There is something in this more than natural - Hamlet

[djAdvocate]

Nov 27, 2017 1:22:54 GMT -5 Aman A.K.A. Ahamburger said:

In fact I'm going to completely ignore this thread once again because my points have been proven ad nauseum in this discussion, as I mentioned. Also, as mentioned, the US isn't heading towards recession as we speak, as some on this thread have claimed; and I have listed to ppl who were pissed off at the current political situation tell me the US has been headed for a disaster for... well since I've been posting on these boards. While they have continued to be wrong, my Economics and trends are holding up nicley.

So, please carry on without me. I'm board and have plenty of things I'd rather do than have my points proven for me; while not even being realized that's what happening.

that's one way to "win": declare victory and walk away without ever really playing.

this has been a very long expansion.  in 2 years, it will be the longest in US history.  i suspect that we have at least a year left (in fact, i am rotating out of commodities in precisely one year).  and, as i said, i hope the tax cuts go through.  i will net tens of thousands off it, which will be money that i can use to buy property abroad.  i am stoked.  go, Trump, go!

now, having said that, eventually the debt is going to be a serious issue for the US.  but by then, i will be long gone, so it will be for my son, my nephews and their families to figure out, not me.  i hope they do.  i built half a dozen businesses here.  my family has been in America for 10 generations.  it would be a shame if all of that blood, $, and hardship went for naught.

winning is a matter of perspective.  if i get out of here with my skin, i will consider that winning.  if winning to you means that you think that i am "making your points for you", then farbeit for me to argue with you.  whatever makes you happy, bro.  i actually just enjoy discussing things.  that is reward enough for me.

[flow5]

The commercial banks (which compete amongst themselves), have no choice but to accept core deposits. Savings flowing through the non-banks never leaves the payment's system. There is just a change in (1) the ownership of existing deposits, and (2) the distribution of existing deposits (as opposed to primarily local markets), within the commercial banking system, a velocity relationship.

You are not depriving the pubic of attractive liquid assets (they could always buy gov'ts). Just the opposite through the activation of idle savings balances, through direct and indirect investment by their owners (a shift to riskier assets).

However, a shift in the holdings, from the commercial banks to the non-banks, will increase the supply of loan-funds, but not the supply of money. This results in no change in commercial bank’s total assets, total reserves, net reserve positions, etc., so the payment’s system lending power remains unaltered (as determined by monetary policy). However the transfer of the title to existing bank deposits increases the lending capacity of the non-banks. This tends to lower long-term interest rates and stimulate spending (increase money velocity).

In effect, if the FED wishes to maintain the pre-existing degree of ease or tightness in credit markets, it will have to force the commercial banks to reduce their deposits and their loans. This course of action assumes that the utilization of savings isn’t offset by an increase the supply of new goods.

Further, a restriction of loans to a narrow range of purposes, e.g., channeled into home mortgages (real-investment outlets), amplifies income velocity (as well as has a multiplier effect).

Some economists perversely think that the Fed shouldn’t even allocate credit, Goodfriend, Plosser, Lacker, Sumner, etc. (but that thinking got us the current monsters, Fannie and Freddie).

Instead Congress, via the DIDMCA, laid the legal basis for turning 38,000 non-inflationary, non-banks into 38,000 money creating, commercial banks with a broader diversification of the types of loans made (diversified portfolio composition).

Policy should be changed by shrinking the commercial banking system (where size isn’t synonymous with profitability due to the DFI’s interest expense). That would increase Vt, and therefore AD. This would raise the *real* rate of interest, producing higher NIMs for the non-banks, and higher ROA & ROI for the commercial banks. It increases the opportunities for “bankable” loans. It also reduces bad debt. It’s history that was re-written (a deliberate cover-up by the banking lobbyists).

[flow5]

Commercial bank-held savings never exchanges counter-parties. This is simply because the commercial banks are carrying on their balance sheet a liability that is owned by the nonbank public that cannot be used unless the nonbank public decides to use it, and by definition it is not being used. The banks cannot use it, the public is not using it, and so it is not being used.

From the system’s belvedere, the monetary savings practices of the public are reflected in the velocity of their deposits, and not in their volume. Whether the public saves, dis-saves, chooses to hold their savings in the commercial banks, or to transfer them to non-banks will not, per se, alter the total assets or liabilities of the commercial banks, nor alter the forms of these assets and liabilities.

Because the payment’s velocity of commercial bank-held savings is zero, these funds obviously are not being made available by their owners -- for either direct or indirect investment. And the growth of time “savings” deposits is almost exclusively at the expense of other demand drafts. If the public would shift into other types of earning assets outside of the payment’s system, then savings would have an income velocity. If a transfer in the ownership of commercial bank deposits takes place, this becomes a velocity of one when the funds are spent/invested.

Demand deposits are created when the payment’s system expands its earning assets: loans + investments = deposits. Deposits are the result of lending and not the other way around. The commercial banks could continue to lend even if the non-bank public ceased to save altogether.
So economists should study deposit insurance and its relationship to economic growth:

www.listofbanksin.com/deposit-insurance-denmark.htm

[flow5]

The general level of prices is determined by (1) the quantity of money; (2) the velocity of money; and (3) the physical volume of trade.

Money velocity, Vt (the transactions velocity of circulation), based on historical variabilities, has been 3 times as important a factor in determining aggregate monetary purchasing power, AD (or money X’s velocity), vs. that of our means-of-payment money. This mathematical weight is not reflected by income velocity, Vi, a contrived metric (which sometimes moves in the opposite direction as Vt). Vt is a much higher figure, encompassing, e.g., intermediate goods. Thus, even a minute increase in Vt translates into a large increase in AD.

Of the 3 figures on income velocity published in the FRED database by the Federal Reserve Bank of St. Louis, the path of MZM velocity is the closest to representing the previous trajectory, its relative direction, of transactions velocity (debits to deposit accounts).

bit.ly/1A9bYH1

American Yale Professor Irving Fisher’s “equation of exchange” can be used as an analytical tool, even though some the truism’s variables are unsolvable [i.e., “P” is not a price index, it is not a relative, but rather an absolute term – and cannot be calculated because of the item “T”. It is obviously impossible to add up quantities of things: – pounds of sugar, yards of cloth, and hours of work, cannot be combined except by reducing these elements to a common denominator]. M*Vt, can nevertheless give us valuable insights into economic horizons.

The importance of Vt in formulating or appraising monetary policy derives from the obvious 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 offered in exchange. A dollar bill that turns over five times can do the same “work” as a five dollar bill which turns over only once.

For our means-of-payment money to have effective purchasing power it must be used; it must turnover, i.e., pass from buyer to seller. The equation of exchange further reveals that prices will not necessarily rise even if total effective purchasing power increases. An increase in the numerator of the equation could, and sometimes is, offset by an increase in the denominator. It is possible for an increase in purchasing power to be offset by an increase in the total output of goods and services, or in the rapidity with which goods turns over. The equation of exchange is adaptable to both a long, and a short-run approach.

However, there is no evidence that the FOMC takes either Vt, or Vi, into account in formulating or executing monetary policy. And the FOMC is no longer required by the Humphrey-Hawkins Act, c. 2000, to set target ranges for any money metric.
The scope of this irresponsible decision is demonstrated by the fact that virtually nothing on the Federal Reserve Bank of New York’s website on “The Money Supply” is palpable.

www.newyorkfed.org/aboutthefed/fedpoint/fed49.html

To wit: “Thus, in July 1993, when the economy had been growing for more than two years, Fed Chairman Alan Greenspan remarked in Congressional testimony that "if the historical relationships between M2 and nominal income had remained intact, the behavior of M2 *in recent years* would have been consistent with an economy in severe contraction."

Chairman Greenspan added, "The historical relationships between money and income, and between money and 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, and no single variable has yet been identified to take its place."

Not so. Money flows, AD, rebounded from a negative figure:

monetaryflows.blogspot.com/

In fact, such conclusions were literally inane: “Interest rates were at the lowest levels in more than three decades, prompting some savers to move funds out of the savings and time deposits that are part of M2 into stock and bond mutual funds, which are not included in any of the money supply measures.”

As any competent economist knows (those who can read the tea leaves), funds transferred through non-bank conduits never leave the payment’s system.

2017 was a very interesting year. Contrary to Janet Yellen: “[t]he biggest surprise in the US economy this year has been inflation”, no, contrary forces were at work, raising the remuneration rate 3 times destroyed money velocity, and the 2 year rate-of-change in money flows acted in the opposite direction, raising money velocity. 2018 will most likely reflect the opposite situation, Vt will decline in conjunction with the drop in inflation and the jacking up of sticky deposit rates.

[flow5]

QE, when remunerating IBDDs, and providing unlimited deposit insurance, is decidedly deflationary. The FED should be charged with getting more bang for its buck.

See FRB of Richmond President Jeffrey Lacker: noted that the purchase of MBS represented an inappropriate effort on the part of the Fed to channel “the flow of credit to particular economic sectors.”

“Deliberately tilting the flow of credit to one particular economic sector is an inappropriate role for the Federal Reserve. As stated in the Joint Statement of the Department of Treasury and the Federal Reserve on March 23, 2009, ‘Government decisions to influence the allocation of credit are the province of the fiscal authorities.’”

See also Charles I. Plosser, President & Chief Executive Officer, FRB of Philadelphia: Plosser said the same thing:

“Finally, I also opposed September’s decision to purchase additional mortgage-backed securities. In general, central banks should refrain from preferential support for one sector or industry over another. Those types of credit-allocation decisions rightfully belong to the fiscal authorities, not the central bank. Engaging in such actions endangers our independence and the effectiveness of monetary policy”

The significant economic purposes for which a debt is contracted, or the manner in which it was financed, is of inestimable value in evaluating its impact.

QE encouraged FINANCIAL investment as opposed to REAL investment.

For example if the debt was acquired to finance the acquisition of a (1) (new-security), the proceeds of which are used to finance plant and equipment expansion, or the construction of a new house, rather than the purchase of an (2) (existing-security) or to finance the purchase of an existing house (read bailout), or to finance (1) (inventory-expansion), rather than refinance (2) (existing-inventories).

The former types of investment are designated as (1) *real* as contrasted to the latter (2), which constitute *financial* investment (existing homes).

Financial investment provides a relatively insignificant demand for labor and materials and in some instances the over-all effects may actually be retarding to the economy (e.g., 1929’s stock speculation)

Compared to real investment, it is rather inconsequential as a contributor to employment and production. Only debt growing out of real investment or consumption makes an actual direct demand for labor and materials.

U.S. Golden Era in economics (despite the Korean and Viet Nam wars, and the 4 recessions – which were Fed errors), was driven by putting savings back to work and backstopped by insuring non-bank pooled deposits.

As Bankrupt-u-Bernanke admitted on pg. 113 in his book: "We failed to take sufficient account of the effects of falling house prices (and the resulting mortgage delinquencies) on the stability of the financial system".

Maybe economists should study deposit insurance and it’s relationship to economic growth (hence my "market zinger" forecast in Dec. 2012).

Commercial banks do not loan out savings. They always create new money whenever they invest/lend with/to the non-bank public. Any incentive to hold savings within the framework of the payment’s system is deflationary.

[djAdvocate]

good posts, flow.  i have one question and one comment for you:

1) what is your background?  you know a lot of economics terminology.
2) the velocity of money through investment, dividends, and tax breaks to the wealthy is extremely low.  the mistake supply sider's make is thinking that the stimulus from the top down is greater than the bottom up.  nothing could be further truth.  during times where earnings growth has been across the spectrum from rich to poor, including the 150 year cycle that ended in 1973, economic growth lead to wealth gains by the rich through what Wolfe calls "the virtuous cycle": the rich engage in business, and reward workers for increased productivity with increased wages.  this cycle has totally broken down since 1973.  the first victim was the single income family, which used to be the norm.  WFP rose until 2001, when that trend was broken, as women started leaving the workforce (rather than compensating for the decline in MEN in the workforce, which has been going on for a while).  then, simultaneously, we have seen the decline of savings from the historical norm of 9% through 1992 to a low of 2% in 2005.  and, finally, the rise in consumer debt, which peaked with the housing bubble in 2007.  having used up all available means of maintaining growth in "household cash flow", we are now in a really dark place, economically.  the ONLY thing that gets us out of it is for wages to grow FASTER than inflation.  i don't see that happening.

[flow5]

Went to KU.  Took money and banking under Leland Pritchard.

Stock market's probably topped.

[djAdvocate]

Dec 4, 2017 18:31:36 GMT -5 flow5 said:

Went to KU.  Took money and banking under Leland Pritchard.

Stock market's probably topped.

yeah, i figured it was something like that.  u know yer shit.

i feel the same about the market.  i am pretty negatively hedged, so hopefully it will work out.

[djAdvocate]

flow5- do you have an opinion on precious metals? 

[flow5]

The long-term trend in the US $ will continue to be down (US PPP will fall).  This will reverse when commodities (inflation) falls from Feb - Apr next year.  Sell gold in Feb.

www.zerohedge.com/news/2017-12-05/de-dollarization-continues-china-iran-eliminate-greenback-bilateral-trade

De-Dollarization Continues: China, Iran To Eliminate Greenback From Bilateral Trade

[flow5]

See Elliot Wave:

caldaro.wordpress.com/

Fundamentals precede technicals.  Both have peaked.

[flow5]

Decline dead ahead.


(1) Ben S. Bernanke - Chairman and a member of the Board of Governors of the Federal Reserve System. Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body.

“At the same time, because economic forecasting is far from a precise science, we have no choice but to regard all our forecasts as provisional and subject to revision as the facts demand. Thus, policy must be flexible and ready to adjust to changes in economic projections.”

2) European Central Bank (ECB) Central Bank for the EURO

“The transmission mechanism is characterised by long, variable and uncertain time lags. Thus it is difficult to predict the precise effect of monetary policy actions on the economy and price level…”

3) Janet L. Yellen, President and CEO of the Federal Reserve Bank of San Francisco

“You will note that I am casting my statements about the stance of policy and the outlook in very conditional terms. I do this because of the great uncertainty that surrounds these issues. Frankly, all approaches to assessing the stance of policy are inherently imprecise. Just as imprecise is our understanding of how long the lags will be between our policy actions and their impacts on the economy and inflation. This uncertainty argues, then, for policy to be responsive to the data as it emerges, especially as we get within range of the especially as we get within range of the desired policy setting.”

(4) Thomas M. Hoenig - President of Federal Reserve Bank of Kansas City

“Monetary policy must be forward-looking because policy influences inflation with long lags. Generally speaking a change in the Federal funds rate may take an estimated 12-18 months to affect inflation measures….But the course of monetary policy is not entirely certain. & will depend on how the economy evolves in the coming months.”

(5) William Poole - President, Federal Reserve Bank of St. Louis

“However inflation is measured, economists agree that monetary policy has at most a minimal influence on the rate of change in the price level over relatively short time periods—months, quarters or perhaps even a year. Central banks are responsible for medium- and long-term inflation—such inflation, as Milton Friedman wrote, is a monetary phenomenon that depends on past, current and expected future monetary policy. As a practical matter, the medium- to long-term likely is a period of two to five years.”

(6) Robert W. Fischer – President Dallas Federal Reserve Bank

November 2, 2006: "In retrospect [because of faulty data] the real funds rate turned out to be lower than what was deemed appropriate at the time and was held lower longer than it should have been. In this case, poor data led to policy action that amplified speculative activity in housing and other markets. The point is that we need to continue to develop and work with better data."

(7) Governor Donald L. Kohn

“I think a third lesson is humility--we should always keep in mind how little we know about the economy. Monetary policy operates in an environment of pervasive uncertainty--about the nature of the shocks hitting the economy, about the economy’s structure, and about agents’ reactions. The 1970s provide a sobering lesson in the difficulty of estimating the level and rate of change of potential output; these are quantities we can never observe directly but can only infer from the behavior of other variables.”

(8) James Grant (Grant’s Interest Rate Observer)

“Both use quantitative methods to build predictive models, but physics deals with matter; economics confronts human beings. And because matter doesn’t talk back or change its mind in the middle of a controlled experiment or buy high with the hope of selling even higher, economists can never match the predictive success of the scientists who wear lab coats.”

(9) Alan Greenspan

"The historical relationships between money and income, and between money and 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, and no single variable has yet been identified to take its place."
-----------------------------------------------------------------------------------------------------------------------

First, there is no ambiguity in forecasts: In contradistinction to Bernanke (and using his terminology), forecasts are mathematically / scientifically "precise”:

(1) “Money” is the measure of liquidity; the yardstick by which the liquidity of all other assets is measured;

(2) Income velocity is a contrived figure (fabricated); it’s the transactions velocity (bank debits - Vt) that’s statistically significant (i.e., financial transactions are not random). However, the G.6: Debit and Demand Deposit Turnover (longest running Federal Reserve statistical release up to that point), was discontinued in Sept. 1996 (money actually exchanging counter-parities within the payment’s system).

(3) N-gDp is a byproduct or proxy, of monetary flows, M*Vt, (or aggregate monetary purchasing power), i.e., our means-of-payment money, M, times its transactions rate of turnover, Vt. N-gDp ≠ AD as Keynesian economists define it.

(4) The rates-of-change, RoC’s (∆) used by economists are specious (always at an annualized rate; which never coincides with an economic lag). The Fed’s technical staff, et al., has learned their catechisms;

(5) Milton Friedman became famous using only half the equation (the means-of-payment money supply), leaving his believers with the labor of Sisyphus;

(6) Contrary to economic theory, & Nobel laureate, Dr. Milton Friedman and Anna J. Swartz (“Money and Business Cycles”), monetary lags are not “long & variable” (A Monetary History of the United States, 1867–1960, published in 1963). The lags for monetary flows, M*Vt, i.e. the proxies for (1) real-growth, & for (2) inflation indices (for the last 100 years), are historically, mathematical constants. However, the FED's transmission mechanism, its target (pegging interest rates), is indirect, varies widely over time, & in magnitude. What the net expansion of money will be, as a consequence of a given injection of additional reserves, or change in policy rates, nobody knows until long after the fact. The consequence is a delayed, remote, & approximate control over the lending and money-creating capacity of the banking system;

(7) RoC’s in M*Vt are always measured with the same length of time as the specific economic lag (as its influence approaches its maximum impact (not an arbitrary date range); as demonstrated by the clustering on a scatter plot diagram;

(8) Not surprisingly, the companion series, non-seasonally adjusted member commercial bank “costless" legal reserves or “Manna from Heaven” (their RoC’s), corroborate both of monetary flows’ distributed lags –-- their lengths are identical (as the weighted arithmetic average of reserve ratios & reservable liabilities remains constant);

(9) Consequently, since the lags for (1) monetary flows, & (2) "costless" legal reserves, are synchronous & indistinguishable, economic prognostications (using simple algebra), are infallible (for less than one year);

(10) Asset inflation, or economic bubbles, are incorporated: including housing, commodity, dot.com, etc. This is the “Holy Grail” & it is inviolate & sacrosanct: See 1931 Committee on Bank Reserves Proposal (by the Board’s Division of Research and Statistics), published Feb, 5, 1938, declassified after 45 years on March 23, 1983.
fraser.stlouisfed.org/docs/meltzer/bogsub020538.pdf;

(11) The BEA uses quarterly accounting periods for R-gDp and the deflator. The accounting periods for gDp should correspond to the specific economic lag, not quarterly (apples to oranges). Because the lags for gDp data overlap RoC’s in M*Vt, the statistical correlation between the two is somewhat degraded. However the statistical correlation between RoC’s in M*Vt, & for example, the bond market is unparalleled;

monetaryflows.blogspot.com/

(12) Monetary policy objectives should not be in terms of any particular rate or range of growth of any monetary aggregate. Rather, policy should be formulated in terms of desired RoC’s in monetary flows relative to RoC’s in R-gDp;

(13) Combining real-output with inflation to obtain RoC’s in N-gDp, can then be used as a proxy figure for RoC’s in all transactions. RoC’s in R-gDp have to be used, of course, as a policy standard;

(14) Because of monopoly elements, and other structural defects, which raise costs, and prices, unnecessarily, and inhibit downward price flexibility in our markets, it is advisable to follow a monetary policy which will permit the RoC in money flows to exceed the RoC in R-gDp by c. 2 percentage points;

(15) Monetary policy is not a cure-all, there are structural elements in our economy that preclude a zero rate of inflation. In other words, some inflation is inevitable given our present market structure and the commitment of the federal government to hold unemployment rates at tolerable levels;

(16) Some people prefer the “devil theory” of inflation: It’s all “Peak Oil's fault", ”Peak Debt's fault", or the result of the “Stockpiling of Strategic Raw Materials/Industrial Metals” & Soaring Agriculture Produce. These approaches ignore the fact that the evidence of inflation is represented by "actual" prices in the marketplace;

(17) The "administered" prices (oligopoly, monopsony, and monopoly elements) would not be the "asked" prices, were they not “validated” by M*Vt (money Xs velocity), i.e., “validated” by the world's Central Banks;

[flow5]

Secular strangulation, chronically deficient aggregate demand, produces an excess of savings over real investment outlets (thereby raising investment "hurdle" rates, the minimum attractive rate of return, MARR, or its risk premium). This slows longer-term economic growth or overall incomes.

I.e., remunerating interbank demand deposits destroys money velocity (exacerbated by raising the remuneration rate *higher* than: "the general level of short-term interest rates" or wholesale money market funding, viz., short-term borrowing and lending with original maturities < one year).

This policy error is dictated by the Keynesian macro-economic persuasion that maintains a commercial bank is a financial intermediary, a conduit between savers and borrowers. Never are the commercial banks intermediaries in the savings-investment process. To wit: Bernanke, Selgin, Thornton, etc.

But the Fed generally “follows the market”. This last rate hike didn’t. And short-term rates are below the Fed’s remuneration rate. This will prove deflationary if short-term wholesale rates don’t follow through (retail saver-holder rates notwithstanding). I.e., it will draw funds out of, or reduces the flow to, the non-banks (where all savings are activated, viz., put back work / i.e., recirculated).

bit.ly/1P87b44

Raising the remuneration rate worked fine in 2017, against an acceleration of long-term money flows, or inflation. It will work the opposite way in 2018, as long-term money flows, the proxy for inflation, decelerate after February

[flow5]

Rates-of-change in monetary flows, volume X’s velocity = RoC’s in P*T (American Yale Professor Irving Fisher’s “equation of exchange”). There are some inherent drawbacks in the make-up of the variables, but in macro, the dominant correlations and trends are obvious.  Professor Irving Fisher's transaction's concept of money velocity, or the "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, P*T, is equal, for the same time period, to the product of the volume, and transactions velocity of money, M*Vt.

The "transactions" velocity (a statistical stepchild), is the rate of speed at which money is being spent, i.e., real money balances actually exchanging contraparties. E.g., a dollar bill which turns over 5 times can do the same "work" as one five dollar bill that turns over only once.

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. Of course, this is just the "unified thread" of algebra, estranged from "general field theory" of macro-economic modeling, where the chorus is: “All analysis is a model" - Ken Arrow

Essentially, 2016 represented a deceleration in long-term monetary flows, the proxy for inflation (based on the distributed lag effect of money flows, one which has been a mathematical constant for over 100 statistical years). In 2017, the RoC in money flows reversed to the upside. But Janet Yellen remarkably rose policy rates to counteract the expected rise. I.e., raising the remuneration rate destroys money velocity, throttling back aggregate demand, AD (where N-gDp is a subset, and therefore a proxy).

Money velocity reversed its path beginning in the 2nd qtr. of 2017. And the distributed lag effect has driven prices up in the last half of this year (as the modeling predicted). But there will be a reversal in the RoC of both long-term and short-term money flows in 2018. The first half will show some deceleration. The question is now whether velocity has increased enough to prevent a recession? (as my model underweights Vt).

[djAdvocate]

Dec 17, 2017 14:52:27 GMT -5 flow5 said:

Secular strangulation, chronically deficient aggregate demand, produces an excess of savings over real investment outlets (thereby raising investment "hurdle" rates, the minimum attractive rate of return, MARR, or its risk premium). This slows longer-term economic growth or overall incomes.

I.e., remunerating interbank demand deposits destroys money velocity (exacerbated by raising the remuneration rate *higher* than: "the general level of short-term interest rates" or wholesale money market funding, viz., short-term borrowing and lending with original maturities < one year).

This policy error is dictated by the Keynesian macro-economic persuasion that maintains a commercial bank is a financial intermediary, a conduit between savers and borrowers. Never are the commercial banks intermediaries in the savings-investment process. To wit: Bernanke, Selgin, Thornton, etc.

But the Fed generally “follows the market”. This last rate hike didn’t. And short-term rates are below the Fed’s remuneration rate. This will prove deflationary if short-term wholesale rates don’t follow through (retail saver-holder rates notwithstanding). I.e., it will draw funds out of, or reduces the flow to, the non-banks (where all savings are activated, viz., put back work / i.e., recirculated).

bit.ly/1P87b44

Raising the remuneration rate worked fine in 2017, against an acceleration of long-term money flows, or inflation. It will work the opposite way in 2018, as long-term money flows, the proxy for inflation, decelerate after February

flow5:

do you have an opinion on precious metals and commodities, moving forward?

[flow5]

The best macro-trade in 2018 will be shorting the price-level, e.g., commodities, come February. The U.S. $'s rise during this time frame will contribute to the decline.

See: "US Tax Cut and Rate Hikes Threaten China Currency"

bit.ly/2DJhfyK

[flow5]

Rising velocity, falling $, rising commodities, etc. will ensure a prosperous new year!

[flow5]

2017 saw an increase in long-term money flows ↑, volume X's velocity, a proxy for inflation. 2018 will see a decrease in long-term money flows ↓.

The single most important monetary power possessed by the Federal Reserve is its “open market power”, the power to expand or contract Federal Reserve bank credit through open market purchases or sales of securities (almost invariably U.S. Treasury obligations).
 
Unfortunately, the Fed’s technical staff does not gauge the volume and timing of its open market operations in terms of the amount and desired rate of increase of member commercial bank legal “complicit” reserves (and that is another story), but rather in terms of the levels of TPR and GCF overnight repurchase, and reverse repurchase agreement rates; the nominal one day cost-of-carry on all government debt or the market clearing rate on credit/capital/loan-funds.

Supposedly the trading desk attempts to close/peg the gap/differential between the expected path of nominal short-term interest rates, and R star, the Wicksellian equilibrium real rate of interest (some nebulous criterion on the overall return on available capital, which in the real world, is an idiosyncratic rate, i.e. based on individual businesses investment hurdle rates).

However, there is no macro-model (link) of financial rates vs. the return on capital. And interest is the price of loan-funds (which is exogenous, the free market’s clearing bailiwick), but the price of money (which is endogenous, and the Fed’s bailiwick) is the reciprocal of the price level, two incongruous metrics. Money is not fungible, one dollar is not like any other, i.e., unless the time frame of your economic analysis is 24 hours, rather than 24 months.

If for example, the manager of the open market account puts in buy orders for Treasury bills for the accounts of the 12 District Reserve banks, the price of those bills will tend to rise, and their yields (interest rates), fall, ceteris paribus. This particular procedure, taken alone, would be evidence of an easier, or less restrictive monetary policy. And the opposite action would be evidence of a tighter monetary policy. But, as noted, this is a 24-hour phenomenon. Over a period of time, open market operations of the buying type, because they provide excess reserves (an increase in legal lending capacity) to the banking system, results in an expansion of Reserve bank credit, and thus given bankable opportunities, an increase in the money stock.

This policy is euphemistically referred to a as accommodating the “money market”. It would be more accurate to characterize the policy as one that accommodates bankers, for it allows bankers that have operated with a 30 day lag from the computation period to automatically guarantee that they are able to acquire sufficient legal reserves so that their average reserve requirement (and any Friday counts as 3 days), for that 2-week prior reporting period can be satisfied during their maintenance period.

In 2017 the increase in long-term money flows was ameliorated by the FOMC, the Fed’s policy-making arm, by hiking its policy rate, a restrictive money policy - which, because the Central Bank remunerates interbank demand deposits, destroys money velocity, thereby reducing aggregate monetary purchasing power, AD.

In 2017 R-gDp (real-output), has expanded and so has inflation (aggregate monetary demand in excess of the growth rate of product and service output). But in 2018, inflation will spike in February, and then decelerate.

However, R-gDp, based on short-term money flows, will suddenly collapse (portending a correction in the 2nd qtr.), i.e., before in the last half of 2018, resuming an upward path (bull market).

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Demographics have nothing to do with what's wrong all across the planet, esp. Japan, for an extended period of time in the U.S. (36 years, before any shift in demographics). To say that professional economists are deaf, dumb and blind is a gross understatement.

It's exactly as previously wrought within the payment’s system, viz., the shifting of commercial bank balances, from transaction type classifications -> savings-investment type classifications: "With reference to Professor Lester V. Chandler's diagram, it seems to me quite obvious that over time the demand for money cannot continue to shift to the left as people build up their savings deposits; if it did, the time would come when there would be no demand for money at.” Circa 1961

Note aside: economist Philip George’s equations today prove this, but not necessarily his explanation (see his Kindle book).

The non-bank public cannot realize their / Keynes’ liquidity preferences or “demand for money” because of Alfred Marshall’s “money paradox”.

Before 1981 (for 16 years): If the non-bank public seeks to decrease its demand for money (economize on their demand deposits), that will be reflected in a step-up in velocity, a step-up in the tempo of business activity, and the banks will expand credit - if the monetary authorities are pliant. But there is no evidence since 1967, that the Fed has not allowed the banking system to expand pari passu with the expansion of the money supply, if not even faster.

After 1981 (for 36 years): If the public increases its demand for money, that will be reflected in a decrease in the velocity of money, and the public would end up with less money than existed before (using the same accommodative monetary transmission mechanism).

So with the saturation of deposit velocity (financial innovation in commercial bank’s deposit accounts), coinciding with the monetization of time deposits, and the widespread introduction of automatic transfer accounts, ATS, negotiable order of withdraw accounts, NOW and Super NOW accounts, and money market demand accounts, MMDA, aggregate monetary purchasing power has persistently decelerated, due to the peak in money velocity (where AD = M*Vt, volume X’s velocity and not as Keynesian economists define it, N-gDp).

Even the Chairmen of the Federal Reserve, a la Greenspan and Bernanke, think banks actually pick up savings and pass them out the window, that they are *intermediaries* in the true sense of the word.

In contrast to the commercial banking system, the non-banks must quickly invest their funds or reduce their profit margins. The expiration of the FDIC’s unlimited transaction deposit insurance at the end of 2012 is prima facie evidence, viz., what actually caused the resultant “taper tantrum” in 2013.

“If people do not place their savings in bank savings accounts, they are much more likely to buy more treasury bonds or to increase their holdings in other income-producing near-money substitutes than they are to add to their non-earning assets in checking accounts.”

Nobel Laureate Dr. Milton Friedman was one-dimensionally confused too (his own terminology from Carol A. Ledenham’s Hoover Institution archives). He pontificated that: “I would (a) eliminate all restrictions on interest payments on deposits, (b) make reserve requirements the same for time and demand deposits”. Dec. 16, 1959. I.e., the iconic Friedman conflated stock with flow (not knowing as well, a debit, from a credit, i.e., flow).

- Michel de Nostredame

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Stop the madness! There’s no such thing as academic freedom in our predatory society. There’s only fake news in the economic world.

Beckworth says:
(1) a NGDP target would never have generated 1970s-type swings in inflation given the actual history of potential output growth.
(2) A NGDPLT lets these potential output changes be absorbed through reasonably-sized changes in the inflation rate
---------

See the current example, viz., what I wrote on June 9th 2017, then look at SA author’s Wolf Richter: “Treasury Market Inflation Expectation 10-year Yield minus TIPS yield”:

...

Wolf Richter’s figures bottomed around the *same time* as Beckworth’s N-gDp targeting chorus.

See:

The stagflationist (advocates of equilibrium interest rates, R*, and targeting N-gDp parameters), “suggest a higher inflation target” (Phillips curve rendition).

Dean Baker
Laurence Ball
Jared Bernstein
Heather Boushey
Josh Bivens
David Blanchflower
J. Bradford DeLong
Tim Duy
Jason Furman
Joseph Gagnon
Marc Jarsulic
Narayana Kocherlakota
Mike Konczal
Michael Madowitz
Lawrence Mishel
Manuel Pastor
Gene Sperling
William Spriggs
Mark Thoma
Joseph Stiglitz
Valerie Wilson
Justin Wolfers
bit.ly/2s67De9
Jun 9, 2017. 06:12 PMLink

Another example:

That was the BLS’s 1st “advance estimate". Don't know how they compile the data (I assume it's based on incomplete info - the latest data being the last to be included). If my assumption is true, then the *second* estimate should be higher - & the *final* (3rd) estimate revised up yet again.
The recent rate hike by the Fed (1st one on Dec. 15, 2015) is prima facie evidence – as the FRB-ATL’s GDPNow model’s forecasts were once again, repeatedly - revised downward.
28, 2016. 11:25 AMLink

I.e., even the most recently compiled forecasts by the Federal Reserve fluctuate widely.

Note especially that gDp is published in arrears, revised and reconstructed, and seasonally mal-adjusted data is used (not real non-seasonally adjusted figures). Nor is Nominal gDp or non-seasonal data publically reported, which the stagflationists want to target (and all the data, of which its inputs have errors, is smoothed or is seasonally mal-adjusted).

A "NGDP futures markets" It would be more like gambling (not hedging). And the biggest problem with the theory of targeting N-gDp is that it caps the *non-inflationary* real-output of goods and services and *maximizes* inflation, how perverse.

Albert Einstein: “The laws of physics…once identified, rarely have to be revised” God doesn’t play dice with the universe”.


Bond guru Bill Gross signaled a *new era* for Treasury markets. Whether it does remains to be seen, but the damage is not yet done. Oil has surged, gas prices are on the rise. Stocks will suddenly fall into an upcoming correction. That is N-gDp targeting has *just failed* miserably.

cnb.cx/2FHrMLJ

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WHEN?
The answer is Feb/Mar, when long-term money flows subside.
Parse: dt; real-output; inflation:
09/1/2017 ,,,,, 0.08 ,,,,, 0.25
10/1/2017 ,,,,, 0.03 ,,,,, 0.23
11/1/2017 ,,,,, 0.08 ,,,,, 0.24
12/1/2017 ,,,,, 0.12 ,,,,, 0.18
01/1/2018 ,,,,, 0.12 ,,,,, 0.30
02/1/2018 ,,,,, 0.11 ,,,,, 0.30 oil tops/ stocks top
03/1/2018 ,,,,, 0.09 ,,,,, 0.27
04/1/2018 ,,,,, 0.07 ,,,,, 0.23
05/1/2018 ,,,,, 0.08 ,,,,, 0.24
06/1/2018 ,,,,, 0.07 ,,,,, 0.21
07/1/2018 ,,,,, 0.09 ,,,,, 0.21
You have to be careful using these #s. They represent surrogate and non-conforming statistics (and they underweight Vt). But they have shown the relationship of money flows to the level and movement of prices. Money is robust, not neutral. Otherwise there wouldn't be lags and concentrations, i.e., mathematical constants for over 100 years (contrary to "long and variable", aka, Dr. Milton Friedman).
Jan 14, 2018. 09:14 AMLink

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What is the purpose of economics, by Singh Nomad, who lives in Mumbai, Maharashtra, India:

“Economics etymologically means, (1580s) "art of managing a household," which later changed to “science of wealth" (1792), post the publishing of the Wealth of Nations (1776)…Economics relates ultimately to the study of ethics and that of politics, and this point of view is further developed in Aristotle’s Politics.”

As Martin Wolf said in his book “The Shifts and the Shocks”: “Whereas the first concept of liberty is quintessentially English, the second goes back to the ancient world. For Athenians, the separated individual who took no place I pubic life was an idiōtēs – the word from which our word “idiot” is derived. Such a person was an inadequate human being because he (for the Greeks, it was always ‘he’) focused only on his private concerns rather than on those of his polis, or city state, the collective that succored him and to which he owed to just his loyalty but also his energy”.

But today you have false prophets, professional economists, who spew more fake news than all the news networks combined. However, present day economists are quick to pander and propagandize in their self-serving, self-interests, of rarified and befogged aspirations. They are universally incompetent at forecasting (not knowing exactly how the economy actually works), but ever ready to say exactly what needs to be done to put the economy on the right path for all of us.

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Martin Wolf: "the monetary system...Meanwhile, other *intermediation* would be done either on a mark-to-market basis or with substantial equity requirements...It would remain important to avoid the emergence of a shadow banking system able to destabilize economies"

Two things are wrong with these statements.  One, the commercial banks are never financial intermediaries, and two, the non-banks match savings with non-inflationary investments.  So if the non-banks are in trouble, it's because of an easy money policy by the Fed.

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An important post by Philip George.  It has been hacked by subversives that disagree with his economic constructs, perhaps the FBI, or the ABA, American Bankers Association:

The riddle of money, finally solved
BY PHILIP GEORGE
This post has been superseded by my book Macroeconomics Redefined
inShare7
... Schools, like people, are subject to hardening of the arteries. Students learn the embalmed truth from their teachers and sacred textbooks, and the imperfections in the orthodox doctrines are ignored as unimportant.
— From 'Economics' by Paul A. Samuelson & William Nordhaus
________________________________________
INTRODUCTION
For nearly a century the progress of macroeconomics has been stalled by a single error, an error so silly that generations to come will scarcely believe that it could have persisted for as long as it has done. It is an error that has been committed by John Maynard Keynes and Milton Friedman, John Hicks and James Tobin, Franco Modigliani and Ludwig von Mises, Murray Rothbard and Paul Krugman, and continues to be taught to every economics undergraduate today.
The error has blinded economists so that, like the seven men of Hindostan, they have mistaken the partial reality that has come within their groping grasp for the whole of reality. And this in turn has divided them into warring sects, looking very little like practitioners of a science and a lot like religious fundamentalists. Keynesian has poked fun at monetarist. Monetarist has ridiculed Keynesian. And both have mocked Austrian and been mocked in return.
Thanks to the error Keynesians have been unable to appreciate the importance of money, monetarists have arrived at a wholly misconceived notion of money, and Austrian economists, although they have occasionally stumbled towards the truth, have fallen far short of it. Worst of all, central banks have been forced to direct monetary policy without a measure of money to guide them, a situation one would have thought hilarious if it had not had such terrible consequences. Were an energy authority to attempt to control energy without having some way to measure energy, it would have been laughed out of town. But modern economists seem perfectly comfortable with the idea of a monetary policy without money.
THE ERROR
The error we are talking about is the error of regarding money as cash balances, and the demand for money as the demand for cash balances. The idea dates back to the early part of the 20th century in Cambridge, UK, and has appeared so obvious it has held unquestioning sway over all schools of economics.
To view it in practice let us look at how Friedman, for example, used it. For Friedman money was an asset, one of many alternative assets, such as stocks, bonds, durable consumer goods, or even human capital. To determine the demand for money one had to compare it with the demand for those alternative assets. If Paul wishes to hold more stocks and bonds it follows that his demand for money and therefore his cash balances will come down. Put another way, when the expected return on stocks and bonds goes up compared with the return on money, the demand for money falls. Given such a view of money it must not have seemed unusual to Friedman when his and Anna Schwartz's calculations showed that just before the 1929 crash, when stock prices were soaring, money supply growth was not unusually high. To the rest of us it seems just a bit odd. After all, money is needed to buy stocks and when stock prices are growing at a manic rate one would expect to need a hugely greater amount of money than before. Be that as it may the theory indicated otherwise, so Friedman and Schwartz were not only not surprised when their calculations showed that money supply growth was not high, it must have seemed a confirmation of their theory. The Great Depression was indeed caused by a contraction in money, but there was no unseemly growth of money before it.
One is not sure what is more egregious - Friedman's error or its passing unnoticed for half a century, a fact that hardly paints economists or indeed economics itself in glowing colours. To see why, consider that Paul decides to hold fewer bonds than he did, preferring instead to hold more money. In Friedman's analysis his demand for money has gone up. But the only way that Paul can reduce his holding of bonds is to sell some to Peter. So Peter's holding of bonds goes up and his demand for money goes down. Although Peter and Paul can change their individual stocks of bonds and money, their combined stock of bonds or combined stock of money cannot change. And the same holds for the economy as a whole. By trading in financial assets the stock of money in the economy cannot be changed one whit. Friedman had fallen into what is known as the fallacy of composition. He assumed that his argument was inductive when it was not.
Exactly the same error can be seen in the Keynesian idea of liquidity preference. The argument goes somewhat like this. When interest rates are very low, everyone expects interest rates to rise and therefore bond prices to fall. Therefore everyone gets out of bonds and prefers to hold cash, whence the phrase 'liquidity preference'. But it is impossible for any one individual to exit bonds and accumulate a larger cash balance without at the same time increasing someone else's supply of bonds and reducing his cash balance. The economy as a whole cannot change its liquidity preference by disposing of bonds.
For both Friedman and Keynes money is primarily an asset. The Austrians on the other hand are vehement that money is not an asset, but a medium of exchange. But like the Keynesians and monetarists they too cling to the idea of cash balances, so that for them too in practice money is mostly an asset, not a medium of exchange, or at best some kind of mongrel hybrid.
To cut a sad story short, the error of confusing cash balances with money means that such elegant concepts as liquidity preference and the liquidity trap, very nearly the whole of Milton Friedman's analysis of money, such elegant constructs as the IS-LM diagram, and a series of classic papers dealing with money by economists of the stature of James Tobin and William Baumol are wholly erroneous.
What is interesting is that although no one unequivocally proved that the IS-LM diagram was wrong, that Friedman's conception of money was erroneous, or that the Tobin analysis of money was incorrect, these ideas have simply passed out of economics. Even when wrong ideas are not proven wrong; they tend to wither away, perhaps a case of truth by attrition.
SO WHAT IS MONEY?
We begin with the money multiplier, a concept that Keynesians, monetarists and Austrians all agree with. In its simplest form, this is how the money multiplier works. The central bank buys $100 worth of, say, government bonds, from a bond dealer. The dealer deposits the $100 in a commercial bank. Assuming that the reserve ratio is 20%, the bank has to retain $20 as a reserve; so it lends out $80. Assuming this is deposited in another bank, the second bank now has to retain 20% of this $80 as a reserve i.e. $16 and can lend out $64, which in turn is deposited in a third bank. By adding up the entire chain of new deposits it can be shown that the $100 created by the central bank's initial purchase of a bond for $100 will result in the creation of $500 of new money, under some standard assumptions.
The model above is silent on how much time it takes for this to happen. Textbooks also often attempt to relate the money multiplier (5 in the above example) to the reserve ratio and other variables. Since we do not know exactly how much time this takes we dispense with these calculations and show the money multiplier in a simple diagram as below.

Fig 1: The money multiplier
In the diagram the purchase of a bond for M dollars by the central bank results in the creation of new money equal to mM dollars, where m is the money multiplier which we do not attempt to relate to the reserve ratio or other variables, since we are not in a position to say how much time has elapsed.
So far, Keynesians, monetarists and Austrians will all be in agreement with us. Curiously none of them seems ever to have asked: What happens when this newly created money mM is spent? We now ask the question by drawing the figure below.

Fig 2: The money multiplier integrated with the economy
And having asked the question we are immediately confronted by a problem. At A the central bank injects M dollars into the system. The banking system, through a series of loans and deposits, converts it into mM dollars at B. When this money returns to A, it is then converted by means of the multiplier to a value of m2M at B. In the next cycle this becomes m3M at B, and on on in an ever-increasing spiral. Equilibrium, it would seem, is impossible.
To salvage the situation we have to resort to a sort of deus ex machina. In order that equilibrium be maintained in the system the money created while moving from A to B must be destroyed in the movement from B to A, so that it again becomes M at A. We answer one objection immediately. Why isn't the entire mM dollars created at B spent? That is to say, why is M dollars retained unspent at A while moving from B to A? The answer is quite simple: in the money multiplication process described at the start of this section, when 500 dollars of new money is created, 100 dollars has to be retained by all the banks together as reserve. In other words M must be retained unlent and unspent in the system; it is simply the total reserves in the example. If it is not, which happens for example when the central bank sells back the bonds, the entire process of money creation described in the example will unravel.
The answer to the second question may be a little more difficult to appreciate. How is the amount of money mM at B destroyed so that it becomes M at A? The answer is that the destruction happens through the mechanism of saving. Each person who receives money spends some of it while saving a little and withdrawing it from the system. The total of this saving must be exactly equal to the net money created mM-M for equilibrium to be maintained. But people do not hide their savings under their mattresses. Because they are assured that the central bank will not allow the disorderly failure of banks they place their savings in the bank. We draw the result as in Fig 3 below.

Fig 3: Savings and money creation in the economy
To sum up the process an injection of money M by the central bank is, through repeated lending by banks, increased to an amount mM. Part of this money is paid out to other firms to buy inputs, a process that leaves money unchanged. The rest is paid out to individuals as wages, interest, rent, dividends and so on. Individuals save part of their receipts and place them in banks which again lend them out. Simple (or even simplistic) as it looks this is the correct model of money, which has eluded economists to this day. The demand for money has nothing to do with cash balances. The demand for money is the demand for loans, and money is equal to loaned funds.
Let us see what the model implies. First of all, Fig 3 tells us: If an injection of money into the banking system by a central bank is multiplied through a process of bank lending, then to sustain the creation of that new money the economy must produce an equal amount of savings AND those savings must be relent by the banking system. If the economy does not produce that quantity of savings or if those savings are not relent, the central bank has to repeatedly inject money into the economy to maintain the money supply. If these repeated injections do not take place the newly created money is destroyed. (That explains, for instance, why QE1 had to be followed by QE2 and so on.)
This is of course what the Austrians have been asserting all these years, or close to what they have been asserting, but have been unable to prove.
What happens when the creation of money runs ahead of savings? In Fig 4 below we have plotted the ratio of M1 to the sum of 12 months savings for the period from 2001 to January 2011. We show later on that M1 is not an accurate measure of money. The sum of 12-months' savings is likewise an arbitrary measure of savings although we show later that it is not quite as arbitrary as we assume here.

Fig 4: The ratio of M1 to 12-months savings
Nevertheless the figure shows clearly that whenever money creation runs far ahead of savings, the result must inevitably be a crash. Seen from this viewpoint it is clear what a recession is: The destruction of unsustainable money until it reaches sustainable levels.
The money model in Fig 3 can be used to throw light on many controversies in economics. Looking at it again, we see that bank lending creates a certain amount of money and that the net money created must be equal to total savings at equilibrium.
S = mM-M (1)
If the savings rate is s, it follows that the total income
Y = (mM-M)/s (2)
and total expenditure
E = (mM-M) (1-s) /s (3)
So income is proportional to money. Now consider the LM curve of the famous IS-LM diagram of Hicks. It is a schedule showing how interest rates change with income given a constant money supply. But as Eqn (2) shows it is impossible for income to increase without an increase in money. The LM curve, in other words, is an impossibility. In hindsight it is surprising that Friedman did not catch this. After all he was the author of the resurrected quantity theory of money. The problem was of course that Friedman's quantity theory was not quite a quantity theory. Witness, for instance, his statement, in an article co-authored with Schwartz, that "the outstanding cyclical fact about the stock of money is that it has tended to rise during both cyclical expansions and cyclical contractions." In practice Friedman's quantity theory of money was the rate of change of quantity of money theory.
In what follows we explore briefly how the money model works in practice.

Fig 5: The Keynesian case
a. The Keynesian case: In Fig 5 the economy is in equilibrium with all expenditure being on current goods and services, no asset bubbles in formation, and no speculative expenditure. An injection of 100 units of money by the central bank is turned into 500 units by the banking system thanks to a multiplier of 5. From equation (1) the Total Savings of the system is 400 units of money and this is spent on investment goods. If we assume a savings rate of 10% the total expenditure resulting from the injection of 100 units of money is, from equation (3), nine times 400 or 3600 units of money.

Fig 6: The speculative case
b. The speculative case: In Fig 6, the central bank decides to loosen monetary policy and accommodate the demand for money by reducing the reserve ratio. The multiplier rises to 6 resulting in the creation of 600 units of money. Now the Total Savings of the system must go up to 500 units. Assume that thanks to the pressure of imports from China, there is no inflation. As in the Keynesian case, 400 units are lent to firms producing real goods and services, and continue to be spent on investment goods. The additional savings of 100 units is borrowed by speculators and spent in the stockmarket, pushing up the prices of shares, and starting an asset bubble. The new expenditure is 4500 units, consisting of 3600 units on real current goods and services as before and 900 units (the multiplier is 9 because of the savings rate of 10%) on stocks. Both the monetary economy and the real economy are in equilibrium, inflation is under check, and the central bank is happy. True, there is some irrational exuberance. But overall things seem to be in control.

Fig 7: The bursting of the asset bubble
c. The bursting of the asset bubble: The central bank decides it's time to rationalise stockmarket exuberance. It calls for banks to cut lending and raises the reserve ratio. The idea is to curb the stockmarket while allowing the real sector to chug along at its current pace. Unfortunately, the plans don't pan out. With money supply squeezed the stockmarket crashes. Banks that have lent heavily to stock punters find themselves with a large hole blown in their assets and capital. They are forced to cut lending. The multiplier falls, not to 5 as intended, but 4. Total savings fall to 300 units. At this level it is not only speculative borrowers who suffer but firms manufacturing real goods and services as well. Total expenditure falls to 2700 units. A recession set off by the bursting of the asset bubble is in full swing.
The model clearly shows how an asset bubble ultimately results in a recession. It agrees with what our common sense tell us, that asset bubbles grow when there is large monetary expansion. When you stop thinking in terms of cash balances everything begins to make more sense.
If we seem to have set up a totally unrealistic example, showing money growth having no impact on inflation, it is only a case of bendng the stick backwards. For all schools of economics without exception seem to have a touching belief that money affects only real goods and services, not financial assets.
Thus Keynes, although he likened the capitalist system to a casino, conducted his entire analysis in terms of investment, savings and aggregate demand for real goods and services.
Friedman said: "To the best of my knowledge there is no instance in which a substantial change in the stock of money per unit of output has occurred without a substantial change in the level of prices in the same direction." Thus the fact that there was no inflation in the period before the 1929 crash was for Friedman proof that there was no substantial increase in the supply of money.
Even the Austrians, who hold that the growth of money supply causes a rise in the price of financial assets, have drawn up an elaborate theory of how a growth in money leads to entrepreneurs investing in longer processes of production, and thus a shift from consumer goods to investment goods, which is unsustainable. This is one possibility and will certainly occur, but more often it is the rise in prices of financial assets which is of greater importance.
In our own time John Taylor's eponymous rule seeks to relate the interest rate with the rate of growth of GDP and inflation, with prices of financial assets not entering anywhere into the equation.
The truth of course is different. In general, it can be said that an increase in money supply will result in an increase in nominal output and an increase in the price of financial assets, and it is impossible to predict how the partitioning will take place.
Fig 3 incidentally shows that Keynes was right in thinking that during a recession monetary policy alone is impotent. For money supply to rise, two conditions must be met: there must be a willing lender and there must be a willing borrower. After a crash like the recent one, banks that have been crippled by the loss of capital are hardly likely to start lending again. But by the same logic, Keynesians are wrong in thinking that keeping interest rates low will get entrepreneurs investing again. Keeping the price of wheat very low may seem very attractive from the viewpoint of the buyer of wheat and certain to keep people from starving, but it is more likely to discourage farmers from growing any wheat and thus to cause the very starvation it seeks to prevent. When interest rates are very low, it may not be profitable for banks to lend to businesses, especially when the risk of the loan not being returned is taken into consideration; it is more tempting to earn higher profits by speculation or by lending to speculators. What else can explain the situation today when unemployment in the US is still high at the same time that the stockmarket is back to its old highs.
Other controversial issues can be analysed with the money model of Fig 3 but since we do not wish to turn this article into a treatise, we move on to a subject on which we have been silent so far.
THE MEASUREMENT OF MONEY
Paul brings an apple to me for safekeeping. I write in my ledger: Paul, 1 apple, meaning thereby that I owe one apple to Paul. Some time later, Peter comes to me asking for an apple and I give him the apple given to me by Paul. I write in my ledger: Peter, 1 apple, meaning thereby that Peter owes me one apple. There are two apple entries in my ledger, but of course in reality there is only one apple.
Paul brings 100 dollars of his savings to me in currency notes. I write in my ledger: Paul, 100 dollars, meaning that I owe Paul 100 dollars. Some time later, Peter comes to me asking for a loan of 100 dollars and I give him the 100 dollars given to me by Paul. I write in my ledger: Peter, 100 dollars, meaning thereby that Peter owes me 100 dollars. There are two 100 dollar entries in my ledger, but of course in reality there are only 100 dollars in existence.
Paul deposits a cheque of 100 dollars of his savings in the bank that I run. I open a deposit in his name and write in my ledger: Paul, 100 dollars. Some time later, Peter comes to me asking for a loan of 100 dollars. I lend him the money by opening a deposit in his name for 100 dollars. So now the total amount of deposits is 200 dollars, but of course in reality there are only 100 dollars in existence. If Paul insists on being paid back his 100 dollars I have no option but to take back the loan from Peter.
The point of all the above is to show that to calculate the amount of money in existence it is incorrect to add all the deposits in existence. I must subtract from them the total amount of savings present in those deposits. So without any further ado we can state categorically that both the Friedmanian and the Austrian definitions of money are incorrect because they both include savings deposits.
But measuring money is far more difficult than just excluding savings deposits. That would give us M1, and we know that M1 does not correlate well with other macroeconomic variables. To measure money accurately, we also need to measure the amount of savings contained in M1, and subtract the savings from M1. When banks (or shadow banks) lend money to a firm it shows up immediately as a demand deposit. When the firm uses that deposit to buy a good or service from another firm the money in the demand deposit changes hands but because it appears in the demand deposit of some other firm it still counts as money. When the firm uses the money in the demand deposit to pay a wage, rent, interest or dividend to Paul the demand deposit in Paul's name increases by an identical amount. Say, the firm pays $1000 as salary to Paul. If his saving rate is 10% he will spend $900 and $100 will be the extent of savings in the demand deposit (we assume that firms are net dissavers). This $100 must be subtracted from the value of demand deposits to derive the value of money. But it is unlikely that Paul goes about the business of life with just $100 in spare money in his demand deposit. If, apart from the $1000 he is paid at the start of the month, he has $500 in his account, it means that he has 5 months of savings in his deposit and this has to be subtracted from the sum of all demand deposits to arrive at the correct value of money.
We cannot go around asking every Peter and Paul how much savings he has in his demand deposit. We have to estimate it by other means. Now, all that we have said upto the beginning of this section is analysis; it is true at all times and at all places. But in estimating the quantum of money we have to dirty our hands and resort to empirical means. In what follows we demonstrate one such method. But it is perfectly possible that there are better and more refined methods to estimate money.
The total amount of demand deposits is the sum of demand deposits that are savings and the demand deposits that are loans.
DDT = DDS + DDL (4)
where T stands for Total, S for Savings, and L for Loans
When we divide both sides of (4) by DDS we get
DDT/DDS = 1 + DDL/DDS (5)
Now, during recessions, two things happen. First, people save more. Second, because interest rates are close to zero, they are more tardy in moving their savings to some other kind of deposits that yield more interest. Therefore, during a recession we would find that the second term in (5) approaches close to zero, and the ratio DDT/DDS approaches close to 1. We use this expected result to find the correct value of DDS. For identifying the correct DDS we use the sum of n-month savings where n=1, 2, 3 etc and examine whether the resulting graph tends towards 1 during severe recessions; the assumption is that at all times demand deposits contain a constant number of months of savings.

Fig 8: Total Deposits to 12 months' savings 1991 to 2010
We have omitted showing all the graphs (of 1-month, 2-month etc savings) but observe that the sum of 12-month savings approaches closely to 1 during the recession of 2008-09. We use this fact to calculate Mc or Corrected Money Supply by deducting 12-months-savings from M1. Our assumption that people keep a constant number of months savings in their demand deposits may not be correct. But it is still a huge improvement over M1 which does not correct for savings at all. Note that the fact that people keep savings in their demand deposits does not increase or decrease money because money is only determined by lending and borrowing, but it affects our MEASUREMENT of money.
Fig 9 plots M1 for the period from 2001 to 2011.

Fig 9: M1 from January 2001 to January 2011
M1 shows a more or less secular rise throughout the period and in 2008, when the liquidity crunch was most intense, shows a sharp rise, whereas from 2004 to 2006 it remains almost flat.
Fig 10 below shows Mc or Corrected money supply during the same period.

The graph of Mc shows clearly the rise in money supply from 2003 right till the peak in money supply at the beginning of 2006, the fall thereafter, and the unsteady attempts by the Fed to push up money supply. Where the difference is most stark is during 2008 when M1 shows a steep rise at a time when the recession was at its peak. This was of course because the amount of savings in demand deposits went up sharply during this period and was miscounted as money. It also explains why Friedman's calculations did not show a sharp rise in money before the crash of 1929. By adding up demand deposits we miss the extent to which savings are falling during an expansion at the same time that money is being borrowed to frantically push up the prices of financial assets. Only towards the latter part of 2009 does corrected money supply finally begin to rise permanently, which is when the recession ended.
We may mention in passing the implications of our calculations for a favourite Austrian recommendation: 100% reserves. Implementing the recommendation would have disastrous effects, because it would mean that the 12 months of savings contained in demand deposits would not be lent out. Without the use of the money model we have developed, ideas like 100% reserve banking are just an opinion, the war-cry of one tribe of economists against another. With the new model the idea can be analysed rationally.
In conclusion, the reader will note that we have upset the existing notion of money and replaced it with a more plausible one, without resorting to any Advanced Mathematical Economics Nonsense.
Amen!
________________________________________
For all our calculations we have used data from the web site of the Federal Reserve Bank of St Louis at the beginning of March 2011
4 April 2011

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The only tool at the disposal of the monetary authority in a free capitalistic system through which the volume of money and money flows can be properly controlled is legal reserves (not interest rate manipulation nor the "demand for money function", as advocated by William Barnett).

Chairman Alan Greenspan reduced legal reserve requirements, Regulation D, by 40 percent in 1990-1991 (on 12/27/90, non-personal time deposits and Eurocurrency liabilities legal reserve requirements were reduced to zero, and on 4/2/92, the 12 percent legal reserve requirement ratio against net transaction deposits was reduced to 10 percent).

There is no reason for differential reserve requirements in the first place. Legal reserves are not a tax, they are Manna from Heaven. A brief “run down” will indicate just how costless, indeed how profitable – to the participants, is the creation of new money (not a tax at all). If the Fed puts through buy orders in the open market, the Federal Reserve Banks acquire earning assets by creating new inter-bank demand deposits. The U.S. Treasury recaptures about 98% of the net income from these assets. The commercial banks acquire “free” legal reserves, yet the bankers complained that they didn't earn any interest on their balances in the Federal Reserve Banks.

On the basis of these newly acquired free reserves, the commercial banks created a multiple volume of credit & money. And, through this money, they acquired a concomitant volume of additional earnings assets. How much was this multiple expansion of money, credit, & bank earning assets? Thanks to fractional reserve banking (an essential characteristic of commercial banking) for every dollar of legal reserves pumped into the member banks by the Fed, the banking system acquired about 93 (c. 2006), dollars in earning assets through credit creation.

See the money multiplier (required reserves to bank credit) graph: “Bank Reserves and Loans: The Fed Is Pushing On A String” - Charles Hugh Smith

seekingalpha.com/article/3152196-bank-reserves-and-loans-the-fed-is-pushing-on-a-string

Monetary policy should limit all reserves to balances in the District Reserve banks (IBDDs), and have uniform reserve ratios, for all deposits, in all banks, irrespective of size (something Nobel Laureate Dr. Milton Friedman also advocated, December 16, 1959). Such demarcation just incentivized reserve avoidance. Legal reserves and reserve ratios were a credit control device.

A competition in laxity, deregulation, plus larger ATM networks, plus temporarily, deposit reclassification via financial innovation, or sweep accounts allowed the DFIs, esp. the larger banks, to no longer be “e-bound” (Richard G. Anderson’s term), by statutory reserve requirements in c 1995 (coinciding with the jump start of the real-estate bubble).

The Fed and Congress (our “elastic legislators”), have always been motivated (whose pockets were filled by the most powerful Federal legislative lobby, the ABA), by an overwhelming desire to accommodate bankers and their borrowing customers.

The axiom is that if private profit institutions are to be allowed the “sovereign” and “exclusive” rights to create new money ex-nihilo, they must be severely circumscribed in the management of both their assets & their liabilities - or made quasi-gov't institutions.

Deregulation (reduced restrictions), e.g., the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 that broke down barriers to interstate banking, and the repeal of the Glass–Steagall Act, or the Banking Act of 1933, which divided the focus on lending, from the focus on trading securities, have been economic disasters. Innovation was marginally reversed by: Statements No. 166 (FAS 166), "Accounting for Transfers of Financial Assets," and No. 167 (FAS 167), "Amendments to FASB Interpretation No. 46(R)."

See “Notes on Data”

www.federalreserve.gov/releases/H8/h8notes.htm#notes_20100409

Deregulation is what caused the real-estate boom/bust. How so? The lending capacity of the member commercial banks of the Federal Reserve System was, prior to 1990, delimited by the volume of legal reserves put at their disposal by the Federal Reserve Banks in conjunction with the reserve ratios applicable to their deposit liabilities as fixed by the Board of Governors.

Through their control over the volume of Reserve Bank credit, and reserve rations, applicable to member bank demand and time deposits, the monetary authorities of the Federal Reserve System could control the size and rate of expansion of commercial bank credit (DFI’s loans and investments).

The Fed controls the money stock. But its operating arm does not give any weight to income velocity, let alone the transactions velocity of circulation (you won’t find the word money velocity in the Federal Open Market Committee’s meeting minutes). So given new financial engineering [CMOs, CDOs, CDSs, ABSs CLOs, CFOs (securitization & credit enhancements), via (SIVs, SPEs, & principally other non-banks], which escapes the Fed’s attention, you get uncontrolled inflation (as the inflation indices are not constructed so as to capture asset inflation).  Velocity is 3 times as potent as the money stock itself in American Yale Professor Iriving Fisher's truistic "equation of exchange".  A dollar bill which turns over 5 times can do the same “work” as one five dollar bill that turns over only once.

By using a price mechanism, pegging interest rates, the Fed since 1964 has pursued a policy of automatic accommodation. That is, additional reserves and excess reserves were made available to the payment’s system whenever the bankers & their customers saw an advantage in expanding loans. The member banks lacking excess reserves would bid up the fed funds rate to the top of the pegged rate thus triggering open market purchases, more bank reserves, more money creation, larger money flows, higher rates of inflation—higher fed funds rates, more open market purchases, etc.

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See my take:

One of the weaknesses of Professor Irving Fisher's formulation is that many transactions are effected on a "deferred payment" basis involving no immediate creation or transfer of money. This shows up as a spike in payments in January (a seasonal spike in money flows). That's why, if the market should be sold short, you enter positions in approximately the 3rd week in January. But this year the spike, based on the distributed lag effect, appears to be in December.
Dec 28, 2017. 07:53 PMLink
The best time to sell short is approximately the 3rd week in January.
Dec 22, 2017. 05:07 PMLink

The 2nd seasonal inflection point is mid-February.

Commodities to top in February.

Watch money velocity

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Speech, "The Outlook for the U.S. Economy in 2018 and Beyond" January 11, 2018
William C. Dudley, President and Chief Executive Officer
Remarks at the Securities Industry and Financial Markets Association, New York City

"Over the longer term, however, I am considerably more cautious about the economic outlook. Keeping the economy on a sustainable path may become more challenging. While the recently passed Tax Cuts and Jobs Act of 2017 likely will provide additional support to growth over the near term, it will come at a cost. After all, there is no such thing as a free lunch. The legislation will increase the nation’s longer-term fiscal burden, which is already facing other pressures, such as higher debt service costs and entitlement spending as the baby-boom generation retires. While this does not seem to be a great concern to market participants today, the current fiscal path is unsustainable. In the long run, ignoring the budget math risks driving up longer-term interest rates, crowding out private sector investment and diminishing the country’s creditworthiness. These dynamics could counteract any favorable direct effects the tax package might have on capital spending and potential output."

As I said:

"If our extraordinarily large Federal Budget Deficits continue in succeeding years, interest rates will be forced sharply higher by the increased demand for loan-funds.

Any recovery will add the private sector's demand for loan-funds, to the voracious demands of Federal, State, & Local Governments. The consequent rise in yields will effectively abort any recovery."
31 Mar 2012, 10:45 PM

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As I said when oil was @ 57

''Oil definitely to set new highs. Upcoming blowout X-mas spending.
Dec 15, 2017. 01:44 PMLink''

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long-term money flows peak the 1st week of February (a bond proxy)....You can buy bonds and make money.
Jan 22, 2018. 07:21 PMLink
Bonds bottom, yields top, commodities top, dollar bottoms, by the 1st week in Feb.
Jan 25, 2018. 05:41 PMLink

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Inflation, when it exists, is the most perverse and perhaps the most disruptive economic force regulated-capitalism encounters.
Price-level targeting by the stagflationist advocates (those who would target N-gDp), is unwarranted. It has now produced, since the advocates banded together and wrote a letter to Janet Yellen, higher prices, a breakout in yields, a falling U.S. dollar, and a credit downgrade from China.

bloom.bg/2FIyHUQ

China Downgrades US Credit Rating From A- To BBB+, Warns US Insolvency Would “Detonate Next Crisis”

bit.ly/2r8igOI

“Today, a group of economists published a letter urging the U.S. Federal Reserve to consider a monumental change in policy: raising its target for inflation above the current 2 percent.” — Narayana Kocherlakota (June 2017)
Price stability is critically important (and is responsible for the length of the current expansion), but income redistribution is imperative to the survival of capitalism and our presumed constitutional freedoms.

Unless savings are expeditiously activated and put back to work, a dampening economic impact is exerted and metastasizes.
The drop in CAPEX is entirely due to the Keynesian macro-economic persuasion that maintains a commercial bank is a financial intermediary. There are 4 years of personal savings that are bottled up, idled, in the payment’s system.

In “The General Theory of Employment, Interest and Money”, John Maynard Keynes’ opus “, pg. 81 (New York: Harcourt, Brace and Co.), gives the impression that a commercial bank is an intermediary type of financial institution (non-bank), serving to join the saver with the borrower when he states that it is an “optical illusion” to assume that “a depositor & his bank can somehow contrive between them to perform an operation by which savings can disappear into the banking system so that they are lost to investment, or, contrariwise, that the banking system can make it possible for investment to occur, to which no savings corresponds.”

In almost every instance in which Keynes wrote the term bank in the General Theory, it is necessary to substitute the term non-bank in order to make his statement correct, viz., the Gurley-Shaw thesis, the DIDMCA of March 31st 1980 which directly caused the S&L crisis.

Lending by the commercial banks is inflationary. Lending by the NBFIs is non-inflationary, ceteris paribus.