BOOM as at 4th October 2020

QUANTITATIVE EASING DISTORTS ASSET PRICES
DOES NOT STIMULATE ECONOMIC GROWTH
DOES NOT INDUCE CPI INFLATION

The central bankers in the advanced economies of the USA, UK and European Union over the last 12 years have progressively lowered official overnight interest rates to all time lows and embarked on massive asset buying programs (called Quantitative Easing). Japan has been doing this for much longer, for about 25 years in fact. The aim is to produce economic growth and CPI inflation.

The various central banks are either close to Zero, at Zero or at Negative interest rate settings. Zero is called ZIRP — Zero Interest Rate Policy. Negative is called NIRP — Negative Interest Rate Policy. And when they are not quite at Zero, they are “moving to the lower bound”.  That actually suggests that zero is the limit of their policy settings. But we all know that is not true. Negative interest rates can happen. In fact, Switzerland, Denmark and Japan have already had negative official overnight interest rates since 2016.

Why are they doing this? The answer is that they are desperately trying to create CPI inflation and economic growth as measured by the GDP (Gross Domestic Product). But it is failing. Most have now given up on lower interest rate settings and simply expanded their asset purchasing programs. The assets they mainly purchase are bonds issued by their respective governments to help fund the huge deficit spending programs which cannot be adequately funded by falling taxation revenues. But this doesn’t seem to trigger growth or CPI inflation.

Central bank asset purchase programs fail because they are asset purchase programs. Sounds circuitous but it is true. These activities distort asset prices to the upside leading to Asset Price Inflation — and of assets that are already in existence so economic growth is not stimulated and neither is CPI inflation. Actually CPI inflation falls as the bulk of money (both new and old) just follows the asset price trail in a bid to benefit from those increases. CPI inflation is then at  the mercy of powerful deflationary forces inside the real economy.

Those deflationary forces include aging demographics (too many old people who don’t borrow), cheap energy inputs, massive technological change, low wages growth, cheap Chinese imports and a relative shortage of borrowers.

BOOM’s Quantitative Boosting new money policy is the answer. It will create interest free electronic cash on the banking sector’s balance sheets and that money will be expended through the normal government channels well established by Treasury departments. It is not mediated through any asset market. Thus, the real economy will grow immediately and CPI inflation will occur. And the central bankers will have another new weapon — a New Money Volume Control —  which will complement their current, standard interest rate controls.

Quantitative Boosting Explained — Link:  https://boomfinanceandeconomics.wordpress.com/2020/01/18/boom-as-at-19th-january-2020/

ISSUING A BOND THAT PAYS INTEREST

Can a Government issue a bond and then use the capital raised from that bond to pay the interest owing on other bonds previously issued? Sounds like a Ponzi Scheme? But the answer is yes. Governments do not have to explain exactly where the funds raised via a bond issuance will be expended. If, for example, the average interest rate owing on previously issued bonds is 4%, then 25 such bonds can be issued over 25 years. The numbers are theoretically staggering.

For example, a nation with $ 1 Trillion ($ 1,000 Billion) of total bonds on issuance with an average annual cost (interest rate) of 4 %. Thus a new bond can be issued each year to raise just $ 40 Billion to cover the cost of the interest owed on the previously issued bonds. Easy.

There is really no end to this game as long as CPI inflation does not get out of control and as long as the currency does not collapse in general acceptance and usage.

The problem however, is this. The excess issuance of government bonds may (theoretically) distort the bond market pricing mechanism. The distortion of bond market prices can have greater consequences than expected over the long term because our whole financial system uses those prices to price credit, especially mortgage credit created to fund house purchases. The result is a BOOM not just in bond prices but also in house prices and other assets (such as shares).

Asset Price Inflation throughout the economy is virtually guaranteed in such a situation.

MAKING CRIME LEGAL

The UK Government is seeking to make crime legal for a number of government departments.

This video is revealing — https://www.ukcolumn.org/ukcolumn-news/uk-column-news-28th-september-2020

Speed up the Playback speed to 1.5 for a quick look. It outlines the introduction to Parliament of a Bill to authorize “criminal conduct, in the course of, or otherwise in connection with, the conduct of covert human intelligence sources”. The Criminal Conduct Bill.

Surely, this means Totalitarian, non-democratic government and the end of Freedom?

HSBC SURGES

Last weekend, BOOM wrote about a possible bank rescue in operation. It happened as per BOOM’s expectation. The shares of a large UK based bank, HSBC, rose 10.22% on the following Monday. A major Chinese insurance company bought a large number of shares to boost its stake to 8% ownership overall. Many other major bank shares around the Globe rose as well.

This rise of 10.22% was the biggest intra-day rise for HSBC shares in a decade. In the previous week, HSBC shares fell to a 25 year low. The lights were burning late into the night in Basel last weekend.

FEAR PRODUCES FEAR

Fear produces Cognitive Dissonance which produces Fear. This phenomenon is a closed loop. And it can result in disturbing outcomes. Cognitive dissonance is a reaction of compressed anxiety that occurs in people who have a fixed view of reality when they are confronted by another person who presents a different view. Sometimes, the anxiety compresses and can suddenly manifest as violence.

Most people cannot hold two different views of reality. They are fully stretched intellectually in constructing one. This one view is precious to them because it is theirs. It is the result of years of patient construction (some would say brainwashing). They prefer narratives as the tool of construction because narratives are easier to remember.

Conflicting facts require a whole new effort and may be presented without a narrative causing consternation. To someone with limited intellect, they can be seen as potential threats. That is when violent reactions can manifest as a defense mechanism.

To change the world, we have to change the dominant narrative by skillfully incorporating new facts in a non-threatening way and moving people slowly to acceptance of the different, new narrative.

The only other methodology is superior force/violence that cannot be opposed. That is what the USSR and the Allies did to Germany in WW2 and the atomic bombs did to the Japanese. Those aggressive, warring nations acquiesced and became peaceful — almost overnight.

VERNON COLEMAN ON BRAND NEW TUBE

https://brandnewtube.com/watch/everything-that-has-happened-was-meant-to-happen_YzirTosrfBeJD65.html

3,500 US COMPANIES SUE TRUMP

Not all American companies are happy with Trump. Trump’s unwise Trade War is the problem. About 3,500 U.S. companies, including Tesla, Ford, Target, Walgreen and Home Depot are legally challenging the Trump administration over tariffs on more than $300 billion of goods imported from China. The legal suits have been filed in the U.S. Court of International Trade.
One suit challenges the administration’s “unbounded and unlimited trade war impacting billions of dollars in goods imported from the People’s Republic of China by importers in the United States”.

On Sept. 15, the World Trade Organization found the United States breached global trading rules by imposing multi billion-dollar tariffs in Trump’s trade war with China.

The Full Story: 
https://www.reuters.com/article/usa-china-tariffs-idUSKCN26H03S

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/

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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.html

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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