PROBLEMS WITH OUR VENETIAN MONEY SYSTEM
Our money system evolved in Venice 400 years ago. BOOM calls this our Venetian money system but, in fact, it evolved much earlier in history and probably in Babylon, an ancient city situated in modern day Iraq. In our Venetian money system, the money supply grows via new bank loans that are collateralized against assets. This means that asset owners can borrow more readily and at lower cost than people who don’t own any collateral assets. It is a wealth channel — funneling fresh new money to the already wealthy for use as they see fit. If a nation is demographically expanding with increasing numbers of working people, it works well — all boats rise. But if the opposite demography happens (a falling working age population) then it can speed fresh new money preferentially into the hands of the wealthy. They subsequently become ever more wealthy, until a handful of people possess most of the asset wealth. Social inequality then follows, the social fabric becomes torn, political instability follows as sure as day follows night. Feudalism and dictatorship awaits.
The way back to a more balanced society is to increase the proportion of cash transactions in the real economy to a much higher figure. Why? Because cash (which is interest free) is a buffer to the dominance of credit money (interest bearing). We have allowed the ratio to fall to 2 % Cash: 98% Credit in many advanced economies. This is a very dangerous imbalance for any nation. So — we simply cannot fix all of our social problems and brewing political instability until we attend to this critical issue. It is the secret money crisis bubbling away under the surface.
CPI inflation in Germany has surged. Annual food inflation in Germany accelerated to 11.1% in May, the highest rate since 1992 according to current estimates. The preliminary report on Germany’s consumer price inflation rate in May climbed to 7.9 percent from 7.4 percent in April, the highest since the winter of 1973/1974. Core consumer prices are accelerating. In the first 4 months of this year, the transportation sub-index of the CPI basket in Germany rose very quickly to 128.5 points from 105 points. This is a 22 % increase — alarming. German economic officials will be anxiously awaiting the next update to that number. In Germany, transportation is 13 % of the CPI Index.
Germany’s political class seems oblivious to these realities. They are too busy looking East towards events in Ukraine which were caused by poor NATO leadership over the previous 8 years. The consequences of threatening Russia’s border were not thought through. Now, they are busy adding fuel to the fire. But BOOM is certain that the German people and German businesses are acutely aware of the increases in the cost of living and the costs of doing business.
If we look at the rest of the Euro area, the annual inflation rate has increased to 8.1% in May, a fresh record high, from 7.4% in each of the previous two months and well above market forecasts of 7.7%. Core Consumer prices have risen rapidly since January. Increased energy costs are the major impetus for those bad results. Again, the Ukraine conflict is the cause.
Luckily, in Germany, France and Italy, wages growth is anemic. For the time being, that gives some hope that the current consumer inflation numbers may soon moderate and perhaps start to decline if the war in Ukraine can be brought to a swift end.
Money supply numbers are continuing to increase in Germany, France and the Euro area. Bank loans to the private sector are notably strong in Germany and France. If the money supply does not moderate, then inflationary pressures will rise.
So the whole of Western Europe seems to be economically precarious with a pattern of developing stagflation while dependent upon continued poor wages growth to rescue them from the curse of an acceleration in CPI inflation.
Meanwhile, the Euro currency has fallen dramatically since January by 17 % against the US Dollar. The falling currency increases CPI inflation inside Europe.
The term “fiddling while Rome burns” seems to sum up the approach of Europe’s political class.
RUSSIAN BANK BLOCKED
Meanwhile, last week, Russia’s biggest bank, Sperbank, was blocked from SWIFT, the global inter-bank messaging system based in Brussels and dominated by US influence. This was announced by the European Council chief Charles Michel at the EU summit.
Just 2 months ago, the Russian Central Bank governor Elvira Nabiullina said most Russian lenders plus 52 foreign financial institutions from 12 countries had received access to the System for Transfer of Financial Messages (SPFS). SPFS is the Russian alternative to SWIFT. She revealed that the identity of payment system members would be kept secret.
RUSSIAN OIL EXPORTS TO INDIA SURGE
India has increased its oil imports from Russia dramatically. It has been reported that those imports are now 25 times higher than last years average. BOOM is not surprised by this and expects India to continue to take advantage of low prices from Russia. China will also reap the advantage of cheap oil. Unless the war in Ukraine is settled quickly, the planet is rapidly heading into a dual system of energy supplies and payment systems. Cool heads must prevail but they seem overwhelmed by hot heads driven by deluded dreams of military victory.
One month ago, the German Economic Cooperation and Development Minister Svenja Schulze warned about a possible looming global famine. She named the Covid-19 pandemic and Russia’s ongoing military operation in Ukraine as its causes.
“The situation is highly dramatic” she said, “affecting more than 300 million people who are already suffering from acute hunger”. Nobody else seems concerned. We are sleep walking into a nightmare. Millions could die from starvation. Again, “fiddling while Rome burns” seems to sum up the situation.
Gro Intelligence, a global company that predicts food supply trends, confirmed that the global food security crisis has intensified. The CEO was reported as saying “even if the war were to end tomorrow, our food security problem isn’t going away anytime soon without concerted action.”
Russia and Ukraine normally supply a third of the world’s wheat exports and are also major exporters of corn. Their exports of food and fertilizer are critical for millions of people worldwide.
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”.
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).”
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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