There is something in this more than natural - Hamlet

[flow5]

Inflation cannot destroy real property nor the equities in these properties. But it can and does capriciously transfer the ownership of vast amounts of these equities thus unnecessarily accelerating the process by which wealth is concentrated among a smaller and smaller proportion of people. The concentration of wealth ownership among the few is inimical both to the capitalistic system and to democratic forms of government.

Calculating the rates-of-change, RoC’s in the CPI has been statistically exaggerated by the present practice of calculating the roc’s in terms of a reference base one year earlier, rather than from the base period of the index (where the Consumer Price Index is benchmarked to 100).

For example: using the base period for the CPI: 1967 = 100. One dollar in 1967 buys $7.49% in terms of base year prices (in other words, a very substantial absolute increase in prices). The base period changed in January 1988. Now the benchmark is 1982-84 = 100. (per BLS:“comparisons cannot be made between indexes with different reference bases”).

This metric assumes that the “market basket” for the CPI is “representative”. The BLS data is also seasonally mal-adjusted…though the data is up-to-date (published with c. 2 week delay) & reasonably frequent (monthly).

The CPI and PCE are political constructs, not economic ones.

[flow5]

“According to the elementary logic of the so-called equation of exchange, any change in either the supply of or demand for money , to the extent that the change is not immediately and fully reflected in an (equilibrating) change in the price level, will imply changed values of real output and employment."

To quote economist John Gurley, ‘Money is a veil, but when the veil flutters, real output sputters’.
"Moreover, because monetary disequilibrium also involves a distortion of relative prices, its real effects are not limited to mere alterations in total quantities of output and employment but also involve qualitative changes in the composition of each, to the detriment of all-around well-being."

"All of this suggests that well-designed monetary arrangements and policies are important to the success of any free-market economic system.”

GDP (NOW): Latest forecast: 4.0 percent — February 6, 2018 vs. 2.6 percent in the 4th qtr. 2017.

“Neutrality of money means that money is neutral in its effect on the economy. A change in the money stock can have no long-run influences on the level of real output, employment, rate of interest, or the composition of final output. The only lasting impact of a change in the money stock is to alter the general price level.”

“The neutrality of money theory is a core belief of classical economics. It was first proposed by David Hume (1711-1776). And the phrase: “neutrality of money” was coined by Austrian economist F.A. Hayek in 1931.

Nobel Laureate Dr. Milton Friedman “gave the example of the (neutrality of money) ‘helicopter drop’ to explain the neutrality of money. Imagine a community in perfect economic equilibrium, when suddenly the following occurs:

“Let us suppose, then, that one day a helicopter flies over our hypothetical long-stationary community and drops additional money from the sky equal to the amount already in circulation-say, $2,000 per representative individual who earns $20,000 a year in income.”

”The money will, of course, be hastily collected by members of the community. Let us suppose further that everyone is convinced this event is unique and will never be repeated….”

“…People’s attempts to spend more than they receive will be frustrated, but in the process these attempts will bid up the nominal value of goods and services. The additional pieces of paper do not alter the basic conditions of the community. They make no additional productive capacity available.”

”They alter no tastes….the final equilibrium will be a nominal income of $40,000 per representative individual instead of $20,000, with precisely the same flow of real goods and services as before.”
-----------

No, money flows, the rate of expenditures, are robust (as concentrations and distributed lags that are mathematical constants clearly demonstrate), not neutral, as hypothesized and mathematically modeled by Bankrupt-u-Bernanke (Brookings Institution), in either the short-run or long run.

See: January 2004 "Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach" - with Jean Boivin, Piotr Eliasz: w10220

"Measuring The Effects Of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach," Quarterly Journal of Economics, 2005, v120(1,Feb), 387-422.

Leastways, the neutrality of money is denigrated by secular strangulation. I.e., the quantity of money does not just: “determine only absolute prices and their level” but does affect the level of income, interest, rate of capital formation and employment. No, the long-term effect of a deceleration in aggregate demand has a long-term impact on the demand for capital goods.

See: See: “profit or Loss from Time Deposit Bank” in Banking and Monetary Studies Comptroller of the Currency Unites States Treasury Department, Irwin, 1963, pp. 369-386.

Money flows do impact “employment, income and output by means other than by just “labour, capital stock, state of technology, availability of natural resources, saving habits of the people, and so on”.

No, money flows may simply adjust existing overstocked inventory levels (e.g., during the X-mas holidays). David Beckworth: "What makes this really interesting is that these wide swings in economic activity are not matched by similarly-sized swings in the price level." “Macro and Other Market Musings”: “It seems, then, that more could be learned about broader business cycle theory from studying GDP and other time series in their raw non-seasonally adjusted form. That will have to wait, however, until the BEA starts releasing the data.”

See: bit.ly/2BQgF4z

Money obviously influences R *, the “equilibrium rate of interest” (and not just because the monetary fulcrum of wedged inflation inverts). A change in M does not cause a proportionate change in P in American Yale Professor Irving Fisher’s truistic “equation of exchange”. Shifts in the money supply do not affect all goods and services proportionately.

See the 10yr:

yhoo.it/2sd7iGp?p=^TNX

There is obviously “money illusion” as well as shifts in the distribution of income: “the central feature of the modern business cycle: a systematic relation between the rate of change in nominal prices and the level of real output. The relationship, essentially a variant of the well-known Phillips curve, is derived within a framework from which all forms of “money illusion” are rigorously excluded: all prices are market clearing, all agents behave optimally in light of their objectives and expectations, and expectations are formed optimally.

Even with a mis-named “liquidity trap”, idled money exerts a dampening economic impact. Next, the pundits will say that money velocity, which fluctuates 3 X’s that of M, is neutral.

[flow5]

A nation has a TRADE DEFICIT when the cost of merchandise imports exceeds the receipts from merchandise exports. The CURRENT ACCOUNT balance encompasses merchandise, service items, commodities, and “current” financial transactions; while the BALANCE OF PAYMENTS includes the entire above plus capital flow items; all transactions involving foreign exchange.

The foreign exchange value of any currency is determined by the supply of and the demand for that particular currency. In international financial analysis supply and demand take on an unique role; for what is demand from our point of view is supply from the standpoint of foreigners – and vice versa. All transactions that require the conversion of foreign currencies into dollars constitute a demand for dollars. These include exports, payments received for services rendered to foreigners, capital flows (interest and dividends collected from foreigners), etc. An increase in the volume of any one of these times will increase the demand for dollars and, ceteris paribus, the foreign exchange value of the dollar. The opposite types of transactions, imports, etc., which involve payments to foreigners increase the supply of dollars and thereby reduce the foreign exchange value of the dollar.

Imports decrease the money supply of the importing country, while exports increase the money supply, and the potential money supply, of the exporting country. In foreign exchange supply always equals demand at the current rates of exchange. International debits equal international credits. The balance of payments always balances since there can be no credit transfer of funds.

When the balance of payments is balanced by foreigners acquiring net holdings of our equities, bonds, and real estate, and capital outflows (interest, dividends, rentals, etc.) exceed inflows, we are either decreasing our net creditor position in the world, or increasing our net debtor position. Beginning 1985 it has been the latter. The trade deficits, plus the unilateral transfer of funds by the Federal Government to foreigners, transformed this country from this world’s largest creditor to the world’s largest debtor – for the first time since 1917. Since 1985 we now have a net debtor position exceeding 11 trillion U.S. dollars, but the principle villain (since 1973) has been our dependence on foreign oil.

Trade deficits at any particular time for any given country can be beneficial or harmful; can represent economic strength or weakness. In the period before Worlds War I the U.S. had mostly trade deficits. We were a debtor country – and we thrived. Foreign investments accelerated our economic development and our standard of living rose faster as a consequence.

By the end of World War I the U.S. was a creditor nation, but we refused to act like one. We opted for tariffs and other restrictions on imports, rather than free trade. Capped by the sky-high Hawley-Smoot tariff of 1931, U.S. trade policy was an important contributor to the world wide depression of the 1930’s. By 1933 there was not a single major nation on the gold standard except the U.S.

The situation was further exacerbated when Roosevelt and his Treasury Secretary, Morgenthau, exercising the crisis powers delegated to the executive branch by Congress, took the U.S. off the gold standard in April, 1933 by making the dollar inconvertible into gold at a fixed price. And to make matters worse they periodically kept raising the price of gold from $20.67 per ounce to a final price in Dec. 1933 of $35. This had the effect of depreciating the exchange value of the dollar. All of this was done by a creditor nation operating with a chronic surplus in its balance of payments.

The Bretton Woods Agreement of 1944 established, among other things, the International Monetary Fund and confirmed the previous international status of the dollar, that an ounce of gold was equal to $35 and that all dollars were to be freely convertible into gold bullion at that price to foreign and confirmed the previous international status of the dollar, that an ounce of gold was equal to $35 and that all dollars were to be freely convertible into gold bullion at that price to foreigners but not to U.S. nationals.

In 1949, the U.S. dollar was not only as “good as gold”, but it was also preferred over gold. There were not enough dollars to finance the legitimate needs of the world economy. So, the chronic balance of payments deficits which began in 1950 were for a number of years beneficial to the world economy and to the U.S. Because of our large and chronic balance of payments surpluses after World War II, foreigners were unable to accumulate sufficient dollar balances to efficiently finance world trade. These balances were desperately needed because of the total dominance of the dollar as the reserve custodian, standard of value and transactions currency of the world.

The Korean Conflict (1950-1953) temporarily solved the problem but, the longer term solution consisted in implementing our “containment policy” against the U.S.S.R. This involved the establishment of approximately 700 military bases, not only around the perimeter of the Soviet Union but throughout the world. We have paid hundreds of billions of dollars to foreigners to acquire the bases and to maintain a garrison of more than 400,000 military personnel abroad. With diminishing merchandise surpluses this policy proved to be financial overkill.

The Korean War, which began in June, 1950, initiated the chronic balance of payments deficits that persist to this time and which will probably continue as long as foreigners are willing to increase their net investments in this country.

The U.S. has had a net liquidity deficit in every year since 1950 (with the exception of 1957), Up to 1976 (when the private sector contributed its first trade deficit ) these deficits were entirely the consequence of excessive U.S. government unilateral transfers to foreigners (re: foreign policy – solely our far flung military bases and personnel). During all this time the private sector was running a surplus in all accounts: merchandise, services and financial. The Vietnam Ten-year War administered the coup d’etat to our gold bullion standard. By 1968, in an effort to keep the dollar at the $35 par, we had exhausted nearly two thirds of our monetary gold stocks, or approximately 700 million ounces to about 260 million ounces.

Although the dollar ceased to be freely convertible in March, 1968, institutional (central bank practices) and attitudinal lags were sufficient to offset, until late 1970, the excessive expansion in the supply of dollars. In August 1971, all convertibility was ended. This further accelerated the decline in the exchange value of the dollar. All fluctuations in exchange rates prior to this time were the result of other currencies changing in value relative to the dollar. Changes in the exchange rates were negotiated by governments, usually through the offices of the International Monetary Fund.

Since 1970, the “western” world has functioned within a system of essentially free exchanges. Before 1973, exchange rates were in terms of a “fixed target”. Now the dollar is a “moving target”.

To think that in 2005 = 737 U.S. military bases and more than 2,500,000 U.S. personnel leaves one with the idea that the trend in the exchange value of the $ will continue to be down.

[flow5]

 It's all about monopolistic price practices. In our capitalistic society, the most dominate predator is legally aided to usurp the welfare of the individual.

Interest usury ceilings is a good example. The Consumer Protection Bureau, CPFB (“a U.S. government agency that makes sure banks, lenders, and other financial companies treat you fairly), provides no such power or protection.

For borrowers and lenders: “due to high inflation, in 1980, the federal government passed a special law which allowed national banks (the ones that have the word "national" or the term "N.A." in their name, and savings banks that are federally chartered) to ignore state usury limits and pegged the rate of interest at a certain number of points above the federal reserve discount rate. In addition, specially chartered organizations like small loan companies and installment plan sellers (like car financing companies) have their own rules.”

www.lectlaw.com/files/ban02.htm

There are no restrictions on saver-holders, whatever investment hurdle rates and the market will now bear. But the economic folly is that we have generally negative real rates of returns.

The RoC in money flows must exceed the RoC in real-output simply because it is impossible for monetary policy to stabilize prices without inducing intolerable levels of unemployment, given the pervasive extent of monopolistic pricing practices of our product markets, and, to a limited extent, of our labor markets.

It is axiomatic that the smaller the degree of price competition in a market and the greater the degree of private unregulated national and international monopoly power over prices and output, then the higher the amount of unit prices, the greater the tendency for restricted output and employment and the smaller the degree of downward price flexibility. Under these conditions, unless money expands at least at the rate prices are being pushed up, output cannot be sold and hence the work force would be cut back.  (pegging currencies or rates are an example of gov't monopoly power)

[flow5]

The problem with the 300 Ph.Ds. on the Fed's research staff is that their ideas have all been built upon the clever elucidation or emendation of this Keynesian postulate or that one. I.e., "We are all Keynesians now" ("a famous phrase coined by Milton Friedman and attributed to U.S. president Richard Nixon").

It is a fact (contrary to Keynes' "optical illusion" in his General Theory). From a system’s belvedere, commercial banks, DFIs, do not loan out existing deposits, “saved” or otherwise. If you tally all of the outside factors that affect the DFI’s liabilities, they collectively are peripheral (offset one another), in the determination of any new bank deposits / money supply. I.e., DFIs always create new money, whenever they lend/invest with the non-bank private sector, somewhere in the payment’s system.

Therein it is a delusion that the non-banks, NBFIs, are in competition with the deposit taking, money creating, financial institutions, DFIs. The NBFIs are the DFIs’ customers. Savings flowing through the NBFIs never leaves the payment’s system. MMMFs however, had a detrimental impact on other NBFIs.

But Congress, at the behest of the most dominant economic predator, the ABA oligarch, conned and bribed the public and Congress, based on economic ignorance (not know the difference between money and liquid assets), into the complete deregulation of savers’ and borrowers’ interest rates (for exclusively the payment’s system as the non-banks were largely, except for state usury, ceilings, previously unregulated).

 

Do we live in a democratic republic or not?

Take the expiration of the FDIC’s unlimited member bank transaction deposit insurance in Dec. 2012 is prima facie evidence. Hence my “market zinger” forecast (zinger = a surprise, shock, or piece of electrifying news).

 

12-16-12, 01:50 PM #1 flow5 "We’re close to seeing the real power of OMOs. R-gDp is likely to accelerate earlier & faster than anyone now expects. The roc in M*Vt before any new stimulus is already above average. With low inflation (given some deficit resolution), Jan-Apr could be a zinger"

Ergo, the infamous “taper tantrum” (simply putting idled, flight-to-bank-held savings, back to work, based on the U.S. Golden Era in economics, the continuous and orderly flow of savings into real-investment, a non-inflationary velocity relationship).

The smartest Ph.Ds. in economics get this backwards.

[flow5]

1yr Treasury Yield Curve rates (gov’t risk free, liquid interest rate curve vs. private sector AAA corporates’ marginal cost of capital, one factor of production), are @ 1.98. The Fed's remuneration rate is @ 1.5. Thus there is already room for the FOMC, which follows the market (the price of credit), to hike again.

That said, Feb. is the top in long-term monetary flows, volume X's velocity (a proxy for inflation). Inflation, while at a higher RoC, is now set to decelerate, and decelerate faster later in 2018 going into 2019. This should prop up the exchange value of the U.S. $, as measured by DXY, supporting bond buying (make the $ more valuable and slow import price rises).

But personally, I wouldn't enter into a bear flattener: "Bear flattener is a yield-rate environment in which short-term interest rates are increasing at a faster rate than long-term interest rates. This causes the yield curve to flatten as short-term and long-term rates start to converge."

And according to the “expectations hypothesis” (term structure of interest rates), “the expected return from holding a long bond until maturity is the same as the expected return from rolling over a series of short bonds with a total maturity equal to that of the long bond [“the average of expected future short-term interest rates—the ‘expectations component’ ”].

Unfortunately for those whose analysis of interest rates is entirely short-run, the long-run is not just a series of short-runs hung together [“economic theory of interest rates determination says that long term interest rates should be the same as what you would get by holding a sequence of short term interest rate assets reinvesting the proceeds of each maturing short term bond in the next one. If this is not the case then there would be an arbitrage opportunity and the market would be out of equilibrium”]

There is also a “segmented market hypothesis”. Or Larry Summers’ “today's production function needs a lot less physical capital to produce the same productivity”, or a “savings glut”, or even a “safe-asset shortage”. So there is no presupposed Wicksellian natural (equilibrium) nominal rate of interest or R *.

And Tobin’s “monetary theory of interest” (increasing the money stock lowers interest rates), Walrus’ Law, (portfolio balance theory, LSAPs by the “trading desk”) is non sequitur, likewise the “real theory of interest” (monetary policy only effects the price-level with no impact on R *.

See: “All that quantitative easing (QE) does is to restructure the maturity of U.S. government debt in private hands. Now, of all the stories you’ve heard why unemployment is stubbornly high, how plausible is this: ‘The main problem is the maturity structure of debt. If only Treasury had issued $600 billion more bills and not all these 5 year notes, unemployment wouldn’t be so high. It’s a good thing the Fed can undo this mistake.’ Of course that’s preposterous.”—John Cochrane, December 7, 2010.

(1) The bank lending channel theorizes that changes in monetary policy will shift the supply of intermediated credit, especially credit extended through commercial banks. - Wikipedia
(2) The balance sheet channel theorizes that the size of the external finance premium should be inversely related to the borrower's net worth. Wikipeida
(3) The credit channel view posits that monetary policy adjustments that affect the short-term interest rate are amplified by endogenous changes in the external finance premium.[3] The external finance premium is a wedge reflecting the difference in the cost of capital internally available to firms (i.e. retaining earnings) versus firms' cost of raising capital externally via equity and debt markets. - Wikipedia
(4) the so-called portfolio balance channel, which is based on the ideas of a number of well-known monetary economists, including James Tobin, Milton Friedman, Franco Modigliani, Karl Brunner, and Allan Meltzer. The key premise underlying this channel is that, for a variety of reasons, different classes of financial assets are not perfect substitutes in investors' portfolios. Imperfect substitutability of assets implies that changes in the supplies of various assets available to private investors may affect the prices and yields of those assets. Thus, Federal Reserve purchases of mortgage-backed securities (MBS), for example, should raise the prices and lower the yields of those securities; moreover, as investors rebalance their portfolios by replacing the MBS sold to the Federal Reserve with other assets, the prices of the assets they buy should rise and their yields decline as well (the Federal Reserve's purchases of longer-term securities affect financial conditions by changing the quantity and mix of financial assets held by the public) – Bernanke speech

And easy money may or may not bring lower short-term rates in the short-run; but if continued long enough, will bring about higher interest rates, both long and short-term. In the long-run, the underlying facts prevail. I.e., a chronic easy-money policy, a flow of funds chronically increasing at a faster rate than R-gDp, will result in higher interest rates, both long and short-term.

And interest rates may respond to other than supply-side influences (savings rates, foreign purchasers, etc.), there is a demand side factor operating in the loan funds market, Federal deficit financing, other than the historical dominant ones, inflation and anticipated inflation. Consider that the term premium earned for holding long-term bonds has recently been negative, where “investors could anticipate higher returns from T-bills compared to Treasury bonds”.

[flow5]

It’s quite simple. All economists are mentally retarded. Unbeknownst to most Fed watchers, N-gDp targeting leads to FOMC schizophrenia: Do I stop because inflation is increasing? Or do I go because R-gDp is falling? [Stagflation’s dilemma, viz., the FOMC’s policy mix]

The reason why the rate-of-change, RoC (first derivative f’), in the inflation indices accelerates (second derivative f”), relative to the RoC of R-gDp (where P*T is its inelastic proxy), is that the relative proportion of idle bank-held savings increases coterminous with higher interest rates on bank liabilities

Note: commercial bankers pay interest on their deposit liabilities, balances that they collectively already own. The elimination of Reg. Q ceilings for commercial banks was at the ABA’s behest (which makes all the DFIs less profitable while reducing *real* rates of interest for non-bank saver-holders).

This alteration in bank’s costs, destroys savings velocity, a subset of the velocity of circulation -- ultimately lowering aggregate monetary demand, AD (and exacerbating secular strangulation).  This drag and decay will cause the next Great Depression.

[flow5]

"We Did It"

•Ben Bernanke didn't learn from the Great Depression.

•Ben Bernanke caused the GFC all by himself.

•Ben Bernanke bankrupt the U.S. (adding 10T to our Federal Deficit).


The Distributed Lag Effect of Money Flows

NSA monthly, M1 crested (maximum upward displacement in Alan Greenspan’s transverse business cycle) on 12/2004 @ $1,401.5b. It didn't exceed that # until 4/2008 @ $1,406.6b. But that is stock, and not flow.

Note: during the Great Depression the money stock fell for c. 4 years (from 1929-1933). Prior to the GFC the money stock also fell for c. 4 years. That is, the Federal Reserve, when Ben Bernanke was at its helm, conducted the most contractionary money policy since the Great Depression precipitating the Great Financial Crisis.

Governor Ben S. Bernanke “On Milton Friedman's Ninetieth Birthday” At the Conference to Honor Milton Friedman, University of Chicago, Chicago, Illinois, Nov. 8, 2002:

“…I would like to say to Milton (Friedman) and Anna (Swartz): Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

I say déjà vu to that.


See: Dr. Richard G. Anderson (world’s leading guru on bank reserves) – “Some Tables of Historical U.S. Currency and Monetary Aggregates Data”

files.stlouisfed.org/files/htdocs/wp/2003/2003-006.pdf

A STOCK variable is measured at a particular point in time (viz., intermezzo), and represents a quantity prevailing at that point in time (say, Dec. 31, 2004), which may have accumulated over a prior time frame. A FLOW variable is measured over an interval of time." – Wikipedia

Economic variables (the same or different ones), are measured by using RoC’s - and not absolute figures (absolute vs. relative change)

The absolute change between the 1st two #s [both M1 quantities] = $5.1b or zilch!
The relative change between the 1st two #s [both M1 quantities] = 0.003639% - both zilch!

However, no money stock figure standing alone is adequate as a “guide post” for monetary policy. M1’s utilization rate is determined by its turnover (money velocity), or how many times M1 components, our means-of-payment money supply, exchange counterparties within the payment’s system, or M*Vt [marque: “money flows” propagation]

The rate of change - RoC - is the rapidity at which a variable changes over a specified time frame. “RoC is often used when speaking about momentum, and it can generally be expressed as a ratio between a change [ Δ, first derivative f’], in one variable relative to a corresponding change in another.” Investopedia.

Acceleration or deceleration in money velocity, Vt, [second derivative, ΔΔ, f” ] is equal to Vt’s RoC relative to a specified time frame.

This calculation is important, ceteris paribus. For example, in current environment, inflation is now falling faster, second derivative f”, than R-gDp (different variables), which, other things equal, is eventually bullish for both bonds and stocks, figuratively raising Nassim Taleb’s quixotic BARBell strategy based on: “randomness, probability, & uncertainty”).

As William Barnett (Divisia Monetary Aggregates) recommended: the Fed should establish a "Bureau of Financial Statistics". The data the Fed aggregates is unusable.

In other words, the data I use is non-conforming. There are limitations on all analyses based upon broad statistical aggregates, namely, data cannot be compiled accurately or in a manner which conforms to rigid theoretical concepts, and the entire approach tends to be ex-post and static.

Neither the CPI nor PCE (“price illusion” measures), captured the speculative foray and collapse that took place in real-estate assets. The value of money to any individual is probably not represented by any price index. Instead, agencies which collect and compile price data create specialized types of indexes, aka, the Case-Shiller Home Price Index.

Nevertheless, our concern is not with how the value of money can be measured, if at all, but rather the relationship of money and money flows to the level and co-movement of prices.

As Nobel Laureate Dr. Milton Friedman (of an engaging persona and skilled statistician, but lousy economist), said: "The only relevant test of the validity of a hypothesis is comparison of prediction with experience."

Scientific evidence "is proof, which serves to either support or counter a scientific theory or hypothesis. Such evidence is expected to be empirical evidence and in accordance with scientific method" - Wikipedia

Scientific method is "a method or procedure…consisting in systematic observation, measurement, and experiment, and the formulation, testing, and modification of hypotheses" - Wikipedia

The doomsday naysayers are in disbelief:

"The Everything Bubble Is Just Waiting For The Pin"

“neither central bankers nor Wall Street ever see these new style recessions coming because, in fact, they can't be detected from even an astute reading of the macro-economic tea-leaves” – David Stockman (a budget financier).

You can thank the Ph.Ds. at the BOG for discontinuing the G.6 release (debit & demand deposit turnover). Bank debits reflect both new & existing residential & commercial real-estate sales/purchases. As such the housing boom/bust would have stuck out like a sore thumb. Don't be fooled. This isn't rocket science. All real-estate transactions are cleared thru the payment’s system. The NBFIs are the DFI’s customers.

This is how past boom/busts in real-estate were depicted:

Monetary Flows (MVt)

You can thank (1) William G. Bretz “Junction Recognition in the Stock Market” Vantage Press, 1972 (and James Grant “Interest Rate Observer” (for giving me his phone #). And our forefathers:

And we knew this already:

In 1931 a commission was established on Member Bank Reserve Requirements. The commission completed their recommendations after a 7 year inquiry on Feb. 5, 1938. The study was entitled "Member Bank Reserve Requirements -- Analysis of Committee Proposal"
It's 2nd proposal: "Requirements against debits to deposits"

bit.ly/1A9bYH1

After a 45 year hiatus, this research paper was "declassified" on March 23, 1983. By the time this paper was "declassified", Nobel Laureate Dr. Milton Friedman had declared RRs to be a "tax" [sic].

Inflation works thru price dispersion. Price dispersion's evident in asset substitution (consumption or investment decisions). Asset substitution depends upon economic staccato, or Gresham’s law: a statement of the “principle of substitution” as applied to money: that a commodity (or service) will be devoted to those uses which are the most profitable. I.e., the bad drives out the good - is apropos.

The inflation indices represent a relative fixed basket of goods and services. The indices are not necessarily "representative" of preferential spending and investing decisions, nor do they capture in real-time, shifts in consumption or investment (esp. speculative swings in outlays).

So if the Fed targets the so-called price-level, e.g., the PCE or CPI, the monetary authorities will miss price dispersion / distribution and asset substitution (mal-investment: the mal-distribution and mis-allocation of available savings, or eating peanut butter instead of steak).

It's funny that the Fed touted the wealth effect on the upside (“The wealth effect is the change in spending that accompanies a change in perceived wealth”), but not the bankruptcy effect on the downside (“After selling the assets, the debts are cleared”…and the entity is “subjected to a number of financial restrictions”).

This is how Bankrupt-u-Bernanke directly caused the GFC entirely by himself and bankrupt the Federal Government:

2006 jan ,,,,,,, 45496 ,,,,,,, 0.04
,,,,, feb ,,,,,,, 43084 ,,,,,,, 0.01
,,,,, mar ,,,,,,, 41242 ,,,,,,, -0.02
,,,,, apr ,,,,,,, 42920 ,,,,,,, -0.03
,,,,, may ,,,,,,, 43648 ,,,,,,, -0.02
,,,,, jun ,,,,,,, 43278 ,,,,,,, -0.01
,,,,, jul ,,,,,,, 43328 ,,,,,,, -0.03
,,,,, aug ,,,,,,, 41162 ,,,,,,, -0.06
,,,,, sep ,,,,,,, 40865 ,,,,,,, -0.08
,,,,, oct ,,,,,,, 40088 ,,,,,,, -0.08
,,,,, nov ,,,,,,, 40543 ,,,,,,, -0.06
,,,,, dec ,,,,,,, 41461 ,,,,,,, -0.07
2007 jan ,,,,,,, 43113 ,,,,,,, -0.11
,,,,, feb ,,,,,,, 41214 ,,,,,,, -0.09
,,,,, mar ,,,,,,, 39159 ,,,,,,, -0.11
,,,,, apr ,,,,,,, 41072 ,,,,,,, -0.09
,,,,, may ,,,,,,, 42699 ,,,,,,, -0.05
,,,,, jun ,,,,,,, 42034 ,,,,,,, -0.05
,,,,, jul ,,,,,,, 41164 ,,,,,,, -0.08
,,,,, aug ,,,,,,, 39906 ,,,,,,, -0.07
,,,,, sep ,,,,,,, 40460 ,,,,,,, -0.07
,,,,, oct ,,,,,,, 40161 ,,,,,,, -0.04
,,,,, nov ,,,,,,, 40331 ,,,,,,, -0.04
,,,,, dec ,,,,,,, 41048 ,,,,,,, -0.04
2008 jan ,,,,,,, 42398 ,,,,,,, -0.07
,,,,, feb ,,,,,,, 41070 ,,,,,,, -0.05
,,,,, mar ,,,,,,, 39731 ,,,,,,, -0.04
,,,,, apr ,,,,,,, 41642 ,,,,,,, -0.03
,,,,, may ,,,,,,, 43062 ,,,,,,, -0.01
,,,,, jun ,,,,,,, 41616 ,,,,,,, -0.04
,,,,, jul ,,,,,,, 42083 ,,,,,,, -0.03
,,,,, aug ,,,,,,, 42055 ,,,,,,, 0.02
,,,,, sep ,,,,,,, 42456 ,,,,,,, 0.04
,,,,, oct ,,,,,,, 46930 ,,,,,,, 0.17
,,,,, nov ,,,,,,, 50363 ,,,,,,, 0.24
,,,,, dec ,,,,,,, 53723 ,,,,,,, 0.30


I.e., Bankrupt-u-Bernanke collapsed American Yale Professor Irving Fisher’s price-level for 29 contiguous months. I.e., contrary to Nobel Laureate Dr. Milton Friedman, the distributed lag effect of money flows are not “long and variable” as he pontificated (1969, “The Optimum Quantity of Money”, Macmillan). The distributive lag effect of monetary flows, volume X’s velocity, have been mathematical constants for over 100 years (my own research).

So what prices do you think were most impacted? It was long-lived property assets that were most impacted by Bankrupt-u-Bernanke’s contractionary money policy.

But that’s not what caused the GFC. The GFC was caused by a collapse in real-output due to a surgically sharp decline in money flows, M*Vt, the proxy for real-output (another mathematical constant):

POSTED: Dec 13 2007 06:55 PM |
The Commerce Department said retail sales in Oct 2007 increased by 1.2% over Oct 2006, & up a huge 6.3% from Nov 2006.
10/1/2007,,,,,,,-0.47,... -0.22 * temporary bottom
11/1/2007,,,,,,, 0.14,,,,,,, -0.18
12/1/2007,,,,,,, 0.44,,,,,,,-0.23
1/1/2008,,,,,,, 0.59,,,,,,, 0.06
2/1/2008,,,,,,, 0.45,,,,,,, 0.10
3/1/2008,,,,,,, 0.06,,,,,,, 0.04
4/1/2008,,,,,,, 0.04,,,,,,, 0.02
5/1/2008,,,,,,, 0.09,,,,,,, 0.04
6/1/2008,,,,,,, 0.20,,,,,,, 0.05
7/1/2008,,,,,,, 0.32,,,,,,, 0.10
8/1/2008,,,,,,, 0.15,,,,,,, 0.05
9/1/2008,,,,,,, 0.00,,,,,,, 0.13
10/1/2008,,,,,,, -0.20,,,,,,, 0.10 * possible recession
11/1/2008,,,,,,, -0.10,,,,,,, 0.00 * possible recession
12/1/2008,,,,,,, 0.10,,,,,,, -0.06 * possible recession
Trajectory as predicted.

Why did Bankrupt-u-Bernanke misjudge the economy? It is because Bankrupt-u-Bernanke thinks that money is neutral, and not robust.

“Neutrality of money is the idea that a change in the stock of money affects only nominal variables in the economy such as prices, wages, and exchange rates, with no effect on real variables, like employment, real GDP, and real consumption.” – Wikipedia

Ben S. Bernanke & Ilian Mihov: “The Liquidity Effect and Long-Run Neutrality" to wit: “The first, the so-called liquidity effect (NASDAQ:LE), asserts that in the short run, changes in the money supply induce changes in short-term nominal interest rates of the opposite sign. The second proposition, the long-run neutrality of money (NYSE:LRN), states that changes it the money supply do not have significant effects on real quantities such as output, employment, real interest rates, and real balances in the long run.”

This is exactly how Bankrupt U Bernanke directly and solely caused the Great-Recession, real-estate’s “pro rata share” of the Yale Professor Irving Fisher’s price-level.

Neither financial transactions nor “animal spirits” are random:

American, Yale Professor Irving Fisher – 1920 2nd edition: “The Purchasing Power of Money”:

“If the principles here advocated are correct, the purchasing power of money — or its reciprocal, the level of prices — depends exclusively on five definite factors:

(1)the volume of money in circulation;
(2) its velocity of circulation;
(3) the volume of bank deposits subject to check;
(4) its velocity; and
(5) the volume of trade.

“Each of these five magnitudes is extremely definite, and their relation to the purchasing power of money is definitely expressed by an “equation of exchange.”

“In my opinion, the branch of economics which treats of these five regulators of purchasing power ought to be recognized and ultimately will be recognized as an EXACT SCIENCE, capable of precise formulation, demonstration, and statistical verification.”

There are 6 seasonal, endogenous, economic inflection points each year. These seasonal factors are pre-determined by the FRB-NY’s "trading desk" operations, executing the FOMC's monetary policy directives (in the present case just reserve "smoothing" and “draining” operations, the oscillating inflows and outflows, the making and or receiving of interbank and correspondent bank payments by and large using their “free" excess reserve balances).

Every year, the seasonal factor's map (economic time series’ cyclical trend), or scientific proof, is demonstrated by the product of money flows, our means-of-payment money X’s its transaction’s velocity of circulation (the scientific method).

Monetary flows (volume X’s velocity) measures money flow’s impact on production, prices, and the economy (as flows are driven by payments: “bank debits”). It is an economic indicator (not necessarily an equity barometer). Rates-of-change Δ, in M*Vt = RoC’s Δ in AD, aggregate monetary purchasing power. Thus M*Vt serves as a “guide post” for N-gDp trajectories.

N-gDp is determined by the volume of goods & services coming on the market relative to the actual, transactions, flow of money. RoC's in R-gDp serves as a close proxy to RoC's in total physical transactions, T, that finance both goods and services. Then RoC's in P, represents the price level, or various RoC's in a group of prices and indices.

Monetary flows’ propagation, is a mathematically robust sequence of numbers (sigma Σ), neither neutral nor opaque, which pre-determine macro-economic momentum (the → “arrow of time” or "directionally sensitive time-frequency de-compositions").

For short-term money flows, the proxy for real-output, R-gDp, it's the rate of accumulation, a posteriori, that adds incrementally and immediately to its running total.

Its economic impact is defined by its rate-of-change, Δ "change in". The RoC, is the pace at which a variable changes, Δ, over that specific lag's established periodicity.

And Alfred Marshall's cash-balances approach (viz., a schedule of the amounts of money that will be offered at given levels of "P"), viz., where at times "K" is the reciprocal of Vt, or “K” has the dimension of a “storage period” and "bridges the gaps of transition periods" in Yale Professor Irving Fisher’s model.

As Nobel Laureate Dr. Ken Arrow says: “all analysis is a model”.

- Michel de Nostredame (I cracked the code in July 1979).

Dr. Leland J. Prichard: "You may have a predictive device nobody has hit on yet"

This "device" is worth trillions of dollars. I should be awarded the Nobel Prize in economics.

Maybe Vladimir Vladimirovich Putin is smart enough to use it (as all my internet traffic is from Russia)

[flow5]

Remember: November 21, 2002 "Deflation: Making Sure "It" Doesn't Happen Here"

bit.ly/2lfkg10

[flow5]

Stocks have been moving sideways. We're close to bottoming. The previous DJIA bottom was @ 23,860.4. Maybe a double-bottom, DJIA now @ 24,515.93? And April, the economic bottom, is almost here. Then the 5th final wave.
yhoo.it/2kjtus2?p=^DJI

[flow5]

Buy gold, it's going parabolic.

Stocks have bottomed.  Prepare for the 5th wave.

[flow5]

Let’s draw, play a game (disambiguation), from a scientific example. Economic mechanics are derived from momentum (a vector calibration having both magnitude and direction). In physics momentum = mass X’s velocity. In economics, momentum is calibrated by money flows, volume X’s velocity.

A robust economy functions as economic momentum, as pre-determined by Newton’s first law of constant velocity, inertia, viz: “Philosophiæ Naturalis Principia Mathematica”. Economic momentum increases as transactions, or velocity, increases [“commutative law”].

Economic energy is conserved if there are no impediments, resistance, to slow it down. Given friction (opposing forces causing deceleration), pre-determines how long it would take for economic motion to become recessionary (or even Irving Fisher’s debt-deflation). “If the net force acting on an object is zero, then the linear momentum is constant.”

In economics a vector is represented by flow (e.g., velocity, force, displacement, and acceleration). Whereas stock, ordinary quantities that have a magnitude, but not a direction, are represented by scalars (e.g., speed, or the magnitude of velocity, as well as time, and mass).

“Work is performed when a force that is applied to an object moves that object.” Like a particle accelerator, a machine that “propels charged particles to nearly light speed and to contain them in well-defined beams.” And that frame of reference, or labor productivity and intellectual capital (a partical accelerator), is derived from capital goods (not a transfer of energy, as in physics), but a multiplier of energy, a lever. A lever amplifies an input force. Labor and capital are factors of production.

Tangible and intangible assets are input goods, producer goods involved in manufacturing, the means of production, as differentiated by the accounting techniques, of depreciation, amortization and depletion. The demand for capital goods (CAPEX consisting of property, plant and equipment used for future production), is a derived demand, derived from primary consumer demands (end-user’s tangible durable goods, nondurable goods and services).

Even in a capitalistic system the end and objective of all production is human consumption. The demand for inventory or plant and equipment, however far removed from the ultimate consumer, is derived from final consumer outlays in the marketplace (as incentivized by Congress, e.g., the Modified Accelerated Cost Recovery System, MACRS).

Aggregate monetary demand is always paramount in successful business planning and commitment decisions. If sufficient demand is not expected to exist (as in secular strangulation, or chronically deficient aggregate demand c. 1981), it matters not what the expected costs will be. "Sufficient" demand, of course, covers all costs plus and expected after tax profit margin.

[flow5]

Banks Are Finally Raising Deposit Rates 2 Years After First Fed Hike

www.zerohedge.com/news/2018-03-19/banks-are-finally-raising-deposit-rates-2-years-after-first-fed-hike

“the average rate on a one-year certificate of deposit climbed to 0.49% last week, according to Bankrate.com - its highest level in more than seven years”


Disinformation of the McCarthyites. All savings originate within the payment's system. Saver-holders never transfer their savings outside the system unless they hoard currency or convert to another national currency.

The only way to "activate" said savings is for the owner to invest/spend directly or indirectly, e.g., via a non-bank conduit.

Thus, all DFI held savings are lost to both consumption and investment, indeed to any type of payment or expenditure.

The DFIs always create new money whenever they lend/invest with the non-bank public somewhere in the payment's system. The DFIs do not loan out existing deposits, saved or otherwise.

Where the public saves or 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. It will not alter the lending capacity of the payment’s system. The experience of any individual bank (micro-economics), may be at variance with this conclusion (macro-economics).

The use or non-use of savings held by the commercial banks is a function of the velocity, not the volume, of their deposit liabilities. The decisions of the public to invest their bank-held savings will not, per se, change the aggregate liabilities of the payment’s system.

Ipso facto, saver-holders will only ultimately receive higher and firmer *real* rates of remuneration if the commercial banks, DFIs, are driven out of the savings business.

[flow5]

You could day trade, swing trade, these markets.  Just watch the 10yr

[flow5]

Read Global Money Notes # 10. Pozsar predicted the widening of LIBOR OIS spreads in Sept. 2017:

"Normalization is set to drain close to $400 billion of reserves from money markets during the fourth quarter, and the impact of that will be felt the world over: repo spreads, spreads to OIS and cross-currency bases are all set to widen, re-tracing most of the narrowing they’ve been through since January."

Basel III requirements are the mistake. More HQLA are required to support higher interest rates, esp. for FBOs that are SIFIs. This is impacting the LIBOR OIS spreads and contracting the unregulated floating interest rates of the E-$ market.

The reason why this metric is rising is that the Fed has tightened monetary policy since the beginning of the year. When the US sneezes, the rest of the world still catches a cold. And the E-$ gets a double whammy. E-$s are not US $s. They represent a completely different currency as all E-$s are created abroad by FBOs (& SIFIs requirements are more stringent)

Therefore E-$s are subject to both currency risk and interest rate risk. When the Fed tightens it impacts both those constraints disproportionately (largely because of Basel III). There are no liquidity backstops for E-$s (only Fed reciprocal swaps -which peaked when the $ troughed in Jan).

[flow5]

Paradoxically, IBDDs are not a member bank’s tax (as the McCarthyites and ABA claim). They are "Manna from Heaven", manufactured ex-nihilo, cost less to, and rained on, the payment’s system -- by the Simon Potter’s Market Group “trading desk”.

When IBDDs are remunerated, this artificially transmogrifies non-earning assets into earning assets, so otherwise potential fractionally distributed interbank clearing balances are monetized & sterilized (immobilizing “hot potatoes”). IBDDs then become a credit (not a money), control device. And this monetary modeling blunder reduces overall incomes, inducing stagflation (business stagnation accompanied by inflation). Interest is the price of loan-funds. The price of money is the reciprocal of the price-level.

Any policy rate that restricts the flow, and pooling, of the public's savings through the non-banks, robs funds otherwise put back-to-work in the savings-investment process, where savings (funds held beyond the income period in which received), should be sagaciously matched with productive, non-inflationary, real-investment outlets.

All savings can only be “activated” and recycled (from the bourgeoisie owners to the proletariat’s division of laborer, in socio-political Marxists’ terms), external of the payment’s system. This blunder destroys money velocity, the circuit income and transactions velocity of funds, shrinking potential R-gDp (i.e., it induces secular strangulation, or chronically deficient aggregate demand c. 1981, via decelerating money velocity and collapsing *real* rates of interest)

The McCarthyites have achieved their objective, that there are no significant differences between money and liquid assets (the Gurley-Shaw thesis).

The degree of policy restraint and policy mix-up centers around the level of the remuneration rate vis-à-vis the short-end segment of the yield curve (catallactic substitutes); wholesale and retail money market funding, in the borrow-short to lend-longer, liquidity risk and maturity transformation. The money market is differentiated by its position, basis the Daily Treasury Yield Curve’s umbrella (i.e., short-term borrowing & lending with original maturities from one year or less).

Lowering the remuneration rate on IBDDs stimulates the flow of saving; exogenous of where they remain impounded and idled, i.e., frozen within the payment’s system (lost to both consumption and investment), e.g., as opposed to the elimination of the FDIC’s unlimited transactions deposit insurance in Dec. 2012.

Because DFIs always create new money endogenously, whenever they lend/invest, bank-held savings (where all savings originate), are lost to all payments and expenditures so long as they are blocked by our elastic legislators, the U.S. Senate Committee on Banking, Housing, and Urban Affairs, and the House Committee on Financial Services, blocked by the most well-funded and influential lobbyists, the oligarchic which goes by the name: the American Bankers Association.

I.e., savings flowing through the non-banks, increases the supply of loan-funds, but not the supply of money. From the standpoint of the economy and the system (macro-economics), not an individual bank (micro-economics, where the ABA is surreptitiously involved), the use or non-use of savings held by the commercial banks is a function of the velocity, not the volume, of their deposit liabilities.

The parameters of economics (fractional, prudential or legal reserve banking), are not those of mathematics – the whole is much larger than the sum of its parts. The decisions of the public to save or dis-save, or invest/spend their bank-held savings will not, per se, alter the total assets or liabilities of the commercial banks, nor alter the forms of the existing assets within the payment’s system.

When non-banks acquire funds and invest, for the payment’s system, there is simply a transfer of ownership of existing deposit liabilities within the system (no funds are lost or withdrawn from the payment's system, unless currency is hoarded or owners transfer their funds to another national currency).

The expansion of time “saved” deposits adds nothing to N-gDp...as the source of time/savings-invest accounts is other bank deposits, directly or indirectly via the currency route, or through the DFI's undivided profits accounts.

The 1966 S&L credit crunch, where the term originated, is the antecedent and paradigm.

[flow5]

Both President Bill Clinton's balanced budgets (& accompanying trade deficits), and Greenspan's "Great Moderation" were due to a change in special one-time factors. Reminds me of John Kenneth Galbraith’s: “Money Whence It Came, Where It Went”

The DIDMCA of March 31st 1980 -- that unambiguously and unswervingly caused the S&L crisis (not presupposed “bad actors”, viz., The Keating Five), inadvertently and misleadingly instigated Chairman Alan Greenspan to reduce legal reserve requirements by 40 percent (to jump-start the economy coming out of the July 1990-Mar 1991 recession)…leading to DFIs to become “non-e-bound”, Dr. Richard G. Anderson’s term (whence “flow”, the transactions velocity of circulation went unreported, as the G.6 release was discontinued in Sept. 1996).

Monetary flows’ propagation, volume X’s velocity [RoC’s in bank debits] registered (-) negative rates-of-change for the 1st time since the Great Depression during the S&L crisis (as Dr. Leland J. Prichard, Ph.D., Economics, Chicago, 1933 properly predicted in May 1980).

bit.ly/2udPcXw

Pritchard on the ACT: “There is no possible way for the Fed to get a ‘handle’ on the money stock unless it has (and properly exercises) direct control over the volume of legal reserves, and the reserve ratios, of all money creating institutions. This, the present Act does not provide.” I.e., the GFC was inevitable.

Pritchard: “One of the principal purposes of the Act was to provide the housing industry with a reliable source of funds”:

Dr. Lawrence H. White, a senior fellow at the Cato Institution wrote about duration risk in the borrow short to lend longer, savings-investment paradigm: “in 1979-1981 it rendered insolvent about two-thirds of US thrift institutions (FSLIC, NCUSIF, insured), who were financing 30-year fixed-rate mortgages with 1- and 2-year deposits”.

Pritchard: “…That may be achieved through various governmental and quasi-governmental corporations [think FNMA & GNMA]. But the role of the S&Ls in housing finance will diminish significantly…Sources of mortgage funds will shift from the subsidized rates heretofore provided by the small saver to: ’bond-backed’ sources” [think the financial re-engineering of MBS or a Non-Agency MBS].

Pritchard: “…In due course, under this Act, our means-of-payment (now designated as M1A by the Board of Governors) will approximate M-3.”

In Dr. Lester V. Chandler’s presentation: [“Should Commercial Banks Accept Savings Deposits”, Conference on Savings and Residential financing (1961 proceedings), United States Savings and Loan League, Chicago,] An epic debate!

Chandler: “Professor Pritchard is quite right, of course, in pointing out that commercial banks tend to compete among themselves when they issue savings deposits.”… “I do agree that savings deposits are ‘stagnant’ in the sense that they are not used as a medium of payment and have a velocity of zero.”

Chandler: “…I have noticed no reluctance on the part of other financial institutions to manufacture attractive near-money substitutes, highly liquid claims.”…”But we are not yet through. The increase to the supply of loanable funds will presumably tend to lower interest rates and stimulate spending” [Greenspan’s interest rate conundrum].

Note: “In congressional testimony on February 16, 2005, Federal Reserve Chairman Greenspan characterized the recent behavior of long-term interest rates as a “conundrum.” Typically, long-term rates tend to rise as monetary policymakers raise short-term rates. But not in the current episode. Despite steady monetary tightening beginning in the middle of 2004, the yields on long-term U.S. Treasury securities actually have declined since then by about 50 basis points. As a consequence, the current level of long-term interest rates seems to be well below what one would expect on the basis of economic fundamentals.”

Chandler: “If the Federal Reserve wishes to maintain the pre-existing degree of ease or tightness in credit markets, it will have to force the DFIs to reduce their deposit and their loans…In effect the Federal Reserve will say to the DFIs, ‘Because the public has shifted its funds from you to the non-banks, we are forcing you to reduce your loans’ “.

Thus the GFC was history.

[flow5]

Bankrupt-u-Bernanke’s remunerating of interbank demand deposits destroyed the non-banks for the 2nd time since the DIDMCA of March 31st 1980. The 1st causality of this Keynesian error, the Gurley-Shaw thesis: that there is no difference between money and liquid assets; was the S&L crisis, “the failure of 1,043 out of the 3,234 savings and loan associations in the United States from 1986 to 1995” - which caused the 1990-1991 recession (as predicted in May 1980 by Dr. Leland J. Prichard, Ph.D., Economics, Chicago 1933, MS, Statistics, Syracuse). I.e., all present day economists don’t know a debit from a credit.

Alan Greenspan’s response was to decouple the commercial banks from their mooring (dropping legal reserve requirements by 40 percent, a decoupling that the DIDMCA already presedged), giving way to President Bill Clinton’s massive trade deficits, i.e., exporting aggregate demand (tantamount to targeting N-gDp LPT), and importing underemployment (Bill Gross’ overconsumption and under savings, productivity accruing to corporations and not real wages, and Larry Summers: “"Since the 1990s…the U.S. has alternated between bubbles and busts.” Or my “FOMC schizophrenia”: Do I stop because inflation is increasing? Or do I go because R-gDp is falling? Or the stagflationists’ dilemma). This lead to Dr. Prichard’s other May 1980 prediction, that M1a would metamorphose into M3, ergo, the GFC.

Remunerating IBDDs induces non-bank dis-intermediation, where the size of the non-banks shrink, but the size of the payment's system remains unaffected. This has the effect of destroying money velocity, precipitating secular strangulation (esp. c. 1981, and exacerbated by remunerating IBDDs). I.e., all DFI savings are un-used and un-spent, lost to both consumption and investment.

All non-bank lending/investing is strictly a velocity relationship, the only place where savers’ funds can be, and are matched with borrowers, i.e., outside of the payment’s system, and through the NBFIs (a prosperous synergetic and symbiotic fiduciary relationship). The NBFIs are the DFI’s customers. Savings flowing through the NBFIs never leaves the payment’s system.

The use or non-use of monetary savings (funds held beyond the income period in which received), cached by the DFIs is a function of the velocity, not the volume, of their deposit liabilities. The parameters of economics are not those of mathematics – the whole is much larger than the sum of its parts. The decisions of the public to invest their bank-held savings will not, per se, change the aggregate liabilities, or the existing assets, of the payment’s system. The expansion of time “saved” deposits adds nothing to N-gDp. The source of time “savings” deposits is other bank deposits, directly or indirectly via the currency route (never more than a short-run situation), or through the bank’s undivided profits accounts.

It amounts to ring-fenced " 'financial repression', a deliberate reduction in the costs of debt by lowering returns to creditors”, or Friedrich Hayek’s “fatal conceit” (the assumption of knowledge where it does not exist).
It’s the difference between Central Bank deposits, the gov’ts liability, or ‘outside money’ [IBDDs] and commercial bank-created liabilities or ‘inside money’ [m2]

This Romulan cloaking device vastly exceeded the level of short term interest rates which is still illegal.
See: "The 2006 Financial Services Regulatory Relief Act gives the Fed permission to pay interest on reserves. The IOR rate was always higher than "the general level of short-term interest rates" which is imposed in the Law. "A Legal Barrier to Higher Interest Rates," The Wall Street Journal, Sept. 28, p. A13.

The 1966 S&L credit crunch (when the term credit crunch was first coined), was the prologue and paradigm. This surreptitious subterfuge reversed the differentials that previously existed via Reg. Q ceilings, before the complete deregulation of all interest rates for the commercial banksters. The non-banks were always unregulated prior to July 1966.

[flow5]

Having cracked the code, I am the best market timer in history bar no one.

Equities will bottom by the 11th (on Wednesday). Think Bruce's (whom I miss) "barbell" strategy.

[djAdvocate]

Apr 8, 2018 14:15:34 GMT -5 flow5 said:

Having cracked the code, I am the best market timer in history bar no one.

Equities will bottom by the 11th (on Wednesday). Think Bruce's (whom I miss) "barbell" strategy.

which "equities", flow?  SP500?  US Stocks?  Global Equities?  mining equities?

[flow5]

I am the Alpha & the Omega. I am going to change this world.

[flow5]

The Distributed Lag Effect Of Monetary Flows [ M*Vt ]

•Monetary lags have been mathematical constants for > 100 years.

•Economics is an exact science and prognostications are infallible.

•Every boom/bust since the Great Depression is *entirely* the Fed's fault.


Nobel Laureate Dr. Milton Friedman, published in the “Journal of Political Economy”, Vol. 69, No. 5 (Oct., 1961), pp. 447-466 “The Lag in Effect of Monetary Policy” where he pontificated that:

"… monetary actions affect economic conditions only after a lag that is both long and variable."

Walter Isaacson pointed out in his biography of Leonardo Da Vinci, “history’s most creative genius”, who maybe said it best: “Before you make a general rule of this case, test it two or three times and observe whether the tests produce the same effects”

Thereby economists and acolytes took the archetypal “Hook Line & Sinker”, viz., “Nobody Can Teach Anybody Anything” W.R. Wees

www.dumbassgifts.com/images/thm-L_fw_hookLineAndSinker.gif

Syncing money flows, volume X’s velocity, with gDp was for me like the artisan, Dr. Ernest G. Schwiebert Jr, who was Director of the Theodore Gordon Flyfishers and his attempts to:”Match the hatch”.

American Yale 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.

Thus mechanically: M*Vt is synonymous with aggregate monetary purchasing power, AD, and is = P*T (where N-gDp is ≈, a subset).

In Professor Irving Fisher’s – 1920 2nd edition: “The Purchasing Power of Money” as “Digitized for FRASER”:

fraser.stlouisfed.org/scribd/?title_id=3610&filepath=/files/docs/meltzer/fispur20.pdf

Neither superfluous financial transactions (no “tax needed”) nor John Maynard Keynes’ “animal spirits” are random:

“If the principles here advocated are correct, the purchasing power of money — or its reciprocal, the level of prices — depends exclusively on five definite factors:

(1)the volume of money in circulation;
(2) its velocity of circulation;
(3) the volume of bank deposits subject to check;
(4) its velocity; and
(5) the volume of trade.

“Each of these five magnitudes is extremely definite, and their relation to the purchasing power of money is definitely expressed by an “equation of exchange.”

“In my opinion, the branch of economics which treats of these five regulators of purchasing power ought to be recognized and ultimately will be recognized as an EXACT SCIENCE, capable of precise formulation, demonstration, and statistical verification.”

Taking Irving Fisher’s *KATALLACTIC* approach (the science of exchanges), viz., as George Garvy spells out in his: “DEPOSIT VELOCITY AND ITS SIGNIFICANCE” published in Nov. 1959 (as: “Digitized for FRASER”):

fraser.stlouisfed.org/files/docs/meltzer/gardep1959.pdf

George Garvy: “Ideally, only balances subject to check or, even better, balances shown on checkbook stubs of depositors should be used to compute velocity rates.”

This is analogous to Dr. Richard G. Anderson’s, Ph.D. Economics, Massachusetts Institute of Technology (the world’s leading guru on bank reserves) explanative: “legal reserves are driven by payments”, payments being “total checkable deposits”.

Documentary proof of this demarcation is given within the G.6 release, Debit and Demand Deposit Turnover, discontinued in Sept. 1996 (discontinued for spurious reasons: “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.”). Ed Fry was its manager. William G. Bretz (of Juncture Recognition), told Fry he had an error in his statistics. That’s the value of a “knowledge worker”, and not an “arm chair” economist.

This explanation disabused the significance of bank debits (money actually exchanging counterparties):

“Changes in business activity are closely linked with changes in the volume of money payments made by check, of which bank debits provide the best available single indicator. The debit figures cover payments for the purchase of goods in the various channels of production & distribution, for wages ^ salaries, for dividends ^ interest; but they also include payments for property ^ other financial transactions that do not necessarily arise for current production & distribution [which e.g., reflect both new & existing residential & commercial real-estate sales/purchases]. They include, in addition, man duplications arising from a series of payments of identical goods at different stages of production & consumption. Only I a very broad way therefore, do these data reflect changes in general business conditions by showing, among other things changes in the attitude of the public toward holding or spending money.”

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.

The NBFIs, non-banks, are the DFI’s customers. Thus all demand drafts originating from the NBFIs clear thru the payment’s system (unified theory). Bank reserves are driven by payments (bank debits). Legal reserves are based on transaction type deposit classifications 30 days prior. 95 percent of all demand drafts clear thru demand deposits (see G.6 release).

Banking and Monetary Statistics, 1914-1941, Part I | FRASER | St. Louis Fed

[section 5]

Of course, money flows registered a (-) negative RoC during the S&L crisis; “the failure of 1,043 out of the 3,234 savings and loan associations in the United States from 1986 to 1995”, during the July 1990-Mar 1991 recession.

Monetary Flows (MVt)

But we knew this already:

In 1931 a commission was established on Member Bank Reserve Requirements. The commission completed their recommendations after a 7 year inquiry on Feb. 5, 1938. The study was entitled "Member Bank Reserve Requirements -- Analysis of Committee Proposal" It's 2nd proposal: "Requirements against debits to deposits"

bit.ly/1A9bYH1

After a 45 year hiatus, this research paper was "declassified" on March 23, 1983. By the time this paper was "declassified", Nobel Laureate Dr. Milton Friedman had declared RRs to be a "tax" [sic].

See: “New Measures Used to Gauge Money supply”, WSJ 6/28/83

You don't have to be a NASA rocket scientist (like Dr. William A. Barnett, of: “Divisia Monetary Aggregates”). What he does is laborious. Changes in “divisia” are automatically captured, real-time, in RRs. “Instead of totaling all types of money and treating them equally, the Divisia numbers assign different weights to assets according to the extent they serve as spending, rather than savings, vehicles.”

“The ‘debit-weighted’ money figures developed by the Fed’s Dr. Paul Spindt, support Prof. Barnett’s conclusion. They assign different weights to various categories of money according to how often they turn over, or are spent.”

See Dr. William Barnett:

“The fact that simple sum monetary aggregation is unsatisfactory has long been recognized, and there has been a steady stream of attempts at weakening the implied perfect substitutability assumption by constructing weighted average monetary aggregates.”

www2.ku.edu/%7Ekuwpaper/2013Papers/201312.pdf

Note #1: “a KATALLACTIC approach—as distinguished from a national income and product approach—places as much emphasis on production and finance as it does on income and final demand. Every agreement to exchange comes to the economist's attention, rather than simply the net of those agreements aimed at final demand. This is important because if one does not consider the intermediate stages of production and financing, it becomes more difficult to isolate the possible sources and paths of disturbance in the exchange nexus. In this connection, the highly distilled, final demand focus of national income and product accounting in particular—while valid—provides only a narrow view into the overall market process.”

In the transactions velocity of circulation: “Money is spent and re-spent.” Whereas with income velocity, inflation analysis is delimited to wages and salaries spent. To the Keynesians, aggregate monetary demand, AD, is N-gDp, the demand for services (human) and final 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 continues through to the end, (“raw materials, intermediate goods and labor costs, which comprise the bulk of business spending are not treated in N-gDp”), etc.

Thus what Milton Friedman had printed on his car license plate: [ M * Vi =P * Q ]was dead wrong for two important reasons.

See the Federal Reserve Bank of New York: “The Money Supply”

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 "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."

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".

The Money Supply - FEDERAL RESERVE BANK of NEW YORK

Money should be defined exclusively in terms of its means-of-payment attributes. The present array of interest-bearing checking accounts has confused the distinction between means-of-payment accounts, and saving-investment accounts, and created a dilemma as to what portion, if any, of these interest-bearing accounts should be considered as savings. This dilemma is resolved when the transactions velocity of demand deposits is taken into account; i.e., deposit classifications are analyzed in terms of monetary flows. Obviously, no money supply figure standing alone is adequate as a "guide post" to monetary policy.

Scientific evidence "is proof, which serves to either support or counter a scientific theory or hypothesis. Such evidence is expected to be empirical evidence and in accordance with scientific method" - Wikipedia

Scientific method is "a method or procedure…consisting in systematic observation, measurement, and experiment, and the formulation, testing, and modification of hypotheses" - Wikipedia

The scientific evidence for the last 100 years is irrefutable. I.e., the trajectory in the roc (proxy for inflation indices), for M*Vt (the scientific method), projected a top in the inflation indices in January (signal to sell commodities and buy bonds). Every year, the seasonal factor's map, or scientific proof, is demonstrated by the product of money flows.

The only tool at the disposal of the monetary authority in a free capitalistic system through which the volume of money can be controlled is legal reserves.

The FOMC's monetary policy objectives should be formulated in terms of desired RoC's in monetary flows, volume X’s velocity, relative to roc's in real-gDp - Y. Roc's in N-gDp, P*Y, can serve as a proxy figure for roc's in all transactions P*T. RoC's in E-gDp have to be used, of course, as a policy standard.

Lest we are to believe the pundits (those responsible for our condition):

"I know of no model that shows a transmission from bank reserves to inflation" - DONALD KOHN - former Vice Chairman of the Board of Governors of the Federal Reserve System

"Reserves don't even factor into my model, that's not what causes inflation and not how the Fed stimulates the economy. It's a side effect." - LAURENCE MEYER - a Federal Reserve System governor from June 1996 to January 2002

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"The Fed is in a tightening mode" – more hubris.

Outside money properties (Central Bank liabilities) aren’t synonymous with inside money properties (DFI, deposit taking, money creating, financial institutions’ liabilities).

IBDDs, interbank demand deposits (a DFI earning asset after Oct. 6, 2018), are not just an asset swap. IBDD’s are assets defined by economists to be outside-of-the properties typically assigned to the money aggregates. IBDD’s are not a medium of exchange. They do not circulate outside of the inter-bank market. They do not require Basel regulatory capital. They are not subject to reserve requirements. In their present state, IOeR’s are a *Romulan cloaking* device, a quasi-tiering of DFI vs. NBFI available credit, a pseudo-credit control device.

Paradoxically, IBDDs are not a member bank’s tax (as the McCarthyites and American Bankers Association speciously hype). They are "Manna from Heaven", digitally manufactured ex-nihilo, cost-less to, and rained on, the payment’s system -- by Simon Potter’s Market Group “trading desk” (money laundered helicopter drops, ergo: sterilized debt monetization).

The FRB-NY trading desk’s open market operations, its “smoke and mirrors” (where the 12 District Reserve Bank “smoothing” procedures were consolidated forming our effective Centralized bank in 1933), has flip-flopped – inverting from a tight money policy to a semi-percolating one (just prior to the 3rd seasonal inflection point).

Digressing note1: Dis-intermediation for the commercial banks ended with the numerous reforms in the Glass–Steagall Act; also ending: "pushing on a string" as only applied prior to the nominal legal adherence to the fallacious "Real Bills Doctrine" when terminated in 1932 - due to a paucity of eligible (hopelessly impaired), commercial and agricultural paper for the 12 District Reserve bank’s discounting purposes.

The prior deceleration in money flows, in its proxy for 1st qr. R-gDp, has abruptly bottomed with the 2nd qtr. R-gDp currently appears to have flat lined (but money growth and velocity have at the same time accelerated), coinciding with the trough in “real-time gross settlements”, oscillating paycheck to paycheck systematic rotation (which reflects the Treasury’s TT&L receipts, prior to its re-depositing payments at one of its master accounts, its General Fund Account, just before making Congressional outlays) as postponed to bank squaring day, April 11th (a surreptitious: on-again, off-again, accounting trick, the injection and draining of IBDDs).

Stephen Goldfeld labeled this type of: “instability in the demand for money function” (Keynes’ liquidity preference curve) as a “case of the missing money”, whereas it was simply related to, e.g., the “monetization” of commercial bank time deposits (ending gate-keeping restrictions), the daily compounding of interest, etc., all of which occurred within the payment’s system. It supposedly “presented a serious challenge to the usefulness of the money demand function as a tool for understanding how monetary policy affects aggregate economic activity.”

This misdirection charged that “advances in computer technology caused the payments mechanism and cash management techniques to undergo rapid changes after 1974. In addition, many new financial instruments (e.g., proliferation in the use of repurchase agreements) emerged and have grown in importance. This has led some researchers to suspect that the rapid pace of financial innovation since 1974 has meant that the conventional definitions of the money supply no longer apply. They searched for a stable money demand function by actually looking directly for the missing money; that is, they looked for financial instruments that have been incorrectly left out of the definition of money used in the money demand function.”

“Conventional” money demand functions over-predicted money demand in the middle and late 1970s; and under-predicted velocity since 1981, and not just (PY/M), or income velocity, Vi, but Irving Fisher’s transactions velocity of circulation, Vt. Thereby M2 was substituted for M1. However, “broad money” substitute measures (vs. “narrow money” or “near money”), or highly liquid assets, “additional variables which do not accurately measure the opportunity cost of holding money”, conflate STOCK with FLOW.

The rapid pace of financial innovation was “validated” by monetary policy, and déjà vu, predictably precipitated the GFC. Economists haven’t found their “missing money”, viz., “the search for a stable money demand function goes on”.

“The recent instability of the money demand function calls into question whether our theories and empirical analyses are adequate. It also has important implications for the way monetary policy should be conducted because it casts doubt on the usefulness of the money demand function as a tool to provide guidance to policymakers. In particular, because the money demand function has become unstable, velocity is now harder to predict, setting rigid money supply targets in order to control aggregate spending in the economy may not be an effective way to conduct monetary policy.”

Note2 aside: The Treasury’s General Fund account has increasingly become a policy lever. Whereas FED-wire transactions were once uncorrelated nettings / settlements prior to the GFC, they have become increasingly an economic modeling variable, a plug in “missing money”.

Note3 aside: It is inaccurate (for the cataloguer of economic statistics) to exclude the Treasury’s General Fund Account from the assets included in M1 (with the exception of WWII). No one has established any unique price effect of federal outlays, as compared to state and local government outlays, or expenditures by the private sector. Of course, the shifting of funds to and out of the Federal Reserve banks has a dollar for dollar effect on member bank reserves, but that is another problem that can be, and is dealt with through open market operations.

-- Michel de Nostredame

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QE = "crowding in".  QT = "crowding out" squared.

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A Flawed Monetary Transmission Mechanism

Summary

•Interest is the price of loan-funds.

•The price of money is the reciprocal of the price-level.

•Keynes' "liquidity preference curve" is a false narrative.

1.Thrust is applying a robust force.

“In economics, robustness is the ability of a financial trading system to remain effective under different markets and different market conditions, or the ability ofan economic model to remain valid under different assumptions, parameters and initial conditions.”
1.A governor, a credit controldevice, restricts a force.

A restrictive monetary policy is when the Federal Reserve slows economic growth by restricting the growth of money and credit (not demarcated by a change in interest rates).

Herbie Hancock’s Man-Child should have been called Thrust. That’s they rhythm that propelled us during “all nighters” in college. Or maybe Grover Washington Jr. - Mister Magic

herbie handcock man child - Bing video

mr majic jazz - Bing video

--------------

Given no change in the Fed’s policy rate, it’s monetary transmission mechanism (interest rate manipulation), economic activity should remain unfettered, impervious to any disequilibria, any volatility, as measured by any outsized deviationin CBOE Volatility Index (^VIX).

According to Wikipedia, “VIXrepresents: a colloquially referred to as the fear index or thefear gauge.”

What is the one truistic policy instrument, the one that is responsive, predictable and impactful? May 7th 2018 will become documentary proof. Any equity decline prior to Mondaymight parallel “Black Monday”. The newspeak is now catching up to the prior economic deceleration.

Whereas using a price mechanism (pegging interest rates), to ration Fed credit is non-sense. The effect of current open market operations on interest rates(now via the remuneration rate), is indirect, varies widely over time, and in magnitude.

The Fed has capriciously emasculatedit’s “open market power”, its sovereign right to create new money and credit: at once and ex-nihilo (by remunerating IBDDs). Unlike Treasury issuance, because the belligerent bifurcation [themis-aligned distribution of sales and purchases of debt by the FRB-NY’s trading desk and its counter-parties] is largely unpredictable, so too now is the volume and rate of expansion in the money stock on even a quarter-to-quarter basis. FOMC policy has now been undermined by turning excess reserves into bank earning assets (a monetary policy blunder that prevented a V recovery). The BOG has inadvertently thereby eviscerated all semblance of a“money multiplier.

And the money multiplier is predicated on the assumption that the commercial banks will immediately buy some type of earning asset with their “Manna from Heaven”, IBDDs. This they always did between 1942 and Oct. 6, 2008’s enactment.

But by mid-1995 (a deliberate and misguided policy change by Alan Greenspan), legal (fractional) reserves ceased to be binding– as increasing levels of vault cash/larger ATM networks, retail deposit sweep programs (c. 1994), fewer applicable deposit classifications (including allocating "low-reserve tranche" & "reservable liabilities exemption amounts" c. 1982) & lower reserve ratios (requirements dropping by 40 percent c. 1990-91), & reserve simplification procedures (c. 2012), combined to remove reserve, & reserve ratio, restrictions.

See the pundit Dr. George Selgin: “I myself don't oppose IOR as a means for limiting the implicit reserve requirement tax [sic]. IBDDs, reserves: excess, borrowed, non-borrowed, required, etc. are not a tax, they are “Manna from Heaven”, costless viz., a “helicopter drop”.

Interest on Excess Reserves: The Hobie Cat Effect - Alt-M

Past Chairman Paul Volcker thought the member banks should be paid interest on reserves "based on rounds of equity” - WSJ 1983. No joke.

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 creatingnew inter-bank demand deposits. The U.S. Treasury recaptures about 98% of the net income from these assets (prior to remunerating IBDDs). The commercial banks acquire “free” legal reserves, yet the bankers complained that they didn't earn any interest on their clearing balances at their District Reserve Banks.

On thebasis 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 earningassets through credit creation.

See SA contributor: “Bank Reserves and Loans: The Fed Is Pushing On A String” - Charles Hugh Smith

Bank Reserves And Loans: The Fed Is Pushing On A String

See: “Quantitative Easing and Money Growth: Potential for Higher Inflation” – FRB-STL’s Dr. Daniel L. Thornton, Vice President and Economic Adviser

bit.ly/2viavlS

And there never has been any mention in the FOMC’s deliberations concerning money velocity.

What the net expansion of new money will be, as a consequence of a given change in policy rates, nobody knows until long after the fact. The consequence is a delayed, remote, & quasi-control over the lending and money-creating capacity of the banking system.

Economists should have learned the falsity of that assumption in the Dec. 1941-Mar. 1951 period. That was what the Treas. – Fed. Res. Accord of Mar. 1951 was all about.

Net changes in Reserve Bank credit (since the 1951 Treasury-Reserve Accord) are predetermined by the policy actions of the Federal Reserve. Note: the Continental Illinois bank bailout provides a spectacular example of William McChesney Martin Jr.’s “bartending”.

Reserve targeting worked well until Chairman Martin abandoned theFOMC’s net free, or net borrowed, reserve targeting position approach in favor of the Federal Funds “bracket racket” (a corridor system) beginning in c. 1965 (coinciding with the rise in chronic monetary inflation & in anticipated inflation).

Net changes in Reserve Bank credit (since the 1951 Treasury-Reserve Accord) were previously determined by the policy actions of the Federal Reserve. In other words the Fed allowed the commercial bankersto change their own operating procedure, and usurp their power to regulate properly, our money stock. I.e., the FRB-NY’s “trading desk” accommodated all requests at the pegged policy rate.

That is, additional & costless excess reserves were made available to the banking system whenever the bankers and their customerssaw an advantage in expanding loans. As long as it is profitable for borrowers to borrow and commercial banks to lend, money creation is not self-regulatory. This observation would be valid even though the Fed did not use the federal funds device as a guide to open market operations. The Fed has always been motivated by an overwhelming desire to accommodate bankers and their borrowing customers. If private profit institutions are to be allowedthe "sovereign right" to create money, they must be severely regulated in the management of both their assets and their liabilities.

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 increased, and vice versa during downswings, e.g., Bernanke’s preliminary response to the onslaught of the GR (credit easing, not quantitative easing). I.e., during upswings, the pressure is on the top side of the Fed’s plug.

Since the member banks had no excess reserves of significance (between 1942 and Oct 6 2008), the banks had to acquire additional reserves to support the expansion of deposits, resulting from their loan expansion. If they used the Fed Funds bracket (which was typical), the rate was bid up & the Fed responded by putting though buy orders, reserves were increased, & soon a multiple volume of money was created on the basis of any given increase in legal reserves. This combined with the rapidly increasing transaction velocity of demand deposits resulted in a further upward pressure on prices. This is the process by which the Fed financed the rampant real-estate speculation that characterized the 70's.

The fed cannot control interest rates during an economic expansion, even in the short end of the market, except temporarily. And by attempting to slow the rise in a policy rate, the fed will pump an excessive volume of legal reserves into the member banks. This will fuel a multiple expansion in the money supply, increase money flows - & generate higher rates of inflation —& higher interest rates, including policy rates.


Paul Meek (FRB-NY assistant V.P. of OMOs and Treasury issues), stated objective in his 3rd edition of “Open Market Operations” published in 1974: of “gauging the general availability of non-borrowed (interbank) reserves in the commercial banking system (which incidentally predates Paul Volcker’s experimental and rhetorically couched approach in Oct 1979).

Meek described how the FRB-NY's "trading desk's" used repurchase agreements (and reverse repurchase agreements), to smooth the level of "non-borrowed" reserves.

But history was re-written (and Dr. Richard Anderson fudged the reconstruction of legal reserves, many times the Fed does not keepthe initial iterations). Paul Volcker told Congress:

"He advised the congressmen to watch the non-borrowed reserves -- "Watch what we do on our own initiative." The Chairman further added --- "Relatively large borrowing (by the banks from the Fed) exertsa lot of restraint" [sic].

Paul Volcker targeted non-borrowed reserves when at times 10 percent of all reserves were borrowed.One dollar of borrowed reserves provided the same legal-economic base for the expansion of money as one dollar of non-borrowed reserves. The fact that advances had to be repaid in 15 days wasimmaterial. A new advance could be obtained, or the borrowing bank replaced by other borrowing banks. That's before the discount rate was made a penalty rate on 1/2003 (a penalty rate is one where the Fed fights inflation - not deflation, which was what the GFC was all about). I.e., Walter Bagehot's dictum should not have applied to the GFC. And the fed funds "bracket racket" was simply widened, not eliminated. Monetarism has never been tried.

See also: Lawrence K. Roos, Past President, Federal Reserve Bank of St. Louis & past member of the FOMC (the policy arm of theFed) as cited in the WSJ April 10, 1986 "...I do not believe that the control of money growth ever became the primary priority of the Fed. I think that there was always & still is, a preoccupation with stabilization of interest rates".

By using the wrongcriteria (interest rates, rather than member bank legal reserves) in formulating and executing monetary policy, the Federal Reserve will invariably continue to be behind any: “supply and demand for money” curve. Why? Because interest is the price of loan-funds (what the free markets dictate), the price of money is thereciprocal of the price level (the Fed’s bailiwick).

See again, George Selgin: The Hobie Cat effect can be illustrated formally using a diagram showing the supply of and demand for bank reserves or federal funds under a floor system. The supply schedule for federal funds is, as usual, a vertical line, the position ofwhich varies with changes in the size of the Fed’s balance sheet. The reserve demand schedule, on the other hand, slopes downward, but only until it reaches the going IOER rate, here initially assumed to be set at 25 basis points. At that point the demandschedule becomes horizontal, because banks would rather accumulate excess reserves that yield the IOER rate than lend reserves overnight for an even lower return.

For the initial stock of reserves R(1), starting at the equilibrium point “a,” a slight reduction in the IOER rate would suffice to get the banking system back onto the sloped part of its reserve demand schedule, at point “b,” where reserves are again scarce at the margin. But once the stock of reserves has increased to R(2), it takes a much more substantial reduction in the IOER rate — perhaps, as the move in the illustration from “c” to “d” suggests, even into negativeterritory — to make reserves scarce at the margin again, and tothereby make switching to a corridor system, by a modest further reduction in the IOER rate, possible without any need for central bank asset sales.

Interest on Excess Reserves: The Hobie Cat Effect - Alt-M

There is "no fool in the shower". Interest isthe price of loan funds. The price of money is the reciprocal of the price level.

Friedman conflated stock with flow. From Carol A. Ledenham’s Hoover Institution archives): Friedman 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.

Since time depositsoriginate within the banking system, there cannot be an “inflow” of time deposits and the growth of time deposits cannot per seincrease the size of the banking system.

George Selgin (who just testified before Congress) said:

“None of this would matterif the Fed acted as an efficient savings-investment intermediary, as commercial banks are able to do, at least in principle.” And: “This is nonsense, Spencer. It amounts to saying that there is no such things as 'financial intermediation,' for what you claim never happens is precisely what that expression refers to."

Or take Martin Wolf, chief economics commentator at the Financial Times writing in his book: “Charles Goodhart of the London School of Economics, doyen of British analysts of finance, responds to such suggestions as follows:

A problem with proposals ofthis kind is that they run counter to the revealed preferences of savers for financial products that are both liquid and safe, and of borrowers for loans that do not have to be repaid until some known future distant date. It is one of the main functions of financial institutions to intermediate between the desires of savers and borrowers, i.e., to create financial mismatch, to make such a function illegal seems draconian."

Take Daniel Thornton:
Re my comment: “Savings are not a source of "financing" for the commercial bankers”
Dr. Dan Thornton’s response:
Thu 3/9, 2:47 PMYou
See the graph below.
Large Time Deposits, All Commercial Banks

No, savings never equals investment. Take the “Marshmallow Test”: (1) banks create new money (macro-economics), andincongruously (2) banks loan out the savings that are placed with them (micro-economics).

Not only are the Fed's econometric models wrong, but their macroeconomic concepts reflect this. These McCarthyites have learned their catechisms, that there is no difference between money and liquid assets (the Gurley-Shaw thesis).

You will soon see the difference.

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Is the FRB-NY just pegging interest rates? or is it managing the Treasury debt market, by a QT / twisting of the yield curve, by shifting total reserves, precautionary reserves, excess reserves, surplus reserves, borrowed reserves, free reserves, required reserves, all “end-of-day averaged” computational period, or “averaged” maintenance period deposits, ad nauseam? Is it the remuneration of IBDDs that determines -- R * ?

Or is the Fed surreptitiously managing the predictability of the “demand for reserve balances” a Central Bank’s reserve regime; or is it the bankster’s usurping (always and everywhere synonymous with the American Bankers Association), of the Fed’s “open market power”, of the level of commercial banker’s “demanded reserves”, the bidding for, and accommodation of, the banker’s need for excess clearing balances whenever and wherever banksters seek a bankable opportunity to exploit as prearranged and conveniently funded for any reason, at any volume, via the pegged policy rate level, or even at a penalty or Lombard rate?

Using a price mechanism (interest rates as a monetary transmission mechanism), to ration Fed credit is non-sense. Interest is the price of loan-funds (a free market clearing rate). The price of money is the reciprocal of the price-level (the Fed’s bailiwick).

Milton Friedman: "First of all, the question is, Why do we look only at the money stock? Why don’t we also look at interest rates? Don’t you have to look at both quantity and price? The answer is yes, but the interest rate is not the price of money in the sense of the money stock. The interest rate is the price of credit. The price of money is how much goods and services you have to give up to get a dollar. You can have big changes in the quantity of money without any changes in credit." -- NYU debate in 1968 between Walter Heller and Milton Friedman

How does the trading desk know whether there is a shortage or surplus of reserves? How does the trading desk know how reserves are properly distributed, and not skewed, within the payment’s system. One size fits all?

Reserve balances aren’t defined so as to just exist as a liability on the Central Bank’s balance sheet. Applied vault cash, which speciously began to count in 1959 (which confuses voluntary liquidity reserves with a credit control device, legal reserves), represented c. 34 of complicit reserves in April 2018 (not “agreed to” reserves).

Is the Fed micro-managing individual liquidity, an idiosyncratic adverse balance of payments, or solvency, or bank credit creation? Isn’t that the function of bank capital or the LCR? Who in Congress is driving regulatory changes?

There is no “de minimis” level. Are RRRs tethered to reservable liabilities? Are the banks’ reserve constrained, i.e., “e-bound”? And there is no reason for differential reserve requirements in the first place. Banks don’t just create credit through transaction deposits. That perverse "monetary policy accommodation" (William Dudley's fedspeak) simply allows for reserve avoidance, e.g., sweep accounts, etc., and therefore the instability of changes to money velocity.

The only tool at the disposal of the monetary authority in a free capitalistic system through which the volume of money can be controlled is legal reserves. The first rule of legal, or complicit reserves and reserve ratios should be to require that all deposit taking, money creating financial institutions, DFIs, have the same legal reserve requirements, both as to types of assets eligible for reserves, as well as the level of reserve ratios.

Monetary policy should delimit all reserves to balances in their District Reserve bank (IBDDs, like the ECB), and have uniform reserve ratios, for all deposits, in all banks, irrespective of size (something Nobel Laureate Dr. Milton Friedman advocated, December 16, 1959).

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Houston, we have a big problem. There’s a difference between money and liquid assets (the manufacture of highly liquid short-term claims, or near money substitutes).

“The term credit crunch had its origins in the unusually tight credit conditions that prevailed in the U.S. in the late summer of 1966, when reports of borrowers unable to obtain credit at any price were commonplace. Prior to 1966, the postwar U.S. experienced 3 periods of tight credit; the spring of 1953; the fall of 1957; and the last third of 1959. These periods were called “credit squeezes” or “credit pinches”. Sidney Homer and Henry Kaufman, economists at Salomon Brothers in the 1960’s, coined the term “crunch” to describe how the 1966 episode differed from those in the 1950’s. Although Homer and Kaufman did not formally define a crunch, Homer (1966) offered the following explanation:

The words squeeze or pinch have gentle connotations. The prehensile male sometimes “squeezes” or “pinches”, with the most affectionate intentions. No bruises need result, no pain need be inflicted. A “crunch” is different. It is painful by definition, and it can even break bones.”

-- “Identifying Credit Crunches” by Raymond E. Owens and Stacey L. Schreft. Federal Reserve Bank of Richmond, March 1993.

Ben Bernanke, i.e., Bankrupt-u-Bernanke (who should be in Federal Prison), still doesn’t know the differences. See: Ben S. Bernanke, Princeton University, Cara S. Lown, Federal Reserve Bank of New York: “The Credit Crunch”.

Published in June 1980 – Dr. Leland James Pritchard: BA, Political Science, MS, Statistics -Syracuse, Ph.D. Economics -Chicago, 1933 (a man 30 times smarter than Albert Einstein).

Professor emeritus Pritchard never minced his words, and in May 1980 pontificated that:

“The Depository Institutions Monetary Control Act will have a pronounced effect in reducing money velocity”.

“The DIDMCA became law on March 31st, 1980. Considering the paucity and nature of the comments in the financial press, the revolution and disastrous implications of this Act clearly are not recognized. The Act created the legal framework for the addition of 38,000 more commercial banks to the 14,000 we already had, and in the process, the abolition of 38,000 intermediary financial institutions. The intermediary financial institutions effected were the nation's savings and loan associations, mutual savings banks, and credit unions. Trust companies and stock savings banks have been commercial banks for many years.”

“One of the principal purposes of the Act was to provide the housing industry with a reliable source of funds. That may be achieved through various governmental and quasi-governmental corporations. But the role of the S&Ls in housing finance will probably diminish significantly.

By becoming commercial banks and having a larger spectrum of loans to choose from, the S&Ls will act like banks and whenever possible eschew “borrowing short and lending long”

“In due course, under this Act, our means-of-payment money supply (now designated as M1A by the Board of Governors) will approximate M-3.”

The S&L crisis and the GFC were therefore inevitable. And thus stagflation is inevitable.

BuB “Money is fungible”…“One dollar is like any other”, pg. 357 in "The Courage to Act"

Obviously, by their blatant admission, present day economists don't know money from mud pie.

[flow5]

Steve Keen knows a credit from a debit.

bit.ly/2GXddnC (at end of article)

"Banks don’t “intermediate loans”, they “originate loans”.

"The fallacy in their thinking is easily demonstrated by looking at the two types of lending – from one non-bank agent to another (Loanable Funds or LF) and by a bank to a non-bank (Bank Originated Money or BOM as an accountant might call it)."

Keen: "A 'Loanable Funds' loan simply shuffles existing money from one person’s bank account to another: no new money is created (row 1 in Table 2). A “Bank Originated Money” loan creates a new asset for the Bank, and creates new money as well – which the recipient then spends."

Lending by the commercial banks is inflationary (increases both the volume and turnover of new money). Lending by the non-banks is non-inflationary, other things equal (results in the transfer of title to existing bank deposits within the payment’s system, a velocity, Vt, relationship).

From the standpoint of the payment’s system, the source of time/savings accounts is demand deposits, directly or indirectly via the currency route (never more than a short-run situation), or through the DFI’s undivided profits accounts. Consequently the expansion of savings-investment accounts, per se, adds nothing to total bank liabilities, assets, or earnings assets. Therefore the expansion of monetary savings, bank-held savings, adds nothing to N- gDp.

See Philip George: “The riddle of money, finally solved”

bit.ly/2u3xiBV

Commercial banks pay for their new earning assets with new money.

A theoretical explanation was advanced in 1961 to support this conclusion. It was based upon the following assumptions:

(1) That monetary policy has as an objective a certain level of spending for N-gDp (sound familiar?, viz., N-gDp targeting?), and that a growth in time/savings deposit classifications will not, per se, alter this objective. And that a shift from demand to time deposits will also not, per se, alter this objective;
(2) That a shift from demand to time deposits involves a decrease in the demand for money balances and that this shift will be reflected in an offsetting increase in the velocity of money.
(3) To prevent the increase in Vt from altering the desired level of spending for N-gDp, it is necessary for the FRB-NY trading desk to prevent the diminished money supply brought about by the shift from demand to time deposits from being replenished through an expansion of bank credit;
(4) To prevent the expansion of bank credit requires that the trading desk “mop up” al excess reserves created by the shift from demand to time deposit classifications.

As hypothesized: It seems quite probable that the growth of time deposits shrinks aggregate demand and therefore produces adverse effects on N-gDp. I.e., it seems highly improbable, and in contradiction to Professor Chandler’s theoretical analysis: that the stoppage in the flow of these funds is entirely compensated for by an increased velocity of the remaining demand deposits.

I.e., all monetary savings, commercial bank-held savings, are from a macro-accounting perspective, un-used and un-spent, lost to both consumption and investment, indeed to any type of payment or expenditure.

Take the “Marshmallow Test”: (1) banks create new money (macro-economics), and incongruously (2) banks loan out the savings that are placed with them (micro-economics).

As professor Lester V. Chandler originally theorized back in 1961, viz., that in the beginning: “a shift from demand to time/savings accounts involves a decrease in the demand for money balances, and that this shift will be reflected in an offsetting increase in the velocity of money”.

His conjecture was correct up until 1981 – up until the saturation of financial innovation for commercial bank deposit accounts I.e., the saturation of DD Vt according to Marshall D. Ketchum (Professor at the Chicago School):

"It seems to be quite obvious that over time the “demand for money” cannot continue to shift to the left as people buildup their savings deposits; if it did, the time would come when there would be no demand for money at all”

Thus, as Dr. Leland J. Pritchard, Ph.D. Chicago - Economics, M.S Statistics, Syracuse predicted after the passage of (1) the DIDMCA of March 31st 1980, i.e., coinciding with his prediction of the (2) "time bomb", the widespread introduction of ATS, NOW, & MMDA accounts, that money velocity had reached a permanently high plateau.

Professor emeritus Pritchard never minced his words, and in May 1980 pontificated that:

“The Depository Institutions Monetary Control Act will have a pronounced effect in reducing money velocity”.

This is the direct and sole cause of both secular strangulation and stagflation (business stagnation accompanied by inflation).

All savings originate within the payment’s system. Saver-holders never transfer their funds outside the payment’s system, unless they hoard currency, or convert to other national currencies, e.g., DFI, direct foreign investment. The source of commercial bank time/savings deposit accounts, is other bank accounts, originally non-interest-bearing demand deposits, directly or indirectly via the currency route (never more than a short-run situation), or through the DFI's undivided profits accounts.

The DFI’s time / savings deposits, e.g., negotiable CDs, rather than being a source of loan funds for the payment’s system, are the indirect consequence of prior bank credit creation. And the source of bank deposits (loans + investments = deposits, not the other way around), can be largely accounted for by the expansion of Reserve bank credit. That there is a close connection between aggregate bank credit and the aggregate volume of bank deposits can be verified by comparing the net changes in commercial bank credit to the net changes in total deposits for any given time period (R. Alton Gilbert was dimensionally confused).

When DFIs grant loans to, or purchase securities from, the non-bank public, they acquire title to earning assets by initially paying for them, by the creation, simultaneously and ex-nihilo, of an equal volume of new money - demand deposits -- somewhere in the payment’s system. For the payment’s system, the whole is not the sum of its parts in the money creating process.

Net changes in Reserve Bank Credit since the Treasury-Reserve Accord of March 1951 are determined by the FOMC.

Critically, the only way to activate voluntary savings (income not spent), is for the saver-holder to invest directly or indirectly, intermediated through, a non-bank conduit.

*Intermediated through* means that funds exchange counter parties, within the payment’s system, as no funds are ever extracted.

“Crunch time” is simply a macro-accounting error. The NBFIs are not in competition with the DFIs. The NBFIs are the DFI’s customers. Savings flowing through the non-banks never leaves the payment’s system (where all savings originate). There is simply an exchange, a transfer of title between counter-parties, to existing DFI liabilities, a money velocity relationship occurring within the payment’s system.

Paradoxically, this is somewhat like the physics principle of SUPERPOSITION:

“The general principle of superposition of quantum mechanics applies to the states [that are theoretically possible without mutual interference or contradiction] ... of any one dynamical system…”that every quantum state can be represented as a sum of two or more other distinct states.”

The capacity of a single bank to create credit as a consequence of a given primary deposit is identical to a financial intermediary. L = S (1-s). The superposition is that all primary deposits are actually derivative deposits from the system’s belvedere.

In other words, there is an increase in the supply of loan-funds, but no change in the money stock, a velocity relationship, where savings are matched with investments (a non-inflationary relationship). This process is the exact opposite of stagflation.

Unless savings are activated, put back to work, a dampening economic impact, a deceleration in money velocity, is engendered and metastases, resulting in secular strangulation. This is the source of the pervasive error that characterizes all developed countries slower growth rates.

The expiration of the FDIC's unlimited transaction deposit insurance in December 2012 is prima facie evidence, i.e., created the infamous "taper tantrum". Hence my “market zinger” forecast, a "predictive success”.

As Leland J. Pritchard, Ph.D., Economics, Chicago 1933, MS, Statistics Syracuse, predicted:

“Savings require prompt utilization if the circuit flow of funds is to be maintained and deflationary effects avoided”…”The growth of commercial bank-held time “savings” deposits shrinks aggregate demand and therefore produces adverse effects on gDp”…”The stoppage in the flow of funds, which is an inexorable part of time-deposit banking, would tend to have a longer-term debilitating effect on demands, particularly the demands for capital goods.” Circa 1960

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Monetarism involves a lot of procedures and regulations involved in controlling the aggregates. For example, the Treasury’s General Fund account should be included in our means-of-payment money.

Responsible monetary policy requires that the Fed control the volume and rate of expansion of our means-of-payment money supply. This is accomplished through control over the volume and rate of expansion of commercial and Reserve Bank credit. At no time and in no way should the commercial bankers decide these matters. As long as it is profitable for borrowers to borrow, and commercial banks to lend, money creation is not self-regulatory.

The volume of bank credit is a necessary component of the monetary control apparatus since any expansion of commercial bank credit involving loans to, or purchase of securities from, the nonbank public results initially in a concomitant expansion the money stock. In the control of these aggregates the monetary authorities are completely dependent on their power to control the volume of bank credit, they have no power over the volume of the Treasury’s General Fund Account or the currency holdings of the public.

The sine qua non of monetary management is total current control by a central monetary authority over the volume of legal reserves held by all deposit taking, money creating, financial institutions, and over the reserve ratios (the maximum allowable ratio of bank deposits to the volume of legal reserves held) applicable to their deposits.

And if the discount window is properly administered, advances would only be made to meet emergency outflows of funds from the applicant banks. And the Fed should never use a price mechanism, rate caps, to ration Fed credit.

Liquidity reserves (demands for cash and payments), shouldn’t be confused with legal reserves (a credit control device). Deposit classification for reserve ratio purposes is based on the false premise that the purpose of legal reserves is to provide bank liquidity.

The reserve assets that all money creating institutions are required to hold should be of a type the monetary authorities can quickly ascertain and absolutely control. The only type of bank asset that fulfills this requirement is inter-bank demand deposits, IBDDs, in the District Reserve Banks owned by the member banks (like the ECB). This was the original definition of the legal reserves of member banks beginning in 1917, under the Federal Reserve Act of Dec. 23, 1913 –(Owen-Glass Act) and it is still the only viable definition (pre-Dec 1959 requirements pertaining to assets).

“Pass-through” accounts should be excluded. The amount of deposits these respondent banks keep in their member correspondents for payment clearing and other services is much greater that the amount needed to meet their legal reserve requirements.

There is no reason for differential reserve requirements. Size and deposit classifications should be abolished. All DFIs should have the same reserve ratio and reserve asset requirements. Reserve ratios should be uniform, for all deposits, in all banks, irrespective of size (something Nobel Laureate Dr. Milton Friedman also advocated, December 16, 1959).

The Board of Governors should have exclusive reserve ratio powers over all DFIs. The payment of interest on deposits should be illegal. Reserve requirements should be calculated on a current basis, not a lagged basis.

Monetary policy objectives should be formulated in terms of desired and probable rates-of-change, RoC's, in monetary flows, M*Vt, volume X’s velocity, relative to RoC's in R-gDp rather than simply the stock of money.

The money stock, and thereby money flows, can never be managed by any attempt to control the cost of credit. Interest, as our common sense tells us, is the price of obtaining loan funds, not the price of money. The price of money is the inverse of the price level. If the price of goods and services rises, the “price” of money falls. Interest rates in any given market at any given time are the result of the interaction of all the forces operating through the supply of and the demand for, loan funds

Loan funds, of course, are in the form of money, but there the similarity ends. Loan funds at any given time are only a fraction of the money stock -- that small part of the money stock which has been saved, and is offered in the loan credit markets.

While interest rates are not determined by the supply of and the demand for money, changes in the volume of money and money flows can alter rates of inflation and, therefore, the supply of and the demand for loan funds…

Using interest rates as a monetary transmission mechanism is therefore incongruous. And R * doesn't / can’t exist. R * is idiosyncratic.

We are left with two ways, other than amending the laws, to bring money creation under control: (1) a financial collapse such as in 1932-33, or (2) a government controlled system of money creation – and credit allocation.

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It's political, not economic. It's the American Bankers Associations' fault (a true and unknown, clandestine conspiracy theory, a coldly calculated stagflation plot). The Ph.Ds. on the Fed’s technical staff have gone from Keynes’ Liquidity Preference Curve (that there is no difference between money and liquid assets) to today’s R *. Neither exists. The money stock can never be properly managed by any attempt to control the cost of credit. We should have learned the falsity of that assumption from the 1951 Treasury-Federal Reserve Accord.

The Maginot Line was drawn in 1965, when the Banksters, jealous of the MSB’s, CU’s, and S&L’s growth since WWII, seeking to get a bigger piece of the “loan-pie”, forced, i.e., in legislative terms, literally lobbied and paid for, the BOG and FDIC to raise Reg. Q ceilings in December (the power to fix the maximum interest rates member banks can pay on time deposits at any level the BOG deemed appropriate), which created the first “credit crunch” (a lack of funds rather than the cost of funds).

Prior to July 20, 1966, the non-banking financial institutions, or thrifts, i.e., before the DIDMCA of March 31st 1980; who put savings back to work in real investment outlets, were entirely un-regulated (since the 1933 Glass-Steagall Act).

I.e., in December 1965, the American Bankers Association obliterated the U.S. Golden Era in economics.

Then on March 31st 1980 Congress, at the behest of Ron Chernow’s “Go-For-Broke Banksters” laid the legal framework for the addition of 38,000 more commercial banks to the 14,000 we already had, and in the process, the abolition of 38,000 intermediary financial institutions. The intermediary financial institutions effected were the nation's S&Ls, MSBs and CUs. That legislation caused both (1) the S&L crisis, “the failure of 1,043 out of the 3,234 savings and loan associations in the United States from 1986 to 1995” and (2) the July 1990 - March 1991 recession (another “credit crunch”). This caused the RoC in bank debits, on the Fed’s G.6 Debit and Demand Deposit Turnover release, to contract (< zero) for the first time since the Great Depression.

Then Bankrupt-u-Bernanke, whose Ph.D. dissertation was on the causes of the Great Depression: “Long-Term Commitments, Dynamic Optimization, and the Business Cycle”, destroyed America (caused the Federal Deficit to double), by (1) contracting long-term monetary flows, volume X’s velocity for 29 contiguous months (< than zero), just like the contraction in monetary flows from period March 1930 -> April 1934, and (2) remunerating IBDDs (causing another credit crunch, where the size of the non-banks ).

This Romulan cloaking device vastly exceeded the level of short term interest rates which is still illegal.

See: "The 2006 Financial Services Regulatory Relief Act gives the Fed permission to pay interest on reserves. The IOR rate was always higher than "the general level of short-term interest rates" which is imposed in the Law. "A Legal Barrier to Higher Interest Rates," The Wall Street Journal, Sept. 28, p. A13.

The resultant dis-intermediation for the NBFIs (where the size of the NBFIs shrank by $6.2T), an outflow funds or negative cash flow, left the DFIs unaffected (the size of the DFIs grew by $3.6T), and thus exacerbated the depth and duration of the GFC. I.e., since Roosevelt’s 1933 Banking Act, dis-intermediation is a term that only applies to the non-banks.