BOOM as at 6th September 2020

COVID CASES DEFINITION CONTROVERSY

WHAT is a Covid 19 “case” definition? The mainstream media has been unwilling to define what a “case” is and yet they continually report “new cases” as if that is something to be terribly worried about. Fear and panic is supposedly the appropriate reaction.

A BOOM reader recommended two articles on this issue. If you are wondering what a “case” actually means and are mystified by the whole Covid 19 phenomenon, then perhaps you should read these? One is an article published in the British Medical Journal 4 days ago and the other is written by Dr Malcolm McKendrick, a General Practitioner in Scotland — yes, a clinician — someone who actually looks after patients. Note — he is NOT an academic epidemiologist or a hospital administrator or an expert in some unrelated obscure disease or a government health adviser, thankfully.

The article title is “Why Terminology Really, Really Matters

The BMJ article is written by Elizabeth Mahase, clinical news reporter at the Journal.

Title:   Covid-19 – the problems with case counting

Link:  https://www.bmj.com/content/370/bmj.m3374

CHINA INDICATORS STRONG

BOOM regularly informs readers about the two indicators that he watches closely in regard to the future prospects of the Chinese economy. Both indicators are now moving steadily upwards since late June. This is continued evidence of strength in the Chinese economy. It is beginning to look like China will (again) be the driving force behind a resurgence in the global economy following the Covid 19 over-reaction by almost all governments.

INSTANT PAYMENTS STRENGTHENS BANKING SYSTEM

On 6th August, the US central bank – the Federal Reserve – issued a Press Release titled — “new 24x7x365 interbank settlement service with clearing functionality to support instant payments in the United States”. It is called the FedNow service.

The Federal Reserve intends to phase this in gradually to the US banking system with full implementation sometime in 2023 or 2024. The term 24x7x365 means that it will operate in real time 24 hours a day, 7 days a week and 365 days of the year. The FedNow Service will modernize the U.S. payment system and bring the benefits of instant payments broadly to communities across the country.

There is a team of well over 100 people working on the FedNow Service. In regard to the risk of fraud, they are developing fraud tools within the FedNow Service to support banks’ efforts to mitigate the risk of fraud with instant payments. Accordingly, upon implementation, banks will be able to proactively set parameters that limit transaction activity in the FedNow Service based on banks’ knowledge of their own customers. They are also developing a liquidity management tool that allows a bank (or other participant) with excess funds in its Federal Reserve account to transfer funds to another bank (or other participant) who needs the funds on weekends, holidays, and after hours. And the FedNow Service will be interoperable with private-sector instant payment services. The FedNow Service will offer real-time gross settlement of transactions, an approach that involves each transaction being processed individually and immediately, which avoids interbank credit risk.

This improves the US banking system a great deal. It helps in eliminating the problem of interbank credit risk during the day, making it much more stable. They are probably using a private blockchain technology as the technology backbone — because blockchain records are immutable (cannot be altered), instant and cheap to keep. They have not revealed which blockchain they are using but one can guess that it is probably a private version of IBM’s Hyperledger, Corda or perhaps Ripple. Presumably, all banks and participants will have access to see their transactions occurring in real time.

This is really good news for the conventional banking system as a whole, rendering it much more stable than previously. It also has economy wide systemic effects via improved trust in all commercial transactions. Trade credit, for example, may become a thing of the past in the long run which would help in providing instant cash flows to businesses with no accounting lag.   Links below:

https://www.federalreserve.gov/newsevents/pressreleases/other20200806a.htmhttps://www.federalreserve.gov/newsevents/speech/brainard20200806a.htm

SWISS NATIONAL BANK

The Swiss National bank is the central bank of Switzerland. It is often called “the biggest hedge fund in the world” but BOOM thinks that title is now firmly held by the US Federal Reserve (their central bank). The Japanese may beg to differ because their central bank has been determinedly buying assets for 25 years — so surely they should hold the title?
But let’s look at the Swiss National Bank and its asset purchasing program. Central bankers don’t like to call it that. They prefer to sound very serious and powerful by calling it a Quantitative Easing program.

The Swiss National Bank has been creating fresh new money for some considerable time now to buy foreign assets and thus drive down the relative price of its currency, the Swiss Franc, against other currencies. The rationale for this is that it helps the Swiss companies that are exporters and that it helps create CPI inflation inside Swiss borders.

It’s hard to know the full extent of their asset holdings. But we can look at what they own in the United States. There, they own US$ 118 Billion worth of stocks. Their biggest holdings are in Apple, Microsoft, Amazon, Alphabet, and Facebook but they own shares in 2,437 US companies. Many of these are Chinese companies whose shares trade in the US but the vast majority are US based companies.

But, if you look at the balance sheet of the SNB, it actually owns about US$ 940 Billion of total foreign currency investments (as at 31st August). So they obviously own a lot more foreign assets than those listed on the US stock markets. It is possible to access the detail of these enormous holdings, all published by the SNB.

Of the US$ 940 Billion total 20% is held in equities (foreign stocks) which amounts to US$ 188 Billion (of which as previously stated $ 118 Billion is in US listed stocks) while 70% is held in foreign Government Bonds and 10% is held in other Bonds (presumably highly rated Corporate bonds). The investment duration of their bond holdings is 4.7 years. So, with 80% of the portfolio held in safe haven bond investments, the Swiss National Bank cannot be accused of being a gambler. However, with a duration of only 4.7 years on their bond holdings, it could be said that they are tending to invest for the relatively short term. Their bonds will mature, on average, every 4.7 years and they will then have to decide what to do going forward.

Can they sell before then? This is the Trillion Dollar question. If they sold out in large volumes and repatriated their resultant foreign currency holdings back to Switzerrland, they would drive the Swiss Franc up dramatically in response to such a huge demand. This would harm their exporters and cause a surge of CPI dis-inflation (or deflation) inside Switzerland.

So the answer is NO — they  cannot sell and never will. These assets are now permanently held by a foreign central bank.  BOOM suggests you read his editorial titled CAN CENTRAL BANKS BUY EVERYTHING? THE BOOM THESIS —  published on 5th July 2020.

Link:  https://boomfinanceandeconomics.wordpress.com/2020/07/05/boom-as-at-5th-july-2020/

Of course, none of this helps Swiss importers. Obviously, the central bank has no concerns for their well being. Perhaps there is a government subsidy program for them aimed at maintaining the peace? BOOM suspects this may be the truth.

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 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”.

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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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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