Loading ...END THE FED ?
BACK TO THE GOLD STANDARD ?
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From time to time we need to re examine our long held entreched thoughts …indeed our core beliefs.
It’s not easy but it is important to challenge what we think we know.
In this case I am talking about Central Banks and the banking System itself.
Most of us have all read the Creature from Jekyl Island the Epic Book which details the “Clandestine” origins of the Federal Reserve and have at least some rudimentary understanding of Austrian Economics .
I personally have never completely understood how the banking System works nor really understood the Monetary System we all live under. But I have come to believe that those who control it are the root of all evil .
So I have ( like most of us here) bought into the story of the EVIL Banksters the create money out of thin air without the restriction of “Sound Money” and that we need to abolish Central Banks and get back to the Gold Standard.
This is THE core belief of Goldbugs …which we ALL are…. here at the Tent.
I have been posting weekly pieces from Boom Finance. This guy also know as Dr Gerry has been trying to re-educate us …but since his message is opposite what we strongly believe we have mostly derided and ignored him
BUT….WHAT IF HE KNOWS AND UNDERSTANDS THE SYSTEM BETTER THAN WE DO ?
HAVE CENTRAL BANKS GONE MAD WITH “MONEY PRINTING”?
AND WILL THIS CAUSE THE US DOLLAR AND THE US ECONOMY TO “COLLAPSE”?
Well If you want to know more …go to the comments section where I have copied his latest piece for our consideration.
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Good night
Fully
BOOM gets asked these questions over and over again. Have central banks around the world gone “mad” with “printing” excessive amounts of money? Are central bankers in a conspiracy of control, preparing to destroy the US and global economy? Other questions that are often asked are — Will the US Dollar collapse? And will that cause Hyperinflation?
There are hundreds, if not thousands, of websites promoting these scenarios. They terrify people into thinking that the global financial system is teetering on the brink of collapse. They use fear to hook readers and promote their newsletters, “investment” conferences, books and cruises. It is an industry with famous star performers. BOOM has watched it repeat the same narratives over and over again for 35 years. None of the dramatic forecasts of collapse ever come true. That is the reality. But that doesn’t stop the industry growing. After all, in BOOM’s estimation, perhaps 95 – 99% of the population has virtually no knowledge of how the financial system works, how banks function, how central banks function, how the economy is funded as a whole, how governments fund their operations or how financial markets function. That means that there is a very big market out there for the “industry” of fear to take advantage of.
To make matters worse, many people in advanced economies have been struggling with relatively high CPI inflation for the last 3 years and may be struggling to pay their mortgage payments or rental payments. They feel trapped and that is understandable. So they look for someone to blame and there are many articles on the Net that point them towards blaming the central bankers.
LET’S LOOK AT CENTRAL BANK OPERATIONS
BOOM is very critical of modern central bank policies and has written many editorials on the grave importance of maintaining large volumes of physical cash in circulation in the real economy which acts as a natural balancing buffer to money created as credit (as bank loans).
BOOM has also written extensively about the failure of central banks to recognise the recent Peak of CPI inflation which occurred in October 2022 and which, by the way, was ignored by all the central bankers of the world. Here is what BOOM wrote in mid October 2022.
BOOM editorial 16th October 2022 — Quote:” the peak of CPI inflation may be in the past … the prices of stocks and bonds should start to rise from here”.
In other words, BOOM was calling the top of the interest rate cycle. US stock prices started rising 2 days later and US bond prices started rising 5 days later.
The most influential central bank, the US Federal Reserve, ignored BOOM and kept raising rates until July 2023. The chart shows exactly what happened. The little red arrow shows exactlywhere BOOM called the Peak of CPI inflation.
From the BOOM editorial 16th July 2023 — Quote:
“BOOM cannot see any reason for further interest rate increases from the Federal Reserve. And companies must soon start to actively lower prices to ensure that their sales and revenues don’t start collapsing.”
This time, the Federal Reserve took note and stopped raising its Fed Funds Interest Rate at that time. However, another 13 months passed before they raised sufficient courage to cut their rates.
Even though the Peak of CPI inflation was obvious to BOOM in October 2022, all the central banks of the world decided to “err on the side of caution” and maintained tight monetary policies for almost (yes) another 2 years. For economics beginners, “tight” in this context means relatively high interest rate settings.
Now, let’s look at some evidence concerning central banks and their so-called “reckless”, “massive”, “money printing”. Readers who prefer outrageous narratives of financial and economic collapse may be disturbed to consider the facts of the matter. However, BOOM is fact driven.
In most circumstances, 98 % of our fresh new money supply in advanced economies is created as commercial/retail bank loans to willing borrowers. Note the last part of that sentence. The banks cannot “print money” in an uncontrolled fashion and they do not. They must have a willing borrower from the real economy in order to create a loan. And this money is not “printed” by the central bank. It is created as a ledger entry by the commercial/retail bank when a loan is agreed. This is how they expand their loan book and subsequently, the money supply for the whole economy grows by that amount. There are some constraints such as the Basel 1, 2 and 3 Capital Accords but central banks allow considerable lee-way.
The remaining 2 % of fresh new money is created as physical Cash, usually issued by the Treasury into the real economy in response to demand in most nations and printed by Treasury controlled Mints. The retail banking system distributes the physical cash. The central bank monitors the demand for cash from the real economy in the banking system and may increase supply to meet that demand by asking the Mint/Treasury to make more if necessary.
The United States Mint is a bureau of the Department of the Treasury responsible for producing coinage for the United States to conduct its trade and commerce, as well as controlling the movement of bullion. The U.S. Mint is one of two U.S. agencies that manufactures physical money. The other is the Bureau of Engraving and Printing, which prints paper currency.
The Bureau of Engraving and Printing (BEP) is a government agency within the United States Department of the Treasury. The BEP’s role as printer of paper currency makes it one of two Treasury Department agencies involved in currency production. The other is the United States Mint, which mints coinage.
These arrangements vary from nation to nation. But they are remarkably similar. Some central banks can issue fresh currency directly into the economy. But that is rare. The constitution of the Bank of Russia allows that, for example.
Central Banks also cannot “print money” without constraint. The vast majority of them cannot issue fresh new money into the real economy. They can only buy and sell assets with/from their client Commercial/Retail banks. In rare circumstances, when CPI deflation or asset price deflation occurs, they are allowed to buy and sell assets in the real economy, but especially and mostly in relation with the Treasury and under the Treasury’s watchful eye. That is what we call “Quantitative Easing” (QE). The commonest asset transaction used in QE is for the central bank to buy assets from the Treasury (Government Bonds). In that case, the Treasury receives the funds electronically and spends that money into the real economy.
The Bank of England explains this clearly on their website. “The money we use to buy bonds when we were doing QE did not come from government taxation or borrowing. Instead, like other central banks, we can create money digitally in the form of “central bank reserves”.
QE has been used extensively since 2008 when the Great Crisis of Insolvency in the US Banking system occurred. Some call this the “Global Financial Crisis” (the GFC) but the fact remains that it originated in the US due to an explosion of banking fraud in that nation. Most of the QE that was subsequently done was done in the USA. Again, under the watchful eye of the US Treasury. The aim of QE was to prevent deflation (negative rates of inflation).
From 2008 to 2020, the Global Total of QE was equivalent to US $ 6 Trillion. That sounds like a “lot” of money but it must be put into perspective. $ 6 Trillion is 0.6 % of Total Global GDP in that period and less than 1 % of estimated Total Global Assets.
Total Global GDP from 2008 – 2020 = US$ 1,000 Trillion
Total Global Assets (estimated) = US $ 650 Trillion
($ 300 Trillion in Real Estate $ 110 Trillion in Stocks $ 235 Trillion in Debt Securities)
These numbers are all approximate for the sake of illustration.
In 2020, in response to the coordinated Pandemic of Covid Fear, more QE programs were run by major central banks with the largest injection coming from the US Federal Reserve which added yet another US $ 2 Trillion of QE expenditure from 2020 to 2023. The European Central Bank added another US$ 1 Trillion in response to the coordinated Covid Panic. In grand total, the QE programs worldwide amounted to around US$ 9 Trillion from the GFC in 2008 to the beginning of 2024.
These numbers sound staggering. However, they don’t change the above calculations very much.
$ 9 Trillion is 0.7 % of Total Global GDP for that (longer) period and 1.2 % of estimated Total Global Assets as at the end of 2023.
Total Global GDP from 2008 – 2024 = US$ 1,300 Trillion
Total Global Assets (estimated) = US $ 700 Trillion
These numbers are all approximate for the sake of illustration.
So — central banks around the world did not “go crazy” with “printing huge amounts of money” in buying “vast amounts of assets” in that period. In fact, they were arguably rather prudent and constrained. The alternative would have been to do nothing in extra monetary support in response to the US banking crisis of 2008 and the Covid Panic of 2020. Doing nothing would have threatened the entire global financial system (twice). Such a lack of action would have resulted in a calamitous situation for 99 % of the people on the planet (twice).
However, it is important to acknowledge that the central banks (most especially the US Federal Reserve) and other government controlled banking regulators in the advanced economies were seriously remiss and arguably incompetent in their oversight of the banking system leading up to the crash in 2008.
So, the real scandal that occurred in 2008 was actually in regard to the disastrously poor regulation and oversight of the US banking system from many different Government agencies. This is summed up well by Wikipedia, believe it or not. In its entry on US banking regulation, the very first sentence is a powerful one and the first paragraph sums up the fragmentation that exists in the US.
“Bank regulation in the United States is highly fragmented compared with other G10 countries, where most countries have only one bank regulator. In the U.S., banking is regulated at both the federal and state level. Depending on the type of charter a banking organization has and on its organizational structure, it may be subject to numerous federal and state banking regulations. Apart from the bank regulatory agencies the U.S. maintains separate securities, commodities, and insurance regulatory agencies at the federal and state level, unlike Japan and the United Kingdom (where regulatory authority over the banking, securities and insurance industries is combined into one single financial-service agency).”
And virtually all governments worldwide were also seriously remiss and arguably incompetent in their oversight and response to the coordinated Covid Panic of 2020 – 2023. In that instance, the virus involved has proved to be no more dangerous than a bad bout of Influenza. If it did kill, it principally killed elderly people above the age of 82 years who had multiple co-morbid conditions. And, somehow, mysteriously, the ancient killer, Influenza, disappeared from the Earth (or was not tested for) during the coordinated Covid panic.
Many experts were ignored who correctly predicted the probable Covid outcomes in early 2020, including the august Professor of Medicine and Epidemiology at Stanford University, John Ioannides, and the equally august authors of the Great Barrington Declaration, released in October 2020. The authors of the Great Barrington Declaration were Professor Sunetra Gupta of the University of Oxford, Professor Jay Bhattacharya of Stanford University, and Professor Martin Kulldorff of Harvard University. Stanford, Harvard, Oxford are arguably three of the most prestigious universities in the English speaking world. But almost all governments ignored them and went on a rampage of destruction – social, political, economic. They trampled all over the Human Rights of the people, locking them up, forcing them to wear masks and coercing them to be injected with experimental, unproven MRNA “vaccine” technology with no medium or long term safety data.
Make no mistake because no mistake was made. There is plenty of incompetence to observe in both the world of central banking and in government.
Governments and central banks certainly make a lot of mistakes and miss-judgements. The citizens pay with their wallets or, in the worst cases, with their lives. BOOM is a harsh critic but, as always, there is another side to the story.
In the 19th century and in the early 20th century, the United States experimented with not having a central bank for around 77 years. The result was financial, economic and social chaos with a great deal of suffering along the way.
This chart shows CPI inflation and deflationary events in the USA during the period. Chaos was the norm. We live in a relatively benign financial world these days with no severe deflationary events since Post World War Two.
US HISTORICAL INFLATION RATE
It is fashionable to rage against central bankers and even commercial bankers with some people vehemently accusing them of creating most if not all of societies ills. It is time to re-consider a world of so-called “sound’ money, backed by gold and when there was no central bank. That world occurred in the 19th century in the United States.
If you hate banks and bankers or if you are a true believer in the wisdom of governments or in the concept of “hard” (or “sound”) money, you should take a good hard look at The Panic of 1837 in the United States.
An examination of the events leading up to the Panic and the events that occurred afterwards are worthy of your time. All of human history reveals that most Governments don’t understand money. And the idea that the concept of “soundness” can be used to somehow tame money creation is magical thinking in action. All forms of money are contracts of credit, based upon trust and enforced by social agreement. Human beings will always find ways to innovate in regard to contracts of credit. That is what the history of money tells us. Let’s look back to 1837.
It all started when the US President, Andrew Jackson, in his wisdom, effectively killed off the central bank which was then called the BUS — the Second Bank of the United States. That process started in 1833 but was not completed until 1836. The end of the central bank triggered a huge real estate boom as State based commercial banks issued credit money loans in large volumes to eager borrowers to purchase land. Is this sounding familiar?
The Government became concerned. So they issued the so-called “Specie Circular”, an executive order issued by President Andrew Jackson on July 11th 1836. He ordered that payments for the purchase of public lands be made exclusively in gold or silver. Jackson was a “hard” money man who was always suspicious of banks creating credit money loans without the “sound” backing of gold and silver. The idea of the “Specie Circular” was to squash “excessive” land speculation and the “excessive” growth of the credit money supply (bank loans).
Jackson directed the Treasury Department and banks to only accept specie (Gold or Silver) as payment for government-owned land after Aug. 15, 1836. However, settlers and residents of the state in which they purchased land were permitted to use “paper” money (bank credit) until December 15th on lots up to 320 acres. After that date, the Specie Circular effectively strangled the use of paper money. This caused a huge collapse of real estate prices. Buyers simply could not find sufficient gold or silver to settle purchases so they stopped buying. The banks had no option but to reduce credit creation dramatically and many banks then subsequently failed (as you would expect) due to loan defaults.
The Panic of 1837 started in April, one month after Martin Von Buren became President. It was an absolute economic disaster. By May 21, 1838, a joint resolution of Congress repealed the Specie Circular. The experiment with “sound” money was decisively over.
Interestingly, a central bank was not established after that debacle. During the period from 1836 – 1862, there were only State banks with no Federal Bank. This period is called the Free Banking Era. Bank notes had to be issued with gold or silver backing but loan books of credit money were allowed. More chaos ensued.
During the free banking era, state banks had an average life span of just 5 years. About half of the banks failed for the usual reason of loan defaults. But some failed because they had inadequate gold and silver with which to honor note redemptions. As a result some banks innovated and began to offer central banking services to other banks. Nonetheless, bank failures continued in huge numbers.
In 1863, the National Banking Act was passed, creating a system of Federal banks. And the office of Comptroller of the Currency was created to supervise those banks. A uniform national currency was also created. A huge bout of CPI inflation followed immediately with inflation hitting 24.6 % in 1864. By 1870, there were 1,638 national banks and only 325 state banks.
Inevitably, with no Central Bank to provide overnight support, liquidity mis-matches occurred and banks lost faith in each other. Mistrust ruled. Outright deflation hit and stayed for dinner (and beyond) from 1866 right through to 1897. Per capita GDP in the US rose very, very slowly from $ 4,700 to $ 7,200 over thirty long years. Much economic hardship was manifest. As sure as night follows day, bank runs occurred when depositors panicked about the security of their deposits.
There were Banking Panics in 1873, 1884, 1893, 1896, 1901, 1907. Many, many banks failed, people lost their savings and deflationary real estate crashes occurred. This is what life is like without a central bank and with cash currency backed by Gold. In other words, in such a situation, credit money — created via commercial bank loans — rules the roost with no effective controls.
But what about the early years of the 19th century? Surely it was a golden era of “sound” money? Gold rushes in the early part of the 19th century triggered mass migrations as people desperately tried to dig money out of the ground. During the early years of the 19th century, there were banking crises in 1819, 1825, 1837, 1847 and 1857.
Almost the entire 19th century in the US were desperate times indeed. It was slowly becoming obvious that a central bank was needed to provide stability to a banking sector in which inter-bank trust was badly damaged.
The concept of “sound” money (backed by Gold) failed to protect the people in the 19th century. The fact is that humans need supervision in regard to money. Banks need to be supervised strictly and have access to overnight capital reserves. A central bank must maintain inter-bank trust and must stop excessive credit creation. Easy to say — not so easy to do.
HUMAN BEINGS ARE THE PROBLEM — THEY REQUIRE REGULATION TO MAINTAIN SOCIETAL TRUST
The problem is that human beings run elected governments and central banks. They also run commercial banks. One nation attempted to rid itself of such beasts. It was called the USSR – the Union of Soviet Socialist Republics where there were no elections, no commercial banks and where a lone, all powerful central bank controlled the supply of money. That institution was appointed by a group of unelected tyrants in the Central Committee, unanswerable to the majority of the people. The experiment lasted 70 years. It ended when productivity eventually collapsed in a heap because nobody bothered to do any work, waiting for all their goods and services to be delivered by a benevolent central government. Utopia achieved.
Our governments, our central banks and our commercial banks are all potentially flawed institutions because they contain human beings. Trust in our national money systems and in our national currencies is critical to keep our social system from implosion. The alternative is economic and social chaos.
Beware of anyone who attempts to destroy that trust. BOOM suggests reform as a better pathway, a better discussion.
“In most circumstances, 98 % of our fresh new money supply in advanced economies is created as commercial/retail bank loans to willing borrowers. Note the last part of that sentence. The banks cannot “print money” in an uncontrolled fashion and they do not. They must have a willing borrower from the real economy in order to create a loan. And this money is not “printed” by the central bank. It is created as a ledger entry by the commercial/retail bank when a loan is agreed.”
The federal government is always a willing borrower.
And they account for at least a third of the growth in money supply, perhaps closer to half.
The difference is that private borrowing can create real capacity to repay the loan. Government borrowing cannot. Hence, we get price inflation.
“The Bank of England explains this clearly on their website. “The money we use to buy bonds when we were doing QE did not come from government taxation or borrowing. Instead, like other central banks, we can create money digitally in the form of “central bank reserves”.”
And those central bank reserves are parked at commercial banks, giving those banks more leeway to expand their lending.
Inflation follows growth in the central bank balance sheets.
Does the Government borrow money directly from Commercial Banks ?
I thought they sell Bonds to them
Governments do borrow, and banks do hold the debt (see Unrealized Losses), but the path is not direct.
I’m not convinced the shell game matters in the end.
JP said gold is money and all else is credit.
You want less financial instability, then you have to slow down issuance of debt. So add in some (automatic) corrective stabilizers, raising the cost when as gets over 50% to 75% or 100% of GDP, ramping those costs as that number grows.
Trust in private banking in the 19th C was understandably unstable.
Invariably, loans go bad. And collateral vanishes with them.
My key suggestions: don’t tax interest receipts and don’t allow interest payments to be written off. Ie, dampen borrowing demand and reward lenders more. Downsize banking and inflation will subside too.
There is no need for either a central bank or a regular banking system. If back on a gold standard and gold and silver coins back in circulation, people can be paid in gold and silver coins, spend gold and silver coins to purchase goods and services. You could still find other financial institutions who might give you a mortgage for a home and financing for a car or a business. Monthly payments would be made with gold and silver coins as well. The one fly in the ointment would be that putting silver back into coins would make that much less silver available for industry. That would reintroduce supply and demand and silver prices would rise to reflect it’s scarcity(and true value). Going forward you would have much less use of silver for solar panels and other products(missiles, bombs etc.) which up until now, have been subsidized by the manipulation that has suppressed it’s price. The end result. No inflation, slow steady economic progress once the system re-adjusted and peace rather than endless wars. Some young silver stackers need to start the Silver Party to replace the criminal Democrat party.
Sounds nice It’s not possible IMO
Gold and silver are too scarce and too heavy and unwieldly to be used for a Modern Financial transaction by 8 Billion People
How much does a 1/10th or 1/20th of an ounce of gold weigh? Just a few grams. Not inconvenient at all. Silver once reflecting it’s true value of a $1000/oz would also not be burdensome. A 1/10th oz piece of silver in my pocket is no different than carrying a $100 dollar bill in my wallet.
I am far from being an expert in finance.
Luckily I had a trusted source of info on loan creation.
The bottom line aways came back to every loan must have collectible collateral if the loan goes bad.
I remember my first credit card and Line of Credit that I was given when I started a business. I had zero assets but an older model car and some Precious Metals (coins) from years before. I never mentioned those assets to the friendly banker. They were lending against future professional income backed by disability and life insurance. Would more than cover the loans.
I asked my trusted source of financial info and he explained how lending works. He cautioned me to only use credit cards to the point that it can be paid off monthly in full. Only borrow on the LoC for assets that would produce an income.
Within a few years, I would hear of people who got in over their head in spending on non-income producing or depreciating assets. The loans were no longer backed by a collectible asset if the loan went bad. Then the former borrower’s assets were liquidated if he had any and they were limited to cash for a few years.
Over speculating by the public and loose lending would always lead to a crisis. Sort of like playing hot potato.
If the Central Bank regulated the Lending institutions with guidelines that required collectible assets for every loan, we could eliminate much of the boom and bust.
Growth in the economy would be throttled to some extent but as a county built assets (commercial and residential RE) collateral would increase and the GDP would grow although slow and steady. Taxation would provide for necessary Government services within a limit. Spending would be reigned in but the Government would be still able to borrow for infrastructure projects that have a usefulness that spans decades and amortize the payments over time as Property taxes would cover those loans.
As long as one has 1)an income to meet and exceed your expenses 2) owning RE, Gold, Silver and other assets (businesses)that have value, one will prosper.
Same goes for the Central Bank and Commercial Banks.
Fast forward to today and we have strayed so far from the above. I know this is a simplified explanation and will attract good counter points.
Also, wars and other wasteful endeavours would be reduced.
Likely the welfare state would not happen. Charity would be delivered by Churches and well-heeled citizens.