BOOM as at 7th June 2020

AMERICA IN TURMOIL

The social contract in the United States is clearly under great pressure. Large protests are underway in at least 75 cities. The White House is under siege.  The President has been unhelpful in his Tweets by demanding more oppression, more control. All along 5th Avenue in New York, shops are boarded up. The Federal Attorney General has admitted that many Americans have lost faith in the justice system. It is apparent that loss of faith in the Congress and Senate is growing. And trust in the mainstream media is in serious decline as journalists endlessly interview other journalists and never break away from the official government narratives, claiming all other explanations as “conspiracy theories”. They have become a mouthpiece for authority. Some would say they are now simply propaganda outlets.

Americans are tired of the rhetoric of endless war. And they are confronted every day with militarized Police forces equipped and trained to fight another one — against them. About 10% of households turn to the Supplemental Nutrition Assistance Program to have enough food to put on the table. The SNAP program used to be called the Food Stamp Program. That is 40 Million people unable to feed themselves adequately.  Now, due to the current economic collapse, another 40 Million have joined the unemployment category and are destitute or soon will be. Millions more are surviving on low wages. Is this The American Dream? Is this The Exceptional Nation? Up to 100 million people who can’t afford to live?

Meanwhile, one individual, Jeff Bezos, the founder of Amazon, has increased his wealth by $ 40 Billion in the last 12 months alone. His personal net worth is now calculated at around $ 150 Billion. This epitomizes the reality of the capitalist system as it operates in America with more and more wealth falling into the hands of fewer and fewer people. Politicians are no longer representatives of the people. They have become representatives of wealth — often of their own wealth with many being billionaires themselves.

The road back to a more equitable society is a long one. BOOM hopes the American people can find their way along that path peacefully. However, as BOOM has said many times, the financial system we have inherited over the last 400 years is largely to blame. If it is not regulated well enough by responsible government, then the divisions in society become amplified over time and eventually, social cohesion gets torn apart by that division.

With 97% of the new money supply coming from banks when they make loans and only 3 % coming from the government, there is a severe built-in bias of power and influence resident in the banking sector and broad financial system. The people are unaware of this. They have no idea that their representative government does not create the bulk of the new money supply. Sadly, most politicians don’t know this either. Worse, they often say things like “we must allow the free market to operate”, abdicating their responsibilities to oversee, regulate and control the financial sector.

US DOLLAR EMPIRE

It is currently fashionable in the United States to say that the US is a victim of global circumstance, that other nations are somehow to blame for the steady decline in the resilience of the US economy.  Donald Trump’s books written before he entered politics have this position as a constant theme. Thus, in that mindset, there is the need to find economic “enemies” to blame. And such a search invariably leads to an extended mindset verging on paranoia whereby America’s economic decline is seen as being due to the actions of other nations. Sanctions, tariffs, trade wars, broken international agreements and outright threats have emerged as a consequence. And all of these actions have not won America any friends in the international community of nations. Far from making America “great again” (whatever that means), they have made America look thoughtless, uncaring and outright belligerent.

The reality is that 90% of the people on this planet do not care for the vision of the US as the exceptional nation or as the world “leader” (whatever that means). They are over 7 Billion strong. However, at present, they have no choice but to accept that the US Dollar is the dominant currency in volume on the balance sheets of their central banks and thus can be conveniently used in settling international trade settlements. That dominance has been established over many decades and will take many decades to weaken. That is the reality of currency dominance until a more even balance can be established over time.

US DOLLAR INDEX SLIDING

The US Dollar dominance — sometimes called the reserve currency — is a double edged sword. It grants America the luxury of creating dollars (essentially out of thin air) and buying anything. However, if it becomes too strong relative to other currencies, then it becomes a cause of CPI dis-inflation and deflation inside America. And that dis-inflation and deflation harms the US banking and financial sector. Banks need CPI inflation to thrive. Thus, US Dollar strength must be tempered by this realization. This is the responsibility of the central bank, the Federal Reserve.

Thankfully, the US Dollar index has been slowly but steadily falling for three weeks now. The U.S. Dollar Index (USDX, DXY, DX) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies. It is a weighted geometric mean of the dollar’s value relative to the following currencies: the Euro (EUR),  Japanese yen (JPY), Pound sterling (GBP), Canadian dollar (CAD), Swedish krona (SEK), Swiss franc (CHF).

While the US Dollar index has been weakening over the last 3 weeks,  the Euro has been rising very rapidly in US Dollar terms. It has been appreciating much more sharply than the Pound, the Canadian Dollar and the Swiss Franc while the Yen has actually been falling.

So the key message here is that the Euro is the major beneficiary of the weakening US Dollar. Thus, the depreciation of the US Dollar is having its main impact inside the US and inside the Euro Area. That is good because they are the bastions of economic activity, making up 50% of global GDP.  However, this does look like a well managed currency situation, something America accuses China of on a regular basis.

EEM IS SURGING

A month ago, on 10th May, BOOM wrote this — “BOOM is watching the emerging markets for evidence that the Fed has woken up and worked it all out. There is some preliminary evidence developing for this but it is too early to tell.”  BOOM was referring to the relative shortage of US Dollars outside the borders of the US and was urging the US Federal Reserve to increase the supply of US Dollars offshore.

Last week, there was finally firm objective evidence of this. The emerging markets ETF listed in New York under the code EEM surged up 8.45 % over the last 5 trading days. It has risen 33 % in total since March 23rd. This sharp rise in investor interest in emerging markets stocks should force the fund manager of EEM, Blackrock, to buy more stocks in many offshore stock markets. It is worth noting that BlackRock is the world’s largest asset manager, with $7.4 trillion in assets under management. All other fund managers should follow suit sending US Dollars offshore.

The rise in offshore asset prices will trigger Eurodollar loan creation by tax haven offshore banks and, thus, the US Dollar volume outside the US should increase, again to lessen the dollar shortage crisis.

Other more advanced economy foreign stock markets surged last week. The stock markets of Germany, France and Italy all rose by almost 11%, as did the Eurostox 50. Russian stocks rose 7.5 %. And the Japanese stock market rose by 11 % in the last 2 trading weeks.

Ideally, US Dollar volumes should now increase outside the US, destined for many other economies. If this were to happen, those US Dollars will eventually fall onto the central bank balance sheets of those nations and become available for the settlement of international trade. The global economy would benefit, not because anyone outside the US is greatly fond of US Dollar dominance but because such dominance at present is essentially unavoidable because of insufficient volumes of other alternative currencies.

US EXPORTS AND IMPORTS COLLAPSE

Let’s look at the triumphant Trump trade war with China and many other trading nations. Recently released trade figures show that US Exports collapsed by 25 % over the last month. Imports also collapsed — by 13.7 %.  Total exports and total imports are now back to levels seen 10 years ago.  That is not “winning” a trade war (whatever that means) or “making America great again” (whatever that means).

Those trade numbers sound terrible and they are. However, in fact, they are not a major consideration for the US Economy. That economy is overwhelmingly a domestic one, based principally upon the consumption of local services. The collapse of services numbers is the main game to watch, not the trade figures. Well over 80 % of US jobs are in the services sector. Less than 20 % or US workers produce goods for sale.

We will have to wait another month to see what is really happening in the Services Sector of the US economy in the first quarter of 2020. The BEA – the Bureau of Economic Analysis – will release its latest figures on Monday July 6th. Mark that date on your calendar and watch closely. The US economy is still 25% of the total global economy and a major provider of finance via its offshore currency volumes. So its health (or weakness) is still critical.

ON CONSPIRACY THEORY

BOOM suggests that you read this article. It is an eloquent article on a key topic — A Conspiracy Theorist Confesses

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

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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