SOME INCONVENIENT FACTS
Let’s look at the Influenza group of viruses.
In the USA alone, during the year 2018, there were 61,000 deaths from Influenza (more than 800,000 people were hospitalized). In the previous year, there were 38,000 deaths and in the year before that, there were 23,000 deaths. But there was no panic, no “global public health emergency” announced by the World Health Organization. No planes were cancelled.
HOT AIR TO THE RESCUE
Maybe we can run the whole global economy on the energy from hot air? There seems to be an abundance of that. A new energy source — readily available at all mainstream media outlets. Currently fueled by Coronavirus.
ENERGY PRICES FALLING SHARPLY
Coal prices have been falling steadily for two years now and dropped sharply last week. Natural gas prices have been falling sharply over the last 12 months. And now Oil prices and Gasoline futures prices have joined them in a downwards plunge that began in early January.
Aluminium producers are the biggest users of electricity (electrical energy) and in just under two years, the Dow Jones Aluminium Index has fallen from around 200 to below 50. Copper and other base metals have joined the party and plunged over the past week.
With energy prices and base metal indicators falling like this, there is no hope of increased CPI inflation so interest rates simply cannot rise. And the energy producers will be faced with steadily falling revenues. Bankruptcies are guaranteed to occur in that sector in the not too distant future.
GOOD NEWS AT LAST
Last week, the US Mortgage Bankers Association reported a 17% increase Year on Year for residential mortgage purchase applications. This is great news for the US economy because mortgage purchase applications have been falling consistently since March 2019. And new mortgages cause an increase in the money supply so they are very important. More new money supply, more economic activity. BOOM will watch this data set closely in the coming months.
Refinancing applications also jumped by 146% YoY. More good news.
SO WHAT’S THE PROBLEM?
Because of our aging demographics, cheap energy, cheap Chinese goods and rapid technological innovation, we have low CPI inflation, low wages growth and low GDP growth in all the advanced economies. The critical impact of these dis-inflationary forces is that our money supply growth is too slow and relatively stagnant.
Record low mortgage interest rates, ZIRP, NIRP, QE and Massive Deficit Spending all help (a little). Those money policies are all quite natural responses and no one should be surprised by them. And any boost to home loan numbers will certainly help but, in the long run, it will probably not be sufficient to stir sustained economic growth.
BOOSTING THE MONEY SUPPLY
DON’T PANIC, DON’T PANIC
Most people, including economists, bankers and politicians, don’t understand money creation and money destruction. And they don’t understand the different types of debt that exist. They use money and debt every day. However, using it does not give them any deep understanding of where it comes from and to where it goes.
Thus — most people, including our leaders, have no real chance of getting anything right in economic analysis.
Economies are effectively built on Money Supply and Energy Supply (with some labor thrown in to effect change). The Money Supply must come first (for without money we cannot get oil out of the ground or build a solar panel). So understanding money fully is STEP ONE.
97% of fresh new money is created as a bank loan to a willing borrower (except in China where the system is a little different) so most money is debt. Only 3% is sovereign (Notes and Coins), created by the Government’s Treasury Department.
Government Bond Issuance does NOT create any new money. It is almost identical to taxation systems. Bonds pull old money into the Treasury and the bureaucrats spend it straight back into the real economy almost immediately. This has no effect on the fresh new money supply (or the total money supply). This is why Keynesian spending programs funded from bond issuance programs have limited “stimulation” effects on an economy.
Government’s are immortal and can roll over debt obligations ad infinitum as long as their currency remains well accepted internationally and as long as they do not encounter severe CPI inflation growth. So many government’s have used bond issuance programs over decades and run budget deficits. It is easy to do and it boosts the government expenditure program. But it does not boost the money supply so it is clearly limited in its “stimulation” effect.
Government “Debt” is a Bond contract and is arguably not a debt in the normal sense because governments don’t borrow from banks. As one Bond matures and the capital is returned, then another Bond can be issued for the same amount. As long as there is investor appetite for that Bond, then the Treasury Balance Sheet is in a steady state. As the economy grows nominally, then more “debt” can be issued. Japan has reached a Government Debt to GDP Ratio of 250% (and that is without having the global reserve currency) — so the US has a long way to go. Don’t panic about government “debt”.
Private debt (household debt) is another matter because it is almost all bank loans and new bank loans always expand the money supply. They are absolutely critical to the sustainability of an economy over time. Our changing demographics is critical to consider here. As our advanced economies age, there is less demand for large household bank loans. Thus, the money supply growth slows and may even stagnate.
Corporate debt is a blend — 1. Bank loans and 2. Corporate Bond issuance. In the US, most companies of size now fund their debt through bond issuance and not bank loans so no significant increase occurs in the money supply).
Financial Sector Debt is also a combination of bond issuance and loans — however, banks don’t borrow much — they borrow marginally on their balance sheets to expand their loan books (again only at the margin). We must remember that all deposits in banks are a loan from the depositor. And that all deposit moneys are almost all created initially as loans in the banking system.
So — Household Private Debt is the primary driver that DOES increase the supply of fresh new money in our current money system. If a house loan is paid off, that money dies (and has to be replaced to maintain the status quo of overall total money). So there is a need to continually expand the money supply via mortgage originations. If this process fails or if the assets underlying those loans fall in price (as in 2008), then the whole system implodes and bank failures can arise.
When there are insufficient borrowers (our current situation), we must innovate to boost the supply of fresh new money in other ways or else we are doomed to economic stagnation. We just can’t wait for abundant fresh new borrowers to appear. We have done that for almost 12 years. The answer is Quantitative Boosting.
SAVE THE PLANET — Read the Link — and send it to your politicians and central bankers.
CHAOS IN PARIS
Last week, there were large scale protests in Paris conducted by the “POMPIERS” — firefighters seeking better employment conditions and better pensions. This broke down into what looked like open warfare between the fire fighters and the riot police. The videos were extraordinary on the Internet but mainstream TV channels simply did not show them in most nations. BOOM wonders why? One reader suggested that protests, riots and fighting on the streets was so commonplace now that it was probably not newsworthy.
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).”
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.
Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.
Disclosure: We accept no advertising or compensation, and have no material connection to any products, brands, topics or companies mentioned anywhere on the site.
Fair Use Notice: This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of issues of economic and social significance. We believe this constitutes a ‘fair use’ of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit. If you wish to use copyrighted material from this site for purposes of your own that go beyond ‘fair use’, you must obtain permission from the copyright owner.