BOOM as at 10th November 2019

HAS DONALD SAVED THE WORLD?

BOOM has often been a critic of Donald Trump as a leader because of his many personal faults. But Trump is a man of many dimensions. He generates so many reactions because he is clearly an egotistical, narcissistic bully who does not understand much of the complexity of the world around him. His global economic and Geo-political analyses are often child-like, resorting to an almost paranoid view of the world. In global economic terms, he sees America as the perpetual victim.

MANY STRENGTHS

Trump’s bad features are on full display for all to see. However, when it comes to the world of finance, he has many strengths. He has spent his life engaging in heavy levels of debt while being involved in property developments. This experience gives him a deep understanding of the critical role of credit availability in an advanced economy. Credit availability (and access) is at the very core of our capitalist system. For example, there can be no new supply (or demand) of goods and services without it because 97% of our fresh new money supply comes when a bank loan is created. Only 3% of our new money supply is created by governments when they print notes or mint coins. The rest comes only when there is a demand for credit (and availability of such), resulting in a bank loan.  This system of money supply must endlessly renew itself over and over again because money (in the form of currency) effectively dies when any bank loan is paid off.

In our system, which principally developed in the 12th to 15th century in Venice, the bankers are critical. Without them, we would have no well oiled credit system, no way to create most new currency. When banking came to Venice, it flourished as a trading nation because merchants could finance their exports and imports through a system of communal trust. This gave them a huge advantage over their competitors. Their suppliers and clients were more confident that they would be paid. Thus, those suppliers and clients tended to deal preferentially with the merchants of Venice as opposed to other merchants around the Mediterranean Sea. This very small, muddy island nation became a trading powerhouse with a fearful Navy.  At the peak of its power and wealth, it had 36,000 sailors operating 3,300 ships, dominating Mediterranean commerce. By the late 15th century, Venice also became the printing capital of the world after inventing paperback books that could be carried in a saddlebag.

The Venetian bankers built a strong relationship with the government of Venice (the “Doge”) whereby everyone (Jews and Christians) could ignore the ancient religious curse against charging interest on loans. The trick was to use a single sentence in the old Book of Deuteronomy 23:20 (used by both Jews and Christians) as an excuse — “to a foreigner you may lend on interest; but to your brother you shall not lend on interest.” This allowed the Jews to make interest bearing loans to Christians (who were conveniently defined as “foreigners” in their own land) and vice versa. The Jews were initially forced to be the financiers of Venice by being effectively banned from merchant, artisanal and professional roles. They were kept locked overnight in a Ghetto called Cannareggio at the back of the island and each day they walked through the streets of Venice with their benches on their shoulders. A bench in Italian is called a “banco”. This is the origin of the word “bank” — Il Banco.

But getting back to Donald Trump. BOOM asks the question “Is he saving the world of finance and thereby saving our advanced western economies”?

BOOM thinks there is a strong argument to answer this question with a positive “Yes” (!)

Trump has declared his contempt for the US central bankers at the Federal Reserve. He has Tweeted and spoken about their incompetence. He has demanded that high interest rates in America are harming the economy and causing the US Dollar to be too strong in comparison to most other currencies. He has attacked the Chairman of the Federal Reserve, Jay Powell, threatening to sack him from the job (after appointing him). To summarize, he has bullied the central bank to do what he wants but while always maintaining that they are “independent”.

TRUMP ON HIS CENTRAL BANKERS

After calling for a full 1% reduction in the Fed’s Overnight rate — “If that happened, our Economy would be even better, and the World Economy would be greatly and quickly enhanced-good for everyone!”

He described Chairman Jay Powell as having “a horrendous lack of vision” and “clueless”.

“Our problem is with the Fed. Raised too much & too fast. Now too slow to cut”

“The Fed’s high interest rate level, in comparison to other countries, is keeping the dollar high, making it more difficult for our great manufacturers.”

“We have the very heavy weight of the Federal Reserve anchor wrapped around our neck”.

“Our most difficult problem is not our competitors, it is the Federal Reserve”.  The Fed “raised rates too soon, too often,” and “doesn’t have a clue!”.

“If we had a Fed that would lower interest rates, we would be like a rocket ship”.

“We don’t have a Fed that knows what they’re doing.”

“The Fed interest rate way too high, added to ridiculous quantitative tightening! They don’t have a clue!”

“Our Federal Reserve has incessantly lifted interest rates, even though inflation is very low,”

“If the Fed had done its job properly, which it has not, the Stock Market would have been up 5,000 to 10,000 additional points, and GDP would have been well over 4% instead of 3%.”

“I think the Fed is a much bigger problem than China.”   “They’re so tight. I think the Fed has gone crazy.”

SO WHAT HAS HAPPENED?
HAS TRUMP SAVED THE WORLD?

Since Trump made those comments in the early and mid part of this year, the Fed has responded and begun progressively reducing their official interest rate. They have also embarked upon an aggressive campaign of purchasing $ 60 Billion per month of short term T-Bills from the Treasury and they have aggressively boosted liquidity into their commercial banking clients via the Repo market.

All of these strong moves have caused a flood of liquidity into the US banking system and into the US Treasury department. This flood began around 2 – 3 months ago. The result is that credit availability is surging and, theoretically, so should demand.

Meanwhile, Trump has embarked upon the biggest acceleration in Government spending ever recorded. After pausing in the second quarter, the Deficit is now expanding rapidly which forces the re-circulation of old money back into the real economy.

As a result of these Federal Reserve and Trumpian efforts, many stock markets around the world have begun to surge upwards and investments into the safe haven of sovereign bonds have begun to decline. This has resulted in Yield Curve improvements towards a more normal slope all over the globe in the last month — in the US, Austria, Belgium, France, Germany, Italy, the Netherlands, Norway, Poland, Russia, Switzerland, UK, Australia, China, Japan, New Zealand, Singapore, Thailand and South Africa.

As BOOM said in last  week’s editorial — “If this all pans out as BOOM is expecting, there will be no global recession. And, if there is one, it will be shallow and very short lived.” And in the previous week’s editorial BOOM said — “It is early days yet but it is beginning to look like the first week of October 2019 was the date for a Risk ON signal.”

So the answer right now to the question “Is Trump saving the world of finance and thereby saving our advanced western economies”?  appears to be — YES — Donald Trump has probably saved the world from a disastrous global recession. Who would have thunk it?

But, in the long term, he may have moved the capitalist world decisively away from capitalism and more towards a future of central planning. That may be a historic event with serious adverse consequences. Or it may be simply the acceptance of economic reality. Time will tell.

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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