Cash — Essential for Freedom and Democracy — US Dollar Dominance to Continue for many years yet — ESG can harm companies — Turkey Cooperation — US Oil Production Static - [06-04-2023]

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THIS WEEK’S EDITORIAL

THIS WEEK IN BOOM

1. Cash is essential to Democracy and Freedom — Austria knows this

2. US Dollar Dominance will continue for many years yet

3. ESG can harm companies — Target and Bud in trouble

4. Turkey Cooperation

5. US energy prices falling — Production static

CASH IS ESSENTIAL TO DEMOCRACY AND FREEDOM – AUSTRIA KNOWS THIS:  BOOM has written often about the importance of physical cash in an economy. Cash is the antidote to excessive credit. In many advanced economies, physical cash is now only 2 – 3% of the supply of fresh new money with bank loans originating 97 – 98% of the money supply. Credit money (originated via new bank loans) is interest bearing, dependent upon demand from borrowers and subject to interest rate influence set from central planning committees — central banks.

Availability to make and receive credit contracts (loans) is essential to any healthy economy but if the balance of fresh new money supply is tilted too much in favour of profligate, non-productive, speculative credit creation (and not cash issuance) then the economy will be more susceptible to CPI inflation and asset price inflation. Then, the conventional, centralised control mechanism via higher interest settings throws a blanket over all national economic sectors and regions. Inevitably, the best economic endeavours may suffer as much as the worst.

So money originated as cash, issued by the Treasury in sufficient volumes and distributed by the banking system (or alternatively, by governmental post offices or other governmental offices) is critical to the long term health and stability of any complex economy.  It also provides other critical components of a free, democratic society.

The people of Austria seem to understand this. Over half a Million Austrians, (530,000 to be exact), signed a Referendum Petition in 2022 calling for the right to cash payments to be enshrined in Austria’s constitution. In other words, the petition called for the unrestricted right to use cash as generally accepted payment to settle all transactions. This means that cash cannot be refused as a payment mechanism. However, Austria’s political class now appears to be refusing to move forward with adding this legal right according to the Freedom Party of Austria (FPÖ).

The Freedom Party argues that citizens would be “financially incapacitated” in a world without cash. It argues that cash represents freedom. “This freedom of choice must continue to exist in the future. Cash is data protection in action. Cash is printed freedom.” “Cash means survival, freedom and self-determination”.

Austria has a total population of almost 9 million so almost 6% of the total signed the petition. But 25% of Austrians are aged below 24 years. Thus, perhaps 8% of adults may have been signatories. A referendum should proceed.

According to reports from within Austria, the centre-right Austrian People’s Party (ÖVP), which has supported the right to cash for many years, is now joining the left-wing parties of Austria and blocking all attempts to add this right to the country’s constitution.

It seems that this matter will be settled in an election if this blockade is not cleared and, if so, such an election would be historical. It would be the first election in history where preserving physical cash became the major issue.

US DOLLAR DOMINANCE FOR MANY YEARS YET: Moody’s Corporation is a company that issues credit ratings. It was founded in 1909 by John Moody, the man who invented bond credit ratings. Last week, Moodys released a statement on the US Dollar that said “We expect a more multi-polar currency system to emerge over the next few decades, but it will be led by the greenback because its challengers will struggle to replicate its scale, safety and convertibility in full.”

BOOM agrees with this statement, as regular readers will know. The global dominance of the US Dollar is maintained by the large volume of US Dollars held offshore making it the most readily available and convenient currency to use in settlements of international trade and capital movements. These off shore dollars are not under the control of the US government, the US Treasury Department or the US financial regulators. They are not exported from the US. They are mostly created offshore as US Dollar denominated loans in tax haven banks. Those loans are made to large, global corporations seeking to finance expansion.  As a result, at present, other currencies simply cannot be found in sufficient volumes off shore to threaten the so-called “reserve currency” role held by the US Dollar.

BOOM is often asked how long this situation can last. And the answer is always the same – “it can last for perhaps another 50 – 100 years”. Of course, that may be an over estimation. A multi-polar world of currency settlements is an honourable and important goal but it will not and cannot happen quickly. Analysts who preach that “the US Dollar will collapse soon” are simply not sufficiently cognisant of US Dollar convenience and availability aspects in global settlements.

ESG CAN HARM COMPANIES — TARGET AND BUD SINKING:  Environmental, social, and governance requirements, otherwise known as ESG, are defined by Wikipedia as “a business framework for considering environmental issues and social issues in the context of corporate governance”. “It is designed to be embedded into an organisation’s strategy that considers the needs and ways in which to generate value for all organisational stakeholders (such as employees, customers, suppliers, and financiers).”

The key words here are “considering” and “considers”. A company should consider all of these things but surely must be careful to not adopt policies that may lead to the detriment of its continued existence as a viable business entity?  Unfortunately, ESG requirements for companies are slowly but surely turning them into hotbeds of political action and this creates a potential for corporate self -harm. That may be a good thing if a company makes a product or service that may be harmful to society. It may be a bad thing if the ESG goals are poorly constructed and harmful to a company that makes essential, beneficial products and services.

Over the last 3 – 4 decades, politicisation has already happened in many national education systems, especially in universities. Schools and universities are not (generally) profit orientated institutions. Their survival is based upon a more complex mix of funding channels. However, within any business organisation, political goals will inevitably create conflict with the need for companies to seek profit. And, after all, profit is necessary for their very survival. It is obvious that if political goals are allowed to dominate over profit-seeking, then company revenues may inevitably suffer and, if those companies are publicly listed, shareholders may abandon them slowly but surely or perhaps rapidly. The ultimate nightmare for any business manager is to see their sales, revenues and profits suddenly declining while their shareholders run for the hills.

This dynamic is being played out right now in regard to Target and Anheuser-Busch (Budweiser) in the United States. The charts – courtesy of Stockcharts – clearly display the actions of some of their shareholders. Those shareholders are selling out because they perceive that the companies are pursuing controversial political goals which clash with their own personal values. Anecdotes tell us that their customers are also turning to alternative products.

It’s hard to describe exactly what is happening and why but one thing is certain. The charts don’t lie. Target’s shares have fallen almost 20% since the current controversy arose in the public domain. Anheuser-Busch’s shares have also fallen by the same amount, around 20%. They began their fall in early May after the release of the now famous “trans” promotion. Of course, these share price falls could be caused by other factors. However, these are serious and sudden declines in market capitalisation. If they continue, then both companies may have damaged their ability to pay future dividends and to raise capital just to meet some ill-defined ESG goal.

And, by the way, it’s important to know that these share price weaknesses did not arise in just the last 4 weeks. Over the last 18 months, Target’s shares have fallen by more than 50% and Anheuser-Busch shares have fallen by 50% since mid-2016. Charts: TGT and BUD over the last 6 months:

TURKEY COOPERATION: Turkey is a critical nation in the Global Geopolitical balance. It is a NATO member with a large military force and, through its President Recep Erdogan, it seeks a destiny independent of interference from larger nations. This is a difficult course to follow and it requires a delicate act of political skill.

Last week, the Chinese President Xi Jinping congratulated Erdogan on winning his re-election, referring to “extensive common interests” between their countries. Xi said he “stands ready to work with Erdogan to promote mutual understanding and mutual support” and to boost “the two countries’ cooperative relationship.”

Vladimir Putin also sent a congratulatory message to the Turkish President: “your victory in the elections was a natural result of your selfless work as head of the Republic of Türkiye, and is clear evidence of the Turkish people’s support for your efforts to strengthen state sovereignty and pursue an independent foreign policy.”

Victor Orban, the President of Hungary, congratulated Erdogan with this Twitter message – “Congratulations to President Erdogan on his unquestionable election victory”.

The Prime Minister of India, Narendra Modi, tweeted a similar message “Congratulations President Erdogan on re-election as the President of Türkiye! I am confident that our bilateral ties and cooperation on global issues will continue to grow in the coming times.”

The US President, Joe Biden, chimed in but with a slightly more nuanced Twitter message — “I look forward to continuing to work together as NATO Allies on bilateral issues and shared global challenges“. Biden seemed to put NATO objectives forward as his objective rather than having thoughts for future friendly cooperation between the US and Turkey. There was possibly a taint of “do as I say, or else” in the message. At the least, it could be interpreted as such.

Turkey is the only member that has not sanctioned Russia over its military operation in Ukraine. Last year, they hosted peace talks between Moscow and Kiev. Turkey also negotiated the Black Sea Grain Initiative that allowed Ukrainian wheat to be transported safely to world markets with Russia’s cooperation.

Unfortunately, Turkey’s economy appears to be under persistent attack by forces unknown with its currency plunging against the US Dollar on global currency exchanges. In fact, over the last 22 years, since the turn of the century, a Turkish citizen holding US Dollars has seen their currency investment appreciate 20-fold against their national currency, the Turkish Lira. This can cause hyperinflation inside Turkey if the US Dollar is allowed to circulate freely. Currently, the Turkish annual CPI inflation rate is 43.7%. Thankfully, over the last 6 months, it has been in decline from its recent high of 85.5%.

It would be wise for Turkey to strictly ban all foreign cash in circulation as soon as possible plus all foreign currency denominated loans in their banking system. It would also be wise to limit foreign currency deposits in the commercial banking system. A nation’s currency is a key element of societal trust and general acceptance. It must be protected and supported by the national government. The circulation and acceptance of foreign currencies should be banned in all nations.

US ENERGY PRICES FALLING AS PRODUCTION IS STATIC:  In mid-2018, daily crude oil production in the US stood at around 11Million Barrels per day. Steady growth then occurred and it reached a high point at 13Million Barrels per day during the first few months of 2020. Then, very suddenly, US oil production fell sharply from 13 to 10.5Million Barrels per day by early June. Something dramatic had occurred that triggered the drop in output – the Covid Panic and Fear campaign.

After June 2020, production stabilised around 11Million Barrels for the next 14 months. Sharp reductions in production occurred during this period from time to time but the average production stabilised towards an average of around 11Million Barrels per day.

After October 2021, US production slowly began to recover and rose again in a relatively steady pattern. However, since January 2023, oil production has stopped rising and has stabilised around 12.0 – 12.2Million Barrels per day. The period of growth appears to have ended and production now seems to have become static.

Over the last few weeks, crude oil prices have been falling again in the United States, confirming the downtrend that began 12 months ago. If prices fall while supply is static, it suggests (strongly) that demand for energy in the US economy is falling. The price chart for Light Crude Oil (Continuous Contract at the CME) shows the downtrend in price since June last year:

Other US energy prices are also continuing to fall recently:

A fall in demand for energy accompanied by falling prices suggests that the US economy is no longer growing.

Alarm bells should be ringing in Washington DC but they are not. American politicians seem blissfully unaware of what is happening in their economy at large. They prefer to play politics or games of foreign war. They play games of budgetary finance. They invent threats. They focus only on the election cycle. They indulge in gender politics and identity politics. They are easily distracted by these agendas, arguably controlled by the mainstream media who are also, arguably, in turn, controlled by unelected people and foreign, non-governmental organisations. Democracy is undermined by these influences.

This happened in Rome in AD 64, thirty years after they crucified Christ. The city was burning but the Emperor, Nero, is said to have watched on and played fiddle in his palace. Nero was popular with the members of his Praetorian Guard and lower-class commoners. He was apparently also popular in the Roman provinces but the Roman aristocracy did not approve of him. Many sources describe him as tyrannical, self-indulgent, and debauched. After being declared a public enemy by the Roman Senate, he committed suicide at age 30 in the year AD 68.

The Roman Empire continued for another 160 years after Nero’s death before it slowly began to unravel. Things happen more quickly in modern times. The US economy and the US Dollar Empire are both at stake here. The politicians in Washington DC seem willing to gamble with both. Irrationality seems as rampant there as in Western Europe.

QB Explained: https://boomfinanceandeconomics.wordpress.com/2019/12/15/boom-as-at-15th-december-2019/  AND BOOM’s Perfect Economy: https://boomfinanceandeconomics.wordpress.com/2020/01/18/boom-as-at-19th-january-2020/

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.

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.

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).” Reference: https://www.bundesbank.de/en/tasks/topics/how-money-is-created-667392

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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