GLOBAL RECOVERY IS HOBBLED — A BAD US JOBS REPORT
Looking at the global economic outlook, the IMF Head Kristalina Georgieva said last week, in a speech for Bocconi University in Italy — “We face a global recovery that remains ‘hobbled’ by the pandemic and its impact. We are unable to walk forward properly – it is like walking with stones in our shoes“.
The US economy is clearly moribund with just 194,000 new jobs added in September when the “expert” forecasts were for an increase of over 500,000. One of BOOM’s major themes over the last 5 years has been the lack of growth in the largest and traditionally most dynamic national economy on Earth. Over the last 4 years, US Gross Domestic Product has increased only marginally on an annual basis. The US is keeping its economy alive with central bank funding of huge government spending programs to “stimulate” the economy. But under the covers, it is asleep.
To give you some idea how bad Friday’s jobs report was, let’s look at the monthly US job creation numbers that were routine 20 years ago. From 1998 through to the year 2000, 300,000 to 400,000 new jobs each month were common results. Since then, the population of the United States has increased from 269 million to 330 million. That is an increase of over 60 million while the total employed has increased by just 20 million. That spells economic danger.
Over the last 16 months, new commercial and industrial bank loans to the US Private Sector have declined from around US$ 3 Trillion to around $ 2.4 Trillion. The fact is that an economy cannot grow if bank loan growth stalls. It is as simple as that. Economic growth in the US has stalled.
The Euro Area economy is also not growing. In fact, its Gross Domestic Product has not increased in 11 years, staying stubbornly around US $ 13 Trillion, expressed in US Dollars.
And the economy in China is now slowing as well. Its GDP is larger than it was in 2018 but the increase is certainly not dramatic. The One Child Policy established in 1979 is estimated to have cost China 400 million births. If those people had been born, China’s economy would now be experiencing a demand driven boom of garguantan size. Instead, that demand is missing. And that potential labor force is also missing.
The prices of some commodities have recently become disconnected from economic realities.
Oil and natural gas prices are surging for no apparent reason since late August. These changes cannot be due to excess demand. And neither can they be due to inadequate supply. Supply chain disruption is often used as an explanation but this is not supported by any strong factual analysis. It seems to many that prices are simply being manipulated higher to create a sense of crisis. If energy prices continue to rise at current rates, then they will cause the global economy to slow even more than it has already. That is as certain as night follows day.
Thus, BOOM cannot see how energy prices can rise any further. They should soon stall and start falling. Last Wednesday, Thursday and Friday, natural gas prices looked like they had run out of enthusiastic buyers (continuous contract futures prices on the Chicago Mutual Exchange). They had been rising strongly since 23rd August along with oil prices.
When economic reality dawns, energy prices will start to fall. BOOM expects sovereign bond prices to then surge higher as yield curve expectations adjust. So — watch for falling energy prices to trigger rising bond prices. If this happens as expected, a great bond buying opportunity is coming in the not too distant future. Braver souls among us will consider going short energy contracts while going long bond futures. Timing is everything.
EURASIAN PROGRESS — IRAN JOINS THE SCO AS FULL MEMBER
Just a few short weeks ago, in late September, the Shanghai Cooperation Organization (SCO) Summit was held in Dushanbe, Tajikistan. SCO member states account for 40 percent of the world’s population and 28 percent of the world’s Gross Domestic Product (GDP). The big news there was the move to include Iran as a full member of the Organization — joining China, India, Russia, Pakistan, Kazakhstan, Tajikistan, Kyrgyzstan and Uzbekistan.
Vladimir Putin said “I would like to highlight the Memorandum of Understanding that was signed today between the SCO Secretariat and the Eurasian Economic Commission. It is clearly designed to further Russia’s idea of establishing a Greater Eurasia Partnership covering the SCO, the EAEU (Eurasian Economic Union), ASEAN (Association of Southeast Asian Nations) and China’s Belt and Road initiative (BRI).“
Of course, all of these nations are committed to increased trade settlements in their own currencies. They wish to slowly lessen the use of US Dollars as a settlement currency. What is called the international “rules based order” is clearly in decline. That term is often used in an intimidatory fashion in speeches made by Western politicians. Many see it as code for “the US dollar must reign supreme ….. or else”.
The head of the Iran-Russia Joint Chamber of Commerce mentioned an agreement to establish a Joint Banking Council among the members of the SCO as another important step, saying: “The purpose of establishing this joint banking council is to facilitate providing the necessary funding required for the implementation of the members’ joint projects.” That is code for “we are going to avoid using the US Dollar”.
Glenn Diesen has been a Professor at the Higher School of Economics in Moscow, and an Adjunct Research Fellow at Western Sydney University. He is currently a Professor at University of South Eastern Norway. His research includes the geoeconomics of European and Eurasian integration. Diesen’s latest books include: EU and NATO relations with Russia: After the Collapse of the Soviet Union (2015); Russia’s Geoeconomic Strategy for a Greater Eurasia (2017); and The Decay of Western Civilisation and Resurgence of Russia: Between Gemeinschaft and Gesellschaft (2018).
Diesen’s latest book is titled — Europe as the Western Peninsula of Greater Eurasia: Geoeconomic Regions in a Multipolar World. In it, he says China “is pursuing a three-pillared geoeconomic initiative by developing technological leadership via its China 2025 plan, new transportation corridors via its trillion-dollar Belt and Road Initiative, and establishing new financial instruments such as banks, payment systems and the internationalization of the yuan. Russia is similarly pursuing technological sovereignty, both in the digital sphere and beyond, as well as new transportation corridors such as the Northern Sea Route through the Arctic, and, primarily, new financial instruments.”
In summary, the Eurasian nations are becoming a significant group both economically and politically. They are intent on rendering Afghanistan to order as it is the next piece in the puzzle. The Islamic Republic of Afghanistan is one of the “Observer States” of the SCO along with the Republic of Belarus and Mongolia.
The SCO also has six “Dialogue Partners”, namely the Republic of Azerbaijan, the Republic of Armenia, the Kingdom of Cambodia, the Federal Democratic Republic of Nepal, the Republic of Turkey, and the Democratic Socialist Republic of Sri Lanka.
The entire conglomeration of nations represents the largest land mass on Earth with 50% of the world’s population. Therein lies a future with massive economic potential. To ignore it or to attempt to irritate it is pure folly. The advanced Western nations must learn to work with it.
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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