BOOM as at 3rd May 2020

CHINA LEADS WITH COUPONS

HISTORY REPEATS

Local currencies are a way to stimulate economies within selected geographic regions. Sometimes, they are called complementary currencies because they circulate in harmony along with the national currency. They were used with great effect in the Great Depression of the 1930’s in Austria and Germany. They are not national currencies so they can circulate together with the nation’s official currency in their region of acceptance. They can be designed to be time-limited and thus have to be spent (quickly) within a certain well defined time frame. Transactional velocity therefore increases and demand for goods and services rise. Thus, the local economy benefits.

These local currencies can be designed for use in purchasing only well defined products (or services). For example, the issuer is usually a local government and can state that they can only be used to buy food, clothing and energy from local providers. Upon receipt of the local currency to settle transactions and at the end of the designated time frame, the providers can take their accumulated proceeds to the issuer and receive the national currency in return. This is how the local currency can be taken out of circulation. So, it is issued locally and destroyed locally after it has circulated rapidly within the economy to boost transactions.

In contrast, if the local government were to just buy an equal amount of goods and services with the national currency and distribute them, then there would be no significant increase in velocity of local transactions and there would be no guarantee that only local suppliers would benefit.

This technique is currently being used in China and there was a very recent report of one being issued in a small region in Italy. In China, they are called “Coupons”. In the Italian example, they are called “Ducati”.  You must appreciate that these coupons and ducati cannot be saved or invested. They must be spent and quickly, before their time limit expires. Merchants are quite naturally incentivised to circulate them during their allotted time frame of existence in order to boost their sales volumes.

There are recent reports that more than 30 Chinese cities have started issuing their own local digital Coupons via social media platforms such as WeChat and AliPay. By the way, the central Chinese government has also boosted Total Social Financing by $ 1.5 Trillion over the last 2 months. So, combined, these two initiatives should stimulate the Chinese domestic economy dramatically.

The Chinese government has used local currency Coupons before in times of great economic hardship, specifically in 1949 when the communist party achieved power after the civil war. The idea is not foreign in Italy either. In fact the inventor of the local currency concept was a German man who had an Italian name — Silvio Gesell — born in 1862.

SILVIO GESELL
COMPLEMENTARY CURRENCIES

Gesell lived in many nations including Germany, Spain, Argentina and Switzerland. But it was in Austria where his ideas of local currency were put to work during the harsh economic collapse of the 1930’s. A small town called Worgl near the German border and within 100 kms drive of Hitler’s holiday home in the Bavarian Alps began issuing  a local currency in 1932 and soon had a booming local economy. This is now known as the Worgl Experiment and, interestingly, it was noticed by Adolf Hitler and his central banker, Hjalmar Horace Greeley Schacht. They soon began issuing a local complementary currency nationally to stimulate the moribund, desperate German economy. They called it a Mefo Bill and it caused the German economy to suddenly surge from 1934 onward. Soon, the German economy was the envy of all of Europe and the United States. Many early followers of Hitler inside and outside Germany sang his praises for reviving the German economy so rapidly and effectively. Many wealthy Americans, French and British were so impressed that they became ardent supporters of Hitler.

But there was another similar money phenomenon that began in Switzerland in 1934. It was called the WIR and it is still in operation today. It is an independent complementary currency system circulating in Switzerland that only serves businesses in hospitality, construction, manufacturing, retail and professional services. It is issued by a bank called the WIR Bank, is called the WIR Franc and it is a totally digital currency (no paper money) that exists on the ledger accounts kept for corporate participants by the WIR bank. The WIR Bank has a banking license and can issue loans to its participants dedicated in WIR Francs.

The WIR system started with only 16 members but today there are 62,000 participants. It is essentially a formalized trade credit system shared between trusting businesses and run by the WIR Bank as the intermediary. The circle of trust and acceptance is critical to understand.

With the Corona Panic Crisis in full swing, the global advanced economies are effectively being held back by having rigid controls on their money supply system. Governments (and their economies) are being held to ransom by the commercial banking system that has assumed the role of principal currency supplier almost totally. In fact, they create 97% of the new money supply when they create new bank loans and much of that new money heads straight into asset purchases where it becomes effectively trapped away from the real economy. This system works well when economic growth is strong, steady and equipped with deeply stable fundamentals that underwrite that growth. But in a situation where the large economies of the world are struggling and contracting rapidly (such as now) this system is clearly too reliant upon finding fresh new borrowers and the loans go towards purchasing already existent assets. Thus, the money system cannot expand sufficiently to combat the contraction that is occurring in the real economy.

China is showing the way. They are adopting complementary currencies, they are expanding their national currency money supply dramatically by command and they are encouraging borrowers to approach their banks for loans. This should see China emerge strongly out of the Great Panic with a strengthened domestic economy based much more upon consumption of local goods and services. If this happens, their stock market should respond positively and their currency should remain stable against other currencies. They will then be able to issue Yuan denominated Bonds to foreign investors that will meet strong demand. Yuan denominated loans between international parties will then grow in volume, created by the tax haven international banks to service this demand.
China’s 10 year sovereign bonds are currently yielding 2.514 % and their Yield Curve is strongly positive. Demand for these bonds in the secondary market has been growing steadily over the last 4 months. A Chinese Bond Futures market was opened up to the large Chinese banks on 24th February — perfect timing. Foreign banks are not yet allowed to trade in that market. Since then, the yield on the 10 Year Bond has dropped by 0.5 %.

China’s current annual CPI inflation rate is 4.3%, having fallen from 5.3 % in January.

ISRAELI BANK FINED FOR ASSISTING TAX EVASION

An Israeli bank has pleaded guilty and been fined US$ 874 Million (almost a Billion) for helping US citizens hide $ 7.6 Billion in assets overseas, presumably to avoid paying taxes. It will have to pay the fine to the US Treasury. It involved over 5,500 secret Swiss and Israeli bank accounts. The bank has also agreed to pay another $ 30 Million fine to the US Treasury in regard to a FIFA money laundering scheme. FIFA is the International Federation of Football Associations, based in Zurich, Switzerland and organizer of the World Cup.

The temptation for crime in banks is enormous and ever present. Why? Because they create money and help move it around. All national bank regulators need to watch them very closely indeed. A banking license should not be a license to commit crime.

ELON MUSKED

Meanwhile, Elon Musk said that, in his opinion, Tesla shares were priced too high on Friday. They dropped immediately by almost 11 %. The day before, they dropped by about 8 %. So the shares have dropped in price by almost 20% in two days. Go figure.

CONSUMER PRICES AND ASSET PRICES

Most people think that they understand what inflation is. But when you ask them to explain it, they can’t. There is Consumer Price Index (CPI) inflation and there is Asset Price inflation. But then there is CPI dis-inflation and CPI deflation. There is also Asset Price dis-inflation and deflation.

Dis-inflation is a situation where prices are still rising but are doing so at a steadily lower rate. In other words, the tendency for prices to rise is decreasing over time. Deflation is negative inflation. In other words, prices are steadily falling in absolute terms over time.

Why is all of this important? We should all understand these terms and apply them to our understanding of what is happening inside an economy. You can quickly see that we can have a range of differing outcomes. In fact, there are nine different combinations that can happen theoretically. This is the key to understanding an economy and also how to invest more wisely in terms of asset allocation across the three major asset classes — real assets (physical real estate), financial assets (non-physical shares and bonds) and cash. Commodities can be defined as a real asset or a financial asset, depending upon the circumstance of the security being considered and viewpoint of the observer. For example, you can buy physical Gold (a real asset) or an Option to buy Gold (a financial asset).

The nine combinations of outcome are
 —

We can have CPI consumer prices rising and asset prices rising simultaneously.
We can have CPI consumer prices rising and asset price rises slowing.
We can have CPI consumer prices rising and asset prices falling.
We can have CPI consumer price rises slowing and asset prices rising.
We can have CPI consumer price rises slowing and asset prices falling.
We  can have CPI consumer price rises slowing and asset price rises slowing.
We can have CPI consumer prices falling and asset prices falling.
We can have CPI consumer prices falling and asset prices rising.
We can have CPI consumer prices falling and asset price rises slowing.

It’s confusing, isn’t it? But critical to understand.

SAVE THE PLANET — Read the Link — and send it to your politicians and central bankers. Quantitative Boosting Explained 

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.


CLICK HERE FOR PODCASTS:
   OUR BRAVE NEW ECONOMIC WORLD

EMAIL: gerry {at} 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

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.”
======================================================================

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.

========================================================================

MOLS Denmark

3 thoughts on “BOOM as at 3rd May 2020

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s