BOOM IS HUMAN
My apologies to all readers, I made a mistake in the initial publication of last week’s BOOM Editorial — the number of listed US companies with Debt to Equity Ratios greater than 200% in the US is 405 companies and not the initial number I quoted of 1360 companies (which includes all listed companies globally except those on Chinese stock markets).
As soon as I realized the error, I immediately corrected that fact in the article online. My company search engine somehow managed to trick me up and reverted back to “all listed companies” in the data base instead of just “US listed companies” while I was writing the article.
However, that does not change the theme of my editorial — 405 US listed companies with Debt to Equity Ratios above 200% is still a staggering fact. And I haven’t included the 300 unlisted Unicorn companies on the planet, most of which are American and which contain untold amounts of debt. Also, the computer data base revealed that almost 1,000 companies listed on other stock markets also have these huge Debt to Equity Ratios above 200%.
My apologies for the error — when you are dealing in really big numbers in a really big database, the poor old human brain can easily be tricked by the power of the computer.
But I think the original argument is still very valid.
TRUMP AND THE DOLLAR
Donald Trump tried bullying the Federal Reserve again early last week — “The Federal Reserve should likewise act so that countries, of which there are many, no longer take advantage of our strong dollar by further devaluing their currencies. This makes it very hard for our manufactures & farmers to fairly export their goods. Lower Rates & Loosen – Fed!”
The Fed reacted and presumably had some proxy banks act in the futures and foreign exchange markets to attack the Dollar. It worked for a while in some currencies such as the Euro, Aussie Dollar and French Franc which rose sharply for a day or so in response. But the US Dollar quickly recovered its strength by the end of the week. Significantly devaluing the Dollar will take more than that. Donald doesn’t understand that.
Trump then flew to Europe and tried bullying his fellow NATO nations by demanding that they “buy more US weapons or else”. However, the world external to the US is finding this behavior rather tiresome. They were laughing at Donald towards the end of the meeting.
SOUTH AMERICA AND THE DOLLAR
Foreign currencies are clearly in circulation in many South American nations. A good friend just returned from that continent and explained the continued reality of dual currency use there. Any national government that allows an alternative currency to circulate inside its borders is clearly endangering their domestic economy gravely. It risks out of control CPI inflation and even a currency crisis event (a simultaneous hyperinflation and hyper-deflation). So one must ask a key question — WHY do these nations allow such blatant foreign currency circulation? The answer can only be that the politicians are paid handsomely or threatened by the foreign nation to allow this. No other conclusion can be reached.
South America has no chance of developing stable economies while this situation is tolerated by the people.
HYPERINFLATION AND HYPER-DEFLATION
A dreaded Hyperinflation event can destroy a nation’s currency and a nation’s economy. Such an event is not about high CPI inflation. It is all about the loss of confidence in a national currency which causes a very high CPI inflation. Meanwhile, a very significant Hyper-Deflation occurs at the exact same time. For example, if confidence in a national currency is collapsing then anyone holding any foreign currency rather than the national currency is seeing the cost of everyday goods and services collapse towards Zero. That is a Hyper-Deflation in CPI costs when expressed in the foreign currency.
OUR ECONOMIC PREDICAMENT
We are in uncharted territory in the advanced western economies. No modern advanced economy has been here before (except Japan). A totally new paradigm of persistently low CPI inflation, high asset price inflation, low interest rates driven by aging demographics, cheap energy inputs, massive technological change, low wages growth, cheap Chinese imports and a shortage of borrowers. Our money system is driven by debt — new bank loans are continually needed to expand the fresh new money supply in capitalist economies. This is because our money is being continually destroyed when bank loans are paid off. And while this continues to happen, new (young) borrowers cannot appear because of high asset prices. They are also carrying large educational debt loads that inhibit them, combined with employment uncertainty and low wages growth. So they are caught in the headlights and they know it.
Looking at the charts of what happened in the past or wailing about inverted yield curves is of no assistance whatsoever. Endlessly looking for evidence of “the coming CPI inflation threat” is pointless. The past is past. This is a new economic paradigm.
We MUST now find ways to replenish our fresh new money supply as bank loans are paid off. The best way to do that in the circumstance is to boost Sovereign Money from the Treasury. CASH in large quantities spent by the government into the real economy would work brilliantly. Quantitative Boosting as designed by BOOM is, in effect, a digital form of cash.
Currently, we are in a steady state situation held in place by huge deficit spending (funded by unprecedented levels of sovereign bond issuance) and, in many advanced economies, also by population boosts from immigration. These are band aid solutions (reasonably good band aids) but they can only have temporary effect.
Why? Because government bond issuance and deficit spending do not create fresh new money and thus does not boost the money supply. It keeps the GDP turning over but it doesn’t solve the problems we are facing at their root cause.
Cash — spent by Governments and Quantitative Boosting are the policies required. Both policies are aimed at the real economy, the fresh new money supply and NOT at asset prices. There is no significant risk of CPI inflation from these policies in our current predicament and the currencies of most advanced economies will almost certainly remain resilient. The VOLUME of Cash and Quantitative Boosting has to be well managed by the central banks to ensure that.
More on Quantitative Boosting next week.
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
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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
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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