 Trillion annual GDP. But that calculation is actually not valid. Why? Because OMO Open Market Operations cannot become permanent at such a scale. The Fed simply cannot fund such a permanent situation and, if it could, it would make a mockery of the banking sector’s presumed solvency.

The major banks saw their share prices surge upwards in response to the announcement. But BOOM suspects that move to be short lived. Nothing of any great significance has happened to make borrowers suddenly more inclined to borrow. And that is the core of the problem that the US banking sector faces — a relative lack of borrowers.

So, BOOM can confidently predict that these Open Market Operations will have little effect on the moribund real US economy. Credit growth will not surge much in response and the Fed will soon stop these shenanigans.

After that, BOOM expects that The Fed will then admit defeat and move to restarting QE (Quantitative Easing) in early 2020, probably before June. And if it has any sense (unlikely), it will restart QE with a BANG and buy up to a $ Trillion of long term Treasury Bonds within 12 months. In other words, it will begin the journey to become the principal purchaser of Federal Government Bonds and thus the principal source of funds for the financing of the rapidly growing Federal Budget Deficit. The Japanification of the US economy will have started in earnest.

THE US IS TURNING JAPANESE

Japan has been on this pathway for some considerable time (decades) and its Federal Government Bond issuance total volume has reached 250% of GDP.  If this was pursued in America, then the total of Federal Bonds on issue would have to surge to the same ratio. In other words, the total of Federal Bonds on issue would surge from around $ 22 Trillion to around $ 55 – 60 Trillion.

$ 33 Trillion is a LOT of “stimulus” to apply to an economy with an annual GDP of $ 20 Trillion. But to have a full effect, it will have to be done quickly. And there is a man available to make this bold move. His name is Donald Trump.

To “Make the American Economy Great Again”, BOOM estimates that Donald will move to TRIPLE the current Budget Surplus to $ 3 Trillion per annum as soon as possible. And that will have to be repeated every year for TEN years.

Can it be done? Yes.

Will it be done? Answer — only if Donald wins next years election. The Democrats are clearly not decisive enough to take such bold action.

But it won’t help the American economy much if it is done too slowly and too little. Japan has proved that. Their economy is stll very flat in regard to GDP growth after decades of trying this method of steady QE economic “stimulation”. Steady is the problem.

Too little, too late is the mistake that all Western central bankers will make in regard to any QE program as far as BOOM can see. Why? Because they fear being called Central Planners. In China, no such fear exists.

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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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 without notice.The presence 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 and Economics.com nor 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.

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MOLS Denmark

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