BOOM Finance and Economics 3rd March 2024 -- a Global Review
WEEKLY -- On Sunday -- All previous Editorials are available at LinkedIn and at Wordpress https://boomfinanceandeconomics.wordpress.com/
US DOLLAR STRENGTH HYPOTHESIS
USA — THE GIANT SOCIALIST NATION?
OWNERSHIP OF THE US FEDERAL RESERVE (CENTRAL BANK)
OWNERSHIP OF OTHER CENTRAL BANKS
THE BANK FOR INTERNATIONAL SETTLEMENTS
US DOLLAR STRENGTH EXPLAINED
This is a chart of the US Dollar Index illustrating US Dollar strength over the last 5 years. This begs the question — How is US Dollar strength maintained?
CHART — US DOLLAR INDEX OVER 5 YEARS
For well over 30 years, BOOM has been reading predictions of US Dollar collapse. These predictions of collapse never eventuate. The “analysts” who promulgate these theorems almost always refer to “unsustainable national debt”, “inflation risks”, “inevitable Hyperinflation”, “surging Gold prices” and then predict the “inevitable collapse of the US Dollar” against (presumably) all other currencies along with “severe economic Depression”, “stock market collapse” and social chaos inside the United States, even civil war.
To reiterate, none of these events ever come to fruition. But that does not stop the predictions. In fact, they continue in abundance. After all, they are useful in selling newsletters, books, conferences, “educational” cruises and podcasts. The authors of these doom laden predictions almost always promulgate the idea of “sound money” (commodity backed). And, not surprisingly, these merchants of economic doom are almost always backed by the gold industry.
In BOOM’s view, so-called “sound money” is an intellectually bankrupt concept but somehow it is very appealing to uninformed citizens who think that nation states should manage their budgetary affairs just like a prudent household does. In other words, they think that a nation’s government should arrange for the accumulation of precious savings (profit) in order to effect payment of outstanding debts.
BOOM reminds readers that nation states do not go cap in hand to a commercial bank seeking loans to fund their deficits. They issue Bonds. And that is a very, very different form of “debt” compared to a bank loan. Also, nation states (generally) do not die and (generally) do not default on their bond contracts. Sovereign default can occur but is actually quite rare. Nation states do not become unemployed and they do not become ill or incapacitated by injury or illness. In financial terms, they are (generally) regarded as immortal beings. This is very different to a human household which must borrow from banks, be prudent and must aim to pay off its debts.
However, rather than endlessly discussing the so-called “inevitable” collapse of the US Dollar, BOOM prefers to look at why the US Dollar continues to display strength.
Some observers argue that the foreign policy objectives and actions of the United States since the Bretton Woods Agreement in July 1944 illustrate a virtuous circle which strengthens international acceptance of the US Dollar and increases offshore volumes of the US Dollar. This argument seeks to explain all the wars that the USA has been engaged in since the end of World War Two as being perpetrated for the benefit of US currency hegemony.
BRETTON WOODS HOTEL NEW HAMPSHIRE - WHERE US DOLLAR DOMINANCE WAS ESTABLISHED
Of course, the US State Department will always advance principled reasons for conducting those wars. They will invoke words such as “democracy” and “freedom” in their explanations with no reference to maintaining global reserve currency status for the US Dollar.
BOOM presents the following in the spirit of discussion and discovery, as a possible aid to understanding US Dollar global dominance and strength since 1944.
The virtuous circle hypothesis is explained thus --
1. The US contributes significantly to Geopolitical chaos and uncertainty which ….
2. Strengthens the US Dollar (compared to other national currencies) which ...
3. Increases global expenditure on US weapons which must be paid for with US Dollars which ….
4. Increases demand for US Dollars offshore …… which allows the US to interfere in the ….
5. Domestic policies of other nations causing more Geopolitical chaos … which ….
6. Strengthens the US Dollar (compared to other national currencies)
Readers will see that this is, in effect, a “virtuous circle” – for the United States. A virtuous circle is a term that describes a positive feedback loop of desirable events (in this case, for continued US Dollar demand and strength). Some argue that this is deliberate strategy conducted by a cynical US Department of State. Others say that the US is simply dragged reluctantly into Geopolitical chaos because of its military dominance. Both hypotheses are feasible.
This “virtuous” circle (or non virtuous to some) is strengthened by the creation of offshore US Dollars by Tax Haven banks when they issue US Dollar denominated loans to corporate borrowers. Those loans are most often used to purchase assets in nations other than the USA and those assets are used as collateral to secure the loans. The United States government has nothing to do with the creation of these offshore US Dollars which reside on foreign bank ledgers. They are called “Eurodollars” wherever they appear on bank ledgers. For example, US Dollars that appear on Japanese bank ledgers or South African bank ledgers or Cayman Islands ledgers are still called “Eurodollars”.
VIRTUOUS CIRCLE OR NON-VIRTUOUS CIRCLE?
To examine the hypothesis of the virtuous/non virtuous circle, it is instructive to look at the List of Wars involving the United States since 1945. Perhaps World War Two never ended? BOOM presents the list from Wikipedia.
Korean War
(1950–1953) Korean Peninsula
Vietnam War
(1955–1964, 1965–1973, 1974–1975) North and South Vietnam
Laotian Civil War
(1959–1975) Laos
Permesta Rebellion
(1958-1961) Indonesia
Lebanon crisis
(1958) Lebanon
Bay of Pigs Invasion
(1961) Cuba
Dominican Civil War
(1965–1966) Dominican Republic
Korean DMZ Conflict
(1966–1969) Korean Peninsula
Cambodian Civil War
(1967–1975) Cambodia
Multinational intervention in Lebanon
(1982–1984) Lebanon
United States invasion of Grenada
(1983) The Island of Grenada
Bombing of Libya
(1986) Libya
Tanker War
(1987–1988) Persian War -- Part of the Iran–Iraq War
United States invasion of Panama
(1989–1990) Panama
Gulf War
(1990–1991) Iraq, Kuwait, Saudi Arabia, and Israel
Iraqi No-Fly Zone Enforcement Operations
(1991–2003) Iraq
First U.S. Intervention in the Somali Civil War
(1992–1995) Somalia
Part of the Somali civil war (1991–present)
Bosnian War and Croatian War
(1992–1995) Bosnia and Herzegovina and Croatia
Part of the Yugoslav Wars
Intervention in Haiti
(1994–1995) Haiti
Kosovo War
(1998–1999) Serbia
War in Afghanistan (20 Years)
(2001–2021) Afghanistan
US intervention in Yemen
(2002–present) Yemen
Iraq War
(2003–2011) Iraq
US intervention in the War in North-West Pakistan
(2004–2018) Pakistan
Second US Intervention in the Somali Civil War
(2007–present) Somalia and Northeastern Kenya
Operation Ocean Shield
(2009–2016) Indian Ocean
International intervention in Libya
(2011) Libya
Operation Observant Compass
(2011–2017) Uganda
US military intervention in Niger (10 Years)
(2013–present) Niger
US-led intervention in Iraq
(2014–2021) Iraq
US intervention in the Syrian civil war
(2014–present) Syria
US intervention in Libya
(2015–2019) Libya
Operation Prosperity Guardian
(2023–present) Red Sea, Gulf of Aden and Yemen
This extensive list of wars are those in which the United States has played a key part since 1945. To see the full list of US wars since the Declaration of Independence in 1776, go to this Wikipedia presentation. You will be surprised.
https://en.wikipedia.org/wiki/List_of_wars_involving_the_United_States
BOOM suggests you study it carefully after reading this editorial. Especially noteworthy is the 19th century where the US was at war almost continuously. In fact, 58 wars in total are listed for the 19th century.
This period is often held up by “sound money” exponents as being wonderfully prosperous for the people of the United States because of the so-called Era of Free Banking from 1836 – 1862 (when there was no central bank). History, however, reveals that there was no outbreak of happiness and peaceful prosperity. The “sound money” dreamers simply ignore the carnage from the almost endless warfare, economic mayhem and massive monetary upheavals. The Era of Free Banking was certainly no picnic.
Wars conducted by the US since 1945 make an impressive list. However, US Military Operations during that time frame are far more extensive. Readers can only marvel at that list which can be found at Wikipedia. US Military Operations:
https://en.wikipedia.org/wiki/Timeline_of_United_States_military_operations
Then there is a Timeline of US Covert Operations. Most covert action by the United States is carried out by the Central Intelligence Agency (the CIA), founded soon after World War Two, which has its own paramilitary branch. However, members of the military’s special-forces units also take part in such activities in many instances.
A Timeline of US Covert Operations can be found here --
https://www.voanews.com/a/us-covert-actions-119012884/174608.html
Then we must also consider Clandestine operations (which are separate from Covert operations). These can be discovered by reading a report titled -- Covert Action and Clandestine Activities of the Intelligence Community: Framework for Congressional Oversight In Brief. That report was produced in 2019 by the Congressional Research Service and is certainly worth perusing.
https://crsreports.congress.gov/product/pdf/R/R45196
It refers to “seventeen diverse elements” (17) of the so-called “Intelligence Community” and states “by their very nature, these and other intelligence programs and activities are classified and shielded from the public”. Covert action is defined in statute (50 U.S.C. §3093(e)) as “an activity or activities of the United States Government to influence political, economic, or military conditions abroad, where it is intended that the role of the United States Government will not be apparent or acknowledged publicly.”
“Congress does not have the authority to approve or disapprove covert actions, it can have (and has had) influence on the President’s decision”.
The term clandestine describes a methodology “for a range of activities wherein both the role of the United States and the activity itself are secret. Clandestine activities can involve traditional intelligence or unconventional military assets. Like covert action, their impact can be strategic even though a specific activity may be tactical in scope. Their secret character suggests the potential harm to sources and methods in the event of an unauthorized or unanticipated public disclosure.”
It is estimated that the US spends approximately US$ 90 – 100 Billion per year on these Covert and Clandestine “activities”. Very little is accounted for to the Congress. US political representatives and citizens have very little idea of where these monies are spent each year.
The US maintains hundreds, if not thousands, of military bases inside and outside of their borders. At least 800 such bases are maintained in 70 nations. Readers can examine a list which also begs the question — why?
American Military Installations:
https://en.wikipedia.org/wiki/List_of_American_military_installations
The US is not directly involved in the current war in Ukraine. However, it is arguable that the war in Ukraine (or “special military operation” as Russia describes it) has been a success for the US Dollar Empire and the US Military Complex. Pressure has been brought to bear on many nations in Western Europe to double their annual military expenditures – from 1 % of GDP to 2 %. And, of course, much of that extra expenditure on weapons must be settled with US Dollars.
Here is the US Dollar strength over the last 15 years – as measured via the US Dollar Index ETF (UUP), listed on the New York stock exchange. Does it look weak? Or strong? BOOM thinks the answer is obvious.
CHART — US DOLLAR INDEX OVER 15 YEARS
The US Dollar Index is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of US trade partners' currencies. The Index goes up when the US dollar gains "strength" (value) when compared to other currencies.
The index is designed, maintained, and published by ICE (Intercontinental Exchange, Inc.), with the name "US Dollar Index" a registered trademark.
It is a weighted geometric mean of the dollar's value relative to following select currencies:
Euro (EUR), 57.6% weight
Japanese yen (JPY), 13.6% weight
Pound sterling (GBP), 11.9% weight
Canadian dollar (CAD), 9.1% weight
Swedish krona (SEK), 4.2% weight
Swiss franc (CHF), 3.6% weight
The hypothesis of deliberate global Geo-political de-stabilisation in support of US Dollar strength is not proved by these military facts. The virtuous/non virtuous circle theory remains conjectural.
However, one must ask the question — is all of this military activity intended to create a defence of the US homeland? Or is it intended to create global instability?
Another question arises here. What other nation has embarked upon such all-encompassing external military action since World War Two?
As far as BOOM can ascertain, the USSR embarked upon a misguided invasion of Afghanistan that lasted for 10 years from 1979 - 1989. The USSR collapsed and disappeared soon afterwards. The Russian Federation now has just nine external military bases — all in former states of the USSR — (excluding their special military operation in Ukraine) while China has two in Djibouti and Tajikistan plus a handful of bases on islands in the South China Sea. China invaded Tibet way back in 1950.
The military threat to the US homeland seems grossly exaggerated when these facts are examined.
UNITED STATES — THE GIANT SOCIALIST NATION? — USSA?
The US government now spends almost $ 1 Trillion on “defence”. And the military industrial complex expenditure, fuelled by equity capital and corporate debt, is in addition to that. No other nation comes close.
Could the giant Wurlitzer of US government expenditure on military bases and weapons actually be a huge socialist inspired expenditure program aimed at maintaining employment and industries dedicated to the task? A never ending monetary stimulus program? Or is it aimed at maintaining US Dollar dominance globally?
These questions must be asked but remain unanswered.
OWNERSHIP OF THE FEDERAL RESERVE
Another controversial subject is the matter of ownership of the Federal Reserve – the central bank of the United States. BOOM continues to hear that this is “secretly owned by one family” or “secretly owned by a number of rich foreign families” or “owned by a small group of foreign banks”. There are many variations on the theme which (always) implies that the people of the US are somehow controlled financially by powerful, foreign entities.
BOOM acknowledges the potentially harmful and suspicious involvement of the banking system with representative governments in almost all nations. This is certainly a matter for serious consideration and discussion. If citizens knew how badly their political representatives understand (or fail to understand) the world of banking and finance, they would become very concerned. However, it is rare to find any deep examination of central bank ownership. So let’s dive deep and see what can be found easily.
The Federal Reserve (America's central bank) is privately owned by a group of commercial and investment banks. That is a fact.
There is much obfuscation of this but it is easy to find the truth. The Federal Reserve website describes its ownership thus -- "Some observers mistakenly consider the Federal Reserve to be a private entity because the Reserve Banks are organised similarly to private corporations. For instance, each of the 12 Reserve Banks operates within its own particular geographic area, or District, of the United States, and each is separately incorporated and has its own board of directors. Commercial banks that are members of the Federal Reserve System hold stock in their District's Reserve Bank."
And from Wikipedia's explanation -- "The US Government does not own shares in the Federal Reserve System or its component banks, but does receive all of the system's annual profits after a statutory dividend of 6% on their capital investment is paid to member banks and a capital account surplus is maintained."
And -- "The Federal Reserve Act created a system of private and public entities. There were to be at least eight and no more than twelve private regional Federal Reserve banks."
"Democratic Congressman Carter Glass and Senator Robert L. Owen crafted a compromise plan in which private banks would control twelve regional Federal Reserve Banks, but a controlling interest in the system was placed in a central board filled with presidential appointees.
Note this on the website for the Federal Reserve Bank of New York -- in regard to its Directors ....… Reference:
https://www.newyorkfed.org/aboutthefed/org_nydirectors
About the Board of Directors
Under Section 4 of the Federal Reserve Act, each Federal Reserve Bank, including the Federal Reserve Bank of New York, operates pursuant to the supervision of a Board of Directors, in addition to the general supervision of the Board of Governors in Washington, DC. The Bank’s Board of Directors has nine members, all chosen from outside the Reserve Bank, who are divided into three equal classes—designated A, B and C.
Class A directors are required to be representative of the member banks in the District and for the most part they have been officers or directors of member banks or their holding companies.
Class B and Class C directors are required to represent the public “with due but not exclusive consideration to the interests of agriculture, commerce, industry, services, labor and consumers.”
"Furthermore, all directors, like all Reserve Bank employees, are generally precluded from participating in any matter in which they have a financial interest. These constraints are designed to minimize the risk of an actual or perceived conflict of interest at the board level."
Class A Director Facts
Elected by member banks
Elected to represent stockholding, “member” banks
Class B Director Facts
Elected by member banks
Elected to represent the public
Class C Director Facts
Appointed by the Federal Reserve Board
Chosen to represent the public
(Note the presence of President of the Rockefeller Foundation as a Class C Director of the New York Federal Reserve)
It is actually not complicated. But you have to read between the lines. The US Federal Reserve structure allows private banks to have influence without appearing to do so. And it allows the US Government to have influence without appearing to do so. There are direct benefits and indirect benefits to each participant. The US Government makes the senior appointments (a direct benefit). However, they will (obviously) listen to any recommendations in that regard from the banking sector (an indirect benefit).
Contrary to popular opinion, most central banks almost always are banned from issuing currency into their real economy (where goods and services are provided). They may distribute the national currency as Notes and Coins via the commercial banks but that is different to being the "Issuer".
Thus, the idea that "central banks are printing too much money" is false at the get go. They control the cost of money directly but not the volume of money and they cannot control borrower demand directly. Direct volume controls are only allowed in China (!).
There are some exceptions to this e.g. the Bank of Russia which still has the power to issue currency into the real economy (a carry-over from their communist times when the central bank issued ALL of the currency in the USSR economy). However, the modern Bank of Russia now will never use that power unless it desperately has to. In such a case, it is similar to a QE program when done in other central banks.
The Peoples Bank of China is the central bank of China. They operate a Potemkin Village system of "private commercial banks". It is carefully managed (in BOOM’s opinion, the best managed monetary system on the planet). They infuse fresh new money into the money supply by having State Owned Enterprises (SOE’s) to borrow strictly defined volumes from the Commercial Banks. They also monitor the loan books of their informal Shadow Banking system carefully and use it to keep the money supply flowing while restricting the formal Commercial Banks lending (when necessary). Volume and cost controls are used in those circumstances. The Chinese rely on bank loans to finance their economy much more than bond issuance. This allows them to expand the money supply very purposely because bond issuance does not contribute to the supply of fresh new money (while bank loans do). This gives them a major advantage over Western economies where bond issuance by governments, corporations and municipals do not increase the supply of fresh new money.
There is no formal, direct connection between the US Federal Reserve and other national central banks such as the Reserve Bank of Australia, the Bank of Japan, the Bank of Canada unless they engage in Currency Swap arrangements. This reference explains those.
https://som.yale.edu/story/2023/central-bank-swap-lines-primer
OTHER NATIONAL CENTRAL BANKS
Please note that the word "assets" in the banking sector is quite different to the use of the word in the real economy. An “asset” in banking is often in reference to a loan that has been agreed with a borrower.
Unlike the US Federal Reserve, the vast majority of national central banks are owned by their national governments. Most cannot issue currency and are restricted to trading in assets. The owners of central banks, mostly governments, generally receive a share of central banks’ profits and are most often responsible for making executive appointments. But the day-to-day control of the central bank is delegated to the central bank’s senior management and policy committees. This is similar to how large commercial corporations are owned and operate.
Some central banks are joint private/public in their ownership structure.
You can buy shares in some of the major central banks e.g. the Swiss National Bank, Bank of Japan and Banca d'Italia. Their shares are listed on their national stock markets. You can buy those shares with the click of a computer mouse. Other smaller central banks have mixed ownership structures e.g. Belgium, San Marino, Turkey, Greece and South Africa.
For example, the Bank of Japan has a Market Capitalisation of US$ 29 Billion. It pays no dividend and has been a poor investment over the last 23 years.
The chart here is from Yahoo Finance — For Bank of Japan Shares over 15 years.
CHART BANK OF JAPAN — 15 years
The following images are sourced from Bank Underground:
https://bankunderground.co.uk/2019/10/18/the-ownership-of-central-banks/
The central banks of Japan, San Marino and Turkey have some private sector shareholders but the majority shareholder is the national government. In Belgium and Switzerland, around half of the shares are held by the government. The American, Italian, and South African governments have no formal ownership stake in their central banks.
THE BANK FOR INTERNATIONAL SETTLEMENTS
Then there is the BIS, the Bank for International Settlements, based in Basel, Switzerland, established in 1929, post World War One. To learn about that, please read this book -- The Tower of Basel by the author Adam Lebor.
“Tower of Basel is the first investigative history of the world's most secretive global financial institution. Based on extensive archival research in Switzerland, Britain, and the United States.”
“Created by the governors of the Bank of England and the Reichsbank in 1930, and protected by an international treaty, the BIS and its assets are legally beyond the reach of any government or jurisdiction. The bank is untouchable. Swiss authorities have no jurisdiction over the bank or its premises. The BIS has just 140 customers but made tax-free profits of 1.17 billion in 2011-2012.
Since its creation, the bank has been at the heart of global events but has often gone unnoticed. Under Thomas McKittrick, the bank's American president from 1940-1946, the BIS was open for business throughout the Second World War. The BIS accepted looted Nazi gold, conducted foreign exchange deals for the Reichsbank, and was used by both the Allies and the Axis powers as a secret contact point to keep the channels of international finance open.”
In economics (and finance), things work until they don’t. Do your own research. Make your own conclusions. BOOM does not offer investment advice.
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