A Forward Look

[flow5]

The best method to eliminate any "noise" when comparing money flows (payments), with goods & services is to (1) use identical time periods, (2) to use the historical, distributed lag effect, & to (3) ignore the seasonally mal-adjusted data.

[flow5]

Cumulative monetary flows are not increasing, they have been decreasing. The 24 month moving average (of the 24 month roc), shows this. Bonds prices become both cheap & expensive -depending upon how long they move in the same direction (up or down).

This mirrors the CPI which peaked in Sept 2011 and has been falling ever since. Using a 6 month moving average for the CPI, it shows a clear & steady downward trend.

parse: dt, NSA cpi, yoy cpi, 6 month moving average NSA cpi

06/1/2012 ,,,,,,, 0.026
07/1/2012 ,,,,,,, 0.024
08/1/2012 ,,,,,,, 0.021
09/1/2012 ,,,,,,, 0.019
10/1/2012 ,,,,,,, 0.018
11/1/2012 ,,,,,,, 0.018
12/1/2012 ,,,,,,, 0.018
01/1/2013 ,,,,,,, 0.018
02/1/2013 ,,,,,,, 0.018
03/1/2013 ,,,,,,, 0.019
04/1/2013 ,,,,,,, 0.018
05/1/2013 ,,,,,,, 0.016
06/1/2013 ,,,,,,, 0.015
07/1/2013 ,,,,,,, 0.015
08/1/2013 ,,,,,,, 0.016
09/1/2013 ,,,,,,, 0.015
10/1/2013 ,,,,,,, 0.015
11/1/2013 ,,,,,,, 0.015
12/1/2013 ,,,,,,, 0.014
01/1/2014 ,,,,,,, 0.014
02/1/2014 ,,,,,,, 0.013
03/1/2014 ,,,,,,, 0.013
04/1/2014 ,,,,,,, 0.013

The cpi is fallilng.  QE3 has failed.

[flow5]

The upcoming shortfall in the money stock (beginning mid-July), portends another set back for the economy. And with a remuneration rate twice as high as all money market wholesale funding rates:

(1) NIM (net interest rate margins), for the non-banks (the risk takers), has been squeezed at both ends of the yield curve (flattening the gap between marginally higher short-term rates, & the FRB-NY's "trading desk's" suppression of long-term rates (stemming from open market operations of the buying type), all of which correctly projects a deceleration in economic activity and a reduction in inflation expectations.

(2) the Fed’s “open market power” is emasculated with the payment of interest on IBDDs (whereas between 1942 & 2008 the CBs bought short-term obligations increasing both their liquidity reserves & the money stock, today they just hold just hold more idle, unused, excess reserve clearing balances).

It’s the short-end segment of the yield curve that drives the economy (i.e., both the wholesale funding for the non-banks & the "grist for the mill" for the commercial bank credit creation via investment in T-bills.

[flow5]

Paul Meek described the FRB-NY’s operating procedure in his 1974 booklet on "Open Market Operations". The fed’s current monetary transmission mechanism was changed by William McChesney Martin Jr. in c. 1965. Between 1951 and 1965, net changes in Reserve Bank credit were determined by monetary policy (i.e., after the Treasury-Federal Reserve Accord in 1951, and not by the public sector’s demand for loan-funds, & not by accommodating the commercial banker’s need for reserves).

The FOMC’s net free, or net borrowed, reserve targeting approach changed in response to the CBs buying their liquidity (as opposed to the old fashioned practice of storing their liquidity) beginning in c. 1965 (coinciding with the rise in chronic monetary inflation & in anticipated inflation). E.g., M1 grew at less than a 2 percent rate in the decade ending in 1964 and in the nine subsequent years money supply grew at a rate in excess of 6.5 percent...

The problem stemmed from using the wrong criteria (interest rates, rather than member bank legal reserves) in formulating & executing monetary policy. The effect of tying open market policy to a fed funds bracket was to supply additional (& excessive) legal reserves to the banking system when loan demand accelerated (& vice versa). I.e., Keynes's liquidity preference curve (demand for money) is a false doctrine (confuses money with liquid assets).

This change was encouraged by the 5 successive raises in the Board’s Reg. Q policy for the CBs exclusively beginning in 1957 (i.e., by allowing the CBs to pay for the deposits they already owned). I.e., the operations of the FRB-NY’s “trading desk” began to be dictated by the Fed Funds “bracket racket”. Though, as Paul Meek described, the repo rate on gov'ts is the actual transmission mechanism (not the FFR), or essentially, the one-day return on all government securities, while the daily volume of fed funds transactions are trivial in comparison.

The money stock can never be managed by any attempt to control the cost of credit. The only tool in a free capitalistic society thru which the volume of money can be controlled is legal reserves (i.e., monetarism). But monetarism has never been tried (i.e., Paul Volcker targeted non-borrowed reserves – not total reserves).

The “unified theory” is that the NBs are the customers of the CBs. Thus all demand drafts originating from the NBs clear thru the payment system (commercial banking system). And bank reserves are driven by payments (bank debits). Legal reserves are a surrogate for monetary flows (bank debits or total spending). 95 percent of all demand drafts clear thru demand deposits (see G.6 release). Caution, roc’s in RRs cannot be retrofitted.

The scientific evidence is irrefutable. The trajectory for the 24 month rate-of-change (roc), in monetary flows (the scientific method), projects a top in the inflation indices during May 2014. Then, the 10 month roc (proxy for real-output), mirrors the seasonal economic inflection points (scientific proof). Both lags have been mathematical constants for the last 100 years.

Monetary flows represent our means-of-payment money times its transactions rate-of-turnover (MVt). Required (legal) reserves (RRs), reflect transaction type deposit classifications 30 days prior. I.e., RRs serve as the policy metric for our primary money stock (means-of-payment money).

The 10 month roc in money flows (RRs) peaks in July. The problem is that there is a 15 percentage point deceleration in MVt by October (proxy for real-output).

This drop (projection), is somewhat diminished by not discounting future monetary expansion, not discounting any increase in Vt (e.g., non-bank lending/investing), & the annual decline in seasonal factors. But then there is a 62 percent drop in the proxy for the inflation indices by December. I.e., roc’s in MVt foreshadow subpar economic growth.

[flow5]

Our monetary mismanagement has been the assumption that the money supply can be managed through interest rates. Since c. 1965, the operation of the "trading desk" has been dictated by a series of interest rate pegs.

The technicians in charge of the hour-to-hour administration of open market operations apparently believe that there is, at any given time, a federal funds rate that is consonant with a proper rate of change in the money supply. They have in fact plugged this concept into a computer model. (a policy rule or a "Taylor” like rule).

What they have actually “plugged in” is an open ended device through which the commercial banks can decide whether or not there should be an expansion in the legal lending capacity of the banking system – the capacity to create credit (money) and to acquire additional earning assets.

This has assured the bankers that no matter what lines of credit they extend, they can always honor them - since the Fed assures the banks access to costless legal reserves whenever the banks need to cover their expanding loans – deposits

[flow5]

"Factors Affecting Reserve Balances" (H.4.1) finally became recognized as a "Principal Economic Indicator" on the BOG's "statistical releases" page - along with "Money Stock Measures" (H.6).

Percent change at seasonally adjusted annual rates

........................................................................M1......M2

3 Months from Feb. 2014 TO May 2014
.......................................................................10.2.....5.8

6 Months from Nov. 2013 TO May 2014
.......................................................................14.1.....6.8

12 Months from May 2013 TO May 2014
.......................................................................10.5.....6.5

Smokin!!!

[flow5]

The remuneration rate is he Fed’s new, and principle, credit control device (monetary policy tool). It inverts the short-end segment of the yield curve. The effect is twofold:

(1) paying interest on excess reserve balances [IBDDs], has induced dis-intermediation among just the non-banks - by destroying the borrow-short to lend-long savings-investment paradigm (i.e., it has decreased net interest rate margins [NIM], & increased the duration of short-term wholesale money market funding, e.g., eliminating the daily rollover of repo funding, etc.), &

(2) it has emasculated the FRB-NY's (the Central Bank) "open market power". CBs (between 1942 & Oct 2008), minimized their non-earning assets (excess reserves), by purchasing zero-risk weighted T-Bills (where there are no capital requirements), etc.

Thus, instead of the CBs buying gov’ts from the non-bank public with their non-earning assets during recessionary periods, they now park their cash (where they receive higher returns), at their District Reserve Banks.

Formally, whenever the “trading desk” injected excess reserves, there would be an immediate expansion of both Reserve bank credit as well as commercial bank credit (creating new money & new reserve requirements). Under current conditions, the Fed’s quantitative easing programs (conducted via the primary dealers, which are all Bank Holding Co’s. with international footprints), simply result in asset swaps (but from an macro-economic standpoint, the removal of “safe assets” from the credit markets has been contractionary).

The point is that the U.S. gov’t is the largest creditworthy borrower in a deleveraging economic environment. If money stock growth is to offset a dearth of non-bank & commercial bank lending opportunities, then the CBs will have to be incentivized to buy gov’ts from the non-bank public. The removal of the payment of interest on excess reserves would contribute to this end.

See:

Record $189 Billion Injected Into Market From "Window Dressing" Reverse Repo Unwind

&

The Fed Needs You To Sell Your Bonds

[Aman A.K.A. Ahamburger]

Jul 2, 2014 11:22:18 GMT -5 flow5 said:

The removal of the payment of interest on excess reserves would contribute to this end.

That's what I have been saying flow!

Jan 24, 2014 23:50:56 GMT -5 Aman A.K.A. Ahamburger said:

The FRB can eliminate the money paid on excess reserves and that 2.4 trillion the banks are holding can start flowing

Since the econ numbers over the last couple months point to a stronger second quarter, it's safe to say...

Apr 27, 2014 9:46:10 GMT -5 Aman A.K.A. Ahamburger said:

While their is still correlation between money flows and market fluctuations, without a doubt, the fundamentals in the economy have changed.

Especially because your math called this months in advance.. Bond Anxiety in $1.6 Trillion Repo Market as Failures Soar

[flow5]

The older one gets, the more things seem to stay the same.  We were once again within one day of the seasonal inflection point (day).

[Aman A.K.A. Ahamburger]

So you think we are going down til Oct? I know biometal was talking about Oct 20th, I think was the date?

[flow5]

Stocks anticipate economic growth. But with QE, the credit channel was bypassed in favor of financial investment (stock ownership).  With QE ending, stocks may struggle - curbing any rebound in the 4th qtr.

The "failures" seem to have been driven by arbitrageurs and short-sellers wanting t-bills. The CBs have an incentive to out-bid non-bank financial institutions on any security whose yield is less than the remuneration rate. This is perverse in that it emasculates the Fed's "open market power" (ability to control short-term money growth - esp. coming out of a recession where there are few new loan opportunities).

[Aman A.K.A. Ahamburger]

I hear ya. The benchmark rate should have been lifted at the first sign of a major rebound in housing. It would have stopped the 20% gains in certain areas of the real estate market and created demand for the credit funding channels. Stocks will rebound at some point as they always do, but it makes sense what you're saying about how they will struggle for a while. Market value to GNP/GDP is way out of whack and the global economy is not in a good place right now.

[flow5]

Pseudo-economists and false prophets argue endlessly about their catechisms. Their ill-conceived and unproven concepts never had anything to do with the real world to begin with (textbook driven, classroom instructed, or not). This goes for the money multiplier as well.

The multiplier is defined as the money stock divided by the monetary base. This formula is wrong from the get-go. First, the money stock keeps changing as depositors switch between different deposit classifications. And the “MB” has never been a base for the expansion of new money as an increase in currency is contractionary (depletes bank deposits unless, as with the current practice, the “trading desk” offsets withdrawals using concurrent open market operations of the buying type).

To say that “the textbook concept of the money multiplier is wrong” is not to explain anything at all.

See: bit.ly/yUdRIZ

[flow5]

2014 is a great year for data smoothing (stronger impulses followed by weaker ones, etc.). The last half is now clear. One selling opportunity.

[flow5]

Momentum to the upside until Sept month-end.

[flow5]

For those needing reminding, Irving Fisher’s (an American), “equation of exchange” is an algebraic way of stating a truism; that the product of the unit prices, and quantities of goods and services exchanged, is equal (for the same time period), to the product of the volume and velocity of money.

Fisher’s “transactions” concept of money velocity: MVt = PT, is where (1) M equals the volume of means-of-payment money; (2) Vt, the rate-of-turnover of this money; (3) T, the volume of transactions (4) P, the average price of all transaction units. Because it is impossible to calculate P and T (according to the econometric modelers), presumably the formula lacks validity. But actually, the equation is a truism in that: to sell 100 units of any product (-T) at $4 dollars per product (-P), requires the exchange of $400 (-M) once, or $200 twice (Vt). It is self-evident from the equation that an increase in the volume and/or velocity of money will cause a rise in unit prices, if the volume of transactions increases less, and vice versa.

Incontradistinction to the Keynesian economists on the Fed’s research staff, aggregate demand is not equal to nominal-gDp (the demand for services-human, and final goods). Instead, MVt = AD (aggregate monetary demand is measured by the flow of money - not nominal-gDp or PY). Inflation can’t be analyzed in terms of the volume of wages and salaries spent. And to say that people can only spend their money once on final products disregards the inflation process - which begins with raw materials and proceeds through the processing costs at all stages and channels of production and distribution.

Thus, Dr. Milton Friedman’s income velocity is obviously a contrived figure (overlooking the expenditure of voluntary savings, etc.). Keynes’s analysis discounts any empirical way to dissect and explain changes in the volume of credit (new money) created by the Reserve and commercial banks, as well as the expenditure rate (velocity of funds).

The importance of Irving Fisher’s Vt in formulating or appraising monetary policy derives from the fact that it is not the volume of money which determines prices and inflation rates, but rather the volume of money flows relative to the volume of goods and services produced (one dollar that turns over 5 times can do the same work as five dollars turning over only once). “No money supply figure standing alone is adequate as a “guide post” to monetary policy” – Dr. Leland J. Prichard, Chicago, economics, 1933.

Mathematical proof (economic theory), provides the foundation for empirical discovery. The historical evidence for the last 100 years demonstrates that rates-of-change in money flows MVt = roc’s in nominal-gDp (a proxy for all transactions in Fisher’s algebra).

This confirms the 1931 commission that was established on “Member Bank Reserve Requirements” during the Great Depression. The commission completed their recommendations on Feb. 5, 1938. The 7 year study was entitled "Member Bank Reserve Requirements -- Analysis of Committee Proposal"

It's 2nd proposal: "Requirements against debits to deposits"

This research paper was "declassified" on March 23, 1983. By the time this paper was "declassified", Dr. Milton Friedman had declared RRs to be a "tax" [sic]. But even today: “bank reserves are largely driven by bank payments (debits)” – Dr. Richard Anderson, V.P. and senior economist FRB-STL.

Since the G.6 release (debit and demand deposit turnover), was discontinued in 1996 (due to President Bill Clinton’s cost cutting measures and not as the Federal Register erroneously implies), RRs (required reserves) are used as a surrogate for all transactions. Though rapid accelerations or decelerations in RRs will temporarily understate Vt (on average, e.g., in 2013, for up to 3 months). “No brag, just fact: The Guns of Will Sonnett”.

The proxy in money flows for real-output is exactly 10 months (courtesy of the "Bank Credit Analyst's" debit/loan ratio calculation.
The proxy for inflation is exactly 24 months (courtesy of "The Optimum Quantity of Money" – Milton Friedman and Anna Schwartz.

Note1: their lengths are identical (as the weighted arithmetic average of reserve ratios & reservable liabilities remains constant). Note2: the BOG's figure differs from the STL FRB's figure. Use STL's for RAM adjustments.

What’s confused some model makers is that money flows have a considerable distributed lag effect before they are registered in the price indices (the last to register these effects is the CPI), - or even in the shorter-term production of goods and services. But contrary to Nobel Laureate Dr. Milton Friedman, the lag effect for money flows is not “long and variable”. Money lags have been mathematical constants for at least 100 years (as long as data has been available). The science (long-run validity), is as repeatedly and accurately reproduced (predicted).

Nassim Taleb's May 6th 1000 point swing was no "black swan" (the failure of circuit breakers and limits on high frequency trading). I predicted the "flash crash" 6 months out and within one day. The “proof is in the pudding’. Stocks are currently set up for another “flash crash” close to this Sept’s month-end.

Transaction based accounts represent our means-of-payment money. All transaction based accounts are reservable 30 days hence. And 96% of all debits cleared thru these deposit classifications. That means only 3.5% cleared thru the remaining M2 account balances (June 1996 Federal Reserve Bulletin). I.e., all the demand drafts drawn on CBs, CUs, and S&Ls all cleared through DDs – except those drawn on MSBs, interbank, and the U.S. government.

Because the Fed's technical staff used Vi instead of Vt, this lead to the BOG de-emphasizing the monetary aggregates: During a Humphrey Hawkins report to Congress Chairman Greenspan remarked: "The historical relationships between money & income, & between money & the price level have largely broken down, depriving the aggregates of much of their usefulness as guides to policy. At least for the time being, M2 has been downgraded as a reliable indicator of financial conditions in the economy, & no single variable has yet been identified to take its place."

In a 2006 speech about the historic use of monetary aggregates in setting Federal Reserve policy, Chairman Bernanke pointed out that, "in practice, the difficulty has been that, in the United States, deregulation, financial innovation, & other factors have led to recurrent instability in the relationships between various monetary aggregates & other nominal variables".

Some liquid assets (time deposits) have a direct one-to-one, relationship to the volume of demand deposits (DDs), while others affect only the velocity of DDs (e.g., retail MMMFs). The former requires direct regulation; the latter simply is important data for the Fed to use in regulating the money supply.

The Fed has no control over voluntary savings. Restricting savings would be tantamount to saying "don’t save money” as savings (which we don’t have enough of) adds to “M2” & therefore has an inflationary bias, when in fact, savings (a large portion of “M2”) is evidence of money that has already been saved/spent/invested.

And if you missed the Fed’s communique, the past President of the FRB-NY William C. Dudley: “For this dynamic to work correctly, the Federal Reserve needs to set an IOER rate consistent with the amount of required reserves, money supply & credit outstanding”

See: bit.ly/yUdRIZ
Quantitative Easing and Money Growth:
Potential for Higher Inflation?
Daniel L. Thornton FRB-STL

Bank debits reflect both new & existing residential & commercial real-estate transactions. As such the housing boom/bust would have stuck out like a sore thumb. This isn't rocket science, these enormous money flows would have triggered the monetary alarms.

The conventional wisdom reflects: “The usefulness of the FR 2573 data in understanding the behavior of the monetary aggregates has diminished in recent years as the distinction between transaction accounts and savings accounts has become increasingly blurred. Further, the emphasis on monetary aggregates as policy targets has decreased”. If you understood – the manager of the debit series was clueless.

Monetary policy objectives should be formulated in terms of desired rates-of-change (roc's), in monetary flows [ M*Vt ] relative to roc's in real-gDp [ Y ]. Roc's in nominal-gDp [ P*Y ] can serve as a proxy figure for roc's in all transactions [ P*T ]. Roc's in real-gDp have to be used, of course, as a policy standard. 

[flow5]

We're rolling over.

[Aman A.K.A. Ahamburger]

Jan 24, 2014 23:50:56 GMT -5 Aman A.K.A. Ahamburger said:

The FRB can eliminate the money paid on excess reserves and that 2.4 trillion the banks are holding can start flowing

Aug 3, 2014 11:15:34 GMT -5 Aman A.K.A. Ahamburger said:

I hear ya. The benchmark rate should have been lifted at the first sign of a major rebound in housing.

Fed to use excess reserves as tool to alter fed funds rate

Aug 16, 2014 14:02:33 GMT -5 flow5 said:

The importance of Irving Fisher’s Vt in formulating or appraising monetary policy derives from the fact that it is not the volume of money which determines prices and inflation rates, but rather the volume of money flows relative to the volume of goods and services produced (one dollar that turns over 5 times can do the same work as five dollars turning over only once). “No money supply figure standing alone is adequate as a “guide post” to monetary policy” – Dr. Leland J. Prichard, Chicago, economics, 1933.

You make interesting points in the post that this quote is from. However, as we can clearly see from the current situation in China and the fact velocity has been dropping since 1999 in the US, there is a tipping point with debt in the system. Once 1 dollar turning over only generates 20 cents in production, they banking system has become systemic.

[flow5]

The ability to service debt is dependent upon many factors. And Vt has not been dropping since 1999. Vt is money actually exchanging hands - not some made up figure.  Whereas the payment of interest on excess reserve balances has artificially suppressed real rates of interest, in the future, remunerating IBDDs will force an increase in the premiums demanded by investors. There is no "free lunch".  The U.S. Treasury will simply go broke much sooner.  

[flow5]

Flash crash should begin around 10/1/2014 + or - a couple of days.

[Aman A.K.A. Ahamburger]

Well according to M2, velocity has been dropping since 1999 and MZM says 1979 - or there about. The reason is... debt. Just like the facts coming out of China.

China Loosens Monetary Conditions in Test of Credit Power

Each $1 in new credit added the equivalent of an extra 20 cents in GDP in the first half of 2014, according to data compiled by Bloomberg. That compares with 29 cents in full-year 2012 and 2013 and 83 cents in 2007, when global money markets began to freeze.

In other words, the more debt there is - Vt spent before made - the less dollars for transactions. Defaults essentially erase Vt, and when credit is used to buy the product there isn't actually money trading hands. Another way to look at it is Larry Summers Is On to Something, aka socialism/keynesian economics is dead - you were wrong Karl.

[flow5]

My prof used to always were a suit and tie along with his Phi Beta Kappa key when teaching (He served as Chairman of the Economics Dept. and Dean of the School of Business at KU).  He never left KU as he said he didn't want to have to educate any other bankers around other colleges where he was often recruited.  Milton  Friedman was in several of his classes at Chicago. I was just getting started trading stock options and commodities in 1973. I took his Money and Banking class because my father's friend owned a lot of banks and seemed to have the Midas touch (He had the dubious distinction of having the largest divorce settlement in the state). So I already had some perspective and paid close attention. It also impressed me that he read to the class much of his correspondence with other economists. I remember him reading several letters from Chairman Burns (He called him ignorant and arrogant). The DOW was around 1000 at semester's end & Pritchard told the class it would be at 600 when we came back in the fall. So I paid even closer attention...

#1 income velocity is a contrived figure: i.e., Gross National Product divided by the money stock. The product of M*Vi is obviously nominal-gDp.  Vi is without a rudder or an anchor. A rise in nominal GDP can be the result of (1) an increased rate of monetary flows (MVt) -which by definition the Keynesians have excluded from their analysis, (2) an increase in real GDP, (3) an increasing number of housewives (or immigrants), selling their labor in the marketplace, etc. The Vi approach doesn't provide a tool by which we can dissect and explain the inflation process.

To the Keynesian economists, aggregate monetary demand is nominal-GDP, the demand for services (human) and final-product goods. This concept excludes the common sense conclusion that the inflation process begins at the beginning (with raw material prices and processing costs at all stages of production and distribution) and continues through to the end.

What you cite as velocity on the FRB-STL's "FRED" database at times moves in the opposite direction as the actual transactions velocity of money. I learned a little about it from the help of Barron's "Current Yield" editor - James Grant.  He put me in touch with Juncture Recognition's William Bretz.  And I called and wrote the editors of the Canadian publication "Bank Credit Analyst" (they published the debit/loan ratio). Plus I knew the manager of the series in D.C. (he also went to KU), and helped with the 4 year review (justification), of the G.6 release. I also find it ironic that William Barnett (of Divisia Aggregates), now teaches at KU.  Before it was discontinued, the G.6 release was the Fed's oldest time series (Dr. Richard Anderson pointed this out to me).

I know something about Vt.  Financial innovation drove it to the stratosphere in 81 (the nationwide introduction of ATS & NOW accounts).  Dr. Pritchard predicted it (called the new accounts a "time bomb").  Financial engineering during Greenspan's real-estate boom had the same effect (vastly accelerated the transactions velocity of bank deposits).

It's a mischaracterization to attribute "peak-debt" to be the cause of the Great-Recession.  "Peak-debt" reoccurs at the top of every "business cycle" [sic].  The "business cycle" is always interrupted as the expected income streams from capitalization rate forecasts are adversely impacted by falling asset prices. In our highly interdependent pecuniary economy, unless the money supply expands at least at the rate prices are being pushed up, output can't be sold, and hence the work force will always be cut back. Such has always been the case since the Great-Depression. Whenever the 10 month rate-of-change in money flows is less than 2-3 percent above the roc in real-output  - we get a recession.

[damnotagain]

Thank you flow5 ! Great reading

[Aman A.K.A. Ahamburger]

Flow, you can drop all the names you want. Fact is that your math doesn't back up your words.(Bruce's math backs up his, however)

I understand that "peak-debt" didn't cause the great recession. I have been trying to explain to you for years that everything leading up to the great recession - caused to great recession. I have also tried to point out the what is going on in China right now is an exact parallel to what the US was facing in the years leading up to the great recession; a point that you have ignored or played down countless times.

Since Summers has published a paper that is making the rounds and is being taken seriously - outlining what I have been saying about the debt wall since 2012 - the US's growth picked up in Q2 (contrary to your math), and I've once again called a speculative real estate bubble accurately; I think it's safe to say that I know a thing or two about velocity and economics as well. (Not even getting into how I was saying in January that the EU was stalling.)

But hey, you got damn here - the guy who was using M2 from the FRED as the basis for why the USA was going into recession in Q2, 2014 agreeing with you. Even though you are literally saying these charts are meaningless when it comes to actual velocity, so all the more power to ya flow5.

[flow5]

“Fact is that your math doesn't back up your words.(Bruce's math backs up his, however)… the US's growth picked up in Q2 (contrary to your math),”

I “rebalance too” (and as I said: legal reserves are a surrogate - not mathematically the same as bank debits).  I have the best market timing record in history. We're set up for a "flash crash".  Go fish.

[flow5]

Neither Barnett (New Measures Used to Gauge Money supply WSJ 6/28/83), nor the St. Louis Fed's technical staff: “Although the evidence is mixed, the MSI (monetary services index), overall suggest that monetary policy WAS ACCOMMODATIVE before the financial crisis when judged in terms of liquidity. — use accurate money supply metrics reflecting changes to AD.

"But opinions vary widely on what M1 and the other, broader Fed measures really mean. The experimental measures are designed to resolve some of the confusion by isolating money intended for spending, the money held as savings. The distinction is important because only money that is spent-so-called “true money” – influences prices and inflation"

(1) The CBs are credit creators (expanding both the volume of new money and increasing its rate-of-turnover).

(2) Whereas the NBs are credit transmitters (where savings exchange hands just one time).

M*Vt =aggregate monetary purchasing power. 2006: "Today, with bank reserves largely driven by bank payments (debits), your views on bank debits and legal reserves sound right!" Dr. Richard Anderson - V.P. and senior economist FRB-STL. In other words, all the demand drafts drawn on the NBs clear through DDs (because of reporting errors - except those drawn on MSBs, interbank & the U.S. government). I.e., greater than 96 percent of all demand drafts cleared thru DDs at the G.6 releases end (after virtually no change in 2 decades).

[flow5]

David Stockman:

Why The Fed's Outrageous Gift To Foreign Banks--- Risk Free Aribitrage On IOER--Is Just The Tip Of The Iceberg

Aug. 24, 2014    

This profit stripping operation is simple. Foreign banks on Wall Street borrow from money market funds at an infinitesimal 3-6 basis points and then shuffle the loot down to 33 Liberty Street where the New York Fed pays them 25 basis points on the same funds. This gift is known as the IOER payment for excess reserves. It is a short-term trade which is rolled-over day after day and is absolutely risk free. Both ends of the arb represent money prices that are administered by the Fed, not set by price discovery in the market.

Indeed, as part of its “open mouth” communications policy, the Fed promises to give considerable advance warning as to when the yield on IOER and also overnight money market borrowings is going to change. Accordingly, any foreign bank caught napping long enough to run afoul of a well-telegraphed Fed change in the arb would likely be operating on pre-telegraph technology. That is to say, this Fed sponsored arb is tantamount to owning a printing press. All it takes is a banking license from the state of New York or other US jurisdiction.

And, yes, the parent bank owning a license to print profits in this manner should be domiciled outside the USA. That’s because foreign banks are generally not subject to FDIC levies designed to fund Uncle Sam’s deposit insurance programs—-fees which would bite into the risk free arb described above. By contrast, domestic banks which pay the FDIC fees are largely not involved in this particular free money gambit.

This seems like a screaming outrage that couldn’t be true—especially because the real beneficiaries of the Fed’s largesse are Europe’s giant banks which are insolvent but socialized wards of the state. But, alas, no less an authority than the Fed’s own unpaid spokesman, Jon Hilsenrath of the Wall Street Journal, confirms that this entire larcenous arrangement happens day-in-and-day-out on Wall Street:


The most striking feature of the Fed’s strategy is that it keeps in place an effective subsidy that the U.S. central bank is currently paying to foreign banks.

Here’s how:

In recent years foreign banks have been tapping U.S. money market funds for very cheap short-term loans. Unlike domestic banks, foreign banks don’t have domestic depositors to tap for funds, so they turn elsewhere for dollars. Money market funds make the funds available for a few hundredths of a percentage point. The foreign banks in turn park those loans at the Fed for 0.25% interest. They earn profits on the spread between the cheap cost of funds available from money market funds and the higher rate they get at the Fed.

It’s a trade that domestic U.S. banks have been unwilling to make because they have to pay additional fees to the Federal Deposit Insurance Corp. on their borrowings, fees the foreign banks don’t have to pay.

Here’s the thing, however. The profit capture by foreign banks is only the tip of the iceberg of financial deformation that has been generated by ZIRP and the Fed’s whole hog domination of financial markets where honest prices for money, debt and risk assets were long ago extinguished. In this instance, ZIRP has caused $2.6 trillion in money market mutual funds to be sequestered in financial limbo where these funds earn virtually nothing in the Fed administered money market.

Moreover, upwards of $1 trillion of this total is in retail funds where grandpa is today collecting 3 basis points at the PNC fund and 6 basis points at Schwab. In a word, this is willy-nilly income redistribution on steroids. Fed policy functions to sweep the assets of main street’s liquid savers into what are essentially ZIRP accounts. Having accomplished this un-voted tax levy on millions of US citizens, it then sponsors a profit stripping scheme for a handful of foreign banks which use these ill-gotten windfalls to augment their grossly deficient capital levels, thereby reducing the bailout exposure of their socialist wardens in Brussels and throughout the EU capitals.

And it doesn’t stop there, either. How does the Fed earn the money to participate in this off-balance sheet foreign aid program? Why, from you and me—the taxpayers of America. The Fed is now earning upwards of $100 billion per year on its swollen $4.4 trillion asset base—–a trove of Treasury and GSE debt that was funded by hitting the “buy” key on its digital printing press. Our taxes then pay the interest on all those Fed assets—-giving the monetary politburo in the Eccles Building nearly infinite walking around money for schemes of this sort.

Undoubtedly, Fed apologists would argue that this subsidy to foreign banks is a modest, collateral effect of god’s work performed by the FOMC as it deftly manages interest rates and other financial levers to shepherd labor markets and national output to the promised land of full employment and potential GDP. But that justification, in fact, is the essential and everlasting indictment of the entire enterprise of monetary central planning.

Free markets always and everywhere liquidate mis-priced spreads among financial assets, meaning that windfalls like the foreign bank subsidy are rapidly arbed-out. By contrast, central bank financial repression and interest rate pegging defeats these beneficent market forces and, instead, locks-in arbitrage opportunities that linger indefinitely. Indeed, the foreign bank subsidy is just a faint example of the carry trade dynamic which infects the entire financial system.

Just as the Fed instructs foreign banks to “come and get it” with its locked-in IOER/money market spread, it delivers the same message to the entirety of what has become the Wall Street gambling casino. By means of ZIRP it decrees that the cost of funding speculative portfolios is virtually free. At the same time, its explicit and aggressive commitment to asset price appreciation and “wealth effects” levitation of jobs and GDP has generated a massive one-way bid for assets like junk bonds with a yield or stocks and ETFs expected to appreciate. And like the foreign banks here essayed, Wall Street gamblers laugh all the way to the bank as they put on both sides of the Fed’s profoundly anti-market trade.

And this awful system of windfall gifts to speculators, and the capricious redistribution of wealth from savers to gamblers on which it depends, will not go away owing to the pending end of QE or the hinted at baby steps toward normalization of interest rates. The heart of the evil is interest rate pegging itself. That is, the replacement of market prices with administered prices—direct and indirect—throughout the financial system.

As Hilsenrath also explains the Fed intends to trap the money market in a 25 basis point corridor between the IOER and the offered rate on its reverse repo facility. If that corridor is initially set at a spread between say 25 bps(reverse repo) and 50 bps(IOER), or is even ratched-up in Greenspan like baby steps for years to come, the Wall Street carry trade is likely to remain in place for a considerable time. What counts is the certainty that near-term funding costs are fixed at rates which generate positive carry against the return on risk assets.

Now that is the essence of Fed policy. An all-powerful, un-elected arm of the state has transformed itself into a crooked croupier and has no intention of leaving the casino.

[damnotagain]

It really is print $$$$$ till it worthless...  Huge debt, no savings . Middle class and the old time savers get robbed.

Play the game and donate to charities.  

My respects flow5

[jarrett1]

Mean...Mode...Median and Range...but no black swans, it was a one off...IF it was that

Statistics are really nice to study, however this nation is in a state of corruption...so you can study numbers...don't look at the numbers...look at who is screw'n who and how you play to get out of the way

[damnotagain]

Aug 25, 2014 17:28:20 GMT -5 jarrett1 said:

Mean...Mode...Median and Range...but no black swans, it was a one off...IF it was that

Statistics are really nice to study, however this nation is in a state of corruption...so you can study numbers...don't look at the numbers...look at who is screw'n who and how you play to get out of the way

No shit , the nation is corrupt . Your brilliant . The old and young will get screwed the worse from Fed policy. Lol " don't look at the numbers" ?  Yeah like real unemployment , stagnant wages, part time work and No interest on savings for our older citizens.

Not hard to see who is getting screwed.

market up!