BOOM as at 26th July 2020

A MAJOR CHANGE FOR EUROPE — A HISTORICAL STEP TAKEN — THE NEXT GENERATION EU

The 445 million people of Europe were last week effectively conquered by a committee of 27 people acting independently of any nation state. No shots were fired. No armies went to battle. But it was, indeed, a moment of great historical significance. The committee will now borrow the huge sum of 750 Billion Euro to spend on the nations of the EU, a massive (and therefore, consequential) increase over the previous total EU debt of only 52 Billion Euro.

It’s described as the Multi-annual Financial Framework (the MFF) for the Next Generation EU (the NGEU). Sir Humphrey Appleby would be proud.

In 1790, a German banker named Mayer Amschel Rothschild is reported to have said — “Let me issue and control a nation’s money and I care not who writes the laws”.  Note the date for future reference.

Because of the sheer size of the sum involved, the European Commission last week essentially achieved the financial power of a Sovereign nation. The Commission is now able to raise almost unlimited debt, to borrow, to issue enormous quantities of bonds on international capital markets. Such financial power is usually claimed only by sovereign nation states. The formal language used in the documentation describes that the Commission was “empowered” in its “Own Resources Decision” (note the purposeful use of Capitals) to borrow these funds on the global capital markets “on behalf” of the European Union up to the amount of EUR 750 Billion. Previously, the EU had issued only 52 Billion Euro of debt instruments in total. One small step has led to one giant leap. Where have you heard that before?

The language is important because clearly the Commission is not a sovereign nation. It has no land to defend and no citizens. But it is declaring itself as possessing the same powers of a sovereign nation in regard to the sheer size of the capital raising. Why is this important?

Because in BOOM’s opinion, 750 Billion Euro is just one step away from unlimited borrowing.

The funds borrowed on the capital markets are claimed to be for the sole purpose of addressing the consequences of the COVID-19 crisis. So this is described as being only a “temporary” arrangement to help with the current crisis. If you believe that this is a temporary, limited step, never to be repeated, then BOOM has a bridge to sell you which you may like to buy.

This has been loosely called the “Hamiltonian” moment for the European Union because Alexander Hamilton did something similar in 1790 when the new Federal Government of the United States assumed responsibility for the debts of the individual states in the Union. However, the Federal Government of the United States was a legislative body elected by the people. What happened last week in Europe is quite a different matter.

So who is the European Commission and do the people of Europe have any direct power over it?

The European Commission (EC) is the executive branch of the European Union, responsible for proposing legislation, implementing decisions, upholding EU treaties and managing the day-to-day business of the EU. The Commission was set up from the very start to act as an independent supranational authority separate from governments. Think carefully about that last phrase “separate from governments” because it is critical in understanding what happened in Europe last week.

It is the only EU body that can propose legislation (new laws) and that is why it stands as the absolute center of EU power. But it has no taxation department, no defense department, no armed forces, is not a nation, does not have Sovereign status and its office holders are not elected by the people of Europe. It is akin to a Department of Government in some respects but it differs markedly because of its enormous power over the people of Europe.

Some describe it as a Dictatorship. Why? Because the appointed Commissioners are bound to act independently – free from other influences such as those governments which appointed them. And it is the Commission that currently holds executive powers over the European Union, making it the supreme power. The powers of the Commission are such that some have suggested changing its name to the “European Government”, calling the present name of the Commission “ridiculous”.

In other words, it is a European Government of appointees not answerable to the people (who cannot remove them).

Its prime office holders are called Commissioners and there are 27 of them — one for each Nation in the Union. The Commissioners are “proposed” by the Council of the European Union, on the basis of “suggestions” to the Council. Clearly, they are not elected by the people of Europe. In other words, the people of Europe have no direct say in who is in charge of proposing their new laws. In 2010, the European Parliament chief Jerzy Buzek said that EU commissioners should in future be directly elected rather than hand-picked by national governments. But that is still not the case. It is theoretically true that the European Parliament has the power at any time to force the entire Commission to resign through a vote of no confidence. However, this requires a vote that makes up at least two-thirds of those voting and a majority of the total membership of the Parliament. While it has never used this power, it threatened to use it against the Commission headed by Jacques Santer in 1999 over allegations of corruption. In response, the Santer Commission resigned en masse of its own accord, the only time a Commission has done so. So the next question to ask is who are the Councillors who appoint the Commissioners? It’s a deep rabbit hole.

The Council of the European Council has 10 different configurations of 27 national ministers (one from each member nation). The precise membership of those configurations varies according to the topic under consideration; for example, when discussing agricultural policy the Council is formed by the 27 national ministers whose portfolio includes that policy area.

In other words, there are 10 Committees involved in the Council that could each have 27 different members.

The complexity here appears deliberate.  All of this seems an elaborate obfuscation of how the European Union power structure really works. And it is clearly NOT a democratic system when it comes to appointing  the supreme body of European Commissioners.

It is more like a club of politicians, meeting in secret to appoint each other (or others) to positions of great power in the European Commission. The European Parliament does exist, elected by the people of Europe but it is clearly on the bottom of the power structure. It is essentially a rubber stamp for the decisions made by the various 10 Councils of the European Council and the European Commission.

Under the decision reached last week, the European Commission will borrow 750 billion Euro using its triple-A debt rating by issuing bonds on the international capital markets. It will disburse 390 billion Euro in grants to individual nation states and 360 billion Euro in cheap loans.

The Commission will lend the money to the most needy nations of the EU at the same interest rate it was borrowed at. This will ensure that highly-indebted countries like Greece and Italy, whose sovereign bonds have very high interest rates, will have access to funds at much lower rates.

Link:  https://www.consilium.europa.eu/media/45109/210720-euco-final-conclusions-en.pdf

The plan now must be approved by the European Parliament and it must be ratified by all EU states. But who would say “No” to 750 Billion Euro at lower than normal rates of interest?

The next questions to ask are these — who will buy 750 Billion Euro of European Commission bonds and who is the President of the European Commission?

 WHO IS URSULA VON DER LEYEN?

The President of the European Commision is Ursula Von Der Leyen. She was previously the Minister of Defence in the German government. Many people were surprised when she was “proposed” as President of the Commission by the Council of the European Union, presumably on the basis of “suggestions” to the Council.  She had no previous experience as an office bearer in the European Union. She is the first President from Germany since the Maastricht Treaty was signed in 1993 to form the European Union.

Her father was Ernst Albrecht who was a very senior German civil servant and politician instrumental in the establishment of the European Commission in 1958. He was also instrumental in forming the European Coal and Steel Community in the early 1950’s — the precursor of the European Union.

FEDERAL RESERVE BUYING FOREIGN ASSETS

Meanwhile, the US central bank, the Federal Reserve, has informed the world that they have begun buying foreign corporate assets (just like the Swiss National Bank). They have been buying foreign bonds issued by foreign companies. Included in the haul are the bonds of Volkswagen, Daimler, BMW, Toyota, BP, Glaxo Smith Kline, Bristol Myers Squibb.

This is the ultimate means by which the Fed can lower their currency exchange rate versus other currencies. BOOM welcomes this move and sees it as a strong stabilizing influence on the global economy and the US economy. The US Dollar Index is now clearly on a Southern trajectory since March in a steady but purposeful decline.

BOOM expects that the Fed will continue to buy foreign assets in the future — shares, corporate bonds, sovereign bonds, REITs, real property, commodities (except Gold and Silver), collectibles. They will eventually become the Largest Hedge Fund on Earth with a view to keeping the US Dollar weaker than it would otherwise be. They are taking the exact same route as the Swiss National Bank in this regard.

Notably, the Swiss Franc has been rising persistently ever since the March 2020 Covid Crisis began. And it has risen 8.8% since March 2019. The three wise men who run the Swiss National Bank will not be pleased but there is little they can do when confronted by a large elephant intent on blocking their path. BOOM suspects that Swiss stock prices of exporting companies may soon come under some significant pressure. Time will tell.

STAYING APART KEEPS US TOGETHER

“Staying Apart Keeps Us Together” is a slogan being commonly used in Australia as a part of the political response to Covid 19. It is often prominently displayed as politicians announce their latest campaign of fear and intimidation aimed, of course, at “keeping you safe”.

The Wikipedia definition of Doublespeak is “language that deliberately obscures, disguises, distorts, or reverses the meaning of words. Doublespeak disguises the nature of the truth.”

The writer Edward S. Herman, author of the book, Beyond Hypocrisy, cited what he saw as examples of doublespeak and doublethink in modern society. Herman describes the principal characteristics of doublespeak:  What is really important in the world of doublespeak is the ability to lie, whether knowingly or unconsciously, and to get away with it; and the ability to use lies and choose and shape facts selectively, blocking out those that don’t fit an agenda or program.

“DO AS WE SAY.  OR ELSE.  IT’S FOR YOUR OWN GOOD”.

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 {at} 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 LOANSBANKS 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”.

Youtube Video —  https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-in-the-modern-economy-an-introduction

and

https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

Paper:  Money in the Modern Economy  PDF —  CLICK HERE

Quarterly Bulletins Indexhttp://www.bankofengland.co.uk/publications/Pages/quarterlybulletin/2014/qb14q1.aspx

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).”Reference: https://www.bundesbank.de/Redaktion/EN/Topics/2017/2017_04_25_how_money_is_created.htmlThe 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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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.

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MOLS Denmark

 

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