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THIS WEEK’S EDITORIAL
CENTRAL BANK DIGITAL CURRENCIES
The major central banks of the advanced economies have been making waves by occasionally talking about CBDC’s — Central Bank Digital Currencies. The subject stirs great suspicion and consternation amongst people who are concerned about central bank power. They are fearful that the central banking system will thus be able to track all transactions and exert social control systems over them. They seem to overlook the fact that the commercial banking system already has that power.
Of course, these discussions are actually misleading from both sides. Why? Because national currencies are already digital and have been for many decades. And central banks do not issue currencies — they borrow or loan funds denominated in their respective national currencies based upon ledger entries with their client commercial banks and their client governments. Or they buy and sell assets with their client commercial banks and their client governments. Sometimes, they are the lender of last resort and sometimes they are the borrower of last resort — but all of their direct actions are ledger based in the arena of banking and government where they are dealing in so-called “Reserve Assets” and “Reserve Liabilities”. The ledger entries are of course denominated in the national currency as a matter of convention. A global digital currency already exists which is used to settle most international transactions. It is called the US Dollar.
An individual or a corporation, in most nations, cannot hold an account with a central bank. Central banks do not trade with the real economy. Most of their actions are aimed at either boosting liquidity (money flow) or restricting it in the banking sector. The aim of such actions is to slow or speed the real economy via either restricting credit demand or boosting it in response to the threat (or otherwise) of CPI inflation. Sometimes, they are busy protecting their client commercial banks when they get into trouble with poor loan books and increased loan defaults. They can arrange for increased liquidity to these banks for a while but if a bank’s loan book is beyond repair, then they can arrange their rescue via a takeover from another larger bank. Total bank failures are now a rare event as the central banks come to the rescue and cover up the situation — preferably before anyone in the general public becomes aware of what is happening.
Central banks also attend to the demand and supply of their national currency in the global foreign exchange markets. Again, they do this by buying and selling assets denominated in national currencies or by buying and selling foreign exchange derivatives.
So — back to CBDC’s — central bank digital currencies. These are essentially efforts by central banks to create electronic forms of non-interest bearing cash. BOOM thinks that is a worthwhile cause but BOOM also thinks that the very nature of central bank activities precludes this from occurring (hopefully).
Sovereign governments issue cash which is non-interest bearing money. But the other glory of cash is that no borrower is required for its issuance. It can be created by the sovereign or the state as and when required. And it can be recalled from the banking system as and when required.
Currently in the most advanced economies, the money stock (money in existence) is in the form of credit money (bank loan created) and cash. Credit money is 98 % of the money stock and Cash is 2 %. This is a ridiculous situation. In the post World War Two era from 1945 to 1965, the cash component was far, far greater. This allowed vast quantities of cash to circulate in the real economy. And that money had no interest cost attached to it. Thus, it was used for the settlement of many, many transactions. During those “golden years” the average citizen and average family was not as enslaved by debt as they are today.
In the US, for example, the CPI inflation rate from 1955 – 1970 averaged about 1 – 2 % annually. It was incredibly stable. In August 1971, the US President Nixon released the Dollar from the Gold price and allowed it to “float”. The US commercial banks were finally allowed to create credit in response to demand for loans not linked to a static price of Gold. And Credit Money as a percentage of the total money stock began to rise and rise. As a result, the volume and circulation of cash began to fall in relative terms. Credit cards also contributed to this. The era of Credit Money had begun in earnest.
Initially, the CPI inflation rate in the US fell. But by early 1972, it started to rise to a peak of 12 % p.a. in 1975. It then fell again but started rising again in 1977. And it rose to a peak of 15 % annualized in 1981. That was the peak of CPI inflation in the US. It fell sharply after that because the central bank raised the overnight interest rate to 20 %. That is called the Federal Funds rate for money loaned to banks overnight.
Since then we have never come close to such high CPI inflation rates and overnight rates. CPI inflation was tamed. Credit Money Madness had been unleashed.
However, the era of “golden prosperity” was long forgotten. The huge contribution of interest free cash to social cohesion and financial stability was also forgotten. The mad rush to bank created credit money had begun and there appeared to be no turning back. Banks led the charge, of course, because they could see great profit opportunities in the expansion of their loan books as they rode the demographic wave of the Baby Boomers into the future.
This all worked (reasonably) well until 2008 when the Global Financial Crisis occurred due to an apparently sudden severe loss of confidence between banks and the failure of some major banks in the US, especially some of the Primary Dealer Banks which were supposedly the strongest commecial banks of all. The sudden dramatic failure of Lehmann Brothers bank was the event that sent shock waves around the world. Bear Sterns bank and stock brokerage also failed. Suddenly, the US central bank looked vulnerable and arguably incompetent. They had failed to see what was coming and had failed to repair it ……. or perhaps they had engineered it? Nobody knows for sure.
Since 2008, the advanced economies have been struggling to grow essentially because of a relative decline in willing borrowers and credit money growth. Central banks have tried to create CPI inflation without much success. Government taxation revenues have been adversely affected and budget deficits have inevitably grown because taxation revenues could not match government expenditure programs. Central banks have come to the rescue with their Quantitative Easing Programs providing huge amounts of funds in return for government issued bonds. The governments have dutifully spent this central bank money and held their economies from collapse.
This has led to some “stability” in the financial system since 2009 and in economic growth trajectories. But this has all been mediated via the asset markets — especially the bond markets. And that “stability” has been won at the cost of Asset Price Inflation. That asset price inflation has led to huge social inequalities and the accumulatuion of wealth into fewer and fewer hands.
It is now time to return to the 1950’s and the 1960’s. We need MUCH MORE CASH to be circulated through our real economies. The central banks seem to understand this (especially in China) and they are taking steps to remedy the situation. BOOM has been strongly suggesting this for some years now. But a return to physical cash in large volumes is impractical. Hence the talk of central bank electronic cash — CBDC’s (central bank digital currencies).
This is fraught with difficulty. As I have pointed out, central banks are actually not in a position to issue large amounts of Cash to the real economy. So the move towards CBDC’s appears to be a pipe dream.
BOOM’s QUANTITATIVE BOOSTING SOLUTION
BOOM’s solution is called Quantitative Boosting QB (as opposed to Quantitative Easing, QE) and it is actually rather simple. It does not require the issuance of any “new” currency. It uses the national currency and the ledgers in existence of the commercial banks, the central banks and the Treasury department of governments.
A Tripartite Pre-Agreement is required between those three parties where they agree to expand all of their balance sheets in the creation of increased Reserve Assets at the Commercial Banks in loans to the Central Bank. The resultant funds are then loaned to the Treasury (that loan becomes a Reserve Asset of the central bank). The funds are then spent by the Treasury into the real economy and they (inevitably) end up as Deposits in the Commercial Banks. Thus, the funds are created by the Commercial Banks, loaned to the central bank and then subsequently loaned to the Treasury. Then they are returned to the Commercial Banks in the form of Deposits. It is effectively a Closed Loop system.
The other essential element of Quantitative Boosting in the Tripartite Pre-Agreement is the agreement to not charge interest on the loans from the commercial banks and the loans from the central bank. Such Pre-Agreement can also include an agreement to forgive the capital payment at loan maturity or to transfer the loan period to Perpetuity.
The only foreseeable problem with QB is that the money created this way cannot be destroyed and must be permanent in nature. Bank loans, by contrast, usually destroy money as they are paid off. And Cash is destroyed as it is recalled and re-issued. The permanence of such interest free money, however, should not be a problem as long as it does not generate out-of-control CPI inflation. The interest free money created under QB will continue to circulate in the real economy, providing much needed stability and utility.
Social cohesion should eventually occur as the society uses the interest free electronic cash over and over again. Its volume in the money stock relative to Credit Money could theoretically rise to 50%.
STUNNING COVID ARTICLE
Last week an interview with Professor Christian Perronne was published. He is arguably France’s most highly rated expert in viral diseases and vaccines. The interview is stunning in its clarity and in its messages. BOOM recommends it highly. The transcript of the interview is available at the link. He states that current government Covid policies are stupid and unethical.
He also says “Vaccinated people are at risk of the new variants. In transmission, it’s been proven now in several countries that vaccinated people should be put in quarantine and isolated from society.
Unvaccinated people are not dangerous; vaccinated people are dangerous to others. That’s been proven in Israel now, where I’m in contact with many physicians. They’re having big problems in Israel now: severe cases in hospitals are among vaccinated people.”
“….. lockdown was completely useless”
PCR tests are much more amplified, and so we have many, many false positive results.”
And finally “….. we cannot reach herd immunity through vaccination.”
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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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.
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 Index
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).”
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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