Money Models how Banking, Reserves and Money Works

By pjain      Published May 23, 2021, 5:55 p.m. in blog Invest   

Banking and Money Flows 101

Evolution of Money

Barter

Gold, Metal Coins worth weight

State STAMPED inferior worth

Paper Money

Banking Store of Money - Paper Letters of Credit

Plastic, Credit cards, Economic, Clearing Houses

Electronic Money, ACH, Debit Cards, Money Transfers Globally

Stable coins, Currency Backed Digital Money

Crypto Currency and Exchanges

Anglo Markets-led Models of Capitalism, Banking and Money Flows

Anglo-Saxon Colonialism based in British Empire 1600+

The term "Anglo-Saxon Model" describes the predominant socio-economic-political lifestyle of English speaking countries emerging from British Empire esp. US, UK, Ireland, NZ and Australia. Canada partially adheres to this having gone more socialist. However, the word "Saxon" is inappropriate as Germany has clearly separated from the British models.

At its most basic level, an Anglo-Saxon economy enforces low levels of taxes and government regulations. It promotes reduced government involvement in providing public services and a greater freedom for private property and business rights.

Key Tenets of Anglo Model - Free markets At any Cost

  1. Market competition. This competition fuels innovation which results in increased wealth generation. According to this model, private companies that are not able to work creatively and efficiently will go out of business, making more opportunities for new ventures.

  2. Profit Centricity - companies focus on the interests of the shareholders rather than its employees or society benefits.

  3. Efficiency, Job insecurity. So it brutally often leads to job insecurity, reduced social services, and increased social inequality.

  4. Short-term Outlook - Often ESG grow longer. But a key disadvantage is it focuses too much on earning profit as quickly as possible, and therefore does not place enough emphasis on long-term planning and sustainability.

  5. Inequality, Also the top management which controls the terms of their compensation, tends to promote inequality among employees and eventually higher levels of poverty or at best wage stagnation. This in turn kills the middle class and can lead to consumption declines and economic problems.

Macro Derivatives and Impact

Its benefits include ease of access to liquidity by encouraging free trade, promote risk-taking with the promise of high reward as an engine of innovation, and securities markets abetting dispersed ownership and corporate financial self-sufficiency.

  1. Independent currency issuance and control by the Government. This is very different than the ECB/EU model.

  2. Capitalism and "Free Markets" Rule. It is characterized by its reliance on free enterprise, private ownership, competitive markets, comparatively limited government intervention and active deregulation esp. whenever conservatives like Trump come to power.

  3. Checks-and-Balances legal system heavily laden with Common Law, representative government and constitutional parliamentary democracy.

  4. Lobbyists and Populism dominates political discussion, with a 2-party system - but under the hood, both labor and conservatives' strings are pulled by corporate interests and big money billionaires due to electoral system manipulation.

  5. Little or No Nationalization of Private assets, Few or No Public Sector Banks and Units.

  6. Health Care - used to be fee-for-service to insurance-contracts, with pharmas being "market-priced". However now only

  7. Big Oil/Gas support and fiscal support and a denial of climate change, regressive forest/wildfire policies, setc.

  8. Elitist Top Educational systems and Abhorrent Public Education free K-12, exclusive College.

  9. Little Social Safety Nets or Social Security Systems. However this is only for USA as others have moved on and provide nearly EU style social welfare systems.

  10. Substantial weakening of union powers (such as in the United States and United Kingdom)

  11. Boosting Entrepreneurship. All forms of government interference are seen as a sudden disruptions and bad for economies and business formation. It makes conducting business easier given the reduced level of government involvement.

Adam Smith 1700s

Believed that self-regulation would lead to economic growth, a similar concept to laissez-faire economics. This idea was expanded upon by several economists in the early and mid-1900’s.

1930s

This acceptance of a liberal market economy was motivated by a period of economic stagnation and inflation that led to a rejection of previously practiced Keynesian economics.

1948-1973 Middle Class Boom in Social Welfare Policies

It was probably a surprise to free-market advocates that the Post WWII welfare state model based on social democracy ushered in a remarkable period of broad-based growth. In the United States, for instance, annual productivity growth averaged 2.8 percent from 1948 to 1973, and progressive taxation and pro-labor policy significantly reduced income disparities and created a robust middle class in what is commonly called "the Great Compression."

1970s Stagflation due to Union power and OPEC destruction of Cheap Oil

The success of the postwar welfare state sowed its own demise as full employment greatly strengthened labor unions' hands and led to excessive welfare demands and practices that alienated not only the rich but eventually the middle class as well.

The stagflation of the 1970s amplified the public's disenchantment with these excesses, even though they continued to value the social safety net provided by the state.

Chicago School - Nearly Rabid Free-Market Beholden to Large Private Parties

These theories are now referred to as the Chicago School of Economics which led to the Anglo-Saxon capitalist model of the 1970’s.

1980s Thatcher-Reagan Model of greed as goodness, Supply Side, Low taxes

Initially popularized by Margaret Thatcher and Ronald Reagan, the Anglo-American model of capitalism enjoyed its heyday right after the collapse of the Soviet Bloc in the early 1990s. Although the actual economic records of Thatcher and Reagan left much to be desired, the collapse of the Soviet Bloc "communism" ushered in a triumphant era for the Anglo-American model of capitalism.

Conservative politicians in an era of anti-union sentiment saw an opportunity to dismantle the welfare state, and adroitly combined the rhetoric of individual liberty and free enterprise.

It swayed the now-suffering rural electorates with indirect racism, equating of outright bellicose provincialism with patriotism, the reframing of bigotry as small-town decency.

Although the advocates of the Anglo-American model of capitalism have tended to present it as an embodiment of irrefutable economic principles, it was actually a product of political and commercial calculations.

2008 Crash traced to Rolling Back Banking Regulation in 2000

Widening income disparities and repeated economic crises over the past decade have reduced Anglo finance model's appeal around the world. Although it successfully eliminated the excesses of the postwar welfare state, its attack on the government and worship of the market failed to deliver broad-based, sustained growth. The current global financial crisis, combined with the resurgence of progressive politics, is likely to hasten its demise and usher in a new era of expanded role for the government and strengthened financial supervision on a global scale.

One theory suggests that the liberal economics of the 1970’s contributed to the 2008 global economic crisis.

The financial crisis of 2008 has been traced back to the

  1. Balloon Payments after Years of Low Rates and Easy Qualifying. U.S. sub-prime mortgage markets, whereby low U.S. interest rates between years 2004-2006 sharply increased from 1% to 5.25% – leaving those who had hardly been able to afford mortgages to begin with unable to repay the banks.

  2. Financial Innovations, CDOs, Bulletproof Bundles of Securitized and Unverifiable Debt. Mortgage debts are asset-backed securities, and non-payment allows the banks to recoup potentially expensive loss of value through a legally protected right to acquire those mortgaged properties.

  3. Lowering of Standards in Greed to Issue MBS high profit to resell to Greater Fools. However, this crisis was insinuated with dramatic property price depreciation because people were in effect demanding what they could not afford, thus artificially marking prices upwards and creating a housing price “bubble”.

  4. Uncontrolled Surge in Defaults. As a surge in loan defaults hits, creating pools of ‘toxic’ debt whereby the ‘diversified portfolio’ risk approach had spread rather than offset the problem.

  5. Credit Crunch, Lack of Liquidity. This in turn decreased bank confidence in lending, as each bank questioned the validity and health of the financial instruments other banks were offering – causing a “credit crunch”; a contraction in the credit banks make available for lending.

  6. Wall Street came out Ahead. Banks were favored over millions of homeowners - PE bought out homes for pennies on the dollar.

Keynes’ fiscal and monetary remedies were adopted in healing economies worldwide, with some of the largest ‘quantitative easing’ measures to date taking place in the Anglo-Saxon systems. But this has led to nearly 13 years of near zero rates and rapid rise in indebtedness.

France and Germany blamed the Anglo-Saxon – read the US – model for the mess in the world economy. French president Sarkozy’s threat to walk out if the Summit did not devise steps to reverse the Anglo-Saxon policies and practices in financial markets led to the G20’s powerful campaign against the tax havens. The G20 also disowned the old Washington consensus which was the mother of the Anglo-Saxon financialism.

Corporate Governance Model is flawed

corporate governance and ownership obligations between the Anglo-Saxon and Rhineland models still remains. The former places regulation and supervision of business on market forces, with weak and ineffective governance systems [Dore, 2000]. The former places supervisory functions in the dual-board system, and still largely depends on long-term, cross-shareholdership [Kono & Clegg, 2001]. Ownership in the Anglo-Saxon system is more price-oriented (fluctuations in share price in the stock market has big effects on demand for such shares), whereby this is not true of the Rhineland and Chinese systems. Indeed, just as the Anglo-Saxon systems have experienced a capitalist-managerial revolution, a counter-revolution may be in the making. Managers are now paid in performance-related

Gold and Support of Currency against Printing

USD as Reverse - Abuses to Fund US Lifestyles

Developing Countries Variations

The Anglo model left some footprints in South Africa, India, Singapore, Malaysia, Sri Lanka, Pakistan, Nigeria, Kenya, Egypt and even in Zimbabwe, Swaziland and Botswana.

EU Models - Banking and Relationship Baseda

Traditional Continental Europe’s bank-based

The key was that finance is largely intermediated by banks. The financial model intermediated by banks operates on ‘relational’ basis.

In 2002, the banks’ share of financial assets was 22% in the US, against 72% then in Germany.

By 2011, the banks’ share in the US remained the same, while in Germany it was still high, but declined to 62%. This was the effect of the Anglo-Saxon financial model on Germany.

Germany and France accuse the US and UK of dynamiting the world of finance between 2005-2007 via the US sub-prime lending which created the housing bubble in the US — entirely a creation of the market-led financial model.

The 1989 housing price index rose by 90 per cent between 2000 and 2006 in the market-led US and in the UK by 133 per cent. This house price inflation morphed and marketed as wealth torpedoed the US and UK finances, later the world’s.

On the other hand, in the bank-led Germany, in the same period, the housing index fell — yes, fell -8%. In Japan it fell even more -26%. The bank-led Germany and Japan obviously knew more than the market-led US and UK that a housing bubble was incubating. Result. Germany and Japan were least affected by the global financial meltdown. The Bank of Japan proudly declared in 2009 that even as the world finance was in turmoil Japan was safe. So much for the all-knowing arms-length market’s knowledge about finance, as opposed to the relational bank system.

Other Models of Capitalism, Banking and Money Flows

Austrian School

ECB/EU model - negative interests

Social Democratic or Welfare Models - France, Italy, Spain

  1. Consistent union conflict (such as in France and Italy, where unions have remained strong)

Banana Republic Models

Developing Miracle Models - Beat the Odds "For the People"

Miracle Countries Craft High Trade Balance winning policies

China, Germany, Japan, S. Korea and Taiwan have emerged as major exporters.

  • From 2003 to 2008, Germany (only 80m) was the world's biggest exporter.
  • 2009, China (1.3b) overtook Germany in exports.

One common thread is the ability to invest capital and social policy effectively to outcompete others. The large forex balances make these hard currency countries. Basically selling their "luxury" high profit items, and importing cheap commodities, often leveraging globalization.

German Miracle Model of Capitalism, Banking and Money Flows

Like EU/ECB, Germany suffers from (a) major taxation, (b) massive government capital bonds, (c) negative interests on gilts as shown below.

However, the term German model is most often used in economics to describe post-World War II West Germany's miracle of growth that contrasts with rest of EU.

Social Capitalism Model - Harmonious Labor Relations

  1. Innovative industrial relations, vocational training, and closer relationships between the financial and industrial sectors to cultivate economic prosperity building on its human resources and technology for several centuries. a. unions are organized at the industry level and co-exist with works councils at both the plant and company levels to negotiate wage determination with employers' associations. b. Stakeholding in corporate governance. The strength of this setup is the cooperation among unions and management councils. This is unique among Western countries, which have been marked by substantial weakening of union powers (such as in the United States and United Kingdom) over the last twenty years, or consistent union conflict (such as in France and Italy, where unions have remained strong).

  2. Jobs support, Industrial Regulations, . German government actively harmonizes relations between regulatory bodies and private industry groups, as well as between individual companies to prevent ruinous competition within the scope of applicable antitrust law. Considered an outgrowth of the non-confrontational culture of postwar Germany, finding a common denominator was often the main goal in such relationships.

  3. Vocational education and training Support not just Elite University Theory. Perhaps the most important component of the German model, and is still structured in the German educational system.

  4. There is a lower percentage of university students in Germany when compared to Euro zone - significant as perpetual "free" college students are a severe drain on economies for other more liberal EU states like France.
  5. A much lower percentage of persons entering the workforce for on-the-job training ie apprenticeships for skilled positions, taught by expert worker-instructors. It has been made possible through long-term politics, focusing on establishing stronger links between the dual vocational education and training system and institutes of higher education, on improving integration into vocational training through basic skills and permeability and on establishing national coverage of branch-specific regional initial and continuing training centers.
  6. REQUIRED Certified Vocational training for 400+ occupations. At the end of vocational training, a highly regarded certification qualification is awarded that is valid for a range of over 400 occupations. This is in stark difference to other European countries, where the number of controlled occupations is much smaller.
  7. Sidelining, discrimination and Inflexibility of the school system is a main disadvantage. Consider the "rebellious teens" being shoved into vocational programs like it or not - if they are unable to clear entrance exams. No wonder that 60% of graduates change their profession within 10 years of graduation

Germany Export Intensity - High Trade Balance winner

Germany as a low population country has a VERY high Export Intensity.

**Hidden Champions as a result of the German Model

Recent Hartz Reforms and growing low-wage sector are believed to have weakened the core setup of this German Model.

One common thread is the ability to invest capital and social policy effectively to outcompete others. The large forex balances make these hard currency countries. Basically selling their "luxury" high profit items, and importing cheap commodities, often leveraging globalization.

  1. High state support of competitiveness of MEGA entities - Siemens, Pharmas, old Chemicals, Metals, Armaments manufacturers. It used to be said that Siemens owned the halls of government. While split up, still the interests of large companies are protected heavily and influence policy.
  2. While Germany has global corporations like Volkswagen, Siemens, BASF and Bosch, these are not substantially different from organisations like Ford, GE, DuPont or Visteon or Japanese Toyota, Honda, etc.

  3. Reliance on Capital intensive exports as foundation of strong Forex balances - Autos, Airplanes, Chemicals. As a counter to the drag and costs of social economies model, the German model is to leverage its international trading companies (like Japan) to concentrate on luxury and technology intensive exports e.g. Autos, Airplanes, Chemicals.

  4. Keep labor costs low with Higher UE - Reliance on former-Eastern Germany, East European factories

  5. After years of 'painful' reforms eg Schroder, the German economy's wage share as percentage of gross national income, was declining in Germany since the 1980s.
  6. Unemployment has fallen below 10% (according to national definition) for the first time in years and economic growth reached 2.7% in 2006. However, unlike the USD reserve Fed-speak, FRG does NOT attempt to minimize UE, as in June 2016, the unemployment rate was reported as 5.9% by the German Federal Employment Agency (Bundesagentur für Arbeit).
  7. Since German reunification German prosperity has declined compared to pre-unification West German levels, and the German unemployment rate reached record levels: 12.6% (according to national definition) as of March 2, 2005, highest rate since World War II. Partly it is a consequence of integrating the much less advanced GDR economy and 17m new citizens, which necessitated a transfer of over 1.3 trillion Euros from west to east as of 2009.

  8. Proactive, Fierce SUPPORT and fight tariffs and IP - fighting unproductive costs and profit-hurting measures

  9. Recent steel and aluminum tariffs fought fiercely with Trump's
  10. Keeping energy costs low by sucking up to Russia - opposing Nord Stream II sanctions by the USA
  11. Angela Merkel unlike the US fiercely opposed relaxing IP rights on Covid vaccines e.g. for India and South Africa

  12. Hidden Champions as Secret Weapon. Germany's strong exports are supported by a large number of midsize firms.

  13. SECRET smaller companies are known only in their market by their customers and suppliers, and are relatively unknown to the wider public. While there are hidden champions everywhere around the world, but they are most frequently found in German speaking countries. This is a slap in face of MBA-public-Anglo saxon model of rollups and financialization.
  14. SUCCESS. In the market for these products they are the top producer in the world. They export most of their products, and so contribute significantly to the current account of their countries, and are more successful than the average.
  15. FAMILY Control, Dominance and Preservation. These are often family owned with strong commitment to their propreitary technology, product knowhow and specialty competitiveness.
  16. SPECIALIZATION - having unique products in niche but global markets in order to achieve economies of scale and unbeatable competitiveness.
  17. SME family firms dominate majority of jobs. Hidden champions are relatively small but highly successful companies that are concealed behind a curtain of inconspicuousness, invisibility, and sometimes secrecy and describes the small, highly specialized world-market leaders in Germany with company having to meet three criteria to be considered a hidden champion:
  18. Number one, two, or three in the global market, or number one on the company's continent, determined by market share
  19. Revenue below $5 billion
  20. Low level of public awareness - so they escape scrutiny, but still contribute thousands of jobs in regional or local state economies.

  21. SRC: Hermann Simon's Hidden champions: lessons from 500 of the world's best unknown companies.[

2008 and Germany

Germany has emerged from the recession as the heavyweight European economy, outperforming all its peers. Germany went into a year-long recession, but bounced back in force. It is now carrying the rest of Europe, whereby a recent increase of 2.3% in its economic growth has lead to a 1% increase in the EU growth rate. The Germans have viewed this economic crisis as an external problem, as opposed to a structural or institutional problem at home. It is rationalised that, as an export-driven economy, the negative effects of its economy were unavoidable. There are certain aspects on which the Anglo-Saxon system thrived on, but which ultimately espoused conditions which would determine its own downfall.

Japan and Germany have seen some continuity in their models, however large enterprises in both countries are slowly converging towards a self-financing strategy by tapping into the international securities markets. The globalized stock market has forced convergence of some German and Japanese companies towards the Anglo-Saxon model.

Critical Role of SMEs for Regional Banks

SMEs remain traditionally funded – thus a part-hybrid system is evident. The economic difficulties brought about in the 1990’s in both Japan and Germany has meant that banks turned to SMEs to sustain their businesses. With Japan’s bank reserves drying up, SMEs found themselves in between a hard place and a rock: unable to turn to the bond markets due to low interest rates, and simultaneously faced higher bank restrictions.

2020 Financial Abuse rampant in German System

  1. German model of a rigidly structured and regulated economy has become more attractive. Unlike the US, they have avoided US big scandals like Bernard Madoff, Enron scandal, and the financial crisis of 2007–2010.

  2. But this seems to have broken by 2019 as Deustsch bank, CS, etc. are high traders with abuse piled on. WHY?

=== Asian Models of Miracles

Laughing at Anglo-Models and Beating WWII Europeans?

Many see similarity between the Asian and the European — read Continental — models. It says that the Asian model is “closer in its institutional arrangements to the European model” and “it focuses on high rates of capital formation”.

A Brookings Institution economist Barry Bobsworth (2006) described the Asian savings model as ‘dynastic’ and trans-generational wealth accumulation, while the savings in the US is the ‘personal’ wealth of the saver.

The Asian models trust banks more than stock markets. A paper (BIS Paper No 46, May 2009) by the officials of the Bank of Japan explained why Japanese households prefer bank deposits over risky financial assets, when all financial instruments are well-developed and heavily traded in Japan, unlike in other Asian markets.

East Asian countries that judiciously combined market mechanisms with selective state intervention generated "rapid, shared growth" which while the bulk of wealth went to billionaires and cronies, still lifted all boats.

--- Japanese Uniques

1980s Japanese Real Estate Bubble

1987 Crash

2008 GFC

Japan and Germany have seen some continuity in their models, however large enterprises in both countries are slowly converging towards a self-financing strategy by tapping into the international securities markets. The globalized stock market has forced convergence of some German and Japanese companies towards the Anglo-Saxon model.

Critical Role of SMEs for Regional Banks

SMEs remain traditionally funded – thus a part-hybrid system is evident. The economic difficulties brought about in the 1990’s in both Japan and Germany has meant that banks turned to SMEs to sustain their businesses. With Japan’s bank reserves drying up, SMEs found themselves in between a hard place and a rock: unable to turn to the bond markets due to low interest rates, and simultaneously faced higher bank restrictions.

2015+ Japanese Miracle Hits Aging, deflationary model - negative interests

South Korea Uniques

Taiwan Uniques

Chinese Miracle

1930s+ Maoist Curse

1970- Deng Hsio Peng restructures Maoism

2008

The Chinese finance system proved adequate in riding out the financial crisis. Its economy was not exposed to any major threat during the recession, as compared to other major nations, because it had limited exposure to foreign markets. In 2008 China remained largely unaffected by the impending recession, and by 2009, when the crisis was at its peak, growth rates halved to +6.2% while other nations experienced contraction. For example, FDI in China is usually only allowed in partnership with Chinese firms. If anything, China helped absorb the full impact of the recession; at one point the government announced its own stimulus package (valued at just under $550 billion) even when its economy was thriving on strong growth. The financial crisis could be argued to have caused a process of temporary Anglo-Saxon convergence towards the Chinese model, especially in the U.K. which nationalised multiple major banks, thus consolidating the banking system. Due to institutional investments made by banks in other businesses, this act of government control has implications which reverberate throughout the whole financial and banking system.

Indian Models

RBI led

Anglo-philes and "brainwashed" leaders in Congress hewed close to Anglo models

The Indian establishment’s economic thinking is undoubtedly Anglo-Saxon as Indian policy makers Manmohan Singh, Montek Ahluwalia, P. Chidambaram and Raghuram Rajan are all admirers of, or trained in, the Anglo-Saxon economic theories and practices.

In his 2001 study with Zingales Raghuram Rajan faulted bank-based models and celebrated market-led models. But are the Indian economic players — the savers, the entrepreneurs and the rest — Anglo Saxon in their outlook? Read on.

  • Bank-Dominant Fiscal Models. In their ‘safe’ saving models Indians seem closer to Japan than to Anglo-Saxons. The bank deposit to GDP ratio was 34 per cent 1990-91, that is before 1990s liberalisation began. In the two decades of liberalisation, bank deposit to GDP ratio almost doubled to 67.2 per cent when the Anglo-Saxon economic thinkers of India were counselling the Indian savers to go stock markets, not banks. (Economic Survey 2011-12).

High Savings Rate of Households vs Bank Credit and Liquidity

In 2005, bank credit to private sector as a percentage of GDP was ONLY 38% in India, 140% in China and 156% in the UK. How the hell does Indian industry get funded or expand?

The household savings is the main source of funding the $1.7 trillion infrastructure investment need in India over the decade ending 2020. The annual financial savings of the household sector in India would top $800 billion by 2016 which is 150 per cent of the total current bank lending.

The reality is the abusive Government of India sucks up majority of Bank credit and wastes on PSUs, Subsidies and Populist sops.

Expensive SME financing 20%+

There is a rainbow model of funding businesses in India, much of which is beyond the reach of organised banking.

The National Economic Census 2005 found some 41.8 million non-farming enterprises operating in India providing livelihood and employment to 101 million persons. They grew annually at 4.7 per cent during 1998-2005. Of this, 90 per cent (37.6 million) is financed by families and local sources. They are not financially excluded. They are very much financially included, though not through the banking system. Therefore, financial inclusion in India does not mean banking.

Case 1. A study of 35 diamond exporters in Surat and Ahmedabad showed that 31 of them received 20-30 per cent of their initial capital from families and relatives. A study of the branded ghee business in Tamil Nadu revealed that almost all of them were funded by their families to start their businesses.

Case 2. In Karur in Tamil Nadu, home to two large scheduled banks and 54 branches of nationalised banks, out of the estimated Rs 2400 crore required by the exporters in 2001 only one-third was provided by banks.

Case 3. In the Knitwear export cluster Tirupur, the World Bank noted that “large and diverse non-bank sources of credit including private finance companies, rotating credit unions called chit funds, money lenders, and forms of mutual assistance between friends family or kin” funded the business.

Non-Traditional Finance Companies Often do Great

Yet, the entire range of small business financing in India, including the most efficient ones like the Shriram group which has just one per cent NPA, is trivialised and dismissed as non-banking finance — to be curbed rather than promoted.

Farm Reforms

Farmers forced to go to High Interest Rate Brokers not Banks

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  • Indian Models of Economy Business and Management (Prof Kanagasabapathi, PHI Learning Private Limited 2012).

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