IMF Cuts Global Growth Forecast Amid Supply Chain Disruptions, Pandemic Pressures

The IMF, a grouping made up of 190 member states, promotes international financial stability and monetary cooperation. It also acts as a lender of last resort for countries in financial crisis.

In the IMF’s latest World Economic Outlook report released on Tuesday, the group’s economists say the most important policy priority is to vaccinate sufficient numbers of people in every country to prevent dangerous mutations of the virus. He stressed the importance of meeting major economies’ pledges to provide vaccines and financial support for international vaccination efforts before new versions derail. “Policy choices have become more difficult … with limited scope,” IMF economists said in the report.

The IMF in its July report cut its global growth forecast for 2021 from 6% to 5.9%, a result of a reduction in its projection for advanced economies from 5.6% to 5.2%. The shortage mostly reflects problems with the global supply chain that causes a mismatch between supply and demand.

For emerging markets and developing economies, the outlook improved. Growth in these economies is pegged at 6.4% for 2021, higher than the 6.3% estimate in July. The strong performance of some commodity-exporting countries accelerated amid rising energy prices.

The group maintained its view that the global growth rate would be 4.9% in 2022.

In key economics, the growth outlook for the US was lowered by 0.1 percentage point to 6% this year, while the forecast for China was also cut by 0.1 percentage point to 8%. Several other major economies saw their outlook cut, including Germany, whose economy is now projected to grow 3.1% this year, down 0.5 percent from its July forecast. Japan’s outlook was down 0.4 per cent to 2.4%.

While the IMF believes that inflation will return to pre-pandemic levels by the middle of 2022, it also warns that the negative effects of inflation could be exacerbated if the pandemic-related supply-chain disruptions become more damaging and prolonged. become permanent over time. This may result in earlier tightening of monetary policy by central banks, leading to recovery back.

The IMF says that supply constraints, combined with stimulus-based consumer appetite for goods, have caused a sharp rise in consumer prices in the US, Germany and many other countries.

Food-price hikes have placed a particularly severe burden on households in poor countries. The IMF’s Food and Beverage Price Index rose 11.1% between February and August, with meat and coffee prices rising 30% and 29%, respectively.

The IMF now expects consumer-price inflation in advanced economies to reach 2.8% in 2021 and 2.3% in 2022, up from 2.4% and 2.1%, respectively, in its July report. Inflationary pressures are even greater in emerging and developing economies, with consumer prices rising 5.5% this year and 4.9% the following year.

Gita Gopinath, economic advisor and research director at the IMF, wrote, “While monetary policy can generally see through a temporary increase in inflation, central banks should be prepared to act swiftly if the risks to rising inflation expectations are high. become more important in this unchanged recovery.” Report.

While rising commodity prices have fueled some emerging and developing economies, many of the world’s poorest countries have been left behind, as they struggle to gain access to the vaccines needed to open their economies. More than 95% of people in low-income countries have not been vaccinated, in contrast to immunization rates of about 60% in wealthy countries.

IMF economists urged major economies to provide adequate liquidity and debt relief for poor countries with limited policy resources. “The alarming divergence in economic prospects remains a major concern across the country,” said Ms. Gopinath.

By: Yuka Hayashi

Yuka Hayashi covers trade and international economy from The Wall Street Journal’s Washington bureau. Previously, she wrote about financial regulation and elder protection. Before her move to Washington in 2015, she was a Journal correspondent in Japan covering regional security, economy and culture. She has also worked for Dow Jones Newswires and Reuters in New York and Tokyo. Follow her on Twitter @tokyowoods

Source: IMF Cuts Global Growth Forecast Amid Supply-Chain Disruptions, Pandemic Pressures – WSJ

.

Related Contents:

Apple Pay Fees Vex Credit-Card Issuers

Banks are nudging Visa to change the way it processes some Apple Pay transactions, according to people familiar with the matter.

According to people familiar with the matter, banks are pressing Visa to change the way some Apple Pay transactions are processed. Some banks are pushing back, weakening the card network Visa Inc.

To change the way some Apple Pay transactions are processed, according to some. This change will reduce the fees that banks pay to Apple.

According to people familiar with the matter and a document seen by Businesshala, Visa plans to implement the change next year. Apple executives have told Visa officials they oppose the change, the people said. The two companies are in discussion and it is possible that the planned change will not start.

Currently, banks pay the fee to Apple when their cardholders use Apple Pay. Under the new process planned, the fee will not apply to automatic recurring payments such as gym memberships and streaming services.

The dispute reflects a long-running tension between the tech and finance giants. Companies like Apple and Amazon.com Inc.

Consumer payments have been expanding over the years. Banks often bargain with them for fear of being left behind. But deals don’t always work out: Alphabet Inc. NS

For example, Google is dropping plans to introduce bank accounts to users. Apple said in a statement that “our banking partners are an important part of the growth of Apple Pay.”

The company said, “Our bank partners continue to see the benefits of providing Apple Pay and invest in new ways to implement and promote Apple Pay for our customers for secure and private in-store and online purchases. “

Major networks including Visa and MasterCard Inc.

There are effective gateways between banks and Apple Pay, as they help to load banks’ cards into mobile wallets. The change will apply to Visa-branded cards, though other networks may follow suit.

Mobile wallets are smartphone apps on which people can load their debit or credit-card credentials and use their phones instead of tangible cards to make payments. The transaction fee is charged to the buyer’s card.

When Apple introduced Apple Pay in 2014, the iPhone had already discontinued the music player, camera, and GPS system. Banks and card networks are worried it will displace card payments as well.

Banks agreed to pay 0.15% to Apple for every purchase made by their credit cardholders. (They pay a separate fee on debit-card transactions.) Those charges account for most of the revenue Apple makes from its digital wallet, according to people familiar with the matter.

The terms had the potential to be uniquely attractive to Apple. Banks do not charge Google for its Wallet.

Visa and MasterCard also agreed to make an unusual concession to Apple: Apple will be able to choose which issuers it will allow on Apple Pay and which issuers will accept cards, according to people familiar with the matter. Visa and MasterCard generally require that all entities that accept their credit cards must accept them. Apple agreed not to develop the card network to compete against Visa and MasterCard, the people said.

But since then, customers have been slower to adopt Apple Pay than bank and card network executives expected. And some bank executives were outraged when Apple launched its own credit card with Goldman Sachs Group in 2019 Inc.,

People familiar with the matter said, because it made Apple a direct competitor.

Apple said in a statement that it “works closely with approximately 9,000 banking partners to offer Apple Pay to customers in approximately 60 countries and territories.”

Visa has shared its planned technological change with at least a few banks in recent months. A document reviewed by the Journal explains the new process that doesn’t mention fees, but details a change to so-called tokens issued by Visa for mobile-wallet payments.

When consumers load their credit cards on Apple Pay, Visa issues a special token that replaces the card number. This allows the card to work on Apple Pay and also helps protect the card in a potential data breach, among other benefits.

Visa is planning to start using a separate token on recurring automatic payments. This effectively means that after making the first payment on the subscription, Apple will not receive a fee on the following transactions.

According to people familiar with the matter, some of the larger banks first tried to lower their Apple Pay fees around 2017, but were not successful.

By: AnnaMaria Andriotis

AnnaMaria Andriotis reports on credit cards for The Wall Street Journal. She covers Visa, Mastercard, American Express and Discover as well as the big banks’ credit-card divisions. She also writes about consumer credit broadly, with a focus on issues that have a big impact on U.S. borrowers. She has been a reporter with The Wall Street Journal since 2014 and got her start at Dow Jones more than 10 years ago. You can email AnnaMaria at annamaria.andriotis@wsj.com and follow her on Twitter @AAndriotis.

Source: Businesshala News Exclusive | Apple Pay Fees Vex Credit-Card Issuers

.

Related Contents:

4 Missteps For Banks To Avoid When Migrating Payment Services To The Cloud

Banks and financial services providers can realize the efficiency and cost savings of cloud-based payments by taking proactive steps to guard against these common mistakes, notes Rustin Carpenter, a Global Payments Solution Leader for Cognizant’s Banking & Financial Services Industry Services Group.

The cloud’s lure of simplification is a powerful incentive for payment providers, as its role enabling modernization and permanently switching off legacy applications. Where banks struggle, however, is in shaping a strategy to get their payment services to the cloud. By understanding the common missteps, banks can create a plan for payment migration that maximizes benefits while minimizing risks.

The pandemic was a digital tipping point for banks, forcing them to implement in just a few months capabilities that otherwise would have taken several years. Research published in 2019 found that financial services firms lagged in adoption of public cloud infrastructure as a service (IaaS), with just 18% broadly implementing IaaS for production applications, compared to 25% of businesses overall.

Now many banking leaders we talk with are taking a serious look at cloud-based payment services, motivated by the age and complexity of their core payment applications as well as their business’s growing confidence in the security of cloud platforms such as Google Cloud, Microsoft Azure and Amazon Web Services (AWS). As banks contemplate migrating payment services to the cloud, here are some common mistakes to avoid that will ensure a smoother journey:

1. Assuming the cloud is cheaper.

Cloud-based services are indeed less expensive to run — once applications and services have been migrated. To manage a successful payments migration, be aware of the costs along the journey. The cloud can be a heavy lift. While banks and financial services providers often consider themselves proficient at consolidation and rationalization, the extensiveness required for cloud migration frequently far exceeds the effort of previous initiatives. For example, we helped a bank reduce its infrastructure footprint by 25% and lower its total cost of ownership by migrating its applications to the cloud.

That outcome, however, required careful analysis of the bank’s application source code and development of a migration strategy and cloud deployment architecture, as well as assessing and migrating more than 800 applications over three years. Cloud-based services are more streamlined and less expensive to operate, but accurately budgeting for the upfront time and resources of a cloud payment migration is challenging due to the many unknowns. Careful attention to planning is critical for a realistic cost assessment.

2. Underestimating the amount of prework.

The cloud promises to reduce complexity but getting to that point takes a thoughtful migration plan that’s complete and doesn’t skimp on details. What steps will be taken to ensure there’s no disruption to clients? Which applications make sense to retain and manage in-house, and which can be leveraged as payments as a service? For instance, fund disbursements for a retail consumer bank that administers 529 plans are typically a low-volume service for which cloud automation is a great fit, replacing paper checks with significantly less costly cloud-based payments.

But when it comes to payments as a service, managing risk and ensuring value also come into play. Wire transfers might appear to be good candidates for migration to cloud payments, but if most of the bank’s transfers are for high net worth individuals with equally high customer lifetime value, then the transfers may require levels of personalized service best handled with an on-premise platform rather than in the cloud. A well thought out strategy that addresses all impacts and value opportunities helps bank leaders avoid the unintended consequences that keep them awake at night.

3. Failure to prioritize.

A payments migration needs to be phased in a way that provides strategic competitive advantage. Setting priorities is key. For example, a bank may choose to align its payments migration with a specific strategy, such as a planned de-emphasis on branch offices. Another approach is to migrate the costliest payment applications first. Some banks may reserve cloud adoption for when they’re ready to add new payments capabilities.

Each bank’s path to cloud payments is nuanced, yet there’s often a feeling among banking leaders that moving to the cloud is an all-or-nothing proposition. That is, payments are either entirely cloud-based or all on premise. A more realistic goal is to craft a migration roadmap for a hybrid environment that accommodates both types of infrastructure for the near future, and to then prioritize and phase the payments migration in a way that makes strategic sense.

4. Testing in a dissimilar environment.

Replicating legacy operating environments for testing is expensive, so it’s not uncommon for banks to settle on environments that are similar but not identical — though the variation often leads to production environment errors that can derail cloud migration efforts. Performance falls short of expectations, typically due to the tangle of payment applications resulting from years of mergers and acquisitions.

For example, post-merger banking platforms often utilize more than one legacy payment hub, and there’s little chance that a bank’s current IT staff fully understands or can predict the unintended consequences for the hubs when making changes to the platform. Don’t fret over creating the perfect testing environment. Rather, build an environment that’s as close as possible.

By avoiding these common missteps, payment providers can reap the benefits of a simplified, modern infrastructure and application environment and minimize the risks.

To learn more, please visit the digital payments section of our website or contact us.

Rustin “Rusty” Carpenter leads payments solutions within Cognizant’s Banking & Financial Services’ Commercial Industry Solutions Group (ISG). In this role, he works with group leaders and client-facing teams to elevate Cognizant’s client relevance, industry expertise and challenge-solving capabilities. Over his career, he has developed deep and broad expertise in payments and the emerging alternative and digital/mobile payments arenas. He is a frequent speaker on these topics at conferences worldwide and serves as a board advisor to fin-techs in all areas of payments and fraud prevention/mitigation.

Carpenter most recently was Head of Sales & Service, NA for ABCorp. Previously, he ran the Instant Issuance business for North America at Entrust Datacard; served as COO for Certegy Check Services, N.A.; was General Manager, NA for American Express Corporate Services; and completed multiple assignments at Andersen Worldwide and Dun & Bradstreet. Rustin has a Bachelor of Arts degree from Denison University and an MBA in finance from Rutgers Graduate School of Management. He can be reached at Rustin.Carpenter@cognizant.com

Source: 4 Missteps For Banks To Avoid When Migrating Payment Services To The Cloud

.

Related Contents:

“Launch of IBM Smarter Computing”. Archived from the original on 20 April 2013. Retrieved 1 March 2011.

 

To Combat Billions In Unemployment Benefit Fraud, Startup SentiLink Raises $70 Million

At least in improper payments, much of it fraud, have been distributed by the Federal government since the pandemic struck in March 2020. In California alone, state officials admitted that as much as of unemployment benefits payments may have been fraudulent.

“Unemployment insurance fraud is probably the biggest fraud issue hitting banks today,” says Naftali Harris, co-founder and CEO at San Francisco’s SentiLink, which just closed a $70 million round of venture capital to expand its business of helping financial institutions detect fake and stolen identities for new account applications.

, a San Francisco-based venture firm, led the Series B round which brings SentiLink’s total capital raised to date to $85 million. Felicis, Andreessen Horowitz and NYCA also joined SentiLink’s latest capital infusion.

SentiLink plans to use the capital raised to continue to help institutions with this recent increase in fraud instances spurred by the CARES Act. They also plan to expand their fraud toolkit to prevent other types of scams, such as and, and investigate new ones.

Harris’ team has seen a huge uptick in fraud rates affecting their clients, as high as 90% among new applications, associated with the CARES Act COVID relief. Fraudsters have been using the same name, social security number or date of birth in several applications, filing in high volumes in several states.

According to Harris, his team is currently verifying around a million account openings per day, and is working with more than 100 financial institutions – due to a non-disclosure agreement Harris could not comment on which financial institutions his company serves.

The company says that beyond simply using artificial intelligence to detect fraud, they have a risk operations team that catches in real time cases of synthetic fraud – a form of identity theft in which the defrauder combines a stolen Social Security Number (SSN) and fake information to create a false identity – that would normally go unnoticed by their clients.

Harris discovered this type of fraud when he was working as a data scientist at Affirm in 2017. At the time, synthetic fraud was relatively unknown, so when he saw that crooks were creating brand new identities instead of stealing  existing ones to apply for credit, he founded SentiLink to focus on tackling this new scam. “We realized this was a really big issue and that nobody in the financial services industry was talking about it,” says Harris.

Now, criminals are creating new identities or stealing existing ones to tap into unemployment benefits. Harris says the problem is not only them stealing from the government, but uncovering the tactics they use to deposit the stolen funds.

“What a lot of people don’t realize is that as a fraudster you have to be able to use the money stolen, and put it into the financial system,” Harris says.

To Harris, the biggest differentiation in SentiLink’s approach is how much it emphasizes “deep understanding of fraud and identity in our models.”

“We have a team of fraud investigators that manually review applications every day looking for fraud, and we use their insights and discoveries in our fraud models and technology,” he told TechCrunch. “This deep understanding is so important to us that every Friday the entire company spends an hour reviewing fraud cases.”

SentiLink, Harris added, focuses on “deeply” understanding fraud and identity, and then using technology to productionalize these insights.  Those discoveries include the deterioration of phone/name match data and uncovering “same name” fraud. “This deep understanding is so important that SentiLink employs a team of risk analysts whose full time job is to investigate new kinds of fraud and discover what the fraudsters are doing,” the company says.

SentiLink, like so many other startups, saw an increase in business during the COVID-19 pandemic. “The various government assistance programs were rife with fraud. This had a cascading effect throughout financial services, where fraudsters that had successfully stolen government money attempted to launder it into the financial system,” Harris said. “As a result we’ve been very busy, particularly with checking and savings accounts that until now have had relatively little fraud.”

genesis-3-1

The startup plans to use its new capital to build out its product suite and do some hiring. Today it has 25 employees, with five accepted offers, and expects to end the year with a headcount of 45-50.

Follow me on  or . Send me a secure .

I’m an assistant editor at Forbes covering money and markets. Before joining Forbes, I worked at NextEra Energy, Inc. developing and implementing successful media relations and public relations campaigns in the energy industry.

I graduated from Stetson University with a degree in Finance, and have a master’s degree in Journalism and International Relations from New York University, where I worked as a staff writer for Latin America News Dispatch and New York Magazine’s Bedford + Bowery.

Source: To Combat Billions In Unemployment Benefit Fraud, Startup SentiLink Raises $70 Million

.

Related Contents:

Amazon’s top Indian seller Cloudtail to cease operations after May 2022

Facebook adds Photobucket and Google Calendar to its data portability options

Canopy raises $15M Series A after posting 4.5x customer growth in H1 2021

CommandBar raises $4.8M to make web-based apps searchable

Wheel the World raises $2M to provide unlimited experiences for travelers with limited accessibility

Wannabe ‘social bank’ Kroo swerves VCs to raise a $24.5M Series A from HNWs

LawVu, a cloud-based platform for in-house legal teams, raises $17M NZD from Insight Partners

Siga secures $8.1M Series B to prevent cyberattacks on critical infrastructure

Moove raises $23M to create flexible options for drivers to own cars in Africa

India’s UpGrad enters unicorn club with $185 million fundraise

Two months after its Series A, Pintu gets $35M in new funding led by Lightspeed

How to claim a student discount for Extra Crunch

Pixels, Palm readers and Pokémon problems

Digital transformation depends on diversity

This Week in Apps: In-app events hit the App Store, TikTok tries Stories, Apple reveals new child safety plan

Building vulnerability into your workflow

China roundup: Games are opium, algorithms need scrutiny

Cities can have flying cars if they start working on infrastructure today

Apple Car Team Held ‘Advanced’ Meetings with South Korea’s SK Group and LG Electronics

Get Lifetime Windows 10 License For Only $12, Microsoft Office For $26, And Much More

Canopy raises $15M Series A after posting 4.5x customer growth in H1 2021 – TechCrunch

Rule The Outdoors With This TOURIT Cooler Backpack For Just $29.59 [You Save $16.40]

LawVu, a cloud-based platform for in-house legal teams, raises $17M NZD from Insight Partners – TechCrunch

Ethereum Co-Founder Anthony Di Iorio Says Safety Concern Has Him Quitting Crypto

Anthony Di Iorio, a co-founder of the Ethereum network, says he’s done with the cryptocurrency world, partially because of personal safety concerns.

Di Iorio, 48, has had a security team since 2017, with someone traveling with or meeting him wherever he goes. In coming weeks, he plans to sell Decentral Inc., and refocus on philanthropy and other ventures not related to crypto. The Canadian expects to sever ties in time with other startups he is involved with, and doesn’t plan on funding any more blockchain projects.

“It’s got a risk profile that I am not too enthused about,” said Di Iorio, who declined to disclose his cryptocurrency holdings or net worth. “I don’t feel necessarily safe in this space. If I was focused on larger problems, I think I’d be safer.”

Back in 2013, Di Iorio co-founded Ethereum, which has become the home of many of the hottest crypto projects, particularly in decentralized finance — which lets people borrow, lend and trade with each other without intermediaries like banks. Ether, the native token of the network, has a market value of about $225 billion.

He made a splash in 2018 when buying the largest and one of the most expensive condos in Canada, paying for it partly with digital money. Di Iorio purchased the three-story penthouse for C$28 million ($22 million) at the St. Regis Residences Toronto, the former Trump International Hotel & Tower in the downtown business district.

In recent years, Di Iorio jumped into venture-capital investing and startup advising. He was also for a time chief digital officer of the Toronto Stock Exchange. In February 2018, Forbes estimated his net worth was as high as $1 billion. Ether’s price has more than doubled since then.

Decentral is a Toronto-based innovation hub and software development company focused on decentralized technologies, and the maker of Jaxx, a digital asset wallet that garnered about 1 million customers this year.

Di Iorio said he has talked with a couple of potential investors, and believes the startup will be valued at “hundreds of millions.” He expects to sell the company for fiat, or equity in another company — not crypto.

“I want to diversify to not being a crypto guy, but being a guy tackling complex problems,” Di Iorio said. He is involved in Project Arrow, run by a high-school friend that’s building a zero-emission vehicle. He is also consulting a senator from Paraguay.

“I will incorporate crypto when needed, but a lot of times, it’s not,” he said. “It’s really a small percentage of what the world needs.”

Source: Ethereum Co-Founder Anthony Di Iorio Says Safety Concern Has Him Quitting Crypto – Bloomberg

.

Critics:

Anthony Di Iorio is a Canadian entrepreneur primarily known as a co-founder of Ethereum and an early investor in Bitcoin. Di Iorio is the founder and CEO of the blockchain company Decentral, and the associated Jaxx wallet. He also served as the first chief digital officer of the Toronto Stock Exchange. In February 2018, Forbes estimated his net worth at $750 million–$1 billion.

Di Iorio grew up with two older siblings in north Toronto, Ontario. He graduated with a degree in marketing from Ryerson University. Di Iorio began developing websites during the early 1990s, and eventually entered the rental housing market as an investor and landlord in Toronto, Ontario. In 2012 he sold his rental properties in order to invest in Bitcoin, and began to organize companies in the field of cryptocurrency.

He first learned about bitcoin from a podcast called Free Talk Live in 2012. According to The Globe and Mail, he “had an anti-authoritarian streak” and  questioned “the fundamentals of mainstream economics.” Di Iorio bought his first bitcoin the same day for $9.73. He created the Toronto Bitcoin Meetup Group which held its first meeting at a pub in the same year.

It was at this first meeting where he met Vitalik Buterin who went on to be the founder of Bitcoin Magazine and one of the original creators of Ethereum. As the Meetups grew from about eight attendees to hundreds, Di Iorio formed the Bitcoin Alliance of Canada.

References:

Money Creation In The Fiat System - a Balance Sheet Analysis of Central Banks and Banks

Money is the engine of the economy. It is the facilitator of trade and specialization. However, few people ask themselves: where does our money come from? This article discusses the process of money creation at banks and central banks. The analysis is based on the respective balance sheet.

Link to the video covering this article

Link to the German version

How the Federal Reserve creates money out of thin air — a balance sheet analysis

This section shows how money is created at the Federal Reserve (Fed), the central bank of the United States. The Fed acts as the bank for the government and as bank for other commercial banks. The Federal Reserve is known to be the “lender of last resort” with the ability to bail out commercial banks. The following analysis is based on the balance sheet of all Federal Reserve Banks combined as published in the annual report 2019 by the Federal Reserve.

The balance sheet of the Fed consists of assets on the one side and liabilities on the other side — just as any company’s balance sheet. The sum of all assets must always be equal to the sum of all liabilities. This is based on the concept of double entry bookkeeping which requires two entries in the balance sheet for every transaction. Assume you are keeping a balance sheet for your personal finances. When you go shopping and pay with cash for food, then there are two entries: a reduction in cash and an increase in food. This fact of every transaction requiring two entries will be important in the further analysis.

Treasury securities and the general account of the treasury

First, we discuss the entries of the Fed’s balance sheet relating to treasury. On the asset side there are „Treasury securities“. On the liability side there is the entry „Treasury, general account“. Treasury securities are bonds issued by the government with varying length and interest rate. The Federal Reserve Bank bought more and more of these government bonds over time thereby providing funding to the government. In 2019, the Fed has claims on the government of more than USD 2.4 trillion. The government is expected to pay this sum with future tax payments by the people since this is the major revenue stream of governments.

These treasuries are considered as zero risk by agreement with the argument that they are backed by the government. This is why government bonds are charged with the lowest interest rates available. Interest rates were artificially reduced by central banks in so far that the phenomenon of negative interest rates emerged which contradicts logic. The yields of one and three month U.S. treasuries turned negative at the end of March 2020. This means that the government is paid for taking on debts which amplifies the incentive of taking on debt.

But how did the Federal Reserve fund the money for buying government bonds? By creating it out of thin air. Here comes the double entry bookkeeping into play. On the liabilities side, we find the operational account of the treasury which sums up to USD 403 billion. We see that the Fed can easily create new money by expanding the credit sheet. The book value of the government bonds is placed under „treasury securities“ as assets . This process involves an intermediary bank that buys the government bond from the government which is then sold to the Federal Reserve. Thus, the process is in fact even more complex. An illustration of the process can be found in the end of the article.

The central bank also creates money by issuing a credit to banks. The value of the loan is noted on the asset side of the central bank and the money loaned is added to the deposit account of the bank on the liabilities side.The process is explained in the figure below.

Money creation through debt issuance (central banks)
Money creation through debt issuance (central banks)

The government may issue unlimited amounts of government debt and thereby finance its activities. The Fed may infinitely buy government bonds thereby closely collaborating with the government. The annual report states that any surplus of the Fed’s income is transferred to the Treasury which clearly lines out that the Fed works for the government (see screenshot below). In contrast, any company who takes on more and more debt would face higher interest rates due to increased risk. At a certain stage, the company would not be able to take on more debt. On the other side, the government can loan money infinitely through collusion with the Fed who buys treasury securities to the lowest interest rate.

Federal Reserve, annual report 2019, p. 15
Federal Reserve, annual report 2019, p. 15

Federal Reserve Notes

Printing new money can be either exercised through book money or by literally printing new money, i.e. Federal Reserve notes. The annual report of the Fed says that “Federal Reserve notes are obligations of the United States government“ which means that by holding a Federal Reserve note one owns a claim on future tax payments — this concept lies at the heart of government backed money. Essentially, the taxpayer is the collateral for Federal Reserve notes. In 2019, the Federal Reserve notes outstanding accumulate to more than USD 1.7 trillion.

The paradox of this system is illustrated in the screenshot below which is taken from the statement named „The Federal Reserve system after 50 years” by the Committee on Banking and Currency which was presented to the Congress in 1964.

The statement „The Federal Reserve system after 50 years” by the Committee on Banking and Currency
The statement „The Federal Reserve system after 50 years” by the Committee on Banking and Currency

Mortgage-backed securities in the Federal Reserve balance sheet

We have discussed the most important entry on the balance sheet of the Federal Reserve which is the claim on the government bonds on the asset side and the general account of the treasury on the liability side. The Federal Reserve, however, does not only hold government bonds as collateral for the Federal Reserve notes. The second largest entry on the assets side of the Fed’s balance sheet are mortgage-backed securities. The entry „Federal Agency and Government-Sponsored Enterprise Mortgage-Backed Securities“ comprises purchases of mortgage-backed securities from “government-sponsored enterprises” such as the Federal National Mortgage Association (Fannie Mae) & Federal Home Loan Mortgage Corporation (Freddie Mac). This means that the Fed owns the claims on house owners’ debt obligations. In general, the buyer of a mortgage-backed security (MBS) has a claim on the real estate in case of credit default. So in case of defaulting MBS, the ownership of the real estate is transferred to the Federal Reserve Bank.

But where did the Federal Reserve receive the funds for buying MBS? The central bank may simply create the money to buy assets as discussed in an article from the Bank of England. The central bank does so by adding the value of the assets on the asset side of the balance sheet and by inserting the funds for the assets to the seller’s bank account. Quantitative Easing works according to the same principle: The central bank buys government bonds from other banks thereby creating the funds out of thin air. The bank accounts can be found in the row “Depository institutions“ which is further explained in the next section.

Money creation through asset purchases (central banks)
Money creation through asset purchases (central banks)

Bank accounts at the Fed and the reserve requirement

Banks are obliged to hold a certain percentage of their liabilities as reserve at the central bank called “reserve requirement”. The reserve requirement of all banks combined is noted in the row “Depository institutions” on the liability side of the central bank. The central bank primarily holds government bonds and MBS as a reserve for the banks’ deposits. This means that the people’s savings are not more secure with higher reserve requirements since these savings are backed by not necessarily “safer” investments. Essentially, savings can be only considered “safe” when assuming unlimited bank bailouts.

In 2019, the total sum of bank deposits at the Fed accounted for more than USD 1.5 trillion. The percentage of reserves banks need to hold in reserve at central banks is set by central banks. In March 26, 2020 this percentage was set to zero. This means that banks are not required to hold any money in reserves for the debt they give out. However, for being able to serve the claims of customers, they should hold a certain amount of money as reserve. The amount of money which banks hold at central banks that exceed the minimum reserve is called “excess reserve”. The Fed has not charged negative interest rate for excess reserves yet but the ECB has already started to do so. This means that banks holding money at the ECB have to pay for doing so. This puts great strain on banks so they have an incentive to give out more debt to make money from the debt related interest.

Can commercial banks create money individually out of thin air?

There is an ongoing discussion on whether commercial banks may create money individually out of thin air in the process of credit creation. This section first discusses the theoretical background followed by empirical evidence supporting the hypothesis that commercial banks create money out of thin air. It also reflects the view of central banks, which clearly shows that banks can create money from nothing.

Banks as custody providers and investment vehicles

The theoretical part refers to Rothbard’s analysis on money creation in his book „Man, Economy, and State with Power and Market“ first published in 1962, page 801 forth following. Rothbard started his argumentation with banks acting as custody providers during the gold standard which means that gold was used as a currency (in contrast to government-backed fiat money which is essentially backed by future tax payments).

Rothbard explains the concept of money creation with the hypothetical example of the „Star Bank“ offering custody services to the public. For storing 5000 ounces of gold, the bank issued warehouse receipts covering exactly 5000 ounces.

Balance sheet of Star Bank
Balance sheet of Star Bank

Now the bank decided to perform investments with their clients’ money to increase their revenue. The bank lends out the saver’s money to others, in turn the bank offers an interest rate to their customers. The bank now acts as an investment vehicle. Since the savers want to withdraw their money every now and then, the bank holds some gold in reserve. This gold in reserve is not used for investment purposes. So the bank acts as both: custody provider and investment vehicle.

If more people want to withdraw their money than the bank has reserves, then the bank goes bankrupt. This happened in the past in so-called „bank runs“. This problem could have been mitigated by the bank clearly separating their business as investment vehicle and as custody provider. In such a scenario, the customer can decide which portion of his money he aims to invest and get interest for and which portion of the money he aims to place in custody where he needs to pay custody fees for the service. Also, the bank should be required to be transparent about which investments the people’s money flows to, which is not the case in the current financial system.

The process of money creation through credit creation at commercial banks

In the process of credit creation, an entry on the asset side of the balance sheet is created depicting the claim of the bank on the debtor. Since the system is based upon double entry bookkeeping, a corresponding entry is required. This means that the money that is lent out has to come from somewhere.

The process of credit creation is explained with another example of the Star Bank illustrated in the screenshot below. The asset side shows that 5000 ounces are kept in custody and 1000 ounces of gold were given out to debtors (I.O.U’s from Debtors — I.O.U. refers to “I owe you”). The liability side shows that warehouse receipts worth 6000 ounces of gold were given out. We assume that exactly 1000 ounces more gold were inserted by customers which was then lent out. This means that the debt money originates from the savers depositing their money in the bank. So, the money was merely shifted from saver to debtor where the bank acts as financial intermediary.

Balance sheet of Star Bank
Balance sheet of Star Bank

This is no problem when the bank first asks their customers whether they agree with this particular investment because in the end, these customers bear the risk of default. The bank becomes the investment vehicle and intermediary for this particular transaction.

But what if the bank creates more warehouse receipts than the total sum of the gold the bank holds in custody and the gold lent out? This is „the creation of new money out of thin air, by issuing receipts for nonexistent gold“ which is called „monetization of debt“ (Rothbard, 1962, p. 809). We use the example above, however, now assuming that the bank created 1000 pseudo warehouse receipts that are not covered by gold. In fact there are only 5000 ounces of gold but the bank acts as if there were 6000 ounces of gold by giving out 6000 pseudo warehouse receipts. In the process of lending out money, 1000 new warehouse receipts were created which are not covered by gold. These are fake money certificates created in the process of debt issuance. So essentially, the bank has issued more money certificates than it can actually redeem. If more customers claim their gold than the bank holds in custody, then the bank goes bankrupt if it is not bailed out.

According to Rothbard „It is, in fact, difficult to see the economic or moral difference between the issuance of pseudo receipts and the appropriation of someone else’s property or outright embezzlement or, more directly, counterfeiting. Most present legal systems do not outlaw this practice; in fact, it is considered basic banking procedure.“ (Rothbard, 1962, p. 809)

When banks engage in fraudulent behavior, they would normally lose customers. Also, other banks would stop lending money to the fraudulent bank. This allows sound checks between banks on their risk and credibility. This was stopped through the nationwide check-clearing system called „Federal Reserve“ which can bail out even the most fraudulent bank. The Federal Reserve published a document explaining its purposes and functions which says the following:

„By creating the Federal Reserve System, Congress intended to eliminate the severe financial crises that had periodically swept the nation, especially the sort of financial panic that occurred in 1907. During that episode, payments were disrupted throughout the country because many banks and clearinghouses refused to clear checks drawn on certain other banks, a practice that contributed to the failure of otherwise solvent banks [Note author: if the banks were solvent they would not need a bailout]. To address these problems, Congress gave the Federal Reserve System the authority to establish a nationwide check-clearing system.“ (Source: Federal Reserve System Publication, Purposes and Functions)

For evidence on whether commercial banks may individually create money out of thin air, we may either look into the source code of the banking system or we look at empirical data. The source code is unfortunately undisclosed. So we may only look at empirical data.

Empirical study on whether commercial banks may create money out of thin air

This section refers to the study “Can banks individually create money out of nothing? — The theories and the empirical evidence“ by Professor Richard Werner. In this study, the cooperating bank granted a loan of 200 000 EUR of maturity under 4 years to Richard Werner. A snapshot of the balance sheet was taken before the transfer and on the next day when the transaction was completed. The study showed the following balance sheet movements of the „Raiffeisenbank”:

Asset side of the balance sheet
Asset side of the balance sheet
Liability side of the balance sheet
Liability side of the balance sheet

We see an increase of around 170 000 EUR on the liability side in the entry „claims by customers“. This entry corresponds to the „pseudo warehouse receipts“ in the analysis of Rothbard. It is quite unlikely that customers inserted so much money as savings on the day regarded. But what else could have moved this entry so much? Let’s remember the mechanism of how central banks created new money — maybe a similar mechanism is applied with commercial banks. Central banks create new money by recording the issued loan as an asset on the asset side and by entering the corresponding money into the banks’ accounts. Commercial banks could make use of the same principle: They can note the loan amount on the asset side and insert this money in the bank account of the debtor. In this process, the credit sum would be added to both sides of the balance sheet: the “claims on customers” on the asset side (the debt) and the “claims by customers” on the liability side of the bank (the loaned money).

A snapshot directly before and after the transaction would have given us more clarity but this is the best to work with for now. The 170 000 EUR of increase in claims by customers is close to the credit sum but does not cover it entirely. So let’s have a look at the other major movements on the balance sheet. Apart from the increase in the claims by customers, we see an increase in cash on the asset side and a decrease in „claims on financial institutions“. This indicates that other banks paid the debt they had with the „Raiffeisenbank“. Since we do not have the balance sheet of all customers and debtors of the Raiffeisenbank, it is not possible to say with absolute clarity which transaction was a pseudo transaction and which was not. But we can have a look at what the central authorities say on Money creation.

Central banks’ view on money creation in the banking system

The German central bank published an article on money creation in 2018. The Bank of England discussed this already in 2014. Both articles describe the same process of money creation at banks and central banks.

Both articles have found that banks and central banks create money by issuing debt. More precisely, the debt is noted on the asset side as a claim on the debtor and the related money is inserted in the deposit account of the debtor. This fits very well to what was explained above.

Money creation through debt issuance (banks)
Money creation through debt issuance (banks)

Both articles have found another mean for money creation namely in the process of buying assets. When a bank or central bank buys an asset, the asset is placed on the asset side of the balance sheet and the related money is placed in the account of the seller of the asset on the liability side.

Money creation through asset purchases (banks)
Money creation through asset purchases (banks)

Concluding, we have great evidence that both banks and central banks create money out of thin air in the process of credit creation and also in the process of asset purchases.

Next, we look at the occurrence of pseudo receipts in history.

Pseudo receipts in the history of money

The most prominent case of pseudo receipts happened during the Bretton Woods System which was in place from 1944 to 1971. In this time period, the US dollar was fixed to gold at USD 35 per ounce of gold. All other currencies were in turn fixed to the US Dollar. The Federal Reserve held the gold in reserve to which the US dollar was pegged to. This means that the Federal Reserve was the only custody provider that held the gold in reserve which is an extreme centralization of trust. Everyone trusted that the Federal Reserve does not create pseudo warehouse receipts, i.e. more US dollars than are covered by the gold reserves. In the 1960s, the first speculators did not trust the Fed anymore and assumed that more US dollars were created than there were gold reserves. This has led to a revaluation of currencies and eventually to the collapse of the Bretton Wood System. Now, the US dollar is pegged to nothing and the Fed may print infinitely.

Note: Here you find one source on Bretton Woods (notice the framing „speculative attacks“ and „confidence problem“ by the public instead of „deception“ and „fraud“ committed by the Fed).

Money alternatives that cannot be created out of thin air

We learned that depositing one’s money in service custody allows the custody provider to easily instigate fraudulent behavior by issuing fake warehouse receipts. We can prevent this by holding our assets in self-custody. But which alternative money is most suitable for self-custody? In the following, Bitcoin and gold are compared as money alternatives.

Bitcoin can be sent over distance almost immediately without a third party. Gold either requires physical shipping which is very slow and comes with a great risk of losing the funds or the gold is held in service custody and merely the ownership is shifted. Storing one’s money in custody requires trust in the custody provider to not issue pseudo receipts. Bitcoin in turn can be held by the individual and can be sent over distance directly to the recipient. Bitcoin does not depend on a trusted centralized authority — Bitcoin is trustless. Moreover, if bitcoin are stored at a custody provider who gives every customer a separate Bitcoin address, then the customer may verify whether the bitcoins are still there 24/7 over the network. This is why Bitcoin is superior over gold even in the situation of custody.

According to Bloomberg, central banks have bought more and more gold just recently. Some people are arguing that the government may introduce a new coin that is backed by gold when the fiat system crashes. But wait! Didn’t the central banks create more US dollars than there was gold in reserve during the Bretton Woods System? Yes. If your government says that a new fiat is issued which is backed by gold where gold is stored in a centralized custody, why should you trust them not to create pseudo receipts if they did so in the past?

Bitcoin is the way out.

Central banks buying gold
Central banks buying gold

I would like to thank Murray Rothbard for his extraordinary logic in laying out the concept of money and its creation. I also thank Professor Richard Werner for conducting the empirical study on money creation at commercial banks. Great thanks to my proofreaders Ben Kaufman, Keyvan Davani and Márton Csernai. I highly appreciate your support in improving this article. Any feedback from subsequent readers is highly welcome!

Note on fractional reserve banking

It is important to differentiate between two different definitions of fractional reserve banking:

  1. Reserve refers to the percentage of money held in custody which is not lent out. So, a portion of the savers money is held in custody (reserve) and the rest is invested.
  2. Reserve refers to the percentage of money actually covered by the underlying asset. Gold standard: Only a portion of the money certificates is backed with the underlying asset, the rest are pseudo warehouse receipts. Fiat system: The bank may create money in the process of debt issuance.

Note that with fiat money, it is difficult to differentiate money and money substitutes because both are based on nothing and essentially fake. This is why the definition “money may be created in the debt issuance process” is used.

In a monetary system where money cannot be created through accounting fraud in the process of debt issuance, debt and credit simply show the obligations between people. In such a system, money would be distributed from e.g. the savers account to the debtors account where the bank acts as financial intermediary (see first example by Rothbard in this article). So, fractional reserve banking as per the first definition does not lead to more money created. However, money in custody and money invested should be clearly separated thereby laying on a sound monetary system that is scarce. Bitcoin enables this.

The implications of the second system where money may be created out of thin air by banks and central banks have found deep consideration in the article. We have strong evidence that banks and in particular central banks create new money in the process of debt issuance through accounting fraud. Even the reserves behind the central bank money, which among other things consists of the banks’ minimum reserves, can be used by the central banks for risky investments, which makes the whole concept of minimum reserves ad absurdum. We may conclude that both definitions of Fractional Reserve Banking hold in the current system. The first concept of Fractional Reserve Banking is organic to a sound monetary system. The latter is inorganic and can be only facilitated with fraud or unsound money coming with great distortions to the economy.

Note on whether fiat money is debt or money

Emil Sandstedt brought up the very interesting question on whether fiat money is money or debt during our Podcast with Keyvan Davani. I would consider fiat money as both: debt and money and I lay out why in the following.

Federal Reserve notes are per definition part of the “monetary base” which is the most superior money. Money is in fact differentiated into certain categories (monetary baseM1, M2, M3). So, Federal Reserve notes are money in the narrow sense. In general, the longer the deposit maturity of a savings deposit, the lower its rank in the monetary hierarchy per definition. However, Federal Reserve notes are a claim on future tax payments (see chapter Federal Reserve Notes). Since future tax payments are a form of debt, Federal Reserve Notes can be considered both: money and debt.

Per definition, the other forms of debt generated through credit creation are not considered money in the fiat system but rather as a “counterpart of M3”. On the other side, one can buy things with the money that one received through the credit. So this money can be used as a medium of exchange. This is a reason why this debt can be considered “money”.

This article has not focused on this differentiation for reasons of simplicity. In the end, what one calls calls “money” is based on definitions. Since money created through debt issuance can be used for payments, it is valid to consider it as money as it was done in this article. But also, it is justified to call central bank money as debt since these are a claims on future tax payments — claims on debt. Therefore, I like the term “debt money” implicating that the fiat system is based on debt and that this money is used as a medium of exchange.

Interesting side note: Only central bank money is considered money by government decree.

Illustration of quantitative easing

Quantitative easing involves the purchase of government bonds by the central bank. But the treasuries are first sold to the secondary market. In the process below the treasury is first bought by a pension fund, then by a bank called “Citibank” and then by the Federal Reserve. Alexander Bechtel explains this process very well in this video.

QE step 1
QE step 1
QE step 2
QE step 2
QE step 3
QE step 3
Stefanie von Jan

By Stefanie von Jan / Freedom and truth seeker, economist for a free market for money, deep into Austrian Economics and Bitcoin, advocate for safe and beneficial technologies

.

.

.

Khan Academy

A brief look at how money has evolved over time from being printed on valuable substances (commodity money), to merely representing those valuable substances (commodity-backed money), to not representing anything at all (fiat money). Created by Grant Sanderson. View more lessons or practice this subject at http://www.khanacademy.org/economics-… AP Macroeconomics on Khan Academy: Welcome to Economics! In this lesson we’ll define Economic and introduce some of the fundamental tools and perspectives economists use to understand the world around us!

Khan Academy is a nonprofit organization with the mission of providing a free, world-class education for anyone, anywhere. We offer quizzes, questions, instructional videos, and articles on a range of academic subjects, including math, biology, chemistry, physics, history, economics, finance, grammar, preschool learning, and more. We provide teachers with tools and data so they can help their students develop the skills, habits, and mindsets for success in school and beyond. Khan Academy has been translated into dozens of languages, and 15 million people around the globe learn on Khan Academy every month. As a 501(c)(3) nonprofit organization, we would love your help! Donate or volunteer today! Donate here: https://www.khanacademy.org/donate?ut… Volunteer here: https://www.khanacademy.org/contribut

77% Of Economic Activity Lost To Social Distancing Is Back, But An Economic Recovery Still Depends On A Vaccine

Third-quarter earnings season officially kicks off this week with big banks, airlines and consumer-staple firms set to report on Tuesday, and though Wall Street’s eyeing improvements over the previous quarter, a sustained economic recovery is still ultimately contingent on widespread vaccination.

Big banks and airlines–two of the coronavirus pandemic’s worst-hit industries–kick off earnings season on Tuesday, with JPMorgan Chase, Citigroup and Delta Air Lines all set to report before the opening bell.

Expect weak and uneven sales growth, and a collapse in profit margins, to characterize third-quarter results, Goldman Sachs said in a weekend note to clients, adding that it still expects election results will have more of an impact on stocks than earnings, and that ultimately, vaccination is “essential for the normalization of the economy.”

Goldman believes there’s a 48% chance that there will be enough doses of an FDA-approved coronavirus vaccine to treat 25 million Americans by the second or third quarters, the most likely time lines, followed closely by 42% odds that this will happen by the first quarter.

Meanwhile, wealth management firm Glenmede said Monday that although it estimates 77% of economic activity lost due to social-distancing mandates has been regained, it only expects earnings will see a small rebound from an “abysmal” second quarter.

PROMOTED Civic Nation BrandVoice | Paid Program Navigating Graduate Admissions As A First-Gen, Low-Income College Grad UNICEF USA BrandVoice | Paid Program Fighting COVID-19 In Venezuela With Soap And Water And Expertise Grads of Life BrandVoice | Paid Program Workforce Update: A Balancing Act For America’s Working Women

Glenmede doesn’t expect earnings will reach new highs until the second half of 2021, which the firm adds is “not so coincidentally aligned with estimates for vaccine delivery.”

In a Monday note to clients, LPL Financial had similar hopes, saying, “The combination of efficiencies gained during the recession, the strong performance of the winners and the tremendous progress in Covid-19 treatment and vaccine development, all suggest we may be only a year away from reaching normalized earnings, though we fully recognize the risk that time line may end up being too aggressive.”

Key Background

The coronavirus pandemic has been a boon for stocks in software, biotech and consumer staples (think: Procter & Gamble, whose shares are at an all-time high and up 17% just this year), but it’s been terrible to a bevy of firms reporting this week, particularly in the banking and airline spaces. The best-performing sectors this year, as tracked by S&P 500 ETFs through Friday’s close, include technology (up 32%), consumer discretionary (up 23%) and communications (up 13%). The worst-performing sectors are energy (down 36%) and financials (down 16%). JPMorgan, the nation’s biggest bank, led by Jamie Dimon, reports tomorrow and has seen shares plummet nearly 28% this year.

Big Number

21%. That’s how much Goldman said it expects third-quarter earnings per share will fall among S&P 500 firms, compared to a 32% drop in the second quarter and a 15% fall in the first. 

Crucial Quote 

“In many respects, the economy’s recovery since this spring has been pretty remarkable. . . . Consensus estimates show an expectation that earnings reach new highs in the second half of 2021, perhaps not so coincidentally aligned with estimates for vaccine delivery,” Glenmede’s Jason Pride and Michael Reynolds said on Monday. “Consumers are driving the pandemic recovery, but the U.S. economy is not completely out of the woods yet.

There are pockets of the economy that continue to struggle, and an additional round of fiscal stimulus could put the U.S. economy on a gentler and less painful path toward full recovery once a vaccine becomes widely available.”

What To Watch For

Banks dominate the 12% of S&P 500 earnings due to be reported this week, Bank of America noted in a Monday research note. Among firms reporting Tuesday are Delta Air Lines, JPMorgan Chase, Citigroup, BlackRock and Johnson & Johnson–all before the opening bell. Bank of America, Wells Fargo, Progressive and United Airlines are slated to release earnings on Wednesday, while Morgan Stanley, Charles Schwab and Walgreens are scheduled for Thursday. Any signs on Tuesday from JPMorgan and Citi that the economy is on the mend will help bank stocks and the overall market, says Marc Chaikin, founder of Philadelphia-based quant investment research firm Chaikin Analytics.

Further Reading

Apple, Twitter, Twilio Shares Rise As Stocks Prep For Big Earnings Week Ahead (Forbes) Follow me on Twitter. Send me a secure tip

Jonathan Ponciano

Jonathan Ponciano

I’m a reporter at Forbes focusing on markets and finance. I graduated from the University of North Carolina at Chapel Hill, where I double-majored in business journalism and economics while working for UNC’s Kenan-Flagler Business School as a marketing and communications assistant. Before Forbes, I spent a summer reporting on the L.A. private sector for Los Angeles Business Journal and wrote about publicly traded North Carolina companies for NC Business News Wire. Reach out at jponciano@forbes.com.

.

.

It’s a weird time to be alive. A pandemic is sweeping the world and life as we know it has gone through a seismic shift in a matter of weeks. But this isn’t the first time humans have encountered an epidemic. Today, Danielle (from the safety of her Chicago flat) looks back at a few of the world’s biggest pandemics. From the Black Death of the 1300s to the 17th c. Plague and the 1918 Spanish Flu, Danielle explores the human and economic tolls of past pandemics and what we can learn to prepare for life during and after COVID-19. Special thanks to our Historian Harry Brisson on Patreon! Join him at https://www.patreon.com/originofevery… Created and Hosted by Danielle Bainbridge Produced by Complexly for PBS Digital Studios — Follow us on… Facebook: https://www.facebook.com/originofever… Instagram: https://www.instagram.com/pbsoriginof… — Origin of Everything is a show about the undertold histories and cultural dialogues that make up our collective story. From the food we eat, to the trivia and fun facts we can’t seem to get out of our heads, to the social issues we can’t stop debating, everything around us has a history. Origin of Everything is here to explore it all. We like to think that no topic is too small or too challenging to get started. Works Cited: https://www.theatlantic.com/ideas/arc… https://www.newstatesman.com/politics… https://www.stlouisfed.org/~/media/fi… https://www.wsj.com/articles/lessons-… https://www.theguardian.com/commentis… https://www.economist.com/finance-and… https://voxeu.org/article/wars-plague… livescience.com/2497-black-death-changed-world.html https://papers.ssrn.com/sol3/papers.c… https://www.tandfonline.com/doi/pdf/1… https://academic.oup.com/ereh/article… https://www.sciencedirect.com/science… https://ec.europa.eu/economy_finance/… https://www.history.com/topics/world-… https://www.history.com/topics/world-… https://www.nytimes.com/2020/03/11/op… https://maximumfun.org/episodes/sawbo… https://www.history.com/topics/middle… https://www.theatlantic.com/health/ar… https://www.cdc.gov/flu/pandemic-reso… https://www.history.com/news/pandemic… https://www.acep.org/how-we-serve/sec… https://www.cdc.gov/plague/maps/index..

.

The Biggest US Banks Have Some Bad News About The American Economy

1

First the good news: The biggest US banks have had time to brace themselves for a wave of losses.

The bad news: They are still bracing themselves to withstand a wave of losses. Their earnings this week suggest the worst is yet to come for the American economy, and that Washington may need to provide even more support for workers and businesses.

Six of the biggest lenders all expect heavy credit defaults and soured loans, as shown by their loan loss provisions, which jumped 43% from the already hair-raising totals in the first quarter to a combined $36 billion in the second quarter.

Loan loss provisions aren’t, as they sound like, a special pot of money set aside for when loans go bad. It’s more like the amount of money banks expect to lose on their loans; it demonstrates the losses their capital may have to absorb in the months ahead and is subtracted from their earnings.

Approaching the moment of truth

For now the dire picture is merely a forecast.

Four months after lockdowns started smothering the world’s largest economy, bank losses have barely ticked up. JPMorgan Chase, for example, reports that charge-offs in its consumer business are little changed from a year ago.

Meanwhile, banks with powerful trading desks profited as stock prices gyrated and companies flooded the bond market with borrowing. JPMorgan said its markets unit had a record $9.7 billion of revenue, a 79% increase from 2019. Morgan Stanley had record profit, while Goldman Sachs said its fixed-income, currency, and commodities division had more than $4 billion of sales, its best quarter in nine years.

bestmining780

The big consumer lenders have yet to be battered by defaults and missed payments because of a ferocious wave of government support—including more than $2 trillion of aid to businesses and the unemployed—and because the banks themselves have offered forbearance and paused loan repayments for some of their customers. Bank of America said it has handled around $30 billion of requests for loan payment deferrals since the crisis set in, and that those requests have fallen by 98% since they peaked in April.

“You look at the banks and they are preparing of Armageddon and nothing is going wrong yet,” says David Ellison, a portfolio manager at Hennessy Funds. He’s optimistic the lenders can work through heavy credit losses—they got a lot of practice in 2009—but they will still have to contend with low interest rates, which makes their bread-and-butter lending businesses less profitable. They also increasingly have to compete with private equity firms that often target the same commercial clients.

If the government doesn’t agree on ways to continue supporting the economy as the initial relief programs expire, “things could start to fall off” for the banks, Ellison says. “And that’s where the banks are saying, ‘If that happens I have to be prepared for it.’”

JPMorgan Chase added $6.8 billion to its credit reserves and is more pessimistic about the economic downturn than it was three months ago. It expects heavy losses in the coming months that extend into 2021. “May and June will prove to be the easy bumps in terms of this recovery,” CFO Jennifer Piepszak said in an earnings call this week. ”And now we’re really hitting the moment of truth, I think, in the months ahead.”

Bank of America’s top executive expects the recession to extend “deep into 2022.” On an earnings call today (July 16), CEO Brian Moynihan said the lender expects US unemployment to end the year at 10% before gradually declining to 7.5% in 2021.

Wells Fargo, Citi

Not quite everything is gloomy. Wells Fargo CEO Charles Scharf said debit card spending made it back to pre-Covid levels in May; in the last week of June, debit card spending was up 10% from a year ago. But credit card spending remained subdued, some 10% lower in June from a year ago. Transactions using commercial cards were even weaker, down 30% during the last week of June, he said.

 

Citigroup’s CEO thinks the economy will only limp forward until a vaccine is available. “Normalization to me is, am I willing to get on the airliner, am I willing to get in a subway, am I willing to go into a crowded venue to watch a sporting event or a concert or what it may be,” Citigroup chief Michael Corbat said this week in an earnings call. “And I think realistically, when we get to that third bucket, I just don’t see that coming. And I would say many don’t see that coming until we feel like there’s an antivirus vaccine that’s available for the mass population around that.”

In the meantime, the carnage is expected to be widespread. Banks around the world are forecast to have more than $2 trillion in credit losses through 2021, according to analysts at Standard & Poor’s. Some $1.3 trillion of those losses are anticipated to come this year, more than double that of 2019.

“The unprecedented level of fiscal support that many governments across the world have deployed in response to the pandemic-related slowdown has been a key factor in supporting their citizens and economies during lockdown periods,” the S&P analysts wrote. “Perhaps the greater danger at this time is the reduction of such support too early, resulting in a longer and deeper economic contraction.”

It’s not clear that officials in Washington, having already committed trillions of dollars, are ready to spend even more. Beefed-up unemployment benefits have been a key plank of America’s response to the crisis, providing an extra $600 a week to workers who qualify. That program will fade away at the end of July unless politicians agree on a way to extend the aid. The government also dished out half a trillion dollars of loans through the Small Business Administration (SBA) to keep businesses afloat—a program that was built on the fly and riddled with inefficiencies but is widely credited with helping to keep the economy afloat.

Karen Mills, who ran the SBA during the Obama presidency, says more money is urgently needed for small enterprises. She forecasts that as many as 30% of these little operators are at risk of closing their doors for good. “We know already there are a number of businesses on the edge,” she said. “The next tranche of funding from the government is critical.” Critical to small businesses, certainly. And also important for their banks.

By John Detrixhe

Source: https://qz.com

financecurrent

%d bloggers like this: