Last week we received confirmation that the US economy shrank by an annualized 32.9 percent in the second quarter of 2020.
Note carefully that word “annualized”. The GDP Contraction for the April – June quarter compared to the January – March quarter was really just 9.5%. However, it is still the biggest quarterly contraction ever, pushing the economy into a recession as the corona-virus pandemic forced many businesses including restaurants, cafes, stores and factories to close and people to stay at home, hurting consumer and business spending. Decreases were seen in personal consumption, exports, private inventory investment, nonresidential fixed investment, residential fixed investment, and state and local government spending. Spending by the federal government sky-rocketed.
That is alarming news. BOOM had told readers to expect this. It leaves millions of Americans effectively destitute and facing extreme poverty. The Census Bureau’s latest weekly Household Pulse Survey showed that almost 30 million Americans are now experiencing hunger. About 23.9 million of 249 million respondents said they had “sometimes not enough to eat.” Around 5.42 million indicated they had “often not enough to eat.”
The Household Pulse Survey is a 20-minute online survey studying how the COVID-19 pandemic is impacting households across the country from a social and economic perspective. The survey asks about jobs, finances, access to food, health, housing, and schooling.
As the US economy collapses internally, leaving millions of Americans dependent upon the federal government or destitute, the White House announced that it is pulling 12,000 troops out of Germany in a “redeployment”. Apparently, 6,400 will be returning to the US while 5,600 will be moved to other NATO nations such as Belgium and Italy.
Of course, Trump thinks the troops are there altruistically to protect Germany and not for the benefit of the US. But to sing his praises, it is clear that he is not averse to stating plainly that America is in the protection racket.
“[US troops] are there to protect Germany, right? And Germany is supposed to pay for it,” Trump said. “Germany’s not paying for it. We don’t want to be the suckers any more. The United States has been taken advantage of for 25 years, both on trade and on the military. So we’re reducing the force because they’re not paying their bills.”
As BOOM has previously pointed out, Trump always sees America as the victim of world Geo-politics, not the chief protagonist. This paranoid stance is critical to grasp if you are ever to understand Trump and his influence on American global power.
However, Daniel Davis, a senior fellow at the Defense Priorities think-tank has a different slant. “We don’t have a need for that many troops,” Lt Col Davis is reported to have said. “Because there’s no security threat that those troops actually help with, in my view. Russia is already deterred. If you took all the American troops out of Europe … that’s not going to change the deterrent factor for Russia because the NATO combined militaries are far more powerful than Russia, plus they have nuclear weapons.”
Two years ago in the editorial on 18th November 2018, BOOM explained the dynamics of such expansion of US power. It is not pure altruistic military power aimed at protecting Germany against external threats and which should be “rightly” paid for as Trump thinks in a moral stance. It is much more subtle than that. It is an overwhelming Geo-political economic power based upon the sale of military equipment and the provision of armed forces but critically with the settlement of those sales only in US currency. The Petrodollar (oil trade settlement only with US Dollars) and the existence of large Eurodollar volumes is also critical to this strategic position. Eurodollar volumes are US Dollars that exist on bank ledgers outside of the US and, most often, created outside the US as international bank loans.
In other words, the US will only accept US Dollars as payment for energy and trade settlement. It tries its best to impose this on as many nations as possible. Any weakening of that position is a weakening of the Geo-political strategy. That can be interpreted as good or bad depending upon the position of any observer. BOOM is agnostic in this argument because BOOM always tries to observe objectively. In view of the recent events in Europe, however, that 2018 BOOM editorial is worthy of consideration again. Here it is —
THE PROTECTION RACKET
(first published 18th November 2018)
Gerhard Schroeder, the former Chancellor of Germany, last week said
“We can’t accept being treated like an occupied country. When I look at the behavior of the US ambassador to Germany I get the impression he sees himself as an occupying officer rather than an ambassador in a sovereign country.” “Those countries that are affected by conflicts emanating from the United States will have to get closer. We can’t become part of an American trade war with China.” and he said that Chinese investors were preferable to American “locusts”, a term coined recently in Germany to describe U.S. private equity firms and aggressive hedge funds.
How can we make sense of these seemingly extraordinary statements?
The US is not a normal nation. Why? Because its principal export is not in normal goods and services. It “exports” US Dollars in a bid to remain in position as the supplier of the world’s principal reserve currency. And this gives it great economic power. I will explain later in this article why the inverted commas are placed around the word “exports” in this context. It is because they don’t really export Dollars — there is a neat trick involved.
The US captured the role of principal global reserve currency supplier from the UK in July 1944 at the Bretton Woods meeting attended by the 44 allied nations. If they can maintain that position as supplier of the principal global reserve currency, then they can effectively buy any goods (including capital goods such as land, real estate, ports) and any services at will from other nations. They can even destroy other nations currencies if they wish in engineered hyperinflation events by circulating US Dollars inside those nations as an alternative currency. A dominant reserve Currency is the ultimate economic weapon. John Maynard Keynes of the UK understood that at Bretton Woods and tried to prevent US Dollar dominance but he was over-ruled by the Americans who were in a position of great power and influence due to the fact that World War Two was still raging in both Europe and the Pacific with America being critical to its successful resolution.
In order to keep this currency dominance in place over time, the US must run a large trade deficit which it does. This began in earnest in 1971 after the US dropped the Gold price link. It must also invest heavily in other nations. If the US imports vast amounts of goods and services or purchases offshore assets and pays for them with US Dollars then, clearly, the counter party nations must be willing to accept US Dollars as settlement.
Now let’s look at US goods exports by asking the question — what traded goods are best suited as US exports? The answer is weapons. If you are a purchaser nation, then the weapons you buy are probably obsolete almost as soon as they are delivered, they can be easily destroyed (thus needing to be replaced), they have no real useful purpose (unless a war is engaged) and they do not contribute to your economy in any productive way. A purchaser nation must acquire US Dollars in loans (US Dollar denominated debt) or in other trade settlements to build their reserve of US Dollars. Then they must ship those US Dollars over to the US manufacturers as payment. This is akin to being trapped in a spider’s web.
The spider’s web is strengthened by the US insisting that the chief supplier of global oil (Saudi Arabia) sell its oil only in return for US Dollar settlement. In return, Saudi Arabia accepts military protection from the US against its Northern Shia neighbors (principally Iran, Iraq, Bahrain, Lebanon and Syria). But this protection is always dependent upon US Dollar settlement, the so-called Petro-Dollar arrangement. Interestingly, Saudi Arabia is also the world’s biggest importer of weapons. Makes sense? Especially if you take into account the fact that only 9 % of America’s oil imports come from Saudi Arabia.
What does “principle reserve currency” mean? It is the currency most held by all central banks because it is accepted most readily as settlement in international trade deals and capital deals. The US Dollar represents about 60% of total foreign currency reserves held by central banks on the planet. The Euro is about 20% of the total. The remaining 20% is held in Yen, British Pounds, Australian & Canadian Dollars, Swiss Francs and Chinese Yuan (plus many other small amounts of other currencies). The Yuan component is about 1.0 – 1.5% of the total so China simply cannot threaten the US Dollar as principal reserve currency at present and it will take a very long time before it can do so. Thus, you can forget the “collapse of the US Dollar” arguments put forward by many famous commentators, many of whom are Gold Bugs and possibly intelligence services operatives pushing dis-information.
Donald Trump understands some of this. He knows that he must continually sell weapons and protection to his client nations. But he probably does not know why. He thinks this is all about protection against mutual enemies and trade but it isn’t. It’s about inducing client nations to acquire US Dollars via trade and loans in order to pay their debts with US Dollars.
It is a marvelous, clever system. It has operated since 1944, principally to the benefit of the US. It was boosted by the Marshall Plan in 1948 and expanded dramatically in 1971 when the US dropped the Gold Standard. Gold’s price connection to the US Dollar had become a hindrance to the ever-necessary global expansion of the US Dollar supply (via US Dollar denominated growth in credit).
If you look at the Net Capital Outflows of the US, however, you will see that they tend to rotate around a base of zero with very large positive and negative swings. You will not see a persistent negative number — so there is no evidence to be seen for a large net export of US Dollars. Why? The answer lies in the Eurodollar system. A Eurodollar is any US Dollar existing on deposit outside of the US.
The US does not need to create large amounts of US Dollars onshore and then push them offshore. There is a clever trick. It allows the large international banks (both US and non US) to create offshore loans denominated in US Dollars. The resultant offshore deposits are, of course, in US Dollars. Long term BOOM readers will know that almost all deposits are created as bank loans. They are assets to the banking system and liabilities to the borrowers.
How many US Dollar deposits are located offshore? That is very, very hard to ascertain but it is probably in the vicinity of US$ 30 – 40 Trillion or possibly more. US$ 5 Trillion can be seen in the foreign currency reserves of central banks and about US$ 25 Trillion can be seen as deposits in tax haven banks. Remember — no one has saved that $ 25 Trillion. Those Dollars have been created as loans to borrowers.
Eurodollars are term deposits denominated in U.S. dollars at banks outside the United States, and thus are not under the jurisdiction of the US Federal Reserve. Consequently, such deposits are subject to much less regulation than similar deposits within the U.S. The term was originally coined for U.S. dollars in European banks, but it expanded over the years to its present definition. A U.S. dollar-denominated deposit in Tokyo or Beijing is deemed a Eurodollar deposit. There is no connection with the Euro currency or the Eurozone.
We don’t live on Planet Earth in an economic or financial sense. We live on a US Dollar Planet. All other currencies are necessary but can never dominate if this situation is to continue. This is a double edged sword for the US as it tends to relentlessly drive the US Dollar upwards.
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.
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 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.
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”.
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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