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THIS WEEK’S EDITORIAL
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 wealthier, 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.
GERMAN INFLATION: 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 anaemic. 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 year’s 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.
FOOD CRISIS: 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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BANKS DON’T TAKE DEPOSITS, THEY BORROW YOUR MONEY: LOANS CREATE DEPOSITS — that is how almost all new money is created in the economy (by commercial banks making loans). https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
Watch this short 15 minutes video and learn as Professor Richard Werner brilliantly explains how global banking systems really work. https://www.youtube.com/watch?v=EnC1UlnFLyI
AND Watch for 4 minutes, this Bank of England explanation: Money is essential to the workings of a modern economy, but its nature has varied substantially over time. This video describes what money is today. https://www.youtube.com/watch?v=ziTE32hiWdk
Most economists are unaware of this and even ignore the banking & finance sectors in their econometric models. EMAIL: gerry {at} boomfinanceandeconomics.com
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Biden Administration Quietly Raised Amount of Ethanol Required in Summer Blend Gasoline from Ten Percent to Fifteen, Three Predictable Problems Will Surface Soon
“Ethanol is a valuable source of octane in finished gasoline, but it is chemically different than petroleum gasoline and cannot be used in concentrations above 10 percent in small engines — like outboard boat motors, motorcycles, lawnmowers, generators or chain saws — or in any cars made before 2001. Complicating matters further, most cars on the road today still aren’t warrantied to run on gasoline with more than 10 percent ethanol. Retail stations also must have compatible infrastructure in order to sell gasoline with higher ethanol blends.” This issue is known within the industry as “The Blend Wall.”
Oh dear, thanks B_MC this is a real disaster for you guys. Maybe you can import some ethanol-free gas from UK?
“At the time of writing, there is no requirement for ethanol to be included in super unleaded (97/99) grade petrol, so if you’re driving a cherished older vehicle (or putting one into long term car storage), consider a switch to the UK’s only ethanol-free fuels, Esso Synergy Supreme+ Unleaded 97 and Synergy Supreme+ 99”
No idea how much transportation would cost – dangerous goods and all that. Surely you have similar in USA or nearby Mexico/Canada?
Good reminder that ethanol-free gas is available at some stations….
https://www.pure-gas.org/
If this were a good thing, he would be all over the news bragging about it.
mm, it’s rather a stretch to attribute this disneyland monetary system to the venetians and even more of a stretch to attribute it to the bablylonians!
both had sophisticated banking, lending, insurance, and complex contracts and markets. Both however also considered metal to be money and no substitutes were acceptable. Also, in neither were there government goons forcing people to accept some substitute for money when they demanded the real thing.
legal tender laws as we might recognize them did get started with the empire-wide attempts at price controls in third century ad rome – where a horribly worthlessly debased coinage circulating with nominal face values were imposed on the whole empire, at government specified rates. Real compliance must have been close to nonexistent though, and the means to enforce the decrees was never very strong. Plenty of evidence exists that anybody with enough money to care about debasement and inflation, was reckoning values in real metal values and only when absolutely necessary for something official, computing any values based on official prices, and so much of a demand had developed for gold and silver in useable form for money, that the emperor constantine abolished the price controls, stopped minting the effectively fake denarius, and began minting a gold solidus of high purity. His successors kept the coinage honest for 700 years, thats got to be a record in history for a stable coinage. From that instant on accounts everywhere were reckoned in solidi, so much that even very far from the empire’s effective control, and centuries after the empire’s decline, the solidus remained a money of account in much bookkeeping in western europe but also throughout the islamic world as well (the gold dinar was fixed to the gold content of the solidi circulating further east – which through long circulation tended to be worn and underweight – the solidus was fixed at 1/72 of a roman pound, about 4.48 grams, the caliphate standardized around 4.25 grams ).
back to the point. Even the roman experiment in forcing people to accept debased tokens instead of money, was a failure and was abandoned in favor of a sound gold coinage. But modern fantasy money, fractional reserve banking, the creation of arbitrary deposits out of nowhere, and ‘legal-tender’ laws forcing people to accept anything by fiat and call it money, those things only get started in the 1700s with the bank of england and all the pieces came together completely around world war 1. leave the venetians out of it! they were definitely a bunch of sneaky SOBs (4th crusade anyone?) but their bankers were night and day different from modern ‘banking’.
Excellent history Anon, thank you – all good. It did indeed all go the isht when the ‘corporations’ got going by the City of London which prevails even today.
Hey Austrian Peter, what is your knowledge on whether or not the banks have closed out their positions on the USD $17.66 trillion that Trump and Mnunchin printed up as part of the 2019-20 REPO? This got brushed under the rug a few weeks ago when the 2 year disclosure blackout expired – Treasury was fuzzy about who was still holding on to free Treasury money and didn’t want their Treasuries or junk paper assets back. Since disclosure was so fuzzy that would indicate that many if not most banks haven’t closed out their REPO positions.
I’m starting to think that the hyperinflation we’re seeing today is a result of this REPO program. Makes sense – short term credit market freezes up, Treasury floods market with “liquidity” but instead of inter-bank loans capital investments banks rush and buy up tech stocks driving market to insane P/Es. Demand has to be crushed or hyperinflation will ensue so Sars-CoV-2 released in Wuhan during World Military Games and world placed on lock down. Idiot Biden takes over with most REPO still not closed out so when demand returns after lock downs here comes the hyperinflation. Banks begin to close out REPO positions and take profits on stocks which results in market dropping as stocks held by banks are sold and REPO positions closed.
What do you think? COVID just another banker scam to get free money?
Yes indeed ICE-9 exactly my contention – Covid was cover. It has all been building up since 2008 which was never solved but rolled on – funded through Repo. In fact Larry Fink said as much in his address to investors in 2019 when he proposed his ‘Going Direct’ solution:
https://www.blackrock.com/us/individual/insights/going-direct-how-central-banks-could-deal-with-the-next-downturn
“We wrote in August 2019 about the nearly exhausted monetary policy toolbox and the challenges it poses for dealing with the next downturn. This has now come to the fore – and that’s why it is time to go direct with policy support. Simply using up the limited monetary policy space remaining – interest rates, forward guidance or even quantitative easing – could quickly put the macro focus on the lack of tools left and thus backfire. The only way to address this is to add further lines of defense and make fiscal policy an explicit part of the crisis response toolkit.”
https://www.blackrock.com/corporate/insights/blackrock-investment-institute/publications/coronavirus-policy-response
But we also have to account for the ECB and the faulty TARGET 2 euro system. I suspect we are seeing a repeat of 2012 and as you say the 2019-20 Repos might not have closed out but maybe hiding in the EU swaplines – here’s a reminder of 2012:
“As financial markets convulse over the European Union once again, RepoWatch would like to remind its readers that at the heart of the problem lies the repurchase market. Yes, some European countries spent too much money and now are burdened with too much debt. So let’s look at where they got that money.”
AND : “There is a further issue to consider over collateral quality. While the US Fed only accepts very high-quality securities as repo collateral, with the Eurozone’s national banks and the ECB almost anything is accepted — it had to be when Greece and the other PIGS were bailed out. And the hidden bailouts of Italian banks by bundling dodgy loans into repo collateral was the way they were removed from national bank balance sheets and hidden in the TARGET2 system”
https://mises.org/wire/could-2022-bring-collapse-euro
London seems to be assisting too and its control of the eurodollar market:
https://www.bankofengland.co.uk/news/2020/march/boe-launches-contingent-term-repo-facility
I’ll keep digging.