There is something in this more than natural - Hamlet

[flow5]

The Distributed Lag Effect: {M*Vt}

Summary

* Go inquire, and so will I, where the money is - The Merchant of Venice.

* Money along sets all the world in motion - Publilius Syrus (c. 42 B.C.).

* If money go before, all ways do lie open - The Merry Wives of Windsor.

Rates-of-change in monetary flows, volume X's velocity = RoC's in P*T in American Yale Professor Irving Fisher's truistic: "equation of exchange" [where R-gDp, inflation, and N-gDp are subsets or proxies]. Whereas, the Fed’s monetary transmission mechanism, as epitomized by Keynes' "Liquidity Preference Curve" [demand-for-money], is a False Doctrine.

Interest is the price of loan-funds [the free market’s deterministic clearing rate]. The price of money is the reciprocal of the generalized price-level [the FRB_NY’s “trading desks” bailiwick].

The Fed’s dismal record: what cost one dollar bill in 1913, today costs $25.57.

Inflation, accompanied by term premiums, is the most destructive force capitalism encounters. Responsible monetary policy can never be achievable when our money stock is managed by attempts, incongruous stair-stepping and cascading pegs, i.e., a price mechanism, to control the cost of credit.

Using R * as the Fed’s monetary transmission channel is thus non sequitur. It defiles and desecrates the tenets of monetarism. The Ph.Ds. on the Fed’s research staff, as Chicago School’s Jacob Viner famously exclaimed: "don't belong in this economic class".

Professor Irving Fisher's transaction's concept of money velocity 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 circulation or M*Vt.

It is self-evident from the equation that an increase in the volume, and/or velocity of money, will cause a rise in unit prices, if the volume of transactions increases less, and vice versa.

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

In contradistinction, the mainstream Keynesian-economic variant, income velocity or Vi, which is a contrived figure, is calculated by dividing N-gDp for a given period, by the average volume of the money stock (M1, M2, & MZM), for the same period (viz., make believe / contrived). A decline in the income velocity of money (like during the Great-Recession), is supposed to suggest that the Fed initiate an expansive, or less contractive, monetary policy.

This signal could be right - by sheer accident. I.e., the historical trend of Vt vs. Vi, at various intervals, moved in absolutely divergent paths - giving the income velocity economists false signposts.

The theoretical bias and confusion is compounded, as Nobel Laureates Dr. Milton Friedman’s and Dr. Anna J. Schwartz’s: “A Monetary History of the United States", 1867–1960, claimed that money has long and variable leads and lags. Not so, the distributed lag effects for monetary flows have been mathematical constants > 100 years, therefore the equation of exchange’s *time periods* become accurately demarcated and conterminously, positively synchronized.

Economists’ quest for answers, linking flows to output, as personified in the maestro Alan Greenspan’s “The Map and the Territory; Risk, Human Nature, and the Future of Forecasting”:

(1) “But leading up to the almost universally unanticipated crisis of September 2008, macro-modeling unequivocally failed when it was needed most, much to the chagrin of the economics profession. The Federal Reserve Board’s highly sophisticated forecasting system did not foresee a recession until the crisis hit. Nor did the model developed by the prestigious International Monetary Fund…”
(2) “JPMorgan, arguably America’s premier financial institution projected on September 12, 2008 –three days before the crisis hit—that the U.S. GDP growth rate would be accelerating into the first half of 2009.”
The Maestro chalked up these errors to Keynes’ quirky “Animal Spirits”.

As I boasted in July 2007: “I need no disclaimer”.

The rate-of-change in the proxy for real-gDp (monetary flows: M*Vt) peaks in July. The rate of change in the proxy for inflation (monetary flows: M*Vt) peaks in July. Therefore it should be obvious: interest rates peak in July.

Because interest rates top in July, the exchange value of the dollar should resume its decline. A very good time to buy gold!

The “Holy Grail” has no disclaimer.

Posted by flow5 at 7:50 AM on 06/29/07
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No, we even knew the "Minsky Moment":

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
01/1/2008,,,,,,, 0.59,,,,,,, 0.06
02/1/2008,,,,,,, 0.45,,,,,,, 0.10
03/1/2008,,,,,,, 0.06,,,,,,, 0.04
04/1/2008,,,,,,, 0.04,,,,,,, 0.02
05/1/2008,,,,,,, 0.09,,,,,,, 0.04
06/1/2008,,,,,,, 0.20,,,,,,, 0.05
07/1/2008,,,,,,, 0.32,,,,,,, 0.10
08/1/2008,,,,,,, 0.15,,,,,,, 0.05
09/1/2008,,,,,,, 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.

Debating knuckleheads is tiresome.

The Maestro:

(3) “What constitutes money, or more exactly, a universal transaction balance, has been far more elusive”…”I tested a number of choices for money supply and even a number of debt instruments as a substitute for money.”…”The closeness of fit of unit M2 and price over the decades is impressive.”…”But starting in the late 1980’s, unit M2 seemed to have lost its closeness of fit to the price level”…”The breakdown of M2 spawned a flurry of analyses”.
(4) ”Money supply, of course, does not directly translate into price.”...“The ratio of price to unit money supply is the virtual algebraic equivalent of what economists call money velocity, the ratio of nominal GDP to M2”…”The greater the degree of inflationary pressure, the more likely people will be to accelerate their turnover of transaction balances; the higher the interest rate or rate of return on equity, the more likely people are to hold income-earning assets in lieu of cash, thereby reducing M2 and raising money velocity."
(5) "Combining these determinants of money turnover with money itself portrays an even closer historical fit to the general price level. Thus, in summary, money supply is by far the dominant determinant of price over the long run but in the short run, other variables are important as well.”

Recognizing the difficulty in explaining income velocity, the Maestro calculates his own proprietary velocity metric, pg. 342 (not necessarily clarifying). Relative to other forecasters, I will give the Maestro high marks for his rigorous empirical approach.
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While GDP is calculated on final products, or different dimensions, and is tabulated in quarters, or different intervals, and is Seasonally mal-adjusted, and also subject to disparate measurement slippages, there is nonetheless a recognizable fit or symmetry in Fisher's equation: M*Vt = P*T [ i.e., when the pundits are expecting disparity ]

Using a rate-of-change, in the flow of funds, for real variables:

01/1/2017 ,,,,, 0.13
02/1/2017 ,,,,, 0.08
03/1/2017 ,,,,, 0.06
04/1/2017 ,,,,, 0.08
05/1/2017 ,,,,, 0.09
06/1/2017 ,,,,, 0.08
07/1/2017 ,,,,, 0.11
08/1/2017 ,,,,, 0.09
09/1/2017 ,,,,, 0.08
10/1/2017 ,,,,, 0.03
11/1/2017 ,,,,, 0.08
12/1/2017 ,,,,, 0.12
01/1/2018 ,,,,, 0.09
02/1/2018 ,,,,, 0.07
03/1/2018 ,,,,, 0.02
04/1/2018 ,,,,, 0.04
05/1/2018 ,,,,, 0.05
06/1/2018 ,,,,, 0.05
07/1/2018 ,,,,, 0.06

The deceleration (-) in 1st qtr. of 2017 is matched by a deceleration in money flows.
The acceleration (+) in 2nd qtr. of 2017 is matched by an acceleration in money flows.
The acceleration (+) in 3rd qtr. of 2017 is matched by an acceleration in money flows.
The deceleration (-) in 4th qtr. of 2017 is matched by a deceleration in money flows.
The deceleration (-) in 1st qtr. of 2018 is matched by a deceleration in money flows.
----------------

Therefore the economy reversed in April of 2018. But in this case, it doesn’t prove there will be an increase in gDp over the 1st qtr. during the 2nd qtr. of 2018, only that there was a correction in the economic downswing.

Q1 2018: 2.2 (-)
Q4 2017: 2.9 (-)
Q3 2017: 3.2 (+)
Q2 2017: 3.1 (+)
Q1 2017: 1.2 (-)

As the archetype of the Renaissance man, Leonardo Da Vinci, said:

“Before you make a general rule of this case, test it two or three times and observe whether the tests produce the same effects”.

Knowing monetary flows trajectory permits us to trade the trend. Whereas Vt began accelerating in 2016, Vi didn’t reverse until the 2nd qtr. of 2017.

Short-term money flows peak in July 2018. Ergo:

{A} Stocks could peak by the end of the month
{B} Rates should fall by the end of the month

Then long-term money flows peaked in May 2018:

{C} This should prevent rates from rising and support stocks
{D} It should support the U.S. $
{E} It should reduce inflation

And by improving the statistic’s “conforming” properties, the Federal Reserve can steer our ship.

Data dependency depends upon accurate definitions. William Barnett (Divisia Monetary Aggregates) is right, in that the Fed should establish a “Bureau of Financial Statistics”.

The figures used for determining economic flows are non-conforming, as determined by the limitations on all analyses based upon broad statistical aggregates, namely, data is not currently being compiled accurately, or in a manner which conforms to rigid theoretical concepts.

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" – Nobel Laureate in Economics Dr. Ken Arrow.

It is the triumph of good theory over inadequate facts.

[flow5]

The re-establishment of pegs (like during WWII), i.e., after the 1951 Treasury-Reserve Accord, also occurred under William McChesney Martin Jr., when he abandoned the FOMC’s net free, or net borrowed, reserve targeting position approach in favor of the Federal Funds “bracket racket” [again targeting interest rates and accommodating the banksters and their customers whenever they saw an advantage in expanding loans, thereby usurping the Fed's "open market power"], beginning in c. 1965 (coinciding with the rise in chronic monetary inflation & in anticipated inflation).

Note: the Continental Illinois bank bailout / rescue, provides a spectacular example of this practice.

The proper volume and rate of growth of our means-of-payment money supply can never be achieved through a policy of accommodation (creeping peg), vis-à-vis following a practice in which the banksters know, will automatically provide them with the volume of additional legal reserves necessary to validate their previous lending practices.

Using a price mechanism as a monetary transmission channel, to ration Fed credit, is non-sense. The rules of a market society do not apply to the rates pegged, charged, or discounted at a penalty rate, by the Reserve banks, or the member banks, on their loans and advances.

The effect of tying open market policy to a fed Funds rate is to supply additional (excessive and costless legal reserves) to the banking system when loan demand increases. Since the member banks (up until reserves became “non-e-bound”), operated without any excess reserves of significance (beginning in 1942), 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 and the Fed responded by putting though buy orders, reserves were increased, and 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, even in the short end of the market except temporarily. By attempting to slow the rise in the effective fed funds 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 - and generate higher rates of inflation — and higher interest rates, including policy rates.

By using the wrong criteria (interest rates, rather than member bank legal reserves) in formulating and executing monetary policy, the Federal Reserve has always been, esp. c. 1965- inflation's engine.

The money stock (and DFI credit, where: loans + investments = deposits), can never be managed by any attempt to control the cost of credit, R *, or Wicksellian: equilibrium/differential real rates, [or thru a series of temporary stair stepping or cascading pegging of policy rates on “eligible collateral”; or thru "spreads", "floors", "ceilings", "corridors", "brackets", IOeR, or BOJ-yield curve type control, YCC, of JGBs, etc.].

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.

Interest is the price of loan-funds (a free market clearing rate). The price of money is the reciprocal of the price-level (the FRB_NY trading desk’s bailiwick). Keynes liquidity preference curve (demand for money), is a false doctrine.

The effect of these operations on interest rates (now largely via the remuneration rate), is indirect, varies widely over time, and in magnitude. What the net expansion of money will be, as a consequence of a given injection of additional reserves, nobody knows until long after the fact. The consequence is a delayed, remote, & approximate control over the lending and money-creating capacity of the payment's system.

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

The validity of the money multiplier as a predictive device is predicted on the assumption that the commercial banks will immediately expand credit and the money supply (invest in some type of earning asset), if they are supplied with additional excess reserves.
The inconsequential volume of excess reserves held by the member commercial banks during 1942 and Sept. 2008 provides documentary proof that they undoubtedly did.

In other words, without the alternative of remunerating excess reserve balances (which turned non-earning assets into bank earning assets), it's virtually impossible for the CBs to engage in any type of activity involving its own non-bank customers without an alteration in the money stock.

After the introduction of the payment of interest on IBDDs, the CBs obtained higher rates of return by accepting a riskless, policy floating/chasing (when the Fed raised rates), remuneration rate. The remuneration rate “inverted” the short-end segment of the wholesale funding yield curve (destroying money velocity). The 1966 Savings and Loan Credit Crunch (where the term credit crunch originated) was the antecedent and paradigm.

The remuneration of interbank demand deposits, IBDDs, by Bankrupt-u-Bernanke emasculated the FRB-NY’s “open market power”, the power to inject ex-nihilo, and gratis, showering money both exogenously and endogenously, into the payment’s system -- by Simon Potter’s Market Group “trading desk”.

Unlike Treasury issuance, because the belligerent bifurcation (the mis-aligned distribution of sales and purchases of debt by the FRB-NY’s trading desk and its customers/counter-parties is largely unpredictable, so too now is the volume and rate of expansion in the money stock. FOMC policy has now been capriciously undermined by turning excess reserves into bank earning assets.

This is in direct contrast to targeting: *RPDs* using non-borrowed reserves as its operating method (predating Paul Volcker’s October 6, 1979 pronouncement on the *Saturday before Columbus Day*), as Paul Meek’s (FRB-NY assistant V.P. of OMOs and Treasury issues), described in his 3rd edition of “Open Market Operations” published in 1974.

This adds up to an obdurate apparatus that the Fed cannot monitor, much less control, even on a month-to-month basis. What the net expansion of the money stock will be, as a consequence of any given addition or subtraction in Federal Reserve Bank credit, nobody can forecast until long after the fact.

And the whole process is now initiated by the member banks, via proffered bankable opportunities, not by the monetary authorities.
Under the rubric of deregulation, and Congressional acts which implicitly assume that the money stock is self-regulatory, as time passes, the Ph.Ds. on the Fed’s technical staff will know less and less about money.

Bankrupt-u-Bernanke should be in Federal prison for bankrupting Americans. He thought that the GFC, the U.S. recession, was due to a “capital crunch”, and not a “credit crunch”.

LSAPs liquidity channel is non sequitur. Even so, the Federal Government is the largest credit worthy borrower.

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. There is no reason for differential reserve requirements in the first place.

By mid-1995 (a deliberate and misguided policy change by Alan Greenspan in order to jump start the economy after the July 1990 –Mar 1991 recession), legal, fractional, reserves (not prudential), 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.

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).
Monetary policy objectives should be formulated in terms of desired rates-of-change in monetary flows, M*Vt, volume X’s velocity, relative to RoC's in R-gDp. RoC's in N-gDp (though "raw materials, intermediate goods and labor costs, which comprise the bulk of business spending are not treated in N-gDp"), can serve as a proxy figure for RoC's in all transactions, P*T, in American Yale Professor Irving Fisher's truistic: "equation of exchange".

-Michel de Nostradame (the best market timer in history)
Jun 7, 2018. 03:54 PM
Link

[flow5]

I decrypted: the preparatory-school macro-economic puzzle in July 1979. As such, I satirize the miscreant McCarthyites who desecrate our Republic. (older followers can skip between the lines):
--------------------
Dr. Leland J. Pritchard (a man 30 times smarter than the theoretical physicist Albert Einstein), Ph.D., Economics, Chicago 1933, M.S. Statistics, Syracuse, told me in his letter 9/8/81:

“You may have a predictive device nobody has hit on yet”.

The distributive lag effect of monetary flows, volume X’s velocity, have been, contrary to Nobel Laureates Milton Friedman’s and Anna J. Schwartz’s in their: “A Monetary History of the United States, 1867–1960) not characterized by long and variable, leads and lags, but demonstrably demarcated by mathematical *constants*.

Contrary to Friedmanites, there is no "fool in the shower".

“Fool in the shower is the notion that changes or policies designed to alter the course of the economy should be done slowly, rather than all at once. This phrase describes a scenario where a central bank, such as the Federal Reserve acts to stimulate or slow down an economy. The phrase is attributed to Nobel laureate Milton Friedman, who likened a central bank that acted too forcefully to a fool in the shower. When the fool realizes that the water is too cold, he turns on the hot water. However, the hot water takes a while to arrive, so the fool simply turns the hot water up all the way, eventually scalding himself.” - Investopedia

www.investopedia.com/...

See: “History and forms. Irving Fisher (1925) was the first to use and discuss the concept of a distributed lag. In a later paper (1937, p. 323), he stated that the basic problem in applying the theory of distributed lags “is to find the ’best’ distribution of lag, by which is meant the distribution such that … the total combined effect [of the lagged values of the variables taken with a distributed lag has] … the highest possible correlation with the actual statistical series … with which we wish to compare it.” Thus, we wish to find the distribution of lag that maximizes the explanation of “effect” by “cause” in a statistical sense”.

www.encyclopedia.com/...

See: Econometrics Beat: Dave Giles' Blog

“The note in question is titled, "Irving Fisher: Pioneer on distributed lags", and was written by J.N.M Wit (of the Netherlands central bank) in 1998. If you don't have time to read the full version, here's the abstract:”

"The theory of distributed lags is that any cause produces a supposed effect only after some lag in time, and that this effect is not felt all at once, but is distributed over a number of points in time. Irving Fisher initiated this theory and provided an empirical methodology in the 1920’s. This article provides a small overview."
----------------------...

I should be awarded the Nobel Prize in Economics. My model is worth trillions of economic $s. My contribution is the most important discovery since man’s invention of the wheel.

@ Kevin A. Erdmann: “Unfortunately, it appears that they may be erring on the side of reducing the balance sheet while maintaining policy that is too tight.”

Another stagflationist, to wit, Erdmann: “the crisis could be blamed on tight monetary policy”.

You don’t, as Kevin A. Erdmann pontificates, add to the FOMC’s schizophrenia i.e., target N-gDp: 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].

No, you gradually drive the commercial banks out of the savings business, you increase non-inflationary money velocity, not stagflationary money, and simultaneously tighten monetary policy, or money flows, thereby increasing the RoC in real-output, relative to the increase in inflation (the opposite of stagflationist’s posits, i.e., producing the exact opposite impact as stagflation).

It is axiomatic. The rate-of-change in the historical distributed lag effect of monetary flows, volume X’s velocity, its inflection point, coincided with the peak in real-estate speculation.

See: Alan S. Blinder: “After the Music Stopped”, pg. 32: “That historical comparison reveals a stunning—and virtually unknown—fact: On balance, the relative prices of houses in American barely changed over more than a century! To be precise, the average annual relative price increase from 1890 to 1997 was just 0.09 of 1 percent. You don’t get rich on that.”

Then things changed dramatically. After 2000 the graph gives the visual impression of a rocket ship taking off. According to the Case-Shiller index, real house prices soared by an astounding 85 percent between 1997 and 2006---and then came crashing down to earth from 2006 to 2012. America had never seen anything like it. Did this huge run-up and crash constitute a bubble? I think Mr. Justice Stewart would have said yes. It was certainly large, long-lasting, and a sharp deviation from fundamental value.”

The pertinent fact is that economists are categorically vacuous. Bankrupt-u-Bernanke devastated America and defiled Americans. Americans are now saddled with another $9.6 trillion of indebtedness, the direct outcome of Bankrupt-u-Bernanke’s incompetence.
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 shrink, but the size of the payment’s system remains unaffected).

This Romulan cloaking device, #2, vastly exceeded the level of short term interest rates which is still illegal. The 1966 Savings and Loan credit crunch (when the term was coined), is the antecedent and paradigm.

Disintermediation, which Bankrupt-u-Bernanke mis-diagnosed as a “capital crunch” (a prelude to his policy response to counter the GFC or TARP [to issue equity warrants, to stabilize bank capital ratios], occurs because the inventory of outstanding loans is funded at levels which can no longer be supported by rolling over older funding: short-term, retail and wholesale funding.

In other words, the non-banks do not compete with the commercial banks for loan-funds. The prosperity of the DFIs is codependent upon the prosperity of the NBFIs.

Disintermediation for the DFIs can only exist in a situation in which there is both a massive loss of faith in the credit of the banks and an inability on the part of the Federal Reserve to prevent bank credit contraction, as a consequence of its depositor’s withdrawals. Ever since 1933, the Federal Reserve has had the capacity to take unified action, through its "open market power", to prevent any outflow of currency from the banking system (i.e., before the remuneration of IBDDs). In contradistinction to the NBFIs, dis-intermediation for the DFIs isn’t predicated on the prevailing level of market clearing interest rates or the administration of policy rates.

Dis-intermediation, an outflow of funds or negative cash flow, 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.

This is Bankrupt-u-Bernanke on “credit crunches”, 1991:

"However, we also argue that a shortage of equity capital has limited banks' ability to make loans, particularly in the most affected regions. Thus we agree with Richard Syron, president of the Boston Federal Reserve, that the credit crunch might better be called a "capital crunch." We present evidence for the capital crunch hypothesis using both state-level data and data on individual banks. The most difficult issue is whether the slowdown in bank lending has had a significant macroeconomic effect. Although it is likely that a bank credit crunch (or capital crunch) has occurred and has imposed costs on some borrowers, we are somewhat skeptical that the credit crunch played a major role in worsening the 1990 recession."

That explains TARP!

“Another important goal of TARP is to encourage banks to resume lending again at levels seen before the crisis, both to each other and to consumers and businesses. If TARP can stabilize bank capital ratios, it should theoretically allow them to increase lending instead of hoarding cash to cushion against future unforeseen losses from troubled assets”

BuB should be in Federal Prison.

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.

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

-Michel de Nostredame

[flow5]

It's not M, or “near money substitutes”, it's Vt, or income not spent (the energy source / force), and the transactions velocity of re-circulation, which is indubitably, the peculiar issue.

Who’s to blame? Why the manager of the G.6 Debit and Demand Deposit Turnover Release, Ed Fry, and President Bill Clinton’s: “The Paperwork Reduction Act of 1995”.

“The legislation recognizes that the private sector is the engine of our prosperity, that when we act to protect the environment or the health of our people, we ought to do it without unnecessary paperwork, maddening redtape, or irrational rules”…”This Paperwork Reduction Act helps us to conquer a mountain of paperwork that is crushing our people and wasting a lot of time and resources and which actually accumulated not because anybody wanted to harm the private sector but because we tend to think of good ideas in serial form without thinking of how the overall impact of them impacts a system that is very dynamic and very sensitive to emerging technologies but which Government does not always respond to in the same way.”

www.presidency.ucsb.ed...

Frictionless / expeditiously propagated financial perpetual-motion, involves putting savings uniformly and efficiently back to work (connecting pooled savings with borrowers), productively transferring and completing the circular flow of income [uni-directional “Brownian ratcheted” mechanical inputs and outputs, savings “prevented from rotating in the opposite direction”, viz., the opposite of dis-intermediated], as opposed to the destruction of funds (backwards résistance), or savings being frozen (all DFI held savings are un-used and un-spent), and dissipated in financial investment (the transfer of title to goods, properties, or claims thereto), which perpetrate leakages from the main income stream.

The Fed uses more money as its carrot, Instead of higher money velocity as a circuit analogue.

[flow5]

All you have to do is look at the dominant economic theories perpetrated today. Google “money velocity”. The one that progressively stands out is that money velocity doesn't matter.

(1) 'Velocity Of Money' Is Superfluous, And Gresham's Law Is A Myth (Forbes)
(2) Velocity Does Not Have an Independent Existence (Mises Institute)
(3) The Useless And Dangerous "Money Velocity" Concept (Steven Saville)

There is money velocity, defined as *income* velocity, a contrivance (make believe): where N-gDp or R-gDp is divided by some questioned and varying measure of the money stock.

Then, alternatively, there is the velocity of re-circulation, which is a transactions concept related to the loanable funds theory. The loanable funds theory is based upon the expansion of credit, both commercial bank credit (new money) and non-bank credit (existing savings), where market clearing interest rates represent the price of credit.

Bank debits, or debits to deposit accounts, are the best measure of this activity.

Unfortunately, according to the regressive theories perpetrated, the G.6 Debit and Demand Deposit Turnover Release was discontinued in September 1996. Today, neither money nor velocity are of much concern in the FOMC’s deliberations.

To say that money velocity doesn’t matter is tantamount to saying savings don’t matter either.

To dismiss the velocity of re-circulation is to deny that people may dis-save. To say that money velocity is a spurious concept is to conflate stock with flow.

Jeffrey Snider contemplates on why consumers are cutting back on retail spending, or any kind of spending for that matter. It is axiomatic. CAPEX outlays depend upon consumer spending. The demand for capital goods is a derived demand, derived from primary consumer demands.

The increase in money velocity up until 1981 was the direct result of financial engineering, of new commercial bank deposit classifications, the relaxation of gate-keeping restrictions within the payment’s system. Financial innovation for bank deposits plateaued in the 1st qtr. of 1981.

Since 1981 savings have been increasingly impounded and ensconced within the framework of the payments’ system (predominately due to the DIDMCA of March 31st 1980). This destroys money velocity, simply because all bank-held savings are un-used and un-spent. Why? Because from the standpoint of the entire economy, commercial banks pay for their new earning assets with new money, not existing deposits (a theoretical error).

The remuneration of interbank demand deposits exacerbated the deceleration of money velocity. 100 percent reserve banking will do the same. Japan is prima facie evidence.

[flow5]

Price-level targeting? That sounds exactly like how Vladimir Lenin said he would overthrow capitalism, and presumably capitalists, by making their money worthless.

Inflation is a chronic, across-the-board increase in prices; or, looking at the other side of the coin, depreciation of money. Contrary to the newfound stagflationist (advocates of N-gDp LPT), inflation, when it exists, is the most perverse and perhaps the most disruptive economic force capitalism encounters.

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. A financial oligarchy and a government of, boy and for the people simply cannot exist side by side. 

Prices in the United States have been rising at varying rates in almost every year since 1933. Until the advent of WWII, the proper appellation for this chronic rise is “reflation”. That is, the price rise created greater price balance within the economy which was more in balance with the commitments made before the financial onslaught of the Great Depression.

During WWII we had official price stability and “black market” inflation. This was reflected in the price indices as soon as price controls were removed.  

In absolute terms, each year confronts all of us with a higher and higher level of prices with no end in sight. 

The stagflationists say, if inflation runs a little lower than its target, then let it run a little hotter, so goods and services will cost more. How absurd!

Unfortunately, academia is full of stagflationists - David Beckworth in National Review: "An inflation driven by the central banks creation of extra money, on the other hand, should increase prices and wages very close to proportionately” [sic]..."That alternative would stabilize the growth of nominal spending: the total amount of dollars spent throughout the economy..." [sic]

“A coalition of economists released a letter Friday urging the Fed to change the criteria it uses to make decisions. Specifically, the group, called "Fed Up," is advocating for a higher inflation rate target than the current 2 percent level.”

cnb.cx/2gZF0Ly

Rethink 2% - Brad DeLong

bit.ly/2s67De9

John Williams at his Shadowstats website: "And if inflation was still calculated the way that it was in 1980, the inflation rate would be about 10 percent today."

Readers should note that calculating inflation on a year-to-year basis minimizes, over time, the reported rate of inflation - since the rate is being calculated from higher and higher price levels (reference base periods). A $ today, using 1967 (a former base-period year), is equivalent to $7.99 of consumer purchasing power in May 2018 (using the CPI calculator). The current base period utilized references 1982-1985 prices.

What cost one dollar bill in 1913, today, in May 2018, costs $25.76 in terms of the CPI (which chronically understates inflation). Inflation has been the most destructive force capitalism and consumers, ever faced.  

That’s why the BLS just reported a spike in inflation:06/12/2018: “In May, the Consumer Price Index for All Urban Consumers increased 0.2 percent seasonally adjusted; rising 2.8 percent over the last 12 months, not seasonally adjusted.” And: 06/13/2018 “The Producer Price Index for final demand rose 0.5 percent in May”

Feeling groovy?

The second verse was as bad as the first: The Fed caved into the similar mantra in June of 2017. 22 Luminaries (And Dick Bove) Sign Open Letter To Fed Demanding End Of QE2

bit.ly/2F3T2Xm

Economic fluctuations reveal dynamic lags and concentrations. So the stagflationists, inevitably get their comeuppance (as inflation accelerates relative to real-output).

It’s once again, 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 blunder]

N-gDp LPT targeting by stagflationist advocates is unwarranted and destructive. It produced, since the advocates banded together and wrote a letter to Janet Yellen, higher prices, a breakout in yields, a continued flattening of the yield curve, a falling U.S. dollar, and 3 FOMC rate hikes, precipitating larger federal deficits, and a credit downgrade from China. And after all this "irrational exuberance", stocks have declined into the 4th Elliott wave correction.

Tematica Research:

• By my read the data here is mixed. Core Capex orders have risen at a 1.2% annual rate year-to-date, which is well below the 20%+ pace we had last September.

• Regional Fed survey data of capex intentions are above historical standards but down to an 8-month low and have been declining for 3 consecutive months.

• Instead, companies have been engaging in buybacks and paying dividends, on pace to total almost $1T in the 12 months ending March! Good news for investors, but not the economy.

• But 40% of Americans can't handle a $400 emergency?

• According to recent Wallet Hub study, the average household credit card balance is $8,166, just $300 shy of the level considered unsustainable and this at a time when the unemployment rate is at a multi-decade low

The problem is that this theoretical concept is back-asswards. Targeting nominal values is STUPID. Why? Because nominal values are contingent upon the rate-of-change in real values in that they are two sides of the same coin.

Alfred Marshall, “The Cash-Balances Approach:: “Unlike the supply and demand analysis applicable to commodities, the supply of and the demand for money are simply the two sides of the same “coin.”. This follows from the fact that the suppliers are simultaneously the demanders, and the demanders are simultaneously the suppliers. If a person increases his demand for money, he is simultaneously reducing his supply of money in the schedule sense; and if he is increasing the supply of money, he is reducing his demand for money.

It may be said therefore, that an increase in the demand for money is concomitantly associate with an equal and opposite decrees it e supply of money, and vice versa; and that an increase in the supply of money is concomitantly associated with an equal and opposite decrees in the demand for money, and vice versa.” Leland J. Pritchard (Ph.D., Economics, Chicago 1933)

“Together with the concept of an economic "elasticity" coefficient, Alfred Marshall is credited with defining PED ("elasticity of demand") in his book Principles of Economics, published in 1890.[20] He described it thus: "And we may say generally:— the elasticity (or responsiveness) of demand in a market is great or small according as the amount demanded increases much or little for a given fall in price, and diminishes much or little for a given rise in price".[21]

He reasons this since "the only universal law as to a person's desire for a commodity is that it diminishes ... but this diminution may be slow or rapid. If it is SLOW... a small fall in price will cause a comparatively LARGE increase in his PURCHASES. But if it is RAPID, a small fall in price will cause only a VERY SMALL increase in his PURCHASES. In the former case... the elasticity of his wants, we may say, is great. In the latter case... the elasticity of his demand is small."[22] Mathematically, the Marshallian PED was based on a point-price definition, using differential calculus to calculate elasticities.[23] - Wikipedia

It is axiomatic. You don't target N-gDp. You target R-gDp. And total spending, AD, does not equal N-gDp as the Keynesian economist claim.

If the Fed’s technical staff can't target R-gDp, how can they target N-gDp? And why would the Fed target N-gDp - when it could target R-gDp? 

So the “nominal-anchor” prevents bond prices from rising - because “inflation is overshooting”, and interest rates from falling, slowing any recovery or slowing real output? No, that perpetuates income inequality. Stagflationist thinking is as ephemeral as their RX.

The fact is that these McCarthyite armchair economists are “Know-Nothings”. The stagflationists don’t know money from mud pie. Rates-of-change in monetary flows, volume X’s velocity (for the same time intervals or distributed lags), equal RoC’s in P*T (where N-gDp is a subset of “aggregate nominal spending”).

The distributed lag effect of money flows have been mathematical constants for greater than 100 years.

Thus we know several things, that money is robust, that the RoC in R-gDp = exactly 10 months, trough to peak. And we know whether money is robust because we know when inflation accelerates relative to inflation, whose distributed lag is exactly 24 months, trough to peak.

Since the distributed lag effects of monetary flows are mathematical constants (which no economist understands or even knows about), you know in advance, what th trade-off between R-gDp and inflation, or the monetary fulcrum, will be. So we know when interest rates will respond to the monetary fulcrum, based on fixed money lags, and the "arrow of time".

So to target N-gDp is stupid. It maximizes inflation and minimizes real-output. IF you can target R-gDp, why try targeting N-gDp? R-gDp accelerates before inflation. And we know when the teeter-totter tips.

That’s why you target R-gDp as a policy standard, and obviously, not the other way around. The debit and deposit turnover time series is documentary proof.


---– Michel de Nostradame

 

[flow5]

People are largely oblivious to anything which does not impact their personal lives. See:

www.huffingtonpost.com/gil-laroya/why-dont-people-care-when_b_5888686.html

“…the bigger question is “Why do we ignore other people’s problems?”.

As Republican Alf Landon’s daughter wrote me, Senator Nancy Landon Kassebaum, back: 11/4/81:

“Today, less than two years since the DIDMCA was established, most of the liabilities have been deregulated with no change in the asset structure that would enable payment of higher rates to depositors”.

The response of the monetary authorities and state legislatures was to give the thrifts more and more discretion in lending (opportunities for self-dealing where greed and fraud reached monumental levels in the thrift industry).

Michael Hudson definition of *financialization* is apropos: "a lapse back into the pre-industrial usury and rent economy of European feudalism".

There is essentially only one macro-economic problem: the delusional Keynesian macro-economic thinking / persuasion, John Maynard Keynes’ “optical illusion”, pg. 81 in his “General Theory”, which maintains that a commercial bank is a financial intermediary. It is both cut and dry. The remuneration of interbank demand deposits exacerbates this economic regression. The 1966 Savings and Loan “credit crunch”, where and when the term “credit crunch” was first coined, is the antecedent and paradigm.

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.

Never, from the standpoint of the entire economy, from the standpoint of the payments’ system, are the commercial banks conduits between savers and borrowers. The DFIs pay for their new earning assets with new money period – not the other way around. But don’t ask a banker, don’t ask SA author Jeremy Blum: “How Accurate Is Bernie Sanders' Diatribe Against Big Banks?”

The implications in the flow-of-funds, in the savings-investment process, are profound. Bankrupt-u-Bernanke pontificated that a “credit crunch”, is a “capital crunch”. Not so. The “lack of funds”, is not the same as the “cost of funds”. It is a confusion of “stock” vs. “flow”.

Leland J. Pritchard, Ph.D., Economics - Chicago 1933 was 30 times smarter than Albert Einstein, i.e., Einstein’s “very revoluntionary” 1905 epochal papers were generally accepted 3 years after their publication. Prichard’s 1963 “very revolutionary” paper has yet to be recognized: These compendium of articles were personally commissioned by John F. Kennedy and his administration:

“Profit or Loss From Time Deposit Banking”, Banking and Monetary Studies, Comptroller of the Currency, United States Treasury Department, Irwin, 1963, pp. 369-386

Disintermediation, an outflow of funds or negative cash flow, which Bankrupt-u-Bernanke mis-diagnosed as a “capital crunch” in his 1991 paper in response to the Savings and Loan debacle, “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”).

It was BuB’s prelude to his mis-guided policy response to counter the GFC or TARP [to issue equity warrants, to stabilize bank capital ratios], occurs because the inventory of outstanding loans is funded at levels which can no longer be supported by rolling over older funding: short-term, retail and wholesale funding.

Just think about it, the countercyclical burden of the imposition of the requirement to add bank capital literally destroys the money stock, dollar for dollar. See: Steve H. Hanke’s “Basel’s Capital Curse”

bit.ly/2mZChDl

De toute évidence, Bankrupt-u-Bernanke does not know a credit from a debit.

[flow5]

"If consumption is approximately 70% of US GDP, then inputs to the consumer are critical to the stability and growth of the economy."
But those who advocate N-gDp LPT would have it otherwise. How do you think we got this slowdown? It was the stagflationists fault, the perverse monetary policy mix:

bit.ly/2JYJxZ7

You increase money velocity by driving the commercial banks out of the savings business, whereby you get a non-inflationary matching of savings with investment. This makes both the non-banks and the commercial banks more profitable (as size isn't synonymous with profitability when a bank pays interest for something that they already own). Any increase in commercial bank held savings, monetary savings, destroys money velocity.

Money velocity has decelerated since 1981, because the DIDMCA of March 31st 1980 laid the legal basis for turning 38,000 non-banks, the CUs, MSBs, and Savings and Loan Associations, into 38,000 commercial banks.

Money velocity decelerated again when Bankrupt-u-Bernnanke remunerated interbank demand deposits.

Money velocity has been augmented by dis-savings, since mid-2016. That is, non-M1 components decelerated relative to transaction deposit classifications. The deceleration in non-M1 components, or dis-saving, is a Hyman Minsky “displacement”. An event that raises optimism (increases money velocity), one which artificially stimulates the economy, a grand illusion (disguising the fact that an increasing number of folks are struggling to make ends meet).

Percentage of time/savings deposits to transaction type deposits:
1939 ,,,,, 0.42
1949 ,,,,, 0.43
1959 ,,,,, 1.30
1969 ,,,,, 2.31
1979 ,,,,, 3.83
1989 ,,,,, 3.84
1999 ,,,,, 5.21
2009 ,,,,, 8.92
2018 ,,,,, 4.87 (declining mid-2016 with the increase in Vt)

• Historical FDIC's insurance coverage deposit account limits:
• 1934 – $2,500
• 1935 – $5,000
• 1950 – $10,000
• 1966 – $15,000
• 1969 – $20,000
• 1974 – $40,000
• 1980 – $100,000
• 2008 - $250,000
• 2011 - unlimited
• 2013 – $250,000 (caused the taper tantrum)

Yes, we are living in the Twilight Zone

[flow5]

The obvious observation is that monetary savings (income not spent), are never transferred from the commercial banks, --as a--system, to the non-banks; rather are monetary savings are always transferred through the non-banks, a velocity correlation.

These funds do not leave the payment’s system. Indeed, as evidenced the existence of “float”, or the “check is in the mail”, (largely eliminated by “The Check 21 Act” which introduced electronic substitutes on Oct 28, 2004), the payment system’s reserve credits tend, on the average, to precede the reserve debits.

This being so it is a delusion to assume that savings can be “attracted” from the commercial banks, for the funds sever leave the payment’s system. By expanding their time/savings deposits the commercial banks retard the growth of the non-banks, reducing money velocity, for savings held in time deposits are obviously not available to finance consumption or investment. But it does not follow that a shrinkage in these non-banks, however induced, will enable the commercial banks to expand.

In other words, the non-banks are some of the commercial bank's best customers.

Thus this theoretical banking error was promulgated through a series of 5 legislative acts all sponsored by public enemy #1, the most powerful economic oligarch, one in which its interested parties seeking to influence the House & Senate Banking Committees spent in campaign contributions, amounts each year, typically exceeding all other industry and labor groupings:

#1 The Depository Institutions Deregulation and Monetary Control Act of 1980 (H.R. 4986, Pub.L. 96–221)

#2 The Garn–St Germain Depository Institutions Act of 1982 (Pub.L. 97–320, H.R. 6267, enacted October 15, 1982)

#3 The Riegle-Neal Interstate Banking and Branching Efficiency Act of September 29, 1994 [IBBEA] PUBLIC LAW 103-328 [H.R. 3841]

#4 The Financial Services Regulatory Relief Act of 2006 (FSRRA) PUBLIC LAW 109–351—OCT. 13, 2006

#5 The Emergency Economic Stabilization Act of 2008 (Division A of Pub.L. 110–343, 122 Stat. 3765, enacted October 3, 2008), viz., the acceleration in the payment of interest on IBDDs from 2011 to Oct. 2008

[flow5]

Price = Cost + Profit? No, that’s “money illusion” (a confusion of nominal values vs. real values).

Mass production requires concomitant mass consumption. Only in the frictionless world created by the mathematical model builders are the asked prices in equilibrium with consumer spendable income. In the real world, there is always a purchasing power deficiency gap of varying proportions.

It is axiomatic, given monopolistic price practices, unless money expands at least at the rate prices are being pushed up, output cannot be sold and hence the work force will be cut back. As Danielle DiMartino Booth points out, the probability is that it’s more likely to metastasize into a credit problem, as businesses are unable to pass along unaffordable costs.

And it is also axiomatic: inflation is the most destructive force that capitalism encounters, persistently eroding the purchasing power of the dollar. What a dollar bill could buy in 1913, today costs $25.76. As Dr. Franz Pick of “PICK’S World Currency Report” famously quipped: “the dollar will be wiped out”, and; “Treasury bonds are certificates of guaranteed confiscation”, and; “the destiny of a currency determines the destiny of a nation", etc.

As Dr. Richard G. Anderson (Ph.D. Economics, MIT), Emeritus, FRB-STL (world’s leading guru on bank reserves), stated: Sent: Thu 11/16/06 9:55 AM:

"Today, with bank reserves largely driven by bank payments (debits), your views on bank debits and legal reserves sound right!"

RoC's in RRs underweight money velocity. Note that MZM income velocity has risen since the 2nd qtr. of 2017 (MZM tracks bank debits the closest). So M has a little more "punch".

Q1 2018: 1.305
Q4 2017: 1.300
Q3 2017: 1.297
Q2 2017: 1.295
Q1 2017: 1.298

Nonetheless we know the precise Minskey Moment of the GFC:

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
01/1/2008,,,,,,, 0.59,,,,,,, 0.06
02/1/2008,,,,,,, 0.45,,,,,,, 0.10
03/1/2008,,,,,,, 0.06,,,,,,, 0.04
04/1/2008,,,,,,, 0.04,,,,,,, 0.02
05/1/2008,,,,,,, 0.09,,,,,,, 0.04
06/1/2008,,,,,,, 0.20,,,,,,, 0.05
07/1/2008,,,,,,, 0.32,,,,,,, 0.10
08/1/2008,,,,,,, 0.15,,,,,,, 0.05
09/1/2008,,,,,,, 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.
Bernanke in his book “The Courage to Act”: “Monetary policy is a blunt tool” and “Unfortunately, beyond a quarter or two, the course of the economy is extremely hard to forecast".

The illuminating revelation is that: rates-of-change in monetary flows, volume X’s velocity, equal, for the same interval, RoC’s in P*T (where R-gDp and inflation are subsets). So we know the actual “Minskey Moment” where money ceases to be robust, and metastases into stagflation.

So N-gDp LPT is STUPID. It minimizes (caps) real-output, and maximizes inflation.

[flow5]

Every economic event has heretofore been artfully predicted. So the deployment of capital was justifiably conscripted. But if you don’t understand elementary accounting (the recycling of income not spent), then you’re terminally lost. The expiration of the FDIC’s unlimited transaction deposit insurance is prima facie evidence. The facts support Leland Pritchard’s theory (Ph.D., Economics – Chicago, 1933).

Commercial banks do not loan out savings (but all savings originate within the payment’s system). Thus the “bottling up” of savings therefore impedes money velocity.

Keynes’ “liquidity preference curve” (demand for money), assumes an infinite progression. In the real world, it didn’t work out that way [the stoppage in the flow of funds wasn’t ultimately, entirely compensated for, as Lester V. Chandler originally theorized – “by an increased velocity of the remaining bank deposits”].

The rate-of-change in the velocity of bank deposits, demand deposit turnover, plateaued in the 2nd qtr. of 1981 (with financial innovations, the widespread introduction of ATS, NOW, SuperNow, and MMDA accounts).

Secular strangulation is simply “chronically deficient aggregate demand, AD. AD fell because money velocity has persistently decelerated, coterminous with an increased ratio of savings-investment type accounts to: transaction’s based accounts (when monetary policy was net neutral).

The remuneration of IBDDs exacerbates this stoppage in the flow of funds, esp., when the IOeR is higher than money market funding rates (a transposition in the historical administration of Reg. Q ceilings, commercial banks vs. the ¼ point differential in favor of the non-banks).

The money stock, and monetary flows, are not self-regulatory, they are self-reinforcing. Alan Greenspan’s loosening of the monetary spigots, reducing complicit reserve requirements by 40 percent, was the initial impetus behind financial engineering’s new money substitutes, the lend to distribute model. Legal reserves ceased to be binding at the same time the real-estate boom started.

That is, velocity accelerated more so than the expansion of money. The circular flow of income velocity, or the rehypothecation of savings (the investment of capital into real-investment outlets) is what drives financial perpetual-motion. The more savings which are impounded and ensconced within the payment’s system, the lower CAPEX outlays.

And if you decrease commercial bank earning assets, and offset that with an increase non-bank’s earning assets, then you promulgate higher and firmer *real* rates of interest. The commercial banks then become more profitable as a result (as size isn’t synonymous with profitability). This is the multiplier of incomes (the ingredient from which debt is paid).

Bankrupt-u-Bernanke, as soon as he was appointed Chairman, radically reversed monetary policy. Whereas Greenspan never tightened monetary policy (after Oct. 2002), Bernanke never loosened monetary policy (up until March 2009). This is clearly demarcated by the trend in long-term monetary flows at those precise junctures (as predetermined by the distributed lag effect of money flows).

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

This concept 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 a system’s context.

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

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 (not because of robotics, not because of demographics).

As the economic syllogism posits:

#1) “Savings require prompt utilization if the circuit flow of funds is to be maintained and deflationary effects avoided”…
#2) ”The growth of commercial bank-held time “savings” deposits shrinks aggregate demand and therefore produces adverse effects on gDp”…
#3) ”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 1959

Unless, you want to manage your investments in a command economy, then the commercial banks must be gradually driven out of the savings business.

[flow5]

China’s trade surplus shrank by 14.2 percent in 2017. So China’s current account surplus was narrower. As SA author Alan Longbon says: “China's current account is less than 2% of GDP.”…” The current account is where the crosscurrents of imports/exports and financial flows are reconciled into an overall figure”

China’s gDp:

fred.stlouisfed.org/series/MKTGDPCNA646NWDB

However, summing China's trade flows, both its imports and exports (and excluding for example, FDI and FPI), as opposed to netting them, or tallying China’s current account surplus, you get a huge figure corresponding to its domestic bilateral trade activity: $4.28 trillion. The aggregate figure amounts to a whopping 36% of China’s 2017 N-gDp of: $12.015 trillion.

As Bloomberg reported on August 11, 2015: “Today’s sudden policy move is a reaction to a significant weakening of China’s export numbers in July and rising deflation risk”.

Judging from the last time China was in this much economic trouble, in August 2015, China devalued the Renminbi, the official currency of the People's Republic of China, by c. 4.4 percent, in 3 days, the biggest drop in decades. Then U.S. stocks subsequently fell by 1613.28 DJIA points.

That was during the period, between January 2013 and December 2015, in which monetary flows, the proxy for inflation, fell by 80 percent. From January to June so far this year, money flows have now fallen by 35 percent. By the end of 2018 they could drop by another 80% in less than half the prior time.

This time around will be worse. Contrary to Alan Longhorn, there's obviously an upcoming economic catastrophe in the making. And when China rattles its trade saber, i.e., depreciates the yuan, things change in a New York minute.

[flow5]

It's funny, but not ha, ha. You see a number of new posts claiming to have hit / predicted the bottom. But all these technical traders look at the turn, a number of days after the actual turn; - not before. So it's not therefore a prediction. That's the problem with technical analysis. Technical trading signals are generally ones that require movements in the action to have already shown up in the charts.

As an example, see Avi Gilbert’s Market Watch article: Published: July 9, 2018 11:37 a.m. ET
Opinion: Technical charts point to S&P 2,800 — and then a pullback

“So, this week (as of Monday July 9), as long as we don’t see a major S&P reversal below 2,730, my expectation is that we can rally back up toward the 2,800 region to complete the a-wave of this rally off the 2,700 support region.” How reassuring!

Fundamental's indeed precede technical's.

It's not trivial. All boom / busts, since 1942 were both predictable and preventable. And the most critical information has been discontinued. This information could be used for the on-line, real-time, immediate streaming of economic activity (absent the laborious and ”amalgamated” or chained-market value composition (economic time lagged, *batch*-processing, of an “advance estimate”, a “preliminary estimate, and a “final estimate”, and subsequent revisions), of the final output of goods and services.

So any deviation to the actual path of the inflation adjusted economic trajectory can be literally fine-tuned. The FRB_NY’s “trading desk” can hit whatever target is set (but not by its current transmission mechanism).

The G.6 Debit and Demand Deposit Turnover Release was discontinued in Sept. 1996 for spurious reasons. I, and some others, William G. Bretz of “Juncture Recognition in the Stock Market”, “The Bank Credit Analyst”, etc., understood how to use the Fed’s figures (then, the longest running time series published).

No one at the Board of Governors understood how to use the #s (but the BOG discontinued it regardless). That included Paul Spindt’ debit weighted indices (who tried and failed). I once helped with the 4 year review, the justification for its continued use. I faxed several examples to Ed Fry, its manager.

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

See: Fed Points

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

“Following the introduction of NOW accounts nationally in 1981, however, the relationship between M1 growth and measures of economic activity, such as Gross Domestic Product, broke down. Depositors moved funds from savings accounts—which are included in M2 but not in M1—into NOW accounts, which are part of M1. As a result, M1 growth exceeded the Fed's target range in 1982, even though the economy experienced its worst recession in decades. The Fed de-emphasized M1 as a guide for monetary policy in late 1982, and it stopped announcing growth ranges for M1 in 1987.”

The plateau in money velocity, the transactions velocity of recirculation, occurred because of the saturation in bank deposit classification in the 1-2 quarters of 1981 (the widespread introduction of ATS, NOW, SuperNOW, and MMDA bank accounts).

Stephen Goldfeld labeled this type of disparity: “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. 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 American Yale Professor Irving Fisher’s:“flows with funds”.

“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.”

In other words, no money stock figure standing alone is adequate as a guide post for monetary policy.

The G.6 was discontinued, according to the Federal Register, because:

“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 (And that’s also what Chairman Alan Greenspan said about M1). Further, the emphasis on monetary aggregates as policy targets has decreased. In addition, respondent participation has declined over the last several years. For these reasons, the Federal Reserve proposes to discontinue the survey and the related statistical release.”

And funny again, 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" Its 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].

These #s aren’t good #s. The #s shouldn’t require interpretation. Nothing’s been optimized. There’s been no concerted effort to right the economic world.

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

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All bank held savings are un-used and un-spent. That's what initially caused stagflation, when the remaining bank deposits offset the increase in savings accounts (exactly as predicted before the term was coined in the late 1950's). That reversed in 1981 (exactly as and when predicted).

Percentage of time/savings deposits to transaction type deposits:

1939 ,,,,, 0.42
1949 ,,,,, 0.43
1959 ,,,,, 1.30
1969 ,,,,, 2.31
1979 ,,,,, 3.83
1989 ,,,,, 3.84
1999 ,,,,, 5.21
2009 ,,,,, 8.92
2018 ,,,,, 4.87 (declining mid-2016 with the increase in Vt)

As Marshall D. Ketchum (Professor at the Chicago School) said:

"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”

It was all over by the end of the 70's. Secular strangulation was already built in:

Savings deposits ,,,,, Reg Q ceiling %

11/01/1933 ,,,,, 0.0300
02/01/1935 ,,,,, 0.0250
01/01/1957 ,,,,, 0.0300
01/01/1962 ,,,,, 0.0350
07/17/1963 ,,,,, 0.0400
11/24/1964 ,,,,, 0.0450
12/06/1965 ,,,,, 0.0550
07/20/1966 ,,,,, 0.0500
04/19/1968 ,,,,, 0.0625
07/21/1970 ,,,,, 0.0750
-----------

And the expiration of the FDIC’s unlimited transactions insurance gave the economy and the markets a little “bounce” as evidenced by the pick-up in N-gDp, hence my call for a market "zinger"

Zinger - a surprise, shock, or piece of electrifying news.

Dec. 15th 2012 market zinger forecast:

“Posts:203 Re: QE3 = nuttin’ honey (on iTulip.com)

“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”

Historical FDIC’s insurance coverage deposit account limits:
• 1934 – $2,500
• 1935 – $5,000
• 1950 – $10,000
• 1966 – $15,000
• 1969 – $20,000
• 1974 – $40,000
• 1980 – $100,000
• 2008 – $unlimited
• 2013 – $250,000 (caused taper tantrum)


So we had a "taper tantrum" and a temporary rise in gDp:

1/1/2013 ,,,,, 4.4
4/1/2013 ,,,,, 1.6
7/1/2013 ,,,,, 5.1
10/1/2013 ,,,,, 6.1
1/1/2014 ,,,,, 0.7
4/1/2014 ,,,,, 7.0
7/1/2014 ,,,,, 7.1
10/1/2014 ,,,,, 2.6
1/1/2015 ,,,,, 3.2
4/1/2015 ,,,,, 5.0

That's called a "predictive success".

There's not a number in your obviously vacuous, crotchety and very unprofessional response to back up anything you said.
It was all over by the end of the 70's. Secular strangulation was already built in:

Savings deposits ,,,,, Reg Q ceiling %

11/1/1933 ,,,,, 0.0300
02/1/1935 ,,,,, 0.0250
01/1/1957 ,,,,, 0.0300
01/1/1962 ,,,,, 0.0350
07/17/1963 ,,,,, 0.0400
11/24/1964 ,,,,, 0.0450
12/6/1965 ,,,,, 0.0550
07/20/1966 ,,,,, 0.0500
04/19/1968 ,,,,, 0.0625
07/21/1970 ,,,,, 0.0750
-----------
And the expiration of the FDIC’s unlimited transactions insurance gave the economy and the markets a little “bounce” as evidenced by the pick-up in N-gDp:

01/1/2013 ,,,,, 4.4
04/1/2013 ,,,,, 1.6
07/1/2013 ,,,,, 5.1
10/1/2013 ,,,,, 6.1
01/1/2014 ,,,,, 0.7
04/1/2014 ,,,,, 7.0
07/1/2014 ,,,,, 7.1
10/1/2014 ,,,,, 2.6
01/1/2015 ,,,,, 3.2
04/1/2015 ,,,,, 5.0
 

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Depending upon whether markets are strong or weak, the seasonal inflection points may come early or late (around the rotation), and then may end late or early.

The drop in oil today, i.e., coming in the month of JULY, corresponds to a peak in long-term money flows. This may mean that the administrative supply side price hike by oil producers has finally caught up to demand side fundamentals in the marketplace.

01/1/2018 ,,,,, 0.27 (administratively uncoupled)
02/1/2018 ,,,,, 0.25
03/1/2018 ,,,,, 0.18
04/1/2018 ,,,,, 0.19
05/1/2018 ,,,,, 0.20
06/1/2018 ,,,,, 0.15
07/1/2018 ,,,,, 0.16 commodities peak (coupled)
08/1/2018 ,,,,, 0.14
09/1/2018 ,,,,, 0.15
10/1/2018 ,,,,, 0.13
11/1/2018 ,,,,, 0.12

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Kirk Spano: “You attribute correlations as causations and you are wrong.”

They are unquestionably direct causations, as they are based on documentary proof: repeatedly accurate and perfectly correlated predictions, all of which are based on solid theoretical concepts.

 
Richard Dennis and his turtles had very good returns without knowing much about macro-economics too. That proves nothing. And you talk micro, not macro.

 
I literally can’t be wrong about double-entry bookkeeping on a national scale, the debits and credits which you know absolutely nothing about, were proven in, e.g.,: “The Case Against Commercial Bank Savings Accounts”, Leland J. Pritchard, The Bankers Magazine
There was absolute coalescence in the underlying primary assumptions during the “Should Commercial banks accept savings deposits?” Conference on Savings and Residential Financing 1961 Proceedings, United States Savings and loan league, Chicago, 1961, 42, 43.

And Dr. Philip George comes to a very similar and remarkable conclusion in “The Riddle of Money Finally Solved”:

www.philipji.com/riddle-of-money/

"The error has blinded economists so that, like the seven men of Hindostan, they have mistaken the partial reality that has come within their groping grasp for the whole of reality. And this in turn has divided them into warring sects, looking very little like practitioners of a science and a lot like religious fundamentalists. Keynesian has poked fun at monetarist. Monetarist has ridiculed Keynesian. And both have mocked Austrian and been mocked in return."

And I’ll repeat myself. Demographics and robotics have nothing to do with secular strangulation. Harvard’s “incredibly bright” Larry Summers doesn’t even understand Alvin Hansen's Secular Stagnation Hypothesis.

If you were really smart enough to understand the esoteric nature of my comments, then you’d be laughing until your gut hurt.
Even Danielle Dimartino Booth gets it mixed up in her book: “Fed Up”, pg. 218

“Before the financial crisis, accounts were insured up to the first $100,000 by the FDIC. That limit kept enormous sums in the shadow banking system. After the crisis, the FDIC raised the insured account limit to $250,000. But trillions of dollars still sat outside the traditional banking system. The “safe” money had no place to go expect money market mutual funds and government securities, leading to a shortage of T-Bills and a corresponding drop in yield."

My point was identical to the century old “tug of war” between the panics ensuing between the former Central Reserve City Banks, vs., Reserve City Banks, vs. Country Banks. Even today, IBDDs are skewed towards the largest money center banks.

See SA’s Alt-M “The Six Trillion Dollar Chairman”

seekingalpha.com/article/4185433-six-trillion-dollar-chairman

In January 1936: “Those favoring ceilings in order to limit “destructive competition” felt that free competition for deposits would force some banks to offer rates on short-term funds which were out of line with returns obtainable on assets “suitable” for banks to hold. In order to earn a return higher than it was paying on deposits, a bank might accept higher-risk and longer-term assets, thus impairing the liquidity and solvency of that bank and the banking system.

If the aggregate relation between interest expense and deposits adequately measures the rates banks pay, this argument seems to provide some justification for ceiling rates. In 1933 this measure shows banks paying rates higher than the rates on high-grade short-term securities.
Banks were paying an average effective rate of 3.4 per cent, about twice the rate on prime four- to six-month commercial paper. The rates banks were paying do not appear significantly different from rates they were charging on short-term business loans. It could be argued that banks were offering strongly competitive rates to improve liquidity, which had fallen because of strong demands for currency and liquidity in the rest of the economy.

In January 1962: “The impact on growth was expected to come through encouraging the flow of bank funds to longer-term assets. “By permitting higher rates to be paid on deposits held for longer periods, the new limits would make it possible for banks to attract long-term savings, in contrast to volatile liquid funds, and thereby give banks greater assurance that they could invest a larger portion of their time deposits in longer-term assets,”

Do you even understand the anomaly: “Because banks were not offering competitive yields, time and savings deposits suffered a relative decline.”

"It is double pleasure to deceive the deceiver." - Niccolo Machiavelli

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Scott Sumner (from the Chicago School): "Actually, only tiny Belgium has more balanced trade than China"

Just the opposite perspective is warranted. While the "balance of payments", may be offsetting when tabulating in terms of the current account’s definition (the net of all foreign transactions consummated, international credits equaling international credits), however, gross financial transactions, the sum total of both: all debits to, and / or credits from: the Chinese Yuan, i.e., all financial transactions requiring currency conversion at its manipulated, black market laundered, exchange rate (e.g., imports, exports, FDI, and FPI), the aggregate amount of multi-national, multi-lateral, merchandise trade, is a humongous 36 percent of a 12 trillion $ gDp.

It’s about international interconnectedness, not whether there’s a small current account in relation to China’s 3rd largest world gDp. Otherwise, U.S. stocks wouldn't be falling.

en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

Still looking for a higher stock market by next Wednesday.