BOOM as at 23rd August 2020

The American Institute of Economic Research published an interesting article titled “Fear is a Viral Monster” on August 17th. The article refers to the psychological damage being caused by governments to entrepreneurs in the business world. Quote:-

“Why build, or build grandly, when some pompous governor or mayor – someone whose only ‘skill’ and most intense itch is to exercise power over fellow human beings – can, with a mere signature, smash down a sledgehammer and turn to mush the fruits of years of hard work and sacrifice?”

This paragraph sums up a major concern of BOOM’s for the future health of all advanced economies. Small to medium sized businesses in most nations provide the bulk of the employment. Entrepreneurs must be incentivized to take risks in order for the economy to be healthy. But now, politicians have decided that they can unilaterally stop “non-essential” commerce and destroy businesses because of the perceived threat from an “extraordinary epidemic” when it is clear that the Covid 19 epidemic is not extraordinary. BOOM’s analysis in last week’s editorial demonstrated that with great clarity.

So WHO will be prepared to employ anyone in future?

Reference:  https://www.aier.org/article/fear-is-a-viral-monster/

LETTER TO A BOOM READER

A key phenomenon which BOOM often refers to in Editorials is the subject of the degree of central bank intervention. A BOOM reader asked me this recently. In other words, just how desperate will the central banks of the advanced economies become in endlessly trying to “return to normal”? This question has been unanswered for 12 years now since the great financial and banking failure crisis of 2008.

BOOM always says — “we ain’t seen nuthin’ yet” — expecting that the central bankers will create more and more Quantitative Easing (QE) programs. And, in doing that, they will obviously encourage governments, companies and municipalities to issue more and more bonds to fund their budget deficits and ambitious expenditure programs. After all, this is not a new process.

Japan has been doing it for the last 28 years. They are the deficit Kings. The Government there has been running huge deficits since 1992 around 4 – 8 % of GDP.  And they also ran large deficits for 11 years prior to that from the mid 1970’s to mid 1980’s. Their central bank is now buying almost all the bonds issued by their government in an endless Quantitative Easing program.

The USA has been running deficits since 1960 with just a few years exception in the late 1990’s. Their deficits have not been as large as Japan’s, usually averaging around 2 % of GDP. However, since 2008, their deficits are becoming larger and larger. And now, the Donald is really pushing for more and more deficit spending in the land of so-called capitalism. Germany has also been a deficit spender since 1995 except for the last 6 years when it has run a small budget surplus. The United Kingdom has run deficits since 1950 except for just 5 years when it managed to achieve a surplus. That is 65 years of deficit spending.

China is good at it too, running budget deficits every year except one for the last 30 years. France has had a budget deficit evey year for almost 50 years and so has India.

Normally, when the central banks are not buying bonds in QE programs, if taxation revenues don’t cover government expenditure programs, then the government must issue bonds to the investment markets to cover the difference. The funds raised are immediately expended into the economy. However, in most cases, the money supply does not increase as almost all the funds applied are already in existence. And as CPI inflation has progressively fallen since 1981, the bond prices have progressively risen. So investors have done very well from their bond investments over the decades from coupon payments and capital gains.

JUST HOW BIG IS THE QE SO FAR?

In September 2019, the Fed Balance Sheet assets were at $ 3.7 Trillion. Did anyone expect (or imagine) that the Fed would soon begin to expand its Balance Sheet by another $ 3.5 Trillion before June 2020? BOOM told correspondents that this would happen but very few agreed. Most thought that BOOM must be mad to expect such government “profligacy”.

Despite much panic from the Doomsayers, the Gold Bugs and the “US Dollar will Collapse” Crowd, the current US Fed Balance Sheet expansion is actually not large. It has taken over 12 years to reach an asset holding of $ 7.2 Trillion. That represents just 3.6 % of the total cumulative GDP of well over $ 200 Trillion during that period (since 2008).

Before the recent expansion occurred, it was just 2 % of cumulative GDP ($ 4 Trillion/$ 200 Trillion).

2 % – 3.6 % is not a great amount of “stimulation” to the economy. That is why it has not had any great effect.

I am expecting that the US Federal Reserve will steadily expand their QE asset purchases towards $ 50 Trillion (minimum) over the next 10 years — unless they see the light and adopt BOOM’s Quantitative Boosting program to send fresh new digital, interest free, sovereign money straight into the real economy. Quantitative Boosting is designed to avoid distortion of bond market prices. However if they continue to just buy Government Bonds in Quantitative Easing programs, distorting the bond market in the process, then the Federal deficit will expand towards $ 5 Trillion per year (every year).

Further QE asset purchases however will have little effect on the real economy which will probably continue to wallow in poor growth, low CPI inflation, high unemployment and worsening productivity. Asset Price Inflation will therefore continue to unimaginable levels. The rich will get richer and richer and richer as the Fed “solution” will guarantee it.

I cannot see any reason for the bankers at the Fed or any other central bank to adopt my QB system. Why? Because it is not in their interests to do so. They are not the representatives of the people, they are the representatives of the banker class.

Please bear in mind that I can only guess how “mad” they can become. I can only guess how high their Balance Sheet can be expanded to. I can only guess how large the Government deficits will become as a nominal figure and as a percentage of GDP.

The only constraint on their expansion is rapid CPI Inflation and/or currency collapse. And neither looks likely in the next 10 years if CPI dis-inflation and deflation continue.

MADNESS BEGETS MADNESS

When madness or mass hysteria arrives, we can only guess how bad it will get. Who would have thought in 1933 that Germany would start a world war 6 years later in which 60 Million people would die and in which the German national infrastructure would be damaged by massive bombing raids leaving it in ruins?

The bizarre responses to the Covid 19 phenomenon is feeding the frenzy with governments crashing their economies on purpose. BOOM showed in last week’s editorial that the death numbers of Covid 19 in Europe this year are no different to the death numbers from Influenza in the winter epidemic of just two years ago in the winter 2017/2018.  In that epidemic of death, there were no lock-downs, no masks, no government panic. But madness begets madness. Hysteria is infectious.

“Madness is something rare in individuals — but in groups, parties, peoples, and ages, it is the rule.”     ― Friedrich Nietzsche, Beyond Good and Evil

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

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

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