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THIS WEEK’S EDITORIAL
WE DON’T NEED CBDC’s — WE NEED MORE CASH AND MORE PEOPLE We have come to the point where 98 % of the money supply in the advanced economies is created as credit (as a bank loan) and 2 % is created as cash (notes and coins). Most of the credit money must be collateralized against assets when it is initially created as a bank loan and it must also generate an interest cost to justify its existence.
So the supply of most fresh new money is interest bearing and inextricably linked to the asset economy . This is a system which developed over hundreds of years since banking as we know it erupted in medieval Venice. The centrality of commercial banks and the centrality of assets in this process have evolved slowly but surely.
If there is a relative shortage of borrowers caused by demographic drop off or if there are excess loan defaults, the money supply system essentially must fail. Excess loan defaults happened in the great, global financial crisis in 2008 when bank insolvencies became manifest, especially in the United States, due to the failure of poor quality commercial bank loan books.
Since then, the central banks have held the system together in the advanced economies by artificially boosting the money supply via Quantitative Easing programs where they have purchased government bonds and other securities with new money freshly created at the central bank level. The result has been asset price inflation writ large.
QE has certainly helped governments to pay for their deficit spending programs but it is an artificial support system, commonly called “kicking the can down the road”. More and more money has to be created at the central bank level to keep the system from failing.
Reducing our reliance on this process — called “tapering” and “QT Quantitative Tightening” — is essentially a pipe dream. Why? Because the reduction in supply of fresh new money will affect the advanced economies adversely and then the central banks will simply be forced to return to QE. That is what will happen next year if the Federal Reserve tries it.
MORE CASH PLEASE: Cash was commonly used and dominant in most western economies after World War Two during the 1950’s and 1960’s. Wages were most often paid in cash and sophisticated cash registers became commonplace in retail shops. Then, slowly but surely, debit cards and credit cards came into existence and people slowly became inclined to use their plastic cards to effect payments instead of using cash.
After 1971 and the Nixon decision to move the US Dollar off its link to Gold, the expansion of credit money began in earnest. Our current situation is this. We are suffering a relative paucity of bank loan borrowers compared to previous periods in history. Thus, we desperately need more non-interest bearing money in our money supply chain to balance out the impact of a (relative) reduction in credit money in our real economy.
That means we need more cash — lots more cash — in circulation. The central banks know this and they are currently playing around with the concept of CBDC’s — Central Bank Digital Currencies — electronic cash. But they are struggling to overcome many obstacles.
Most central banks simply cannot become issuers of a new form of national currency because either they are not authorized to do so or because their governing bodies are constrained by political considerations. After all, their principal role is one of providing liquidity to their commercial bank clients. It is not to create new forms of electronic non-interest bearing currency, no matter how urgent the matter.
BOOM’s QB – Quantitative Boosting is a far superior solution. China will adopt it very soon — probably next month. And their real economy will respond positively to the supply of fresh new non-credit money.
https://boomfinanceandeconomics.wordpress.com/2019/12/15/boom-as-at-15th-december-2019/
WILL CREDIT CONTRACT FURTHER?: The next matter for consideration is the inevitability of further reduced credit growth due to declining demographics in the 15 – 64 year age groups in the advanced economies. Such reduction in credit growth over time will cause even more urgency in regard to fresh new cash creation.
The United Nations has produced hefty statistics outlining the past growth in Working Age Populations from 1950 to present day and projections into the future moving out to the end of this century, 2099. They are indeed very sobering.
In the United States, from 1950 to 2020, the working age population doubled from 100 million to 220 million. Such history reveals a 1 % per annum average rate of growth. But the projections from 2020 to the year 2099 show a dramatic slowing with the working age population reaching just 240 million over the next 80 years — an increase of only another 20 million. In other words, US demographic growth has probably stalled already and will be extremely slow from here.
In Japan, the peak of working age population occurred in 1995 and has been declining ever since from 85 million to about 75 million at present. Over the next 80 years, it will decline to 38 Million — almost halving in number.
Germany’s working age population is about to rapidly fall from its present number of 54 million towards just 40 million in 2099. The next 15 years will see the sharpest rate of fall off.
The outlook for France is less dramatic but it will, nonetheless, decline slowly and steadily from 40 million to 35 million working age population.
Spain shows dramatic projections with the workforce falling from 32 million to 17 million — almost halving in the process. Italy will fall from 38 million to 22 million. The United Kingdom shows a very different pattern with the working age group staying essentially static around 43 million.
The Euro Area will see a decline from 220 million to 170 million — a net decline of 50 million people. And All of Europe will see a decline from 480 million now to just 350 million — a net decline of 130 million in the 15 – 64 year consumerist age group.
China will decline from around 1 Billion to about 0.60 Billion — a reduction of a staggering 400 Million consumers. That decline has already begun in 2015.
Growth in working age populations will come in India — from 900 million to 1.1 billion over the next 30 years. It will then start to reduce slowly. Asia as a whole will also see growth from 3.0 Billion consumers now to 3.5 Billion in 2050. Then it will slowly start to reduce.
But — where is the BIG growth coming? The answer is Africa with the current 15 – 64 year age group growing from its present level at 0.75 Billion to 2.75 Billion by 2099. That is a massive increase of around 2 Billion new consumers.
We will see massive population shifts via huge migrations from Africa to the advanced economies over the next 50 – 80 years. It is essential as the replenishment of the consumer age groups in the West will become of paramount importance. The continent of Africa will undergo strong, steady economic growth while, at the same time, losing large numbers of people to Europe and the United States. Asia will remain a powerhouse site of growth but China’s contribution to that will slowly diminish.
Globally, there will be net growth in the working age population — from around 5 Billion now to about 6.5 Billion in 2099.
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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Everything old is new again.
Interesting, but I have a question. If most dollars generated now are interested bearing, created with debt, wouldn’t non-interest bearing dollar creation be inflationary?
Each debt-dollar has a small piece of interest associated with it. Creating and spending that debt-dollar has a penalty which is the interest. If I borrow for a purchase my penalty is the interest I pay, so in reality that debt-dollar cost $1+interest.
A non-interest bearing dollar only costs $1. Banks are not going to make less income so the new debt dollars they would create would cost $1+more interest.
Hi Arizona, Yes — you are correct. Thanks for the intelligent comment. Interest Free Dollars (electronic cash) are inflationary. If they are created, they cannot be destroyed — they can only be withdrawn from circulation (usually by the issuer — preferably the Sovereign). Interest generating Dollars are also inflationary but are destroyed when bank loans are paid off — so they have a finite life. They have to be replaced by new loans. Thus, electronic cash will have to be controlled via volume measure not via interest cost or loan repayment. This gives another lever of control in regard to CPI inflation. The alternative is to not use (any) currency as a medium of exchange….. no inflation but …. back to the cave and Barter. But that will only last for a micro-second until a contract of credit (an IOU) is created by two consenting parties. The next step (for the village) is always to then create a generally accepted medium of representation for the increasing use of IOU’s. That is when a currency is born e.g. blocks of salt, shells, stones, beads, animal skins, tokens, metal pieces, coins ……….. then ledgers develop e.g. Tally Sticks. Ledgers are records of IOU’s, generally accepted by the village as a record of debts. Then computer ledgers arrived in the 1960’s. …….. Banks will have to accept electronic cash eventually — or else the social breakdown generated by 98 % credit money will eventually ensure the collapse of the economy (and their loan books).
All cash is also created as interest bearing debt.
“After 1971 and the Nixon decision to move the US Dollar off its link to Gold . . .”
He didn’t decide, he was forced by European powers headed de Gaulle, because the gold had already been stolen. The silver was stolen in 1965. The latter was the real killer, as the actual silver was in the actual hands of the American public, whereas the gold standard only applied to foreign banks, affecting foreign trade, but not domestic.
Sir, further to…..
Old Truism is: “When the tide goes out ALL boats go down!” Chinese president KNOWS this rule!
Chinese president begging the FED TO NOT RAISE RATES!!!! WOW!!
https://www.marketwatch.com/story/xi-jinping-warns-fed-against-hiking-interest-rates-11642502735?siteid=yhoof2
Yes UD – the article doesn’t explicitly state that the Fed will do its own thing regardless but many commenters do and I agree. In the old days when bonds went down the stock market went up – negative correlation. For many years this has not occurred, they have moved in unison because the Fed rules the markets and the other way round.
But I don’t understand, that with negative real interest rates at 6+%, why would anyone buy these things just to lose money? I guess that eventually the market will dictate once again in the face of rising inflation and interest rates will rise accordingly as happened in the past. The Fed will have lost the controls they have implemented all these many years and especially since 2008 with QE.
The FED creates inflation by printing more dollars. The Dollar has been dying a slow death for years.
Yes — all currency systems are ultimately inflationary (more and more currency is required especially when you have a banking system generating interest costs) and have the same fate …. ultimately. But the US Dollar system (which replaced the Pound in 1944) that now dominates the world is unique in one very special way. Dollars are created offshore in tax haven banks — as US Dollar denominated loans. These are “Eurodollars”. They are used to settle global trade and capital settlements and they (almost) never go to the USA. The Fed or the US Treasury has no direct control over them. This is what gives the US Dollar such dominance …. supported by oil and weapons trades where the US enforces (most) settlements in US Dollars. The Yuan, the Yen, the Euro and the so-called “Cryptocurrencies” (which are digital assets, not currencies) are no threat to its dominance at present.