It's like the 450 sheep that followed one another over a cliff to their deaths in Turkey in 2005. Economists, in their imprudence, could pass for sheep. And they may be competent at math, e.g., Nobel Laureate Dr. Milton Friedman, but wholly lost when it comes to applying the general rules and concepts that govern the field of accounting – i.e., deep in their economic ozone of abstraction.
Standardized units of measurement (a system of cataloguing stock variables), was paradoxically developed and published by a mathematician, Luca Pacioli. Comparing stock (quantities as of a particular snapshot) vs. flow (rates of change sandwiched between some designated interval) is what separates imprudence from scientists.
Polish economist Michał Kalecki c. 1936 exclaimed: “I have found out what economics is; it is the science of confusing stocks with flows”. I.e., Milton Friedman was “dimensionally confused”. He pontificated that: “I would (a) eliminate all restrictions on interest payments on deposits, (b) make reserve requirements the same for time and demand deposits”. Dec. 16, 1959
From the standpoint of monetary authorities, charged with the responsibility of regulating the money supply, none of the current definitions of money make sense. The definitions include numerous items over which the Fed has little or no control (e.g., M2), including many the Fed need not and should not control (currency). The definitions (which are increasingly erroneously tabulated c. 1981), also assume there are numerous degrees of “moneyness”, thus confusing liquidity with money (money is the “yardstick” by which the liquidity of all other assets is measured).
The definitions also oddly and incongruously ignore the fact that some liquid assets (time deposits) have a direct one-to-one, relationship to the volume of demand deposits (DDs), while others affect only the velocity of DD (an increase in TDs depletes DDs by an offsetting and identical amount). The former requires direct regulation; the latter simply is important data for the Fed to use in regulating the money supply and thus money flows, AD, and N-gDp.
If the “store of purchasing power” attribute of money, when applied to a given asset, is to have significant meaning, it ought to be defined in terms which are applicable to the whole economy. That is, no asset really has a “monetary store of purchasing power” quality unless there can be a net conversion of that asset into money, ceteris paribus. In other words it must be possible to effect this conversion without necessitating that any present money holder reduce/liquidate his holdings/assets (e.g., without “breaking the buck”, viz., when the net asset value (NAV) of a money market fund falls below $1). Any other interpretation becomes mired in a futile discussion of relative degrees of confidence and liquidity. But much more than monetary liquidity for the individual holder is necessary if an asset can be said to have the “store of purchasing power” quality; it must be simultaneously monetarily liquid for society as a whole. - Leland James Prichard, Ph.D., economics, Chicago, 1933
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 (the primary money supply driven by payments) and saving-investment accounts, and created a dilemma as to what portion, if any, of these interest-bearing accounts should be considered as savings. See: "New Measures Used to Gauge Money supply" “Divisia – aggregates” & “debit-weighted-money-... - WSJ 6/28/83
This dilemma is resolved when the transactions velocity of demand deposits was taken into account (i.e., the G.6 debit and demand deposit turnover release discontinued by Ed Fry in September 1996); i.e., deposit classifications are analyzed in terms of monetary flows (MVt). Obviously, no money supply figure standing alone is adequate as a “guide post” to monetary policy.
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"
After a 45 year hiatus, this research paper was "declassified" on March 23, 1983. By the time this paper was "declassified", RRs had become a "tax" [sic].
Contrary to Bankrupt u Bernanke: "Unfortunately, beyond a quarter or two, the course of the economy is extremely hard to forecast", economic prognostications (extraordinary movements in flow), within a year’s period are infallible.
Stocks will bottom in October, if they haven't already. Stocks will peak in December. We'll have to wait and see how far the price-level drops in December for a better read on long term holdings.
See: Ray Dalio: "potential losses that would befall asset holders if interest rates rose by just 1%. Recall from his speech that "if interest rates rise just a little bit more than is discounted in the curve it will have a big negative effect on bonds and all asset prices, as they are all very sensitive to the discount rate used to calculate the present value of their future cash flows. That is because with interest rates having declined, the effective durations of all assets have lengthened, so they are more price-sensitive."
"it would only take a 100 basis point rise in Treasury bond yields to trigger the worst price decline in bonds since the 1981 bond market crash. And since those interest rates are embedded in the pricing of all investment assets, that would send them all much lower."
Keynesian economists have achieved their objective: that there is no difference between money and liquid assets (the Gurley-Shaw thesis). In almost every instance in which Keynes wrote the term bank in his General Theory, it is necessary to substitute the term financial intermediary in order to make his statements correct. Our economy is going to pay the piper. Deficit financing has also reached its limit.
It's all reversible. But the solution is too abstract for Congress. If you don't own a gun, you'd better buy one.
"hot economy"? Yellen buckled under. That's the cry from the N-gDp targeting camp (the persistent politicalized persuasion of herd instinct).
Janet Yellen will, in effect, maximize inflation and minimize real-output, in other words, accelerate stagflation (and accentuate declining incomes).
It took some posting fecundity on the blogsphere to convince and popularize the notion that commercial banks don't loan out their excess reserve balances. Perhaps we can mimic the response and refute the folklore that banks not only don’t loan out IBDDs, but don’t underwrite their newfound loans and investments, viz., commercial bank credit, with old deposits, rather with newfound deposits ex-nihilo. And that an individual commercial bank’s operations may be diametrically at odds from the synchronization of the commercial banking system (DFIs as a unit).
Getting the CBs out of the savings business, increases the velocity of existing bank deposits. It increases the supply of loan-funds, Vt,- but not the supply of new money, M. Reversing the current ideological conspired flow of funds decreases long term interest rates – which feeds back to short-term rates to some extent. In a mechanical sense, it matches savings with investments by activating monetary (bank-held) savings. It accomplishes said financial legerdemain, reversing the direction of political-economic instruction, in a non-inflationary manner boosting R-gDp (not inflation).
Market clearing interest rates are the price of loan-funds, driven by the supply and demand for credit, not money – not as the Federal Reserve incorrectly assumes and therefore incorrectly targets (uses as its monetary transmission mechanism c. 1965).
Keynes's “demand for money” is a false doctrine, confusing money with liquid assets. The Fed's monetary transmission mechanism is non sequitur, and presumes that a “liquidity preference” curve exists which represents the supply of money. In this system, interest is the cost which must be paid, if lenders are to forgo the advantages of liquidity... All of this has little or nothing to do with the real world - a world in which interest is paid on checking accounts (viz., the elimination of Reg. Q ceilings for exclusively, by public enemy #1, the ABA, for their “Go-for-Broke” constituents, the liability mis-management and profit proclivities of commercial bankers).
I.e., the money supply can never be managed by any attempt to control the cost of credit. The effect of tying (pegging interest rates) open market policy to any policy rate is to supply additional (and excessive legal reserves) to the banking system when loan demand increases (which has been why the Fed’s been behind the inflationary curve – it follows the markets and has been responsible for all boom/busts since Roosevelt’s Bank Holiday in 1933). We 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.
The first legal reserve modification in the post-Accord era was in 1959 - when the Fed began to allow vault cash to count towards their reserve maintenance requirements. By confusing liquidity reserves, with legal reserves the FOMC began to lose control of the money stock (i.e., just as the BOG & FDIC raised Reg Q ceiling for the CBs on 5 successive occasions).
The transmogrification of the “U.S. Golden Era” policy took pace in December 1965, when the Board of Governors raised the permissible interest ceiling on time certificates of deposit from 4 ½ to 5 ½ per cent for member banks. The FDIC made the Board’s ceilings applicable to all nonmember insured banks. This was the fifth in a series of rate increases promulgated by the BOG and the FDIC beginning in January 1957, and it was unique in that it was the first increase that permitted the commercial banks to pay higher rates on savings than savings and loan s and the mutual savings banks could competitively meet (despite the fact that the non-banks are the CB’s customers and don’t compete with the CBs for loan-funds).
Responding to these money market and regulatory developments, William McChesney Martin, Jr. then changed the FRB-NY’s “trading desk” operating procedure: from using a “net free” or “net borrowed” reserve position approach to the Federal Funds "Bracket Racket" c. 1965. Note: the 1984 Continental Illinois bank bailout provides a spectacular example of this practice. Since the member banks had no excess reserves of significance (before reserves were remunerated on 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 racket” (which was typical), the rate was bid up and pressure was placed on the top of the FOMC’s policy rate, & the FRB_NY’s “trading desk” using their “open market power”, responded by putting though buy orders, IBDDs were increased, & soon a multiple volume of new money was created on the basis of any given increase in legal reserves. This combined with the rapidly increasing transaction velocity of circulation in 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 (which coincided with the rise in chronic monetary inflation & in anticipated inflation).
The demand for money (Keynes' liquidity preference curve, or “schedule of the money demanded at each different interest rate”), is not a demand for money, per se, but a demand which reflects the advantages of spending borrowed money. Insofar as there is a relationship, it may be said that an increase in the demand for loan-funds tends to be associated with a decrease in the demand for money.
All motives which induce the holding of a larger volume of money will tend to increase the demand for money - and reduce its velocity. Thus, low interest rates may induce people to hold onto their funds (increasing K in Alfred Marshall’s Cash-Balances equation), and not part with liquidity for such a small price. This will also tend to reduce the supply of funds and their velocity (decidedly deflationary).
The transactions concept of money velocity, Vt, not income velocity, Vi (not as was deprecated on Nobel Laureate Milton Friedman’s car license plate), has its roots in Yale Professor Irving Fisher’s “equation of exchange” P*T = M*Vt, where:
(1) M equals the volume of means-of-payment money; (2) Vt, the transactions rate of turnover of this money; (3) T, the volume of transactions units; and (4) P, the average price of all transactions units.
Irving Fisher’s economic axiom is a statistically validated truism, e.g., plugging in the #’s: to sell 100 bushels of wheat, (T) at $4 a bushel (P) requires the exchange between counterparties of $400 (M) once, or $200 (Vt) twice, etc. As Nobel Laureate Ken Arrow opined: “All analysis is a model”.
Some speculative scientific theories depend upon induction: analyzing a lot of experimental findings and tying them together to explain the empirical patterns. What science teaches is the correlation between empiricism and theory.
In Professor Fisher’s 1920, 2nd edition, of: "The Purchasing Power of Money", digitized for FRASER, he instructed:
“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.”
The transactions velocity, a statistical stepchild, is the rate of speed at which money is being spent, i.e., real money balances actually exchanging counterparties. E.g., a dollar bill which turns over 5 times can do the same “work” as one, five dollar bill that turns over only once.
It is self-evident from Fisher’s equation that an increase in the volume, and/or velocity of money, will cause a rise in unit prices, if the volume of transactions increases less, and vice versa. Of course, this is just the “unified thread” of algebra, estranged from “General Field Theory” of macro-econometric modeling.
The algebraic way of stating Fisher’s econometric “flow” is: The rate-of-change in the product of the unit prices, and quantities of goods and services exchanged, P*T is equal, for the same time period (as empirically demonstrated by Fisher’s “distributed lag” effect), to the rate-of-change in the product of the volume, and transactions velocity of money.
Note: N-gDp serves as a surrogate for all economic transactions -albeit AD does not precisely equal N-gDp (e.g., transfer payments, i.e., Social Security, Medicare, unemployment insurance, welfare programs, and subsidies, interest payments on the Federal debt, etc., are excluded).
The upshot is that the rate-of-change, roc, in the proxy for the Fisherian “price-level”, and specialized price indices, is determined, ex ante, by monetary flows (our means of payment money times its transactions velocity of circulation).
Note: The price-indices are subject to the limitations of all analyses based upon broad statistical aggregates, where data points in a time series must be accurately compiled in a manner which conforms to rigid theoretical concepts.
Restated, Fisher’s reconstruction of the quantity theory of money, and heuristic techniques, describes the oscillating crests and troughs of the value of money. The Professor’s quantitative analysis was intended to “prevent and mitigate fluctuations” responsible for “producing alternate crises and depressions of trade.”
But Federal Reserve Chairman Janet Yellen doesn’t follow George Santayana’s aphorism: “Those who cannot remember the past are condemned to repeat it"; viz., what the greatest American economist, Professor Irving Fisher, previously taught at Ivy League, Yale University during 1898 - 1935.
As Dr. Richard G. Anderson, former FRB-STL senior economist and V.P. disclosed [Thu 11/16/06 9:55 AM]: “Nobody at the Fed tracks reserves.” Heretofore unbeknownst, legal reserves are the BOG’s true policy instrument, based upon member bank’s maintenance / compliance. Anderson is the world’s leading guru on reserves (telling me “required reserves are driven by payments”). SA’s Nattering Naybob called them “elephant tracks!”
Opportunists can front-run “tomorrows’ WSJ”. Irving Fisher’s price-index will fall precipitously between November and December, as contrary to legendary Joseph Granville preached, fundamentals precede Joe’s technicals.
November 23rd should mark your entry point (if other speculators don't front-run the news). Speculators should short commodities and buy bonds (and then reverse their positions c. December 21st).
“Banks” are not intermediaries between savers and borrowers. Banks always create new money when they lend/invest (increasing the supply of loan-funds without any savings). Banks never loan out existing deposits, saved or otherwise. All bank-held savings are impounded within the system, indeed suspended, and lost to both investment and consumption - until their true owners spend/invest them.
All bank-held savings originate within the system, and all savers never transfer their funds out of the system (unless they hoard currency). An increase in time (savings) deposits does not increase the supply of bank-held loan funds simply because all savings are derived from previously created bank deposits. The source of time deposits is demand deposits, directly or indirectly via the currency route, or thru the bank’s undivided profits accounts.
And as time deposits grow, demand deposits shrink. Time deposits have a direct one-to-one, relationship to the volume of demand deposits. An increase in TDs depletes DDs by an offsetting and identical amount. These are proven accounting truisms (yet still unbeknownst to the 300 Ph.Ds. on the Fed’s technical / research staff).
And in contradistinction to the aging / demographic implication, the growth of bank-held savings reduces the supply of loan-funds, not increases the supply.
However, if a saver-holder invests his funds directly, or indirectly via a non-bank conduit (thereby matching voluntary savings with non-inflationary real-investment outlets), then the supply of savings (loan-funds) increases, as savings are literally “put to work”, i.e., “risk on”.
Larry Summer’s secular stagnation then is the bottling up of existing savings. While the initial effect of decreasing the supply of loanable funds is to push rates up, the stoppage in the circuit income velocity of funds (monetary savings) has a longer-term debilitating impact on demands, especially the demands for capital goods. Contrary forces are therefore operative. The resolution in this conflict occurred in 1981 (the beginning of the 35 year bull market in bonds).
Ever since the saturation in demand deposit turnover (the climax in bank-deposit financial innovation and the monetization of time deposits, viz., withdrawal without decreasing asset liquidity), N-gDp has fallen because money velocity falls when savings are increasingly idled (un-used and un-spent).
And investment hurdle rates are idiosyncratic, depending upon: the "time value of money" or "time preference" or "carry" (a $ received later is worth more than a $ received today), and the assessment and assumption of risks. Expensive "R and D" outlays must be compensated for by some unknown factors -- higher and deferred rewards. But one such reward depends upon the time horizon of “Modified Accelerated Cost Recovery System”, MACRS.
Investments are deferred when demand is absent. And demand depends heavily upon money velocity. The demand for capital goods is a derived demand, derived from primary consumer demands. That 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.
Demand is always paramount in successful business planning and commitment decisions. If sufficient demand is not expected to exist, it matters not what the expected costs will be. "Sufficient" demand, of course, covers all costs plus and expected after tax profit margin. I.e., both Say's law and the Phillips Curve have already been denigrated.
The proposition is simple. An economy such as ours which is geared to mass production requires concomitant mass consumption. Payrolls must be sufficient to buy the goods and services produced - at the asked prices.
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. This is just another way of saying that to have high levels of production and employment, we need not only a vastly more competitive price structure, we also need a steady but slightly inflationary monetary policy (prices increase c. 2-3 percent annually), and a tax policy that contains some elements of compulsory income redistribution - downward.
There are historically, three basic elements comprising long-term interest rates: (1) a “pure” rate; (2) a risk rate; (3) an inflation premium:
(1) The pure rate presumably reflects the price required to induce lenders into parting with their money in a non-inflationary and risk-free situation.
(2) The risk rate is measured by the yield curve in conjunction with the bond’s duration (counterparty credit, and credit spreads, the difference between one maturity and another, etc.).
(3) The inflation premium is the expected interest rate differential added to compensate for the future rate-of-change in inflation (in Bernanke’s lexicon, this means “the expected path of short-term real, or inflation-adjusted, interest rates; and a residual component known as the term premium”).
But there's no mis-understanding about nominal interest rates. Debt monetization, QE LSAPs, took a disproportionate volume of debt off the secondary securities market (increasing the Fed’s assets on their balance sheet, and in their SOMA portfolio, to $4.5 trillion). This simultaneously increases the supply of loan funds (in both a quantitative and schedule sense), while on the other side of the equation, decreasing the demand for loan funds.
At the same time there was (1) an internationally inspired “flight-to-safety” (and to “safe-assets” - as opposed to Bernanke’s epochal wave creation of impaired assets), and a (2) FDIC flight to unlimited bank-held transaction deposit insurance, and (3) an excess of savings over real investment outlets exerting a contractive economic influence (viz., the cumulative loss of 12 million jobs), and an overvalued exchange rate and lop-sided interest rate differential arbitrage sucking in foreigner’s sui generis, herd instinct, carry trade flows.
FRED’s “Trade Weighted U.S. Dollar Index: Broad Series ID: TWEXBMTH has risen from 95.4 in July 2008 to 122.6 in October 2016. For the unthinking, this means that U.S. consumers have been subsidized by a 29 percent decrease in the cost of imported goods and services (broadly speaking), thereby lowering the real-rate of interest comparisons. In other words, the term premium component of longer dated maturities, inflation expectations, has been artificially diminished.
A. Long-term rates are a function of supply & demand factors such as economic growth, the current & expected rate of inflation (supply side), & the Gov'ts deficit financing (demand side), etc. B. Long-term interest rates are determined by inflation expectations. The expectation that price levels will chronically increase injects an “inflation premium” into long-term rates.
Under A and B assumptions, the present supply of loan funds would decrease (in both a quantitative & schedule sense). I.e., lenders as a group, reduce the volume of loan funds offered in the markets, & refuse to loan any particular volume of funds (except at higher rates that will compensate for the expected rates of inflation).
I.e., higher inflation expectations generate higher inflation premiums. The higher the expected rate of inflation, the higher long-term rates will climb. Conversely, borrowers expecting to be able to pay off loans with depreciated dollars will increase their demand for loan-funds.
Bonds are a function of the average of short-term rates. A flight to “safe-assets” will produce a flatter yield curve thereby reinforcing the drop in rates.
“the slope of the U.S. Treasury yield curve, most often measured by the difference in yield between the 2yr. and 10yr. Notes is used as an indication of investors' outlook on rates and as such, growth. A big difference between the yield on the 2yr. and the yield on the 10yr. says that the market expects rates to be higher in the future while a small differential between the two expresses the exact opposite view. Better prospects for future growth minus low and steady short term rates equals a steep yield curve.”
Coincident with falling demand as a result of fewer credit worthy borrowers (and fewer bankable and investment opportunities), supply increased as consumers and business savings rates increased (as dis-savings, spending decreased)…
“There would have to be a major rethink of the way in which financial intermediaries whose job is maturity transformation (banks, pension funds, insurance companies) work.” ------------------
An indoctrinated, populist, intractable, misconception. All rates of investor’s returns, including interest coupon payments, are lower than otherwise would be, because of secular stagflation. And we, and all Keynesian inspired disciples, have low rates of returns on our savings simply because of one huge overriding government policy blunder: Commercial banks are not financial intermediaries (buying their liquidity, instead of following the old fashion practice of storing their liquidity), ever functioning to match investors with creditworthy borrowers, i.e., pooled savings with investment opportunity outlets.
And the epic error responsible for our economic malaise (lower incomes), was driven by the most dominant economic predator, the oligarch which goes by the name of the American Bankers Association, the ABA. We, as capitalists, entrepreneurs, and consumers, live in a predator society (which necessitates regulated capitalism, not laissez-faire capitalism, not Greenspanism). I.e., there is nothing “normal” about Gov’t incentives and “equilibrium” rates.
It is a statistical fact that commercial banks, from the standpoint of the entire economy do not loan out extant deposit classifications, saved or otherwise. Commercial banks, DFIs, do not loan out reserves, nor any liability, asset, or equity item. Whenever CBs grant loans to, or purchase securities from, the non-bank public, they acquire title to earning assets, pay for them, by initially, the creation of an equal volume of new money (demand deposits) - somewhere in the interdependent member banking system. I.e., commercial bank deposits are the result of lending, - not the other way around.
Larry Summer’s secular stagnation is the direct result of impounding savings within the confines of the CB system. From the system’s architecture, CB held savings are idle, un-used and un-spent (their means-of-payment velocity is zero). And unless bank-held savings are expeditiously activated and put back to work, (matched with non-inflationary real-investment outlets), money velocity shrinks, AD shrinks, and N-gDp shrinks (i.e., all incomes), i.e., ever since 1981 (c. the saturation of DD Vt, and the climax in the monetization of time deposit classifications).
Frances Coppola expounds: “this chart shows that the real interest rate still has further to fall” --------------------
No this will not be the outcome. This was already theoretically, and empirically discredited. And it happened long ago. The reaction of the monetary authorities is already known, indeed has a precedent, is not indeterminate. It is called stagflation, which was predicted in 1958, before the word was coined in 1965 (resulting from a fifth in a series of rate increases promulgated by the Board and the FDIC beginning in January 1957, unique in that it was the first increase that permitted the commercial banks to pay higher rates on savings than the non-banks, savings and loan s and the mutual savings banks, could competitively meet).
It is a historical fact (and we don’t need another Great Depression), indeed empirical evidence, that the removal of the payment of interest on commercial bank’s depositors accounts, will force money to be re-routed outside the banks (through non-bank conduits). Saver-holders will then seek out higher rates of return outside of the commercial banking system. Contrary to conventional wisdom, this does not decrease or alter the total assets or liabilities of the commercial banking system, unless ameliorated through monetary policy objectives (which will be necessary).
Monetary savings are never transferred to the intermediaries; rather monetary savings are always transferred through the intermediaries. Indeed, as evidenced by the existence of “float”, reserve credits tend, on the average, to precede reserve debits. Therefore, it is a delusion to assume that the intermediaries can “attract” savings from the CBs, for the funds never leave the commercial banking system.
Shifts from time (savings) deposits, TDs, to transaction based accounts, TRs, within the CBs and the transfer of the ownership / title of these deposits to the non-banks, NBs, involves a shift in the form of bank liabilities (from TD to TR) and a shift in the ownership of (existing) TRs, from savers to NBs, et al. The utilization of these TRs by the NBs has no effect on the volume of TRs held by the CBs, or the volume of their earnings assets. I.e., the NBs are customers of the deposit taking, money creating, CBs.
…When you drive the CB's out of the savings business. Rates become higher and firmer and there is subsequently a lower loss from bad debt. I.e., the CBs, NBs, and their customers have a symbiotic relationship. The welfare of the CBs is dependent upon the welfare of the NBs, which in turn benefits saver-holders, and all participants' incomes, NIMs, ROA, ROI, and real rates of interest.
(1) Also, for money supply changes over periods of less than a year, such need to be viewed on a seasonally-adjusted basis. Unadjusted change over short periods may show changes that are little more than regular seasonal variations. Short-term changes also may run counter to year-to-year change, as seen in the latter part of 2009, for example.
This is a Shadow Stats’ error. All seasonal adjustments are mal-adjusted to "fit" something (but fit what is left unknown). His "variations", represent the actual rate-of-change in money flows, the seasonal factors scientific map (the Fed's bailiwick).
What says a lot about the 300 Ph.Ds., on the Fed’s technical staff, is that the money stock has never been reported accurately, i.e., correctly defined, since the Fed’s 1913 onset. The error of including MSB’s balances in the computations preceding the DIDMCA was inadvertently corrected by the Act. After the Act, the classification of means-of-payment money within the Savings and Loan Associations, and Credit Unions was increasingly overstated. It included both NOW account balances and thrifts balances in the commercial banks – a double counting.
"At the end of 1929, every $1 in vault cash was supporting $43.47 in deposits" & “that if it had supplied just $400 million more, history would have been far different” -------------- ? Applied vault cash (a bank’s “liquidity” or “prudential” reserves), was not eligible for statutory requirements (legally binding reserves, the Fed’s and a Central Bank’s consummate credit control device) until 1959 (another policy blunder). The only type of bank asset the FRB-NY’s “trading desk” is in a position to constantly monitor and absolutely control are interbank demand deposits, held in the District Reserve Banks, owned by the member banks (aka the ECB’s legal reserves – not ATM deposits).
The Glass-Steagall Act, gave Gov’ts the same discounting privileges as short-term self-liquidating paper, because there was insufficient collateral for rediscounting and advances, viz., not “$400 million more”, (hence Roosevelt declared a "bank holiday" in 1933 from March 6 to March 10).
The demise of the pre-1914 commercial loan theory of banking was inevitable. There was never an extensive “bill market” in the U.S. as existed in Britain and in Western Europe. The mechanical difficulties of rediscounting customer’s paper, which was an insignificant fraction of bank assets, was compounded by the many pieces of paper that had to be manually handled to cover one reserve deficiency, the aggregate of all the paper discounted may not correspond to the amount the member bank wished to borrow, and the maturity of the paper varied (too short or too long).
And if “master accounts” were indeed a problem, then this would have surfaced after the DIDMCA of March 31st 1980 -- when the “pass thru” accounts of respondent banks (all Savings and Loan Associations, Mutual Savings banks, and Credit Unions), cleared and held by correspondents were initially established. The problem with correspondent relationships was that the volume of required clearing balances vastly exceeded the volume of required correspondent balances – hence no binding restriction on creating credit.
I used FRED's figures because the BOG's data has not been updated yet (somebody at the BOG's site has become lazy). RRs behave differently than bank debits (as the big seasonal drop this year demonstrates). RRs are a surrogate for money flows. When there is a decline in RRs, immediately followed by a rebound, it looks like the data should just be smoothed.
There's been increased volatility in the #s, e.g., Treasury's General Fund Account, and this has affected accuracy in my time series. I’ve extrapolated the data to try and establish “levels”, and I might be too generous (conservative):
The widespread introduction of ATS and Now deposit accounts in January 1980, in conjunction with the publication of the G.6 Debit and Demand Deposit Turnover release, initially distorted Yale Professor Irving Fisher’s transactions velocity of circulation, Vt, figures for M1a. The transactions, Vt, of DDs (demand deposits) for a given month is equal to total bank debits to these deposits divided by the average volume of DDs for the same period. The exclusion of ATS and NOW accounts in the denominator was the principal explanation of the sharp upward statistical “bias” in these figures.
But the Fed never “cleaned up its act”, reporting errors notwithstanding, viz., Manufacturers Hanover Trust Co. of New York’s overestimated back-to-back figures of $3.7b on Oct. 3 and $800m on Oct. 10, 1979.
And the Fed never reclassified the DFI’s deposit categories when Congress laid the legal basis for turning 38,000 financial intermediaries into 38,000 commercial banks via the DIDMCA of March 31st 1980 (this Act was the direct cause of the S&L crisis, as well as the Great Recession, by as Dr. Leland Pritchard predicted: allowing money “to approximate M3”).
To the Keynesian economists on the Fed’s research staff, transactions velocity is a statistical stepchild”. It is income velocity, Vi, that matters. Vi is calculated by dividing N-gDp for a given period by the average volume of money for the same period. A decline in the income velocity of money is supposed to suggest that the Fed initiate an expansion or less contractive monetary policy. This signal could be right – by sheer accident.
N-gDp is determined by the volume of goods and services coming on the market relative to the actual “transactions” flow of money. Rates-of-change, roc’s, in money flows (money times velocity), can serve as a reasonably good proxy for the roc’s of those money flows, M*Vt, which finance R-gDp (when international and money center transactions are excluded).
Any increase in Vt, since it will tend to cause N-gDp to rise, will give the Vi economists false signals. This is true even though both the volume of money and Vt tend to move in the same direction. The effect on money flows and N-gDp of an increase in both money and Vt is obviously greater than an increase in either money or Vt. Consequently Vi declines and vice versa. Given these circumstances it is a tighter money policy that is probably needed, not the easier policy the Vi economists would probably recommend.
M2 is the money figure currently in vogue as a measure of the impact of money on the economy. But 95 percent of all demand drafts clear thru transaction based accounts, or M1 (and retail MMMF deposits are not “money” as Martin Wolf, chief economics commentator at the Financial Times, rightly says: “money is not subject to liquidity of solvency issues”).. And the upward bias as a consequence of classifying S&L and CU deposits at commercial banks (but not Mutual Savings Bank deposits, MSB deposit classifications had always been wrong up until then - ever since the Fed’s inception), rather than as interbank demand deposits, IBDDs (some bankers and stock holders are losing their income from the remuneration of reserves).
These issues, plus the weekly M1 figures, are often distorted by net shifts of funds from the public to U.S. Treasury, or vice versa. When you write a check to “Uncle Sam”, the money supply is diminished thereby (TT&L accounts swept to the General Fund Account). When you get a check from Uncle Sam, the money supply expands (General Fund Account to, e.g., social security recipients). In real economic terms the money supply does neither. But that is the way the irrational way the Fed counts money. See David Stockman:
"Since the eve of the financial crisis in 2007, a rapidly increasing share of DPI (disposable personal income) has been accounted for by the explosive growth of transfer payments.” And transfer payments aren't included in gDp tabulations. So some economic models need adjusted.
Thus, the Fed’s monetary mis-management was compounded by Chairman Alan Greenspan:
“By the early 1990s, the relationship between M2 growth and the performance of the economy also had weakened. Interest rates were at the lowest levels in more than three decades, prompting some savers to move funds out of the savings and time deposits that are part of M2 into stock and bond mutual funds, which are not included in any of the money supply measures. Thus, in July 1993, when the economy had been growing for more than two years, Fed Chairman Alan Greenspan remarked in Congressional testimony that "if the historical relationships between M2 and nominal income had remained intact, the behavior of M2 in recent years would have been consistent with an economy in severe contraction." Chairman Greenspan added, "The historical relationships between money and income, and between money and the price level have largely broken down, depriving the aggregates of much of their usefulness as guides to policy. At least for the time being, M2 has been downgraded as a reliable indicator of financial conditions in the economy, and no single variable has yet been identified to take its place."
The Greenspan Fed then discontinued the survey, calculation, and publication for all bank debits in September 1996 (by mistake, driven by the “Paperwork Reduction Act ‘PRA’ of 1995”) when Ed Fry was its manager in D.C. Thus, stakeholders are left without an anchor or rudder to steer the genuine economy.
Lacking any means for making a valid estimate of money flows, or even a reliable mean-of-payment money figure, one must fall back on a surrogate, member bank legal reserves data:
Leland James Pritchard, Ph.D., Economics, Chicago 1933, MS, Statistics, Syracuse said 9/8/81:
“Considering the distortions in the definition of M1a and the rapid increase in the currency component the correlation of the time series is remarkable…You have hit on a predictive device nobody has hit on yet.”
Our economy now requires DD Vt to be maintained at these lofty hyper-transaction activity levels in order to just sustain economic growth. But the Vi economists (using national income and product accounts), chiefly endorse M2 Vi:
The impact of an injection (or draining) of money is not “neutral” as the distributed lag effect of money flows verifies. “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 (not a Phillips’s curve confirmation).
As Janet Yellen and the FOMC meet to consider raising interest rates, this economic projection is important. It spells a deceleration in R-gDp and an acceleration in inflation, viz. stagflation (FOMC schizophrenia, the kind immediately before the 4th qtr. of 2008).
If monopolistic (oligarchic) exercised powers, e.g., in 1973 OPEC, “administer” an upward shift in a marked price, the long-term effect will not be inflationary, but will be deflationary unless monetary flows “validate” these specific price changes. If, during the upward spiral of oil prices, the rates-of-change, roc’s, in symbolically, M*Vt, had not increased, there would have been a massive diversion of purchasing power from non-petroleum products, and the whole country would have experienced, in varying degrees, the depression that afflicted the automotive industry post 1973.
The same reasoning applies to increases in wages achieved thru the monopoly powers of a union. These price increase will result in a transfer of purchasing power and wealth to the groups with dominant economic powers. The resulting price distortions will weaken and depress the economy, increasing unemployment and ultimately creating a deflationary effect.
The OPEC-manipulated increase in oil prices in 1973 and subsequently would have had a depressing effect on the economy had not these higher prices been validated by an expansion in monetary flows. OPEC, organized in 1973, was undoubtedly the force propelling petroleum prices to unsustainable levels.
OPEC thus created a depression in the U.S. automotive industry and presented foreign producers of gas-economical cars an unparalleled opportunity to penetrate our domestic market. This has contributed enormously to our foreign trade deficit and to the transition of the U.S. from being a creditor, to being a world debtor nation.
Money flows actually overcompensated, resulting in high levels of inflation and double-digit interest rates. The impact of both an accelerated increase in the volume and velocity of money on prices is made more evident when we examine rates of increase in aggregate monetary demand (money time’s velocity).
During the decade ending in 1964, AD increased at an annual compounded rate of about 6 per cent (money, M1, at an annual compounded roc of c. 2 per cent, vs. a 6.5 per cent compounded annual rate of change up until 1973). In the nine years up until 1973, the increase in AD was more than 13 per cent and in 1972-1973 nearly 30 percent (money and turnover figures taken from Federal Reserve Bulletin). Because R-gDp and presumably, the volume of goods and services offered in the markets, was increasing at a rate of less than 5 per cent, it was no happenstance that there was an intensification of the chronic rates of inflation to their devastating levels.
The lesson to be learned is that inflation is basically a monetary phenomenon. Price increases attributable to the exercise of monopoly powers applied to specific commodities, are of temporary duration, create price distortions that foster stagnation and unemployment, and generally lower prices, if not “validated” by an offsetting expansion of M*Vt.
Unspent balances from the main income stream, which economists don't even measure, esp. those funds that are a permanent leakage and wholly unrecognized in Keynesian National Income Accounting procedures, or funds which are not rapidly utilized, are the root cause of unemployment, underemployment, and declining incomes, viz., secular strangulation c. 1981 (which was vastly exacerbated by remunerating IBDDs).
The flow-of-funds chart implies no doctrinaire equality of savings and investment. And an excess of savings over real investment outlets exerts a contractive influence. Ponder that in the Keynesian system, S = I simply by ill-definition.
Bankrupt u Bernanke doesn’t know money from mud pie. And he violated the FSRRA of 2006: "Section 19(b)(12)(A) of the Financial Services Regulatory Relief Act of 2006 stipulates: the Fed can only pay interest "at a rate or rates not to exceed the general level of short-term interest rates." Otherwise, aka the 1966 S&L credit crunch, the non-banks shrink in size, but the size of the CB system remains unaffected. I.e., money velocity declines, and AD (money time’s velocity) declines, and its economic proxy, N-gDp declines. I.e., the average standard of living of Americans declines.
And net financial investment (the regulatory “wealth effect”), speculative transactions rather than being a catalyst, are simply a transfer of title to existing goods, properties, or claims thereto, viz., another leakage from the main income stream which contribute nothing of value to current output. I.e., the stock market represents questionable financing that does not add “value to product” and siphons off a net volume of funds that would otherwise have been spent on current output, financing that is not just neutral, but restrictive.
And the acceleration in transfer payments involve expenditures which do not directly finance current output.
An expansion of time / savings deposits, c. $10 trillion in the DFIs (as encouraged by the complete deregulation of commercial bank Reg. Q ceilings), is prima facie evidence of a leakage which collects in the form of unspent balances. A change in time deposits cannot produce a net change in the total money supply since the source of time deposits is, with immaterial exceptions, the primary money stock. I.e., TDs are not a funding source for the CBs.
Never are the CBs intermediaries (conduits between savers and borrowers), in the savings investment process. The CBs always create new money when they lend/invest. The utilization of bank credit to finance real-investment or gov’t deficits does not constitute a utilization of savings since bank financing is accomplished by the creation of new money. All bank held savings are lost to investment and consumption until their owners decide to invest or spend their balances directly or indirectly via non-bank conduits.
Voluntary savings require prompt utilization if the circuit flow of funds is to be maintained and deflationary effects avoided. It is undeniable that $10 trillion in CB held time deposits is an important factor retarding economic growth. The economy, and thus the stock market, is peaking and will decelerate in the 1st qtr. of 2017.
"Keynes wrote a brilliant and enduring book in 1919, in the aftermath World War I, titled The Economic Consequences of the Peace. In it, he states:
Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.
… Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
What Yellen just did was egregious If you look at the yield curve in 12/16/15 (when the Fed first hike rates), and then today, you will find that there has been a dramatic flattening of the yield curve from the 10yr to the 30yr buckets.
I discovered the Gospel in July 1979. It is worth trillions of economic dollars. It should be classified as "top secret" by the CIA. I should be awarded the Nobel Prize in economics.
A prior post.:
"John, the #'s (which represent AD), for the 3rd qtr. are 2x that of the 2nd qtr. And that's without extrapolation and assuming Vt remains constant (& Vt will rise). - 20 Jul 2016, 06:50 PM
Dr. Leland Pritchard (Ph.D, Economics, Chicago School -1933,MS, Statistics):
"You have a predictive device nobody has hit on yet" - 9/8/81
And “considering the distortions in the def. of M1a and the rapid increase in the currency component, the correlation of the time series is remarkable”
Today's BEA release: Real gross domestic product increased at an annual rate of 3.5 percent in the third quarter of 2016 (table 1), according to the "third" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.4 percent.
dec 99.8 1979 jan 105.5 feb 107.3 mar 111.2 apr 109.2 may 112.2 jun 111.5 jul 114.3 aug 116 sep 116.9 oct 119.2 nov 115.4 dec 118.2 jan 125.8 1980 feb 129.3 mar 129.7 apr 126.8 may 132 jun 134.7 jul 135.3 aug 135.4 sep 135.3 oct 135.2 nov 141.8 dec 150.8 jan 161.3 1981 - intro of NOW & ATS accounts feb 168.7 mar 176.9 apr 171.8 may 176.3 jun 185.8 jul 182.4 aug 189.9 sep 191.6 oct 193.6 nov 190.7 dec 206.6
When the U.S. sneezes (e.g., unconventional monetary policy), the rest of the world still catches a cold (reflecting mis-aligned currencies and maturity mis-matches and wider credit-spread responses), viz. a synchronized impact, correlated with cross-border movements and adjustments in market volatility, asset prices and capital – channeled / concentrated hot-money flows disrupting the exchange rates between dominant trading partners (the Fed’s reciprocal currency swap lines notwithstanding).
Money flows are not neutral, money flows do change the economic patterns of trade, production and consumption, employment and R-gDp (the denigration of the Phillips Curve notwithstanding). Money flows do not exclusively, as pontificated by Ben Bernanke, act only on nominal quantities in prices, wages, exchange rate, etc. (who blames our declining incomes and the redistribution of wealth to the upper quintiles on technology, robots, globalization, and aging). No, BuB doesn’t know money from mud pie. Money flows are not, as Milton Friedman and Anna Schwartz advocated, punctuated with “long and variable” results (helicopter drops notwithstanding).
The distributed lag effects of money flows (money times velocity), are mathematical impregnable constants (hence exactly as my “market zinger” forecast played out at the end of 2012 via the expiration of the FDIC’s unlimited transaction deposit insurance, or “putting savings back to work”, not QE3’s impact (which ended without a paradoxical “taper tantrum” outcome). Quantitative easing programs, as IBDDs were remunerated, induced non-bank disintermediation and a deceleration in money velocity. This was immediately reflected by the money market’s response after all QE programs ended.
It is not exactly a Cantillon effect on the allocation of long-term fixed capital goods, but more so impacts the consumption of short-term intermediate durable consumer goods.
In May 2013, a monetary policy expectations’ shock wave (changing perception of risk premia in the spot and forward/swap markets precipitating portfolio reallocations) came on the signal, via jawboning, that the Fed would taper its QE3, LSAP purchases of treasury securities and MBS agency bonds, decried as a “taper tantrum” i.e., temporary “noise” (fiscal budget policy sequestration notwithstanding). No, the “expectations” charge that there was a “taper tantrum” is false. Money flows, the proxy for real-output), had ex-ante, or previously cemented, the markets’ upcoming reaction.
In May 2013, a monetary policy expectations’ shock wave (changing perception of risk premia in the spot and forward/swap markets precipitating portfolio re-allocations) came on the signal, via jawboning, that the Fed would taper its QE3, LSAP purchases of treasury securities and MBS agency bonds, decried as a “taper tantrum” i.e., temporary “noise” (fiscal budget policy sequestration notwithstanding).
No, the “expectations” charge that there was a “taper tantrum” is false. Money flows, the proxy for real-output), had ex-ante, or previously cemented, the markets’ upcoming reaction.
Since the NBER's Business Cycle Dating Committee’s, start of the GR in Dec. 2007, R-gDp has grown by c. 12% and the deflator has grown by c. 14% (stagflation). So, overall, income has declined (secular strangulation). And the distribution of income has shifted to the upper quintiles. That’s exactly how the economy is set up to work (it’s modeled to decelerate and then shrink).
And: “the NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales”.
Keynesian economists are “dimensionally confused” (never having learned a credit from a debit, and thus do not understand the flow of funds, the U.S. savings-investment process). All savings originate within the DFIs, deposit taking, money creating, financial institutions. And from the standpoint of the entire economy and the member banking system, the DFIs always create new money when they lend/invest.
The DFIs do not loan out existing deposits, saved or otherwise. Contrary to the Fed’s bible: “Requiem for Regulation Q: What It Did and Why It Passed Away” – R. Alton Gilbert; deposits are the result of lending, not the other way around. Whether the public saves, or dis-saves, chooses to hold their savings in the DFIs, or transfers their savings to a non-bank conduit, will not, per se, alter the total assets, liabilities, or earning assets of the DFIs, nor alter the forms of these assets and liabilities (transaction or savings accounts).
Savings flowing through the non-banks never leave the payment’s system. And virtually all demand drafts clear thru transaction account classifications. When savings are matched with investments, there is a transfer of title inside DFI deposits. So unless DFI saver-holders invest directly or indirectly via non-bank conduits (outside the payment’s system), money velocity and thus AD, money times velocity, will slow.
I.e., contrary to public enemy #1, the ABA, the non-banks are not in competition with the DFIs. The complete deregulation of commercial bank deposit rate ceilings was patently conspiratorial: “well funded lobbyists that routinely spends more money influencing legislation, than all other industry and labor groupings”. God doesn’t like “ugly”.
Inflation (which is ill-defined and understated, esp. considering lower per-unit pricing), relative to R-gDp, will widen substantially in 2017. That’s how it’s modeled, a priori & a posteriori. Money flows are not neutral. They demonstrably affect real variables, employment, consumption, and R-gdp. Rates-of-change my M*Vt time series are mathematically impregnated constants, ex-ante extrapolations.
The seasonal business cycle discussion was particularly fascinating for me. There is a literature that starts with Barksy and Miron (1989) (ungated version) that shows most of the variation in aggregate economic measures like GDP comes from seasonal fluctuations. Yet most macroeconomists, myself included, typically start our analysis with seasonally-adjusted data. Here is a Barky and Miron summarizing their findings on GDP for 1948:Q2-1985:Q5:
The standard deviation of the deterministic seasonal component in the log growth rate of real GNP is estimated to he 5.06%, while that of the deviations from trend is estimated to be 2.87%. Deterministic seasonal fluctuations account for more than 85% of the fluctuations in the rate of growth of real output and more than 55% of the (percentage) deviations from trend. Business cycle fluctuations and/or stochastic seasonal fluctuations represent a relatively small percentage of the fluctuations in real output. Plots of the log level of real output (Figure 1) and the log growth rate of real output (Figure 2) make this point even more clearly. The seasonal fluctuations in output are so large and regular that the timing of the peak or trough quarter for any year is rarely affected by the phase of the business cycle in which that year happens to fall.
Unfortunately, the BEA no longer makes available non-seasonally adjusted GDP data. However, we can look at other times series to see how large seasonal swings can be relative to recessions. For example, below is retail sales:
What makes this really interesting is that these wide swings in economic activity are not matched by similarly-sized swings in the price level. Most of the seasonal boom is in real activity. Put differently, there is an exogenous demand shock every fourth quarter where prices remain relatively sticky so real activity surges. This is a microcosm of demand-side theories of the business cycle. 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.
This was a fascinating conversation throughout. You can listen to the podcast on Soundcloud, iTunes, or your favorite podcast app. You can also listen via the embedded player above. And remember to subscribe since more shows are coming.
On the individual DFI’s balance sheets in our domestic market (Federal Reserve System of member banks), E-$ borrowings, & likewise, wholesale CDs (instruments which draw funds out from all over the world) is, by legislative custom, a losing anachronistic “macro-economic” proposition. The domestic fractional reserve banking system already owns these deposits (when the DFIs buy their liquidity, there is just a shift in bank liabilities and deposit ownership, or with E-$s a shift too in currencies).
From the standpoint of the economy, the individual bankers are simply paying for existing deposits (the principle expense item reducing profitability on their income statement, and reducing retained earnings on their balance sheet), i.e., bottled up idle savings, that the system and these banks, already possess. It’s tantamount to geographical redlining of the loan-pie, e.g., like the endogenous redistribution of deposits between former Central Reserve City Banks, vs., Reserve City Banks, vs. Country Banks - instead of following the old fashioned practice of storing their liquidity (using core deposits). The question is not whether net earnings on CD assets are greater than the cost of the CDs to the bank; the question is the effect on the total profitability of the commercial banking system. This is not a zero sum game. One bank’s gain is less than the losses sustained by the other banks in the System.
The skimming or siphoning off of savings from the main income stream, also tends to re-distribute and mis-allocate the residual available credit offered in the loan-funds market (its utilization being skewed towards financing existing goods as opposed to new goods - a throwback to the old Commercial Loan Theory of banking). Liability management practices are monopolistic price practices - increasing business borrowing costs, reducing saver-holder’s account returns, increasing the volume of marginal / risky loans and subsequent bad debt (bad debt destroys money and money velocity), delimiting downward price flexibility.
Banks collectively, cannot attract savings and thereby expand their earning assets (i.e., commercial bank credit). This inescapable error is as stupid as stupid gets. The ABA is public enemy #1. And all savings originate within the payment’s system. The source of time (savings) deposits is other bank deposits, directly or indirectly via the currency route, or thru the bank’s undivided profits accounts.
Time / savings deposits rather than being a source of loan funds for the system, are the indirect consequence of prior bank credit creation. And the source of bank deposits (loans=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, the creation ex-nihilo, with an equal volume of new money - demand deposits -- somewhere in the banking system. For the CB 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. The CBs could continue to lend even if the non-bank public ceased to save altogether.
It is not happenstance. “Near-Money Premiums, Monetary Policy, and the Integration of Money” Markets: Lessons from Deregulation:
“Specifically, we find that changes in the supply of Treasury bills, as well as other factors influencing the issuance of CDs and Eurodollars led banks to adjust the composition of their liabilities, but not the growth of total bank liabilities. Thus, at least in the short run, money market developments did not bring about changes in total bank leverage.”
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 M*Vt.
Given that the symbols in Fisher’s time series: (1) M*Vt is equal to aggregate monetary purchasing power, or AD and (2) P*T, or all economic transactions, are a proxy for N-gDp. Then, based on the distributed lag effects of the independent variables (which have been mathematical constants for 100 + years), money flows, a priori and a posteriori, are not neutral in the short or the long run. Note: “A distributed-lag model is a dynamic model in which the effect of a regressor x on y occurs over time rather than all at once”.
Monetary flows, money time’s velocity, are a mathematically robust sequence of numbers. For short-term money flows, the proxy for real-output, R-gDp, it's the rate of accumulation (sigma Σ), 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 rate-of-change, ROC, is the pace at which a variable changes, Δ, over that specific lag’s established periodicity.
Fisher (1930, p.451) deduced:
When the effects of price changes upon interest rates are distributed over several years, we have found remarkably high coefficients of correlation, thus indicating that interest rates follow price changes closely in degree, though rather distantly in time.”
See: “The Purchasing Power of Money”, MACMILLAN (1920)
As David Beckworth posted on “Macro and Other Market Musings”:
“What makes this really interesting is that these wide swings in economic activity are not matched by similarly-sized swings in the price level. Most of the seasonal boom is in real activity. Put differently, there is an exogenous demand shock every fourth quarter where prices remain relatively sticky so real activity surges. This is a microcosm of demand-side theories of the business cycle”
But what is true on the upside is false on the downside. Unless money flows expand at least at the rate prices are being pushed up, incomes will fall, output can't be sold, and jobs will be lost. I.e., there should be a fall in retail prices after the holidays.
This is something Ben S. Bernanke repeatedly refutes:
Bernanke: “Finally, the R2 of the common components is particularly low for the money aggregates, being 10.3% for the monetary base and 5.2% for M2. This implies that we should have less confidence on the impulse response estimates for these variables. Interestingly, these are variables for which the impulse response functions from the two estimation methods differ the most.”
Ben S. Bernanke & Ilian Mihov: “The Liquidity Effect and Long-Run Neutrality, Ben S. Bernanke & Ilian Mihov:
“The first, the so-called liquidity effect (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 (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.”
With respect to interest rates, the combined lags may work against, or for, one another (Bernanke et. al., don’t even consider the existence of more than one lag). An injection of liquidity might initially depress rates, given for example, either long-term or short-term money flows,-Δ, declining, or without any significant change in their calculus.
All of which is to say that the stock market averages, following the economy, is now set to drop.
Ben Bernanke on Financial Crisis
“…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.”
Governor Ben S. Bernanke “On Milton Friedman's Ninetieth Birthday” At the Conference to Honor Milton Friedman, University of Chicago, Chicago, Illinois, November 8, 2002