RUSSIA MAKES COUPON PAYMENTS
It was reported last week that Russia made coupon payments due on its bonds issued to foreign investors, most of whom were US based. This is a very important step. Nations who default do not honor their bond payments. Thus, Russia has demonstrated that it is a reliable financial partner, even during a very challenging Geopolitical crisis and while the US is seizing offshore Russian assets and banning Russian banks from the SWIFT payment system.
RUSSIA STRIKES
Russia took another decisive step last week. They insisted that payments for Russian natural gas supplies by unfriendly customer nations must be settled in Rubles, instead of with Euros and US Dollars. Austria was stunned and reportedly said something like “this is very confusing”.
BOOM cannot see any reason for such confusion. If a client nation wishes to side solely with the US in Geopolitical matters and sees Russia as some sort of existential enemy, then they have a choice — they can freeze to death or they can make their payments for natural gas to Russia in Rubles, the Russian currency. Crystal clear, don’t you think?
Russia supplies about 45 % of Europe’s imported natural gas, essential for heating homes in the bitter winters and for cooking. Russia now includes the US, UK and all of the European Union nations in its list of “unfriendly nations”. Nations cannot operate their economies without energy and the vast bulk of energy for heating, transport and food requirements comes from oil and gas — not electricity.
Vaclav Smil, the famous energy expert who has written 36 books and numerous articles on the subject of energy often asks his audiences — do you like to eat, move and stay warm in winter? If so, you will need to use oil and gas because there is no alternative energy source available to solve those problems. Transportation, food and heating are totally reliant on oil, gas and petrochemicals. And that especially applies to the 7.5 Billion people on planet Earth because the majority live in very cold climates.
Russia’s patience with US interference in European affairs has clearly been exhausted. They have warned NATO for 8 years (or more) not to move military installations closer to Russia’s borders. And they have built the Nordstream 2 pipeline to Germany to allow increased supplies of gas. But the US has insisted that Germany block the Nordstream 2 pipeline and, through NATO and Jens Stoltenberg, have consistently interfered in the affairs of Ukraine and moved more and more military installations closer and closer to Russian borders.
If Russia was doing all of this in Mexico, the US would be screaming “aggressive expansion” at the top of its lungs and taking practical steps to stop it. But when the shoe is on the other foot …..
SEIZING ASSETS IS UNWISE
Russia is clearly unhappy with the seizure of its offshore assets by the United States and its cooperative partners. And it is clearly unhappy with US interference in the SWIFT financial messaging system, based in Belgium. So it has decided to play hard ball with how natural gas payments should be made. It is a natural consequence of the foolish actions of the Western alliance of so-called democracies that are presumably capitalist economies.
BOOM has previously described recent moves by the Governments of Canada and the US to seize financial assets as extremely unwise. The stark foolishness of such actions is evident if one considers that the core philosophy of western democracies is one which enshrines the sanctity of private property. If the State can seize private property on any whim, then the entire edifice of democracy and capitalist economics collapses.
There has been significant interference from the US in regard to some Russian banks’ access to the SWIFT inter-bank messaging system. The free flow of currency and capital movements is another core philosophy of western democracies. Interference by governments in such movements which are necessary for trade and capital settlements is extremely unwise.
As BOOM has said in previous editorials on the Ukraine situation, this is akin to watching a war unfold that you had a hand in triggering while shooting yourself in the foot because you are forbidden to enter the battlefield. Not too clever.
European natural gas prices surged by 30% immediately. And the Ruble surged by 10% against the US Dollar.
BUYING OR BORROWING RUBLES — THE PETRO RUBLE IS HERE
If European nations must suddenly pay for their gas supplies with Rubles, then they will have to buy Rubles or borrow them. And there are only two sources for large volumes of Rubles — the Russian Central Bank or Russian commercial banks. The Russian central bank can interact with other nations’ central banks to effect currency swaps. They cannot sell Rubles to commercial entities in Europe. This places the Russian commercial banks in a strong position. They can offer to make Ruble denominated loans to commercial entities which could then use that Russian currency to pay Russian energy suppliers. Thus, the Rubles would return as deposits to the Russian banking system.
This methodology of payment settlement is exactly the same as the US Dollar system of global payments. The US sells armaments to nations who must pay in US Dollars. The US insists on paying for oil with US Dollars. And it insists that allied energy supplying states such as Saudi Arabia only accept US Dollars as settlement for oil sales. The US Dollars created offshore by tax haven banks in Dollar Denominated loans to corporate borrowers provide the volume of offshore US Dollars required to operate this system.
As far as BOOM can see, the Ruble is set to skyrocket against all other currencies. Readers can watch the fireworks this coming week as central bank buyers desperately seek Rubles. Meanwhile, commercial borrowers should soon line up at offshore Russian banks begging for Ruble denominated loans.
This is Check Mate. A new world order is here and it is not the one envisaged by Klaus Schwab and his Transhumanist, Totalitarian mates in Davos. It is the one envisaged by Vladimir Putin in Moscow, backed by his mates in Beijing.
US DOLLAR and RUSSIAN RUBLE
The US Dollar Index remained relatively stable last week, gaining 0.6 % by the close of trading on Friday. The uptrend that began in June last year continues to hold nicely with no weakness evident.
Over the last 5 weeks as the invasion of Ukraine began, the Russian Ruble fell by 56 % against the Dollar in the first 3 weeks of that period. However, it has since recovered over half that fall in the last 2 weeks. BOOM expects this rebound to continue if the Ukraine accepts Russia’s proposals and ends the war. In such an event, oil and gas prices should drop immediately. BOOM would expect West Texas Crude to fall towards $ 70 per barrel.
The alternative of continued military action by Ukraine would appear foolish in the extreme. But then again, human beings have proven themselves to be remarkably foolish throughout history. So perhaps we should expect that outcome?
US BUYBACKS
In the US stock market last week, stock buybacks by corporations were strong. This is an indicator of strength in the market. If buybacks continue to rise, then the bottom may be in for the market decline that began in early January.
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”.
YouTube Video — https://www.bankofengland.co.u/quarterly-bulletin/2014/q1/money-in-the-modern-economy-an-introduction
and https://www.youtube.com/watch?v=ziTE32hiWdk
Paper: Money in the Modern Economy — CLICK HERE
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/en/tasks/topics/how-money-is-created-667392
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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