BOOM’s QUANTITATIVE BOOSTING
Commercial banks can make loans to the central bank. In this situation, the central bank becomes “the borrower of last resort”. Now, what if that became a permanent situation and the central bank then loaned the funds in turn onto the Treasury Department? The result would be a Treasury department that could spend the funds directly into the real economy. The real economy would be boosted immediately with no time lags between policy and consequence. And as long as all three parties agreed to reverse all interest payments when due, the money would be essentially new, debt free, digital and sovereign money.
The commercial banks would wind up with a Reserve Asset (a loan to the central bank). The central bank would be in control of the speed and volume of this fresh new money. And the Treasury would be the beneficiary of a fresh new money supply which it could then spend immediately into the real economy (not the asset economy). The real economy rather than asset prices would benefit from this new form of sovereign money.
Deficit spending, funded via bond issuance, by way of contrast does not boost the supply of fresh new money which is why it has limited impact.
That is Quantitative Boosting explained in a nutshell (as devised by BOOM).
Quantitative Boosting is a term invented by BOOM. It is the way forward for advanced economies suffering from low growth and low CPI inflation. Having three separate parties involved will mean that no one single entity can “rule the roost” and endanger the economy with too much, too rapid money supply leading to excessive CPI inflation and/or a currency collapse. The central bank would acquire another powerful monetary lever, being the chief arbiter of Volume and Speed. And the commercial bank would have a secure Reserve Asset on its balance sheet.
Over time, the Treasury could repay the loans from the central bank whenever private credit growth resumed strongly in the economy. The central bank could then repay the commercial banks and the original loans would be cancelled.
BOOM does not suggest that this should happen all the time. It should be used cyclically to boost the real economy when necessary. At present, the central banks really only have two monetary levers — lower interest rates and/or Quantitative Easing (where their new funds end up in asset markets). Our current system fails if insufficient private borrowers appear or if the time lags between policy and consequence are too great. And QE has been a poor, slow stimulus to the real economy because it acts via asset prices.
BOOM would be happy to see up to 50% of the total money supply provided in this manner over the long term, but no more. Why? Because it would be foolish to throw the baby out with the bathwater in replacing bank loans as our chief source of fresh new money. Despite their frequent failings, banks do provide excellent distribution channels and apportionment of credit risk across an economy.
A MAJOR PROBLEM
There is one major problem with BOOM’s revolution in money supply. That involves the human element — the ignorance, hubris, venality and ignorance of the people in the three entities required to reach agreement. Sociopaths with little economic knowledge and an excess of hubris are attracted to positions of power in the political class, commercial bankers are known for their greed and venality while central bankers are mainstream economists wedded to their false assumptions and false dogmas.
In particular, almost none of these people understand the methods of creation and destruction of money in our financial system. They also do not understand fully the significant monetary differences between commercial bank loans, government bonds and sovereign money. We even have some politicians who think they are running a household budget. Many commercial bankers who think they are just intermediaries between savers and borrowers. And central bankers who only know credit expansion in an economy and think that ZIRP, NIRP and QE will be sufficient tools to rescue our sluggish advanced economies where persistent dis-inflation and deflation are caused by aging demographics, cheap energy inputs, massive technological change, low wages growth, cheap Chinese imports and a shortage of borrowers.
BOOM is reluctant to explain a future where all of these destructive human elements are able to be well controlled and harnessed for the good of all citizens. For that to happen would require outstanding leadership combined with wisdom and both of those are sadly lacking in our world of today.
TRADE WAR IMPACT EXAGGERATED
Six months ago, on June 2nd, BOOM analyzed the US China trade war initiated by Donald Trump — it is worth reading again. BOOM was prescient.
Quote: – “So what impact will this “trade war” have on world trade and Global GDP? It is a fact that previous such episodes in modern history have had very serious impacts. This is the rationale for the buying panic in the bond market. However, the structure of the advanced economies is now quite different to what it was in the past. The most important difference is that they are now much less dependent upon merchandise trade and increasingly more dependent upon trade in services. That means that tariffs on goods (trade wars) no longer have as much effect as in previous historic eras.
Total World trade is about 45% of Total Global GDP. So it is important to grasp that 55% of world GDP occurs inside domestic transactions. That puts trade into perspective.
Then there is the services component. This varies from nation to nation. In Singapore, for example, the export of services accounts for 32 % of their trade total (of goods and services). In the EU, it is about 31%. In the USA, it is 26 % and in China, it is about 20% (but worth noting that percentage has doubled since 2010). Overall, world trade in services is about 25 % of the total of goods and services. So goods make up the rest — 75 %.
Thus, we can calculate that total world trade in goods is about 33 % of Total Global GDP.
Tariffs only affect the trade in goods and, as we have calculated, global merchandise trade is only 33% of Global GDP so a decline in the trading of goods globally of 10% (massive) resulting from the China-US tariff war would shave off just 3.3% of Global GDP. If Global GDP is growing at 3.3% annually (the current IMF estimate), then even in such a dire trade situation there would not be a Global Recession. Nations would soon adjust and sell many of their goods to other markets. Meanwhile the trade in services would continue, barely affected.
RELAX — IT WILL PASS
So BOOM says — relax, this so-called “trade war” is certainly a storm on the high seas but it is not a giant typhoon. Stay calm and watch for the inevitable end to this squall as it blows through and the US comes to its senses (after it has exhausted all other options). After that, we will all be left with record low interest rates, low CPI inflation and low growth prospects. None of those are worthy of panic.” End Quote.
TRUMP HAS CAVED IN
So what happened last Friday? Trump caved in to the Chinese. The US has been humiliated by an economy that does not need them in the long run. You can be sure that the Chinese will never forget this. Once bitten, twice shy.
THE FED TO THE RESCUE
Since September, the US Federal Reserve has been increasing liquidity into the banking sector fast via the repo market. BOOM strongly suspects that this is due to the rescue of a foreign bank. Quite naturally, the Fed does not want to admit this to the American people who are led to believe that the Fed works only for them and their banks. Nothing could be further from the truth. All central banks coordinate their actions to help each other’s banking systems to stay alive when liquidity dries up and overnight stress becomes apparent. That is why central banks were invented. Before we had them, bank failures were very common and depositors lost their savings frequently. Panics and financial collapses were the norm. That was back in the day when gold ruled the currency roost and we had no central bank in the US.
Some people want to return to those days. They want to destroy central banks and return to gold as a constrictive element on our money supply. They are certainly not students of financial history although they pretend to be. BOOM suggests that readers be aware of such mis-information.
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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