BOOM as at 5th January 2020

BANKER DEATH SENTENCE

In China, bankers get death sentences when they misbehave. In the Western world, they get bonuses and bailouts or maybe promotions and in a worse case scenario, the bank’s shareholders get fined (although they didn’t do anything illegal or bad).

The former Chairman of Hengfeng Bank in China was recently convicted and sentenced to death. He took US$ 8.6 million in bribes. He also destroyed accounts and records relating to US$ 94 million and he stole another $ 108 million. He was sentenced to death (but which will probably be served as a life sentence) by the Chinese court and those were the details revealed by court records.

Which is the better system?  You decide.

HOW TO INVEST

BOOM was recently asked how to invest in the changed economic world that we live in today. That is a difficult question to answer. BOOM is certainly of the opinion that the economic dynamics inside the advanced economies are, indeed, “changed”. However, it is more accurate to call this “accelerated change”.  We need to deconstruct this view.

Why use the term “accelerated change”? To answer that, we need to look at economic history. When did this “change” begin? And when did it accelerate? From the end of World War 2 in 1945 and leading up to 1971, the advanced economies operated under the terms of the Bretton Woods Agreement reached in July 1944 at the meeting of the allied nations in New Hampshire. After the war, global trade was being principally settled with US Dollars that had flooded out of the US towards Europe in the Marshall Plan. The amount of Dollars involved is estimated to be of the order US$ 100 Billion in today’s equivalence. Then offshore banks began issuing US Dollar denominated loans and the so-called “Eurodollar” phenomenon began in earnest. Eurodollars are US Dollars outside of the borders of America. They can be found in deposits in banks anywhere on Earth (not just in Europe) and they are all referred to as Eurodollars. They are created as US dollar denominated bank loans.

The global economy expanded slowly but steadily through the late 1950’s and 1960’s in this “Eurodollar World” until a critical event in economic history occurred in 1971. That was the Nixon Shock decision. “The Nixon shock was a series of economic measures undertaken by United States President Richard Nixon in 1971, in response to increasing inflation, the most significant of which were wage and price freezes, surcharges on imports, and the unilateral cancellation of the direct international convertibility of the United States dollar to gold.  By 1973, the Bretton Woods system was replaced de facto by the current regime based on freely floating fiat currencies.”

Reference: Nixon Shock
 https://en.wikipedia.org/wiki/Nixon_shock

CPI inflation rapidly increased after 1971 in the advanced economies due to this decision. Banks were no longer constrained in regard to the creation of US Dollar denominated bank loans. The US Dollar money supply boomed. Oil prices surged along with wages. By 1975, the annual CPI inflation rate in the US surged ever higher and the official overnight interest rate set by the central bank in the US was moved above 12%. CPI inflation eased and the world breathed a sigh of relief. But the genie was out of the bottle and CPI inflation soon surged upwards again. In June 1981 at the peak of CPI Inflation, the US overnight interest rate was set by Paul Volker above 20%. That was the beginning of the end for rising CPI inflation in the advanced Western economies. Inflation of goods and services prices did not stop but its rate of increase declined steadily. We fell into a Post Peak CPI Inflation world with relatively high interest rate settings and strong cyclical GDP growth fueled by credit growth from relatively unconstrained commercial banks. This was called “the business cycle”.

That world came to an end in the global financial crisis of 2008. The banks of America and Europe were then effectively rescued from insolvency caused by banking fraud, incompetence and outright criminal behavior and we staggered into a “Post CPI Inflation world” of low GDP growth, low CPI inflation and extra low interest rates.

We have lived in that Post CPI Inflation world ever since. Central banks and governments have desperately tried for 12 years to effect a return to the economic world that they call “normal”. They have lowered interest rates towards Zero, they have created Quantitative Easing Programs to buy financial assets, they have flattened government bond yield curves, they have massively increased government bond issuance programs and spent the proceeds on huge deficit spending programs. They are still going down those policy roads, desperate for steady CPI Inflation to return. But they have not managed to adequately light the fire of money supply expansion that is necessary to return to that “normal” world that existed from 1945 through to 1971 and then on to 2008.

None of the measures they have adopted expand the supply of fresh new money sufficiently to reach persistent GDP growth and create persistent CPI inflation. The QE program money gets locked into asset prices, lower interest rates do not attract sufficient borrowers and government bond issuance programs simply attract old money. Bonds do not expand the money supply with fresh new money. The central bankers and the politicians seem locked in a loop of mis-understanding. They fire their weapons but nothing substantial happens. And, while all this is happening, old money is being continually destroyed as bank loans are persistently paid back. This shrinks the money supply in circulation. CPI dis-inflation and deflation are the outcomes.

BOOM knows the answer to this conundrum. It is called Quantitative Boosting and it mediates its economic benefits via the increased creation of fresh new money in the form of digital sovereign money that can be expended directly into the real economy (and not the asset economy). Its creation, volume, speed and destruction must be wisely controlled. Hopefully, our leaders can acquire such wisdom to effect this control. Fingers crossed.

To understand Quantitative Boosting — read the BOOM Editorial published just 3 weeks ago on 15th December 2019.

Link: —
https://boomfinanceandeconomics.wordpress.com/2019/12/15/boom-as-at-15th-december-2019/

BUT HOW TO INVEST?

BOOM does not offer investment advice. But it seems obvious that (most) asset prices will (probably) continue to surge higher and higher until central banks and politicians stop firing their dud weapons and move towards Quantitative Boosting.

When that happens, the real economies in the advanced nations will recover, the banking system will be reborn and we can all expect opportunity and prosperity to return. The alternative is to keep firing the dud weapons until all the assets of the advanced economies are owned by a small group of people sitting in a single room and wondering what the hell happened. Because at that stage of economic history, they will be unable to leave that room due to lack of security and their assets will be effectively destroyed by social unrest.

Which is the better system?  You decide. Send the link outlining the process of Quantitative Boosting to your politicians and your central bankers. Now.

Link: — Quantitative Boosting Explained

https://boomfinanceandeconomics.wordpress.com/2019/12/15/boom-as-at-15th-december-2019/

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.


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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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