BOOM as at 25th October 2020

WHAT IS A KAKISTOCRACY?

A Kakistocracy is a system of government that is run by the worst, least qualified, and/or most unscrupulous citizens. The word was coined as early as the seventeenth century.

CPI INFLATION & GOVERNMENT DEBT —  VERSUS — ASSET PRICE INFLATION & PRIVATE DEBT

Mainstream economists endlessly look at CPI inflation and government debt as major threats and indicators of future economic fragility. They tend to (mostly) ignore asset price inflation and private debt. BOOM does not make this mistake. The bulk of new money being created by the banking system as bank loans to private borrowers goes into funding purchases of already existing assets at increasingly higher prices. So the supply of new money largely fuels asset prices.

Government debt (via bond issuance) does not increase the new money supply in normal circumstances, only when central banks are buying government bonds in rare Quantitative Easing programs (QE). But then, it distorts the bond market — a major signalling mechanism for prices of finance. Not good.

The profession of economics generally ignores this dynamic. There is an exception and that is Robert Shiller. He is the man who, with Karl Case, invented the Case Shiller US Home Price Index. And he was awarded the 2013 Nobel Memorial Prize in Economic Sciences, “for the empirical analysis of asset prices”. His fellow mainstream economists tend to ignore this work and carry on as if asset prices and private debt have little economic influence. They also largely ignore the banking system, money supply dynamics, money destruction and energy. Then they wonder why they fail to predict economic fragility accurately.

The Case Shiller US Home Price Index is rising steadily at present. It has been doing so since 2012. Over that 8 year time frame, it has risen 63 % from a low point of 134 in February 2012. Its current level is 221.63. That steady increase is about 6% per annum compounded.

Note that prior to the Global Financial Crisis of 2008, the index stalled in August 2006 and then fell for 18 months before the banking crisis erupted in the US in early 2008. Nobody in the world of professional economics took much notice of the warning sign.

However, despite all of these considerations, mainstream economists still endlessly watch Government debt levels for evidence of an overheated economy and as an indicator for future economic fragility. By ignoring private debt levels, they ignore the very engine of economic expansion which must ultimately fail for stagnation or contraction to occur.

Any broad economic analysis that does not include a thorough assessment of asset prices and private debt loads is incomplete as far as BOOM can see. And any analysis that emphasizes government debt and CPI inflation over private debt and asset price inflation is equally flawed.

In regard to private debt, there are different types to consider. Bank generated debt (commercial bank loans) is the most important form to watch because it increases the supply of new money to the economy. Housing loans are therefore especially critical to watch. Corporate debt is more complex.

Many companies, especially in the US,  can now issue bonds rather than borrowing from a bank. That difference is critical in any analysis of the impact of private debt across a whole economy.

For example, in the US, many companies issue bonds to fund their share buyback programs. But the money supply to the economy is not increased in any of these circumstances. Old money (mostly) funds the bond purchases. So that is an important consideration from an economic perspective.

CHINA KNOWS BETTER?

The Chinese, who paradoxically seem to understand money better than Western mainstream economists, watch Asset Price inflation and Private Debt to GDP ratios closely for signs of an overheated financial system. They control their new money supply each year arising from bank loans and they watch bank loan repayments and loan defaults very closely. Why? Because those destroy money and thus reduce the overall total money stock. If you wish to learn more about the Chinese money system, you need to look at China Total Social Financing and the Bank Loan component of that.

China’s Total Social Financing (TSF) is a very broad measure of credit and liquidity in the economy. Their outstanding total social financing has increased by 13.5 percent from a year ago. And their Bank Loan component of that has increased by 13%. Over the last 10 years, it has averaged about 14% per year.  Compare that to the 6% per annum expansion of the Case Shiller US Home Price Index.

An annual expansion of 13 – 14 % is a significant expansion and, not surprisingly, the Chinese economy of goods and services (the real economy) is performing well even under the strain of a global slowdown. There is water for the Chinese garden.

Over the last 10 years, China’s total of bank loans have grown at a far greater pace than US bank loans. This relative under-performance in US bank loan growth is harming the US economy seriously. Bond finance in the US is the problem.

By the way, TSF includes off-balance-sheet forms of financing that exist outside the conventional bank lending system, such as initial public offerings, loans from trust companies and bond sales. So it is a very broad measure of money inside their economy. But their economy is really a centrally controlled, command economy, unlike Western economies that are much more reliant upon private demand and private borrowers of money from private commercial banks.

The Chinese Total Commercial Bank Loans Outstanding now amounts to about 155 % of their GDP. That is a comfortable ratio even with its current 13 % annual growth rate and its 14 % average growth over the last decade.

So — let’s look at private debt to GDP levels in Western economies. This is a key metric to watch as an indicator of present (or future) economic fragility. The speed of change is also critical. If total private debt to GDP levels exceed 250 – 300%, then it indicates an economy that is at or near peak private debt and needs to slow down its supply of fresh new capital. In 1995, Japan’s private debt to GDP level was at almost 300 %. Since then, the Japanese economy has not grown (at all) while its private debt levels have slowly fallen from 300 % to 220 % as the adjustment takes place.

This gives us some idea of how private debt levels indicate future possible economic fragility.
In the United States the Private Debt to GDP Ratio is currently 220%. It had a peak in 2009 at 224 %. This is problematic but not yet critical. It is not nearly as bad as some other Western nations.

France’s Ratio is at 266%, Canada is at 263%, South Korea is at 261%, Netherlands at 298% (was at 318% in 2014), Switzerland is at 250%, Belgium is at 260% (was at 278 % in 2016), Norway is at 275% (was at 298% in 2016), Sweden is at 280%, Denmark is at 269% (was at 280% in 2016 and 284% in 2011),  Ireland is at 374 % (was at 427% in 2016), Finland is at 222 %, Portugal is at 248 % (was at 320% in 2012), Spain is at 194 % (was at 275% in 2007), Italy is at 166 %, Luxembourg is at 485 %.  The United Kingdom’s ratio is at 224 %. It reached its peak of 247 % in 2008. There is economic DANGER EVERYWHERE because private debt growth is falling or stagnant.

By comparison, Germany is at 154 %, Poland is at 120%, Australia is at 200%.

The Western garden needs more water. But the taps are running dry.

What is the answer? BOOM’s Quantitative Boosting (QB) is the answer  —  a rapid infusion of more water in the form of non interest bearing CASH is needed and fast. Electronic cash is the answer but it MUST come to the economy the right way, not via the Bond market and not directly from the central banks. QB provides the answer.

Our economists, bankers and politicians cannot see the problem because they do not understand money as well as the Chinese. Therefore, they cannot see the solution either. Worst still, they have decided to wage a war against cash at the worst possible time. The Chinese economy is being well managed in regard to money supply. The US and most European economies are being poorly managed.

If a garden is deprived of fresh new water, it will struggle to survive and, if the drought contiues for too long, it may even die.

QUANTITATIVE BOOSTING An Introduction  — You can safely Click on the Links:

https://boomfinanceandeconomics.wordpress.com/2019/12/15/boom-as-at-15th-december-2019/

and THE PERFECT ECONOMY

https://boomfinanceandeconomics.wordpress.com/2020/01/18/boom-as-at-19th-january-2020/

TRUTH IS DEAD OR DYING

A book was banned on Amazon last week titled “Covid 19 and the Agendas to Come: Red Pilled” by James Perloff. 3,500 copies of it had already been sold by Amazon since August 20th. The explanation given by Amazon was that the book “violated content guidelines”.
On the night of May 10, 1933, German students and Hitler’s Nazi Brown Shirts gathered in Berlin to burn books with “unGerman” ideas. The Nazi Propaganda Minister Joseph Goebbels was there to encourage the activity. The crowd tossed heaps of books into a bonfire while giving the Hitler arm-salute and singing Nazi anthems.

Long before Hitler was born, the German-Jewish poet, Heinrich Heine, said — “Wherever books are burned, human beings are destined to be burned too.”

In the communist dictatorship of the USSR, the people said “We pretend to work and they pretend to pay us”.

In our world today, we could say “We pretend to believe and they pretend to tell us the truth”.

Link:  Are the Global Scientific Elite Trying to Bury the Truth About the Origin of COVID-19? https://ccnationalsecurity.org/are-the-global-scientific-elite-trying-to-bury-the-truth-about-the-origin-of-covid-19/

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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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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