There is something in this more than natural - Hamlet

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We knew this already: In 1931 a commission was established on Member Bank Reserve Requirements. The commission completed their recommendations after a 7 year inquiry on Feb. 5, 1938. The study was entitled “Member Bank Reserve Requirements — Analysis of Committee Proposal”

It’s 2nd proposal: “Requirements against debits to deposits”

bit.ly/1A9bYH1

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

See my calculations:

monetaryflows.blogspot.com/2010/07/monetary-flows-mvt-1921-1950.html

These are not ex-post realizations, viz., “Taylor like”.

They are ex-ante extrapolations; defined as: “is based on ‘forecasts’ rather than actual results”.

It actually is based on the lag event, so it is a “forward looking” extrapolation defined as: “the action of estimating or concluding something by assuming that existing”…”trends will continue or a current method will remain applicable”.

I thought that it would differentiate and emphasize my avant-garde, modeling technique. So I concatenate the terms.

I.e., my modeling beats the Hell out of all other modeling.

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Durable goods decline, then ->capital goods decline. Exactly as the savings-investment theory predicted in 1958. It will get much worse under the remuneration of IBDDs:

"the stoppage in the flow of monetary savings, 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"

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As I said on 2/17/17: “stocks peak in March”
And as I also called:
“Oil is definitely a short at some point in late January. It will bottom at some point in March”.
Jan 5, 2017. 05:52 PMLink
————–
These aren’t well researched estimations. They just track money flows. But Houston, we have a problem – money velocity. MZM velocity fell for 2 qtrs. after the 12/17/15 rate hike. And we’ve now had 2 back-to-back rate hikes on 12/15/16 & 3/15/17.

FRB-ATL’s GDPNow model’s iterative downward revisions are no happenstance. Under the remuneration of IBDDs, a hike in the inter-bank remuneration rate (outside money), either induces non-bank dis-intermediation, or impedes the S=I brokering channel (increases leakages from the main, circular, income stream).

I.e., the payment of interest on IBDDs, destroys savings velocity by driving existing money (voluntary savings) out of circulation into the stagnant, commercial bank impounded and ensconced, savings deposits (where savings velocity is a subset of both money & credit velocity).

And it was non-inflationary savings velocity (all non-bank activity clears thru the payment’s system), that spawned the U.S. “Golden Era” in economics. Economic policy is perverse, one where the majority of policies are regressive (backsliding models leading to “arrested development”).

A hike in the remuneration rate swallows up successive prints in R-gDp. It decreases the demand for durable consumer goods, and then in the longer-term->business’s demand for new capital goods (a reflection of also, Alfred Marshall’s “cash-balances equation”, where “K” becomes the reciprocal of “V, and Larry Summers’: an excess of savings over investment outlets).

Oil and inflation will be lower in 2018. But I have to question as to whether bonds will follow suit (as there is now a snowballing demand side factor in the supply of and demand for loan-funds (gov’t deficit financing).  But after this correction, stocks to the moon - TINA

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The payment of interest on excess reserve balances (obviously not a tax as IBDDs are “Manna from Heaven”), has exceeded the level of short-term interest rates (contrary to the letter of the law-of-the-land - per the provisions for the FSRRA of 2006). I.e., the remuneration rate inverts the short-end segment of the yield curve known as the money market (the non-banks’ wholesale funding umbrella: in borrow-short, to lend-longer, NIM arbitrage).

IOeR’s compete with money market “paper” (as contrasted to the capital market). The financial instruments traded in the money market include Treasury bills, commercial paper, bankers acceptances, certificates of deposit, repurchase agreements (repos), municipal notes, federal funds, short-lived mortgage and asset-backed securities & E-$ CDs.

The money market is differentiated by its position on the yield curve (i.e., short-term borrowing & lending with original maturities from one year or less). Domestic liquidity funding is customarily benchmarked by LIBOR indexes & foreign exchange swaps.
In turn, money market paper funds the capital market (earning assets greater than 1 year).

Non-bank financial intermediaries in the capital market (conduits between savers and borrowers), include hedge funds, SIVs, conduits, money funds, pension funds, selective mutual funds, hedge funds, sovereign wealth funds, insurance companies, banks , foundations, universities, & individuals as well...

Like in 1966, it was the lack of funds, rather than their cost, that spawned the GR’s credit crisis & collapsed non-bank lending/investing by $6.2 trillion. I.e., IOeRs induce non-bank dis-intermediation (where the size of the non-banks shrink, but the size commercial banking system remains unaffected). IOeR’s reduce the spread, NIM, (between the weighted-average interest earned on loans, securities, and other interest-earning assets, & the weighted-average interest paid on deposits and other interest-bearing liabilities). A flatter yield curve and/or lower rates shrink both CB and NB profits.

Notwithstanding the savings-investment mechanics, (1) the remuneration rate has exceeded the level of 6 month T-Bills ever since 9/2009 (i.e., since the end of the NBER dated recession in 6/2009. (2) The remuneration rate began exceed the level of 1 year constant maturity rates beginning in 5/2011 and ending in 5/2015. (3) The remuneration rate first exceeded the level of the 2 year constant maturity rate in 8/2011 and lastly on 5/2013.

Then as both the commercial paper market and the repo market was collapsing, the “SPF program alone immobilized almost $559 billion in base money” (absorbed the supply of the U.S. Treasury’s safe-assets). I.e., QE or LSAPs, using the presupposed interest rate manipulation portfolio re-balancing channel, did not overtly increase aggregate monetary purchasing power.

QE (sterilizing open market operations of the buying type, i.e., not “stimulus”), contracted the E-$ market - mopping up the supply of its prudential reserves

But the July 2011 demarcation in E-$ liabilities was principally due to: (1) “the FDIC formally modified the assessment base in 2011 to include all bank liabilities”, which made foreign deposits, e.g., E-$ borrowings, more expensive (never before applied assessment fees), and Basel’s additive (phasing in liquidity standards), Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).

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I think we already have a good idea when stocks correct, almost as good as I predicted in Dec. 2007. This typical seasonal rally coming off of the 2nd inflection point, should end in conjunction with the 3rd seasonal inflection point on 5/5/2017 (as rates and inflation rise and Alfred Marshall’s “K”, the reciprocal of Vt, or momentum, falls).  As the seasonal pendulum swings, strength and weakness shows up.

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Indeed, our economy is quite literally being driven in reverse. You may sense this, but can't put your finger on it.

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

F. Scott Fitzgerald: “The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.”

You have to retain the cognitive dissonance capacity, like Walter Isaacson described Albert Einstein’s ability: to hold two thoughts in your mind simultaneously – “to be puzzled when they conflicted, and to marvel when he could smell an underlying unity”.

John Maynard Keynes couldn’t do it:

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

In almost every instance in which Keynes wrote the term bank in the General Theory, it is necessary to substitute the term non-bank in order to make his statement correct.

See e-mail response from senior economist and V.P. FRB-STL:
-----------
Re: Savings are not a source of "financing" for the commercial bankers
Dan Thornton
Thu 3/9, 2:47 PMYou
See the graph below.

bit.ly/2n03HJ8

Daniel L. Thornton
D.L. Thornton Economics LLC
xxxxx

Never are the commercial banks intermediaries (conduits between savers and borrowers), in the savings-investment process. I.e., altogether we have to invalidate the “Austrian Theory of The Business Cycle”.

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If talking macro-economics, or system dynamics, you're talking about: (1) rates-of-change (speed, Vt) in conjunction with the (2) flow-of-funds (direction, inflows & outflows, ↔, &/or, more and less, ↕), and for example, whether income is (+) increasing or (-) decreasing. And if you don't know a debit from a credit, then you can't understand (1) stock: a quantity at a point in time, or C= q/V, capacitance vs. (2) flow: a change, ∑ , over a period of time, Δ.

All saving’s originate endogenously within the interconnected: payments’ clearing, and settlement banking system (our Federal, FDIC insured, member commercial banking system). That is to say commercial bank credit creation is a "system" process. No bank, or minority group of banks (from an asset standpoint), can expand credit (& the money stock), significantly faster than the majority group are expanding.

Savings are defined as funds held beyond the income period in which received. All bank-held savings are thus idled (un-used and un-spent), until such time as their owners spend/invest directly or indirectly via non-bank conduits (outside of the payment’s system, the only place where savings are activated and matched), thereby completing the circuit income velocity of funds and the redistribution of largely upper quintiles’ incomes.

A bank cannot write a check against your deposit (so to speak). Only the saver-holder (owner) can decide to whether spend or invest (exchange their assets). This is contrary to Keynesian economists, e.g., Francis A. Scotland’s micro-economic perspective (BCA Publications LTD): “the banking system is chiefly a conduit through which the savings of the public are pooled in order to finance investment activity in the economy”.

From the standpoint of the entire economy (Martin Wolf’s, chief economics commentator at the Financial Times, macro-economic perspective), or from a systems’ belvedere, commercial banks, deposit taking, money creating financial institutions, or DFIs, as contrasted to financial intermediaries (non-banks or NBFIs): never loan out, & can’t loan out, existing funds in any deposit classification (saved or otherwise), or the owner’s equity, or any liability item.

When DFIs grant loans to, or purchase securities from, the non-bank public, they acquire title to earning assets by initially, the creation of an equal volume of new money (demand deposits) - somewhere in the banking system. I.e., the DFI’s bank deposits are the result of lending, not the other way around.

So whereas Dr. R. Alton Gilbert didn’t understand the system dynamics of stock from flow, in “Requiem for Regulation Q: What It Did and Why It Passed Away” (FRB-STL, February 1986), the Fed’s “Bible”, he surmised that Reg. Q ceilings “discriminated against small savers, and did not increase the supply of residential mortgage credit”.

Dr. Lawrence H. White, a senior fellow at the Cato Institution wrote about duration risk in the borrow short to lend longer, savings-investment paradigm: “in 1979-1981 it rendered insolvent about two-thirds of US thrift institutions (FSLIC, NCUSIF, insured), who were financing 30-year fixed-rate mortgages with 1- and 2-year deposits”. Funny how professional economists talk about dis-intermediation for the NBFI, but not for the DFIs. But this is correct. The DFI’s, via various Depression Era regulatory modifications and enhancements, are now backstopped.

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 & 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.

I.e., Dr. Gilbert assumed that the NBFIs were in competition with the DFIs (whereas actually, the NBFIs are the DFI’s customers). And savings flowing through the NBFI (from the commercial banks), never leaves the member commercial bank system (as anyone who has applied double-entry bookkeeping on a national scale should already know).

Dr. Gilbert naively asked the wrong question. His implicit and false premise was that savings are a source of loan-funds to the banking system. Gilbert assumed that any potential primary deposit (funds acquired from other DFIs within the same regulated boundaries), were newfound funds to the banking system as a whole.

Thereby in his analysis, Gilbert also assumes that every dollar placed with a non-bank deprives some commercial bank of a corresponding volume of loanable funds. However, saver-holders never transfer their funds out of the payments system unless they hoard currency or convert their funds to other national currencies. This applies to all investments made directly or indirectly through intermediaries.

Gilbert asked: Was the net interest income on loans/investments derived from "attracting" these savings deposits (viz., outbidding other DFIs for the same stock of core deposits), greater than the interest attributable to the direct and indirect operating expenses of endogenous retail and this wholesale "funding" [sic]?

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 whole (the forest), is not the sum of its parts (the trees), in the money creating process.

In other words, the impounding and ensconcing of savings within the confines of the domestic commercial banking system is directly responsible for both stagflation and secular strangulation.

-Michel de Nostredame

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The U.S. Golden Era in Economics was accomplished by putting savings back to work.

The magnitude of this Keynesian error is all encompassing. The implications are profound. Virtually 100% of all Ph.Ds. in economics don't understand money and central banking. See George Selgin:

"This is nonsense, Spencer. It amounts to saying that there is no such things as "financial intermediation," for what you claim never happens is precisely what that expression refers to.

It is, of course, occasionally though rarely the case that when someone contradicts what the mass of other experts has long maintained, the iconoclastic view is in fact correct. I get that; I have been there myself. Nevertheless, the odds are generally that the generally accepted view has some merit. In any event, it takes more than a mere assertion, however bold, to refute it."
------

This idea is referred to as the Gurley-Shaw thesis, the Keynesian idea that there is no difference between money and liquid assets. All economists are dimensionally confused (including the 300 Ph.Ds on the Fed's research staff). But this wasn’t the case in the 1950’s. See Lester V. Chandler:

“Professor Pritchard is quite right, of course, in pointing out that commercial banks tend to compete with themselves when they issue savings deposits.”

Then Chandler gets lost:

“My guess is that most savings deposits represent funds that would be shifted to other intuitions or other liquid earning assets if the individual bank refused to pay interest on them. The individual bank would not have the funds for free; it would not have them at all. In other words, in determining its revenues and costs from savings accounts, a bank is in much the same situation as a non-bank”
------------

And therein lies the error. Savers (contrary to the premise underlying the DIDMCA of March 31st 1980, in which CBs were assumed to be intermediaries & in competition with thrifts) never transfer their savings out of the banking system (unless they are hoarding currency or convert to other national currencies). This applies to all investments made directly or indirectly through intermediaries (non-banks).

The DIDMCA caused the S&L crisis. This error caused another error, the Fed’s reduction in the DFI’s reserve requirements by 40% (i.e., after the S&L crisis caused the July 1990 –Mar 1991 recession). This in turn manifested itself, causing the housing crisis and eventually the GR.

I.e., shifts from savings accounts, TDs, to transaction accounts, TRs, within the DFIs & the transfer of the ownership of these deposits to the NBFIs, involves a shift in the form of the DFI’s liabilities (from TD to TR) & a shift in the ownership of existing TRs (from savers to NBFIs, et al). The utilization of these TRs by the NBFIs has no effect on the volume of TRs held by the DFIs, or the volume of their earnings assets. I.e., the non-banks, NBFIs, are customers of the deposit taking, money creating, DFIs.

In the context of their lending operations it is only possible to reduce the DFI’s assets, & TRs, by retiring bank-held loans, e.g., for the saver-holder to use his funds for the payment of a bank loan, interest on a bank loan for the payment of a bank service, or for the purchase from their banks of any type of commercial bank security obligation, e.g., banks stocks, debentures, etc.

Monetary savings are never transferred to the NBFIs; rather monetary savings are always transferred through these 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 savings can be “attracted” from non-bank conduits; for the funds never leave the commercial banking System.

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The term “credit crunch” was first coined during the 1966 S&L residential real-estate debacle. It was the lack of funds, rather than the cost of funds, that spawned the credit crisis of 1966. It was the 5th successive Regulation Q ceiling rate hike for exclusively the commercial banks, DFIs, since 1957 (& 1957 was the first hike since 1933). This hike ended the U.S. Golden Era in economics.

The 5th rate hike in the DFI’s deposit ceilings was unique in that it was the first increase that permitted the DFIs, to pay higher rates on savings than S&Ls and MSBs (the non-banks, NBFIs) could competitively meet. And the thrifts, non-banks, were previously always unregulated and unrestricted with regard to pooled savings, and gov’t insured, consumer/retail type deposits (representative of BuB’s “democratization of credit”, the obverse of the elimination of usury ceilings, the five C's of credit, & antitrust laws). Reg. Q ceilings for the non-banks were imposed beginning with the advent of the credit crunch in 1966.

I.e., the 5 ceiling rate hikes for the DFIs caused stagflation (the word coined in 1965 by Iain Macleod) as predicted by Dr. Leland James Pritchard (Ph.D., Chicago, Economics, 1933, MS, Statistics, Syracuse), in the late 1950’s.

See: “Commercial Bank and Financial Intermediaries: Fallacies and Policy Implications”, The Journal of Political Economy, Vol. LXVIIII, No. 5, October 1960 – L.J.P.

See also: “Should Commercial Banks Accept Savings Deposits”, Conference on Savings and Residential Financing (1961 proceedings), United States Savings and Loan League, Chicago - L.J.P.

See: George Selgin’s re-cap on remunerating IBDDs:

1. IOR was implemented in October 2008 for the avowed purpose of checking bank credit expansion in response to the Fed's creation of fresh bank reserves.
2. In fact, IOR contributed to the fall 2008 wholesale credit crunch, most obviously by causing a dramatic decline in interbank lending. Again, this contribution was anticipated by Bernanke and others responsible for the policy.
3. Once the rate of IOR exceeded the yield on Treasuries and other low-risk assets, as it did shortly after the program began, banks had an incentive to accumulate excess reserves instead of attempting to acquire such securities. Thus the normal process of bank balance-sheet expansion and deposit creation in response to reserve injections was short-circuited.
4. IOR also contributed to the relative decline in risky bank lending by increasing the marginal opportunity cost of such lending. This portfolio effect of IOR on risky lending was very small relative to that of increasing regulatory burdens, including capital requirements, especially after 2008. But as at least some banks had both surplus capital and surplus reserves, capital constraints alone did not prevent IOR from also having some influence.
5. Fed officials, including Bernanke, who would deny that IOR had the consequences I have just outlined, are at least obliged to reconcile their denials with the justifications offered for implementing the program in the first place."

Greenspan in the “Map and the Territory”: “the depth of a financial crisis is best characterized by the degree of collapse in the availability of short-term credit (like call money precipitated the 1907 panic). “The evaporation of short-term credits, especially trade credits, in September 2008 was global and all encompassing”. “Not only did short-term funding collapse, but customer collateral that was subject to recall fled”.

Alan Blinder “After the Music Stopped”: “the inability to roll over short-term borrowings is the modern version of a run on the bank. Such runs more or less killed both Bear Sterns and Lehman Brothers in 2008, and almost killed Merrill Lynch, Morgan Stanley and Goldman Sachs”.

Ben Bernanke: “BNP Paribas said that it could not determine the value of its funds because of the ‘complete evaporation of liquidity’ in the markets for those securities.”…”As in a traditional run, the outcome was that shadow banking entities (including conduits) found it increasingly difficult to obtain funding”…”financed, directly or indirectly, b wholesale funding, mostly in the form of commercial paper or repurchase agreements.”…”We faced: the growing scarcity of short-term funding”…”granting temporary exemptions from Section 23A of the Federal Reserve Act, which normally prevented them from funneling discount window credit to nonbank components of their companies”…”our goal was to increase the supply of short-term funding to the shadow banking system”.

In other words, contagion in the form of dis-intermediation (a term only applicable to the non-banks since 1933). In other words, contrary to bad Ben, money isn’t fungible, one dollar isn’t like any other. BuB caused the GR all by himself.

As I said: “So, now, each and every time the Fed raises the remuneration rate, it will induce non-bank dis-intermediation and money velocity will decelerate.” Aug 1, 2016. 08:38 PMLink

We’ve now had 3 rate hikes in the Remuneration rate beginning 12/17/15. 5 rate hikes could cause a permanent economic Depression.

- Michel de Nostredame

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It's never too late to correct your mistakes.

Interest is the price of loan funds. The price of money is the reciprocal of the price level. So, if savings are transferred through non-bank conduits (strictly a velocity relationship), then there is an absolute increase in the outstanding supply/volume of loan-funds (but no change in the money stock), and vice versa (something Steve Keen knows nothing about). There is just a shift in the title to commercial bank deposit ownership (the funds never leave the commercial banking system, i.e., ->where ALL savings originate).

This vacuous theoretical blunder is the sole cause of both [1] stagflation, c. the 5 successive Reg. Q ceiling rate hikes beginning in 1957 -which caused the S&L credit crunch, the GR’s prologue and paradigm (for exclusively Ron Chernow’s: “go-for-broke-bankers”…“sworn foe of bureaucrats”, and public enemy #1, the ABA), and [2] secular strangulation, coterminous with the end of Professor Lester V. Chandler’s presupposed monetary offset, viz., the saturation of DD Vt financial innovation, the widespread introduction of ATS, NOW, and MMDA accounts in 1981.

The remuneration of IBDDs exacerbates this pertinacious phenomenon. Thus, “in a twinkling…”, viz., 3 successive rate hikes in the remuneration rate, R-gDp is swallowed up (as I predicted . Aug 3, 2016. 02:48 PMLink: “And if the Fed continues its madness, i.e., every time the Fed raises the then the economy will flat line”).

So Bankrupt u Bernanke actually tightened monetary policy during the sharpest surgical decline in U.S. economic growth during the 4th qtr. of 2008. And everyone jumped on the bandwagon. There was a world-wide flight to FDIC flim-flam promotional savings, funds held beyond the income period in which received, impounding and ensconcing savings within the commercial banking system (thereby destroying money velocity, destroying money flows, M*Vt, destroying aggregate monetary purchasing power, AD, and thereby lowering the standard of living for the vast majority of Americans).

There was a counter-cyclical increase in bank capital requirements (destroying existing deposits, dollar for dollar).

And unlike U.S. Treasury legislatively targeted issuance options, the “trading desk” did not specifically target non-bank counter-parties as Paul Meek, FRB-NY assistant V.P. of OMOs and Treasury issues described in his Fed booklet: “Open Market Operations”, Federal Reserve Bank of New York, May 1973. No, BuB speaking with a “forked-tongue”, instead of couching the “desk’s” instructions in terms of reserves available for private non-bank deposits (RPDs), as the FOMC did in 1972, FOMC policy was bifurcated, and this subsequently emasculated the Fed’s “open market power”, ”, viz., the Central Bank’s sovereign right to promulgate the creation of new money and credit: at once and ex-nihilo.

And monetary policy is impossible without the cooperation of the U.S. Treasury. The Fed requires “grist for its mill” as if the Great Depression didn’t teach anyone, including BuB, anything. There was a blatant lack of coordination between the Federal Reserve and the Treasury Dept. (e.g., necessitating the Treasury Supplementary Financing Program -SFP), etc.

BuB should be held accountable for his mistakes. He should not go down as the “savior of Rome”.

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www.debtdeflation.com/blogs/manifesto/

Steve Keen doesn't understand macro, viz., "but at some time between 1945 and America’s first post-WWII financial crisis in 1966 (Minsky 1982, p. xiii), it passed this level."

No, the U.S. Golden Era in economics was where savings were "activated", FSLIC promoted, and "put back to work" (completing the circuit income and transactions velocity of funds), by encouraging saver-holder's outlets (both higher and firmer *real* rates of interest, and ROI), through non-bank conduits, thrifts, e.g., MSBs, CUs, and S&Ls, via residential *real-investment*, i.e., "new" starts in real-estate.

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

In almost every instance in which Keynes wrote the term bank in the General Theory, it is necessary to substitute the term non-bank in order to make Keynes' statement correct.

Thereby, in stark contrast to Keynesian economists, e.g., Ben Bernanke: his neutrality of money as evidenced by his FAVAR 2002 Bernanke paper, and Bankrupt u Bernanke wrote in his book/memoirs: "The Courage to Act" said: "Money is fungible. One dollar is like any other”, or in other words, there is no difference between money and liquid assets (the Gurley-Shaw thesis).

Money, and money flows, are robust, not neutral (“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”).

As Professor Leland James Pritchard, Ph.D., economics 1933, from “The Chicago School”, alone prophesized:

“The revolutionary & disastrous implications of the DIDMCA of March 31st 1980 are clearly not recognized”…” Under this Act, the means-of-payment money supply (then designated as M1A by the Board of Governors) will come to approach approximately M3” (as it subsequently did during the real-estate “bubble”)…” One of the principal purposes of this Act was to provide the housing industry with a reliable source of funds.”…”this might be achieved through various governmental & quasi-governmental corporations (note: “Freddie, Fannie and the Federal Housing Administration together now guarantee about 90 percent of all new mortgages, far above their historic level” 2013’s figures)., but the role of the S&Ls in housing finance will be diminished significantly. By becoming commercial banks & having a larger spectrum of loans to choose from, the S&Ls began to act like banks & whenever possible, eschewed “borrowing short & lending long”…”Sources of mortgage funds shifted from the subsidized rates formally provided by the small saver to “bond-backed” sources which reflecting the interest rates prevailing in the longer-dated loan-funds markets”.

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Monetary policy objectives should be formulated in terms of desired rates-of-change, RoC's, in monetary flows, M*Vt (volume X’s velocity), relative to RoC's in R-gDp. RoC's in R-gDp serves as a close proxy to RoC's in total physical transactions, T, that finance both goods and services.

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 Yale Professor Irving Fisher's truistic: "equation of exchange". And Alfred Marshall's cash-balances approach: "bridges the gaps of transition periods" in Professor Irving Fisher’s model. Roc's in R-gDp have to be used, of course, as a policy standard.

As I said: Aug 3, 2016. 02:48 PMLink: “And if the Fed continues its madness, i.e., every time the Fed raises the then the economy will flat line”).

The Fed will not hike again in 2017. Unless the Fed eases monetary policy, there will ensue an economic recession beginning in the 4th qtr. of 2017.

-- Michel de Nostredame

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Just as it is a folly to conclude that the payment’s system and debt aren’t integrated (primary broker-dealer debt clears through the payment’s system), it is also a folly to conclude that Treasuries, or GC, can’t be used to pyramid credit (the discounted rehypothication of counterparty, risk-adjusted, hedged, cross-border, and subrogation of claims).

The unbackstopped, prudential reserve E-$ system (of FBOs) created a superstructure of credit. But shadow bank lending is more like that of a pawnshop, issuing cash credit for collateral (repos) at a buffered haircut (or synthetic leverage), providing a standard of deferred-payments (CCP and OTC bilateral cleared). It is not like the commercial loan theory of banking (real bills doctrine).

No, money isn’t fungible, one unit-of-account is not like any other. Money is not necessarily the final settlement of claims, as differentiated from credit, or promises to pay, e.g., share account runs, or margin calls on pooled MMMF’s “underwater” paper, breaking “C-NAVs”. Money has a universal definition, viz., “must be simultaneously monetarily liquid for society as a whole”.

Money has invariable characteristics. Money functions as a store-of-value, a medium-of-exchange, a unit-of-account, and a standard-of-value. “At par”, and marked-to market (MTM) implies irrevocable convertibility. No asset has the “monetary store of purchasing power” quality unless there can be a net conversion of that asset into money. It must be possible to effect this conversion without necessitating that any present money holder reduce/liquidate his holdings (e.g., MMMFs don’t meet this criterion when their NAV breaks a $1) & they do not have FDIC insurance coverage, and do not meet "Bagehot's dictum".

Economics, which is quite a dismal cacology of lies, hasn’t changed in over 100 years. Financial innovation hasn’t changed basic money and debt relationships. Paul McCulley’s regurgitated iterations of shadow money, and shadow banking, represent parochial and oligarchic mindsets. If liquid assets clear thru other exchanges, e.g., and not the payment’s system, then that is new.

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"NIM" for commercial banks is “fake news” propagated by “fake” economists. True, when commercial banks pay for their liquidity ->by buying their liquidity (redistributing “core” system-wide deposits), then on their income statements, wherein their interest expense is the largest single entry, bank’s profitability is diminished – but not their NIMs, rather their ROI and ROA. The technical macro-distinction is that from the standpoint of the entire economy and the banking system, banks pay for their *new* earning assets simultaneously with *new* money - not *old* deposits.

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R*, or the Wicksellian “Natural Rate of Interest”, Swedish economist Knut Wicksell’s economic pendulum’s “equilibrium” rate, is compete tripe (& its “Taylor Rule” application is ex-post). Interest is the price of loan funds. The price of money is the reciprocal of the price level. And base-line investment hurdle rates, MARR, are idiosyncratic (demand being incentivized, by e.g., MACRS).

Boston Fed President Eric Rosengren's recommendation: “adopt balance sheet exit strategies that reinforce the primacy of interest rate policy”…“should allow policymakers to focus on gradual increases in the federal funds rate target as the primary mechanism for normalizing monetary policy and calibrating the economy.”

No thanks.

The money stock (& DFI credit, where: loans + investments = deposits), can never be managed by any attempt to control the cost of credit [or thru a series of temporary stair stepping or cascading pegging of policy rates, the ROI, or ROA, on government marketable securities; or thru "spreads", "floors", "ceilings", "corridors", "brackets", IOeR, 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. Keynes' liquidity preference curve (demand for money) is a false doctrine. Secular strangulation (chronically deficient aggregate demand), can be self-reinforcing, a Fisherian debt-deflationary protracted contraction (leading to a permanent low *real* rates of interest, and an excess of savings over investment opportunities).

Qui Vive. You have to be able to observe ->to track. What's happened is obvious. FDIC insurance was increased and the proportion of time (savings) deposit, commercial bank deposit classification ratios, have increased. Every time the ratio increases, gDp falls (and economic recoveries are stalled).

Historical insurance 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

Thus, “in a twinkling…” R-gDp is swallowed up.

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FDIC deposit protection is good up to some point. But FSLIC insurance of the non-banks / thrifts (MSBs, CUs, and S&Ls), was inherently better (incentivizing the matching of savers with borrowers). Now non-bank gov’t guaranteeing largely occurs with the Fannie and Freddie behemoths. It is an accounting truism, never are the DFIs intermediaries in the savings-investment process (savings ≠ investments).

All savings originate within the confines of the payment's system. Time (monetary savings) deposits are not a source of loan-funds for the commercial banking system, rather pooled bank-held savings are the indirect consequence of prior bank credit creation (so all monetary savings are temporarily idled, lost to both consumption and investment, ensconced and impounded within the DFIs).

From the standpoint of the economy and the banking system, commercial banks always create new money whenever they lend/invest. DFIs never loan out existing deposits, saved or otherwise. The DFIs could continue to lend even if the non-bank public ceased to save altogether. "Monetary savings" is defined as income held beyond the income period in which received.

The source of time (savings) deposits is other bank deposits (demand deposits), directly or indirectly via the currency route, or thru the DFI's undivided profits' accounts. And the source of demand deposits can largely be accounted for by the expansion of Reserve and commercial bank credit.

In other words, an increase in time/savings accounts depletes DDs by the same amount. And time deposits represent the largest expense entry on the bank’s income statements. Thus, the size of the DFI system is not synonymous with individual bank’s profitability, ROA & ROE (not consequently NIMs).

Savings are never "activated" or "put back to work" unless saver-holders invest/spend directly, or indirectly through non-bank conduits. And unless savings are put to work outside of the payment’s system, a dampening economic impact is perpetually exerted (the cause of both stagflation and secular strangulation).

And savings are never transferred to the non-banks, rather savings are always transferred through the non-banks, as money flowing through the non-banks never leaves the payment’s system.

I.e., shifts from savings accounts, TDs, to transaction accounts, TRs, within the DFIs & the transfer of the ownership of these deposits to the NBFIs, involves a shift in the form of the DFI’s liabilities (from TD to TR) & a shift in the ownership of existing TRs (from savers to NBFIs, et al). The utilization of these TRs by the NBFIs has no effect on the volume of TRs held by the DFIs, or the volume of their earnings assets.

I.e., the non-banks, NBFIs, are customers of the deposit taking, money creating, DFIs. As custodians of stagnant money, an expansion of commercial bank savings accounts adds nothing to the bank’s liabilities, assets, or earning assets, nor makes any contribution to R-gDp.

In the context of their lending operations, it is only possible to reduce the DFI’s assets, & TRs, by retiring bank-held loans, e.g., for the saver-holder to use his funds for the payment of a bank loan, interest on a bank loan for the payment of a bank service, or for the purchase from their banks of any type of commercial bank security obligation, e.g., banks stocks, debentures, etc.

Up until 1981, increasing the ratio of time to transaction deposits was a non-problem (AD was unaffected), as there was a monetary offset - in that the remaining turnover of transaction type deposits offset this bottling up of savings. I.e., AD was in surplus, as output was being curtailed.

Note: the 5 successive increases in Reg. Q ceilings for the commercial bankers, the non-banks were unrestricted and unregulated up until 1966, created stagflation.

The saturation / plateau of commercial bank deposit innovation, the widespread introduction of ATS, NOW, and MMDA accounts in 1981 – was the advent of secular strangulation (chronically deficient AD, decline in money velocity), and subsequently the bull market in bonds (excess of savings over investment outlets).

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My “market zinger” forecast of Dec. 2012 is prima facie evidence and foretold of the expiration of unlimited transaction deposit insurance (counter-cyclically putting savings back to work), not a “taper tantrum", not budget “sequestration”.

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Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

www.bloomberg.com/view/articles/2017-04-04/when-economics-failed



"All this adds up to a pessimistic conclusion -- recessions just aren’t very predictable from economic data. The reason economists couldn’t foresee the Great Recession isn’t that they’re blinkered or closed-minded or arrogant or stupid -- it’s because no one could predict it, at least not with the kind of macroeconomic data that now exist."

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

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Economists are charlatans. And that assumes that "professional forecasters" and their: 5-year/5-year forward inflation rate projections are even correct. As Bloomberg’s Noah Smith claims: “the inability to forecast is often a clue that a model is just plain wrong.”

Noah Smith: DSGE models and “Different models work better at different time horizons, for different historical time periods, and for different variables.”

Noah Smith: “The reason economists couldn’t foresee the Great Recession isn’t that they’re blinkered or closed-minded or arrogant or stupid -- it’s because no one could predict it, at least not with the kind of macroeconomic data that now exist.”

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

Readers already knewed it. Nothing’s changed in 100 + years. Roc’s in M*Vt = Roc’s in P*T (where N-gDp is a proxy for all transactions in Yale Professor Irving Fisher’s truistic “equation-of-exchange”).

SA contributor, “Avi Gilburt of ElliottWaveTrader.net conducted a thoughtful interview with Bob Prechter recently.”

www.elliottwave.com/Social-Mood/Robert-Prechter-Talks-About-Elliott-Waves-and-His-New-Book

No, successful sleuthing isn’t about output and inflation as Noah Smith emphasized. It’s about the capacity to predict economic events in the longer run. No one was better than Leland James Pritchard of the "Chicago School" (Viner's class, Milton Friedman's classmate).

Robert Prechter “exogenous causation”: “Markets have changed in superficial ways but not in any essential way. They still trace out Elliott waves. But that doesn't mean it has been easy”…stocks to the moon, then a depression: “All I can say for sure is that the degree of the corrective wave will be larger than that which created the malaise of the 1930s and 1940s”.

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SECULAR STRANGULATION (a compilation of excerpts)

Professional “economists” simply aren’t high level thinkers (when and if you finally get the economic Gospel, I guarantee that you will “bust a gut”). But the BOE, epistemologically, comes close:

“The vast majority of money held by the public takes the form of bank deposits. But where the stock of bank deposits comes from is often misunderstood. One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them. In this view deposits are typically ‘created’ by the saving decisions of households, and banks then ‘lend out’ those existing deposits to borrowers, for example to companies looking to finance investment or individuals wanting to purchase houses.

In fact, when households choose to save more money in bank accounts, those deposits come simply at the expense of deposits that would have otherwise gone to companies in payment for goods and services. Saving does not by itself increase the deposits or ‘funds available’ for banks to lend. Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money. This article explains how, rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.”

Syllogistically:

Tier 1 understanding: The earning assets held by the commercial banks, from the standpoint of the entire economy and the commercial banking system, are not the result of the growth of time/savings deposits (liability management), as the transactions sequence is not from time/savings deposits to earning assets, rather the sequence is from earning assets, and new demand deposits, these two come into being simultaneously, and from “old” demand deposits (which the public has saved) to time/saved deposits (deposits held beyond the income period in which received).

In other words, from a macro-economic belvedere, the commercial banks pay for their earning assets with new money (initially demand deposits) somewhere in the banking system (not old/existing->money/savings). Whereas, lending by the DFIs is inflationary. Lending by the NBFIs is non-inflationary, other things being equal.

Tier 2 understanding: Then it also follows, with a macabre twist, that DFI’s pay (interest) for what they already own (derivative deposits, endogenously redistributed by outbidding other member banks for preexisting, and Central Bank delimited funds, as opposed to following the old fashioned, original, real-bills’ practice of storing their liquidity).

“The DFIs should not have been permitted to attempt to buy their liquidity through an open market instrument. Essentially, e.g., the negotiable CD is a device for buying liquidity. But it obviously cannot fulfill this function if the issuing banks do not have the option of raising the rates they pay to meet any market conditions that may prevail.” This oligarchic practice, monopolistic pricing or, TBTF/G-SIBs, leads to the mis-allocation and mal-distribution of available credit (asymmetry, credit rationing, adverse selection, or a redlining effect). It feeds any asset frenzy.

Reigning in the E-$ market (and averting the global “carry trade” and currency manipulation disequilibria), is a step in the right direction:. More and more, Gurley-Shaw nonsense: “Basel III and structural banking reforms, such as the "ring-fencing" of domestic operations and "subsidiarisation," which requires banks to operate as subsidiaries overseas, with their own capital and liquidity buffers, and funding dedicated to different entities. Moreover, several jurisdictions have implemented enhanced oversight and prudential measures, including local capital, liquidity and funding requirements and restrictions on intragroup financial transfers, promoting "self-sufficiency" and effectively reducing the scope of global banking groups’ internal capital markets (Goldberg and Gupta, 2013). In effect, these regulations restrict the foreign activities of domestic banks and the local activities of foreign banks ("localisation;" Morgan Stanley and Oliver Wyman, 2013).”

Thus, contrary to professional economists, e.g., beloved Dr. Daniel Thornton of the Fed’s “Maverick bank”, never are the DFIs intermediaries (conduits between savers and borrowers) in the savings->investment continuum.

The financial engineering of credit intermediation (crisscrossed risks in liquidity, maturity, & credit, vis-à-vis leveraged transformation), pre-GFC, pushed regulatory arbitraged envelopes. Capital structures (e.g., debt-to equity ratios), and corresponding designer packaged and hedged securities, were given dubious AAA credits (evading all capital requirements), via CDS wrapped constructs and were surreptitiously offloaded (an originate to distribute to a greater fool model).

The non-bank balance sheets’, daisy-chain matching procedure, in which a financial intermediary issues shorter-term wholesale, or pooled liabilities (Paul Krugman’s “contingencies” or David Merkel’s “liquid assets”), to fund longer-term, risk adjusted, earning assets (Paul Krugman’s “commitments”, or David Merkel’s “ill-liquid assets”), does NOT, as Krieger said: “renders financial intermediaries intrinsically fragile”.

Sandra C. Krieger, Executive Vice President, “Credit and Payments Risk Group”, FRB-NY disingenuously claimed: “The Federal Reserve created seven emergency liquidity facilities to deal with the /unwind/ of shadow-credit transformation” [sic]. “Second verse, same as the first", the 1966 crisis where: “On July 1 1966, the Board of Governors of the Federal Reserve System took the unprecedented action of authorizing the Federal Reserve banks to make their credit facilities available, through the member banks, to the mutual savings banks and the savings and loan associations. Fortunately it was never necessary to use this emergency measure.”

The inherent convertibility vulnerabilities necessitating gate-keeping restrictions was exacerbated absent gov’t, e.g., FSLIC non-bank particular, guaranteeing. But the principle pricking of the real-estate bubble was due to a contractionary money policy (one where the rate-of-change in Fisher’s: volume Xs velocity, fell below zero for 29 contiguous months). This lowered real-estate’s disproportionate pro rata share values (consumer’s preferential basket of goods and services), of American Yale Professor Irving Fisher’s “price-level”.

But that was on the asset side of the balance sheet (producing upside down / underwater collateral prices), leading BuB to facetiously joke: “I'd like to know what those damn things are worth,” – Economic Club of New York, Oct. 2007). I.e., the so-called a posteriori “wealth effect” was shoved into reverse via a monetary policy theoretical blunder (contrary to what Milton Friedman advocated, or price-level stability).

Digressing, dissenting economists, Carmen Reinhart (University of Maryland) and Ken Rogoff (Harvard), argued about the inevitability of excessive debt reliance in their "panoramic analysis of the history of financial crises dating from England’s fourteenth-century” book: “This Time is Different”: and also that higher public debts contribute to lower gDp growth. Richard Koo’s, balance-sheet recession, deleveraging and “peak debt”, notwithstanding.

Moving on, then on the other side of the financial legerdemain, the liability side of the shadow banks’ balance sheets: was consequently decimated by remunerating IBDDs (predominately runs on ABCP, tri-party repo, and money market mutual fund paper, viz., perversely, the shortest and most secure paper). The remuneration rate’s umbrella (a deliberate “yield curve control” and indeed *inversion* of the monetary authorities’ policy rate), encompassed the gamut of money-market wholesale funding.
 
This caused the GR’s proverbial “credit crunch” -déjà vu. The, a fait accompli, 1966 S&L credit crunch (lack of funds, not their cost), is the macro-economic prologue and paradigm (the culmination of the ABA’s commandeering (omnipotent lobbying efforts). The term “credit crunch” was first coined during the 1966 S&L residential real-estate debacle. It was the 5th successive Regulation Q ceiling rate hike for exclusively the commercial bankers, DFIs, since 1957 (& 1957 was the first hike since 1933). This hike ended the U.S. Golden Era in economics.

The 5th rate hike in the DFI’s deposit ceilings was unique in that it was the first increase that permitted the DFIs, to pay higher rates on savings than S&Ls, MSBs, & CUs (the non-banks, NBFIs) could competitively meet. And the thrifts, non-banks, were previously always unregulated and unrestricted with regard to pooled savings, and gov’t insured, consumer/retail type deposits (representative of BuB’s “democratization of credit”, the obverse of the elimination of usury ceilings, the five C's of credit, & antitrust laws).

Reg. Q ceilings for the non-banks were imposed beginning with the advent of the credit crunch in 1966 (followed by the reversing and dropping of commercial banker’s deposit rate ceilings twice inside of 3 months, & establishing ceilings which preserved to a small degree a rate differential advantageous to the intermediaries). Whereas time/savings deposits were 105 percent of demand deposits in July 1966, by the end of the year, the proportion had fallen to 98 percent (and insufficient as it was, it ended the housing financing crisis).

“Raising interest ceilings on time deposits, as the Board did on five successive occasions beginning January 1, 1957 and culminating in the disastrous increase to 5 ½ per cent on December 6, 1965, simply allowed the banks to increase their expenses with no concomitant increase in income. The earning assets held by the commercial banks, from a system standpoint, are not the result of the growth of time deposits.”

The 5 ceiling rate hikes for the DFIs caused stagflation (the word coined in 1965 by Iain Macleod) as predicted by Dr. Leland James Pritchard (Ph.D., Chicago, Economics, 1933, MS, Statistics, Syracuse), in the late 1950’s.

See: “Commercial Bank and Financial Intermediaries: Fallacies and Policy Implications”, The Journal of Political Economy, Vol. LXVIIII, No. 5, October 1960 – L.J.P.

See also: “Should Commercial Banks Accept Savings Deposits”, Conference on Savings and Residential Financing (1961 proceedings), United States Savings and Loan League, Chicago - L.J.P.

Remunerating IBDDs beginning Oct. 6, 2008, short-circuited interbank lending. IOeR’s (not IOrRs) were used as a credit control device. IOeR liabilities on the Fed’s balance sheet, absorbed bank credit (which offset the expansion of the FED’s liquidity funding facilities on the asset side of its balance sheet, e.g., QE1’s, QE2’s, & QE3’s: MBS, & Treasury purchases). Or in effect, IOeR’s sterilize open market operations of the buying type. “Reserve velocity“ declined: from its peak in December 2007 of 353, to 2.4 as of December 2010. Reserve velocity is defined as the ratio of the average daily value of transactions on FEDWIRE, divided by the daily average value of IBDDs (reserves held at the Federal Reserve.

As I originally pointed out, IOeR’s are the bank’s primary liquidity reserves (clearing balance backstop), i.e., apart from the Central Bank's day-light credit backstop, & or System's Federal Funds Market, etc. I.e. as the volume of IOeR’s grew -- FED-WIRE, Fed Funds, day-light credit, & contractual clearing balances (i.e., counter-party transactions), declined conterminously.

Greenspan in the “Map and the Territory”: “the depth of a financial crisis is best characterized by the degree of collapse in the availability of short-term credit (like call money precipitated the 1907 panic). “The evaporation of short-term credits, especially trade credits, in September 2008 was global and all encompassing”. “Not only did short-term funding collapse, but customer collateral that was subject to recall fled”.

Alan Blinder “After the Music Stopped”: “the inability to roll over short-term borrowings is the modern version of a run on the bank. Such runs more or less killed both Bear Sterns and Lehman Brothers in 2008, and almost killed Merrill Lynch, Morgan Stanley and Goldman Sachs”.

Federal Reserve Chairman Ben Bernanke: “BNP Paribas said that it could not determine the value of its funds because of the ‘complete evaporation of liquidity’ in the markets for those securities.”…”As in a traditional run, the outcome was that shadow banking entities (including conduits) found it increasingly difficult to obtain funding”…”financed, directly or indirectly, b wholesale funding, mostly in the form of commercial paper or repurchase agreements.”…”We faced: the growing scarcity of short-term funding”…”granting temporary exemptions from Section 23A of the Federal Reserve Act, which normally prevented them from funneling discount window credit to nonbank components of their companies”…”our goal was to increase the supply of short-term funding to the shadow banking system”.
In other words, contagion metastasized in the form of dis-intermediation (a term only applicable to the non-banks since 1933). Id est, BuB caused the GR all by himself.

Make no mistake, the Fed literally *wiped out* the non-banks short-term funding liabilities. By remunerating IBDDs, it inadvertently created a money market, saver-holder’s run out of the NBFIs (Bad Ben’s coup d'état), and back to the DFIs (reversing the direction and flow of the savings-investment continuum). By paying a higher interest rate of return on IBDDs, institutional driven money managers flocked to the commercial banking system (destroying money velocity).

Thus the NB system shrank by 6.2T (precipitated by a credit crunch), and the DFIs to be expanded by 3.6T (neither the commercial paper market, nor the repurchase agreements have since recovered). This reversal of the savings-investment process was aided and abetted by other gov’t policies, e.g., the FDIC’s unlimited transaction deposit insurance, a world-wide flight to safer-assets, etc.

See: "A Legal Barrier to Higher Interest Rates," The Wall Street Journal, Sept. 28, p. A13)" "The 2006 Financial Services Regulatory Relief Act gives the Fed permission to pay interest on reserves (IOR). The current IOR rate 0.5% would be higher than the legal prescript: "the general level of short-term interest rates".

Tier 3 understanding: It all goes back to John Maynard Keynes’ “optical illusion”, and the Keynesian economists who dominate academia, Congress, and the Fed’s research staff: that there is no difference between money and liquid assets.  Bankrupt u Bernanke: “Or Ben Bernanke in his book “The Courage to Act”: “Money is fungible. One dollar is like any other”.

Bernanke: “I adapted this general idea to show how, by affecting banks' loanable funds, monetary policy could influence the supply of intermediated credit" [sic] (Bernanke and Blinder, 1988).”

See Thornton’s response to my comment: “Re: Savings are not a source of "financing" for the commercial bankers” -Dan Thornton’s reply on Thu 3/9, 2:47 PMYou…”See the graph below”:

bit.ly/2n03HJ8

Daniel L. Thornton
D.L. Thornton Economics LLC

Same from Jeremy Blum, long-standing community banker: “Please explain how M2 grew to $12,662.9 trillion since 1939?" …Author’s reply » 1) Business profits and personal savings 2) Interest credited on deposits.

Back to Tier 3 understanding: So a direct comparison of the return on assets (ROA & ROE) with cost of savings is only valid for non-bank conduits (NIM’s, the margin between interest income and interest expenses). It is not a valid comparison for DFIs. Time/savings deposits are not a source of loan-funds, rather they are the indirect consequence of prior bank credit creation, a shift in the “mix” of deposit liabilities (as all savings originate, and have been shadily ensconced and impounded by public enemy #1, the ABA, within the DFIs).

Tier 1 understanding: An increase in time/savings accounts depletes transaction accounts by the same amount. The DFIs do not acquire savings from outside the system. All savings held in the commercial banks originate within the system itself. Commercial banks are not therefore in any meaningful sense competing with the non-banks for the monetary savings of the public.

So whereas 20 years ago (and still no recompetence), Dr. R. Alton Gilbert didn’t understand the system dynamics of “stock” from “flow”, in “Requiem for Regulation Q: What It Did and Why It Passed Away” (FRB-STL, February 1986), the Fed’s “Bible”, surmising that Reg. Q ceilings “discriminated against small savers, and did not increase the supply of residential mortgage credit”.

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

Funny how professional economists talk about dis-intermediation for NBFIs, but not for DFIs. But this is correct. The DFI’s, via various previously adopted Depression Era regulatory modifications and enhancements, are now backstopped; as Sandra C. Krieger says: “banks are special—they have access to direct and explicit official credit and liquidity backstops”.

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 & 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. 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.

Dr. Gilbert assumed that the NBFIs were in competition with the DFIs (whereas actually, the NBFIs are the DFI’s customers). Savings flowing through the NBFIs (from the commercial banks), never leaves the member commercial banking system (as anyone who has applied double-entry bookkeeping on a national scale should already know).

Dr. Gilbert naively asked the wrong question. His implicit and false premise was that savings are a primary source of loan-funds to the banking system. Gilbert assumed that any potential primary deposit (funds acquired from other DFIs within the same regulated boundaries, so derivative deposits from a system’s perspective), were newfound funds to the banking system as a whole.

Thereby in his analysis, Gilbert also assumes that every dollar placed with a non-bank deprives some commercial bank of a corresponding volume of loanable funds. However, saver-holders never transfer their funds out of the payments system unless they hoard currency or convert their funds to other national currencies. This applies to all investments made directly or indirectly through non-bank conduits (truistic financial intermediaries).

Gilbert asked: Was the net interest income on loans/investments derived from "attracting" these savings deposits (viz., outbidding other DFIs for the same stock of core deposits), greater than the interest attributable to the direct and indirect operating expenses of endogenous retail and this wholesale "funding" [sic]? Since time deposits originate within the banking system, there cannot be an “inflow” of time deposits and the growth of time deposits cannot per se increase the size of the banking system.

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 whole (the forest), is not the sum of its parts (the trees), in the money creating process.

The source of time deposits is almost exclusively demand deposits (directly or indirectly via the currency route, or thru the DFI’s undivided profits accounts) – and the source of demand deposits can largely be accounted for by the expansion of commercial bank credit. The T-account proof is given by examining all exogenous (outside) factors influencing changes to the endogenous (inside) money stock. Synopsizing, outside factors are adjudicated peripheral to the expansion of new money.

The remuneration of IBDDs (interbank demand deposits), held at the District Reserve banks, owned by the member commercial banks, DFIs, induces non-bank dis-intermediation (an outflow of funds, or negative cash flow), for the NBFIs. At the very minimum, it curbs money velocity (or temporarily stops any net inflow of funds into the non-banks). Thus in a twinkling R-gDp falls. As I repeated emphasized: (1) “So, now, each and every time the Fed raises the remuneration rate, it will induce non-bank dis-intermediation and money velocity will decelerate.” Aug 1, 2016. 08:38 PMLink (2) "The economy is behaving exactly as it is programed to act. Raise the remuneration rate and in a twinkling the economy subsequently suffers. The Fed's 300 Ph.Ds. in economics don't know the differences between money and liquid assets." Apr 28, 2016. 11:25 AM

IBDDs represent “outside” (exogenous) money to the banking system. .IBDDs are not a tax. IBDDs are “Manna from Heaven”. They are costless to the banks and showered on the system. A brief “run down” will indicate just how costless, indeed how profitable – to the participants, is the creation of new money. If the Fed puts through buy orders in the open market, the Federal Reserve Banks acquire earning assets (held in SOMA), by creating new inter-bank demand deposits, IBDDs. The U.S. Treasury recaptures about 98% of the net income from these assets. The commercial banks acquire “free” legal reserves, yet the bankers complained that they didn't earn any interest on their balances in the Federal Reserve Banks.

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

Excess reserve balances, are assets defined by economists to be outside-of-the properties normally assigned to the money aggregates. I.e., IOeR’s are not a medium of exchange. They do not circulate outside of the inter-bank market. They do not require Basel II regulatory capital. They are not subject to reserve requirements.
 
And they satisfy the recently Basel imposition of the LCR, see Zoltan Poszar: Global Money Notes #5 there is limited scope to shrink the Fed’s balance sheet…because the Liquidity Coverage Ratio (LCR) coupled with the Feds’ preference that banks hold significant amounts of reserves as high-quality liquid assets (HQLA) represents a step change in the amount of reserves banks will have to hold – not to comply with reserve requirements, but with the LCR.

The IOeR reduces the size of the non-banks (but not the size of the DFIs), thereby shrinking money velocity -- swallowing up R-gDp. So now, every time the Central Bank raises the remuneration rate, R-gDp immediately contracts. Thus, by raising the remuneration rate (the interest subsidy paid to commercial bankers for their IBDDs), real growth rates are not just recalibrated somewhat lower, but growth is reversed (as the FOMC policy is contractive).

“And as long as monetary savings are held in the commercial banks either in the form of demand or time deposits the rate of turnover of these deposits is zero. Unfortunately the impact on the economy is not zero, it is decidedly negative. Monetary savings involve a prior cost of production to business and when the funds are not returned to the marketplace a depressing effect is exerted on the economy.” - L.J.P. Unless saver-holders invest their funds directly or indirectly, a corrosive economic impact is perpetually compounded.

“No matter which saver-holder alternative is selected there will be no effect, per se, on the size of the banking system or the volume of earning assets held by the system. The fact that the earning assets held by the commercial banks are approximately equal to their demand and time deposits liabilities is often cited to prove that demand and time deposits are actually being invested. It bears reiteration that no investment can take place unless money is turning over. The turnover of money involves the transfer in the ownership of demand deposits and this is the exclusive prerogative of the nonbank owners of these deposits.”

“The earning assets held by the commercial banks are not therefore investment or even evidence of consumption. Their existence provides only presumptive evidence that investment (or consumption) has taken place; on the assumption that the recipients of the banks newly created demand deposits have transferred the ownership of these deposits to the producers of goods and services.”
“In contrast to the commercial banks the earning assets held by the non-banks, are positive proof that expenditures have been made, that money has “exchanged hands” – for it is impossible for the financial intermediaries to acquire earning assets without expending the money balances put at their disposal by savers, or acquired through the retention of earnings” L.J.P. [Ph.D., economics “the Chicago School” 1933, M.S. statistics, Syracuse]

Unless pooled voluntary savings are expeditiously activated, and put back to work via non-bank conduits (completing the circuit income and transactions velocity of funds), their payment's velocity is zero, fostering a dampening economic drag and decay paralysis, which is perpetually exerted. It is not benign, it metastases and is cumulative.

Savings flowing through the non-banks increases the supply of loan-funds (not the supply of existing money), where savings could then be matched with non-inflationary, real-investment, outlets. The U.S. Golden Era in economics was prima facie evidence. In fact, it was the only time where the non-banks’ pooled savings were insured by the U.S. government.

The only way to activate idle monetary savings (put voluntary savings back to work), is outside of the commercial banking system, e.g., via financial intermediaries. I.e., monetary savings are un-used and un-spent, lost to both investment and consumption, indeed to any type of payment or expenditure.

Martin Wolff (chief economics’ commentator at the Financial Times, London) defines secular stagnation as “chronically deficient AD”. The deceleration in R-gDp and inflation stems from not putting savings back to work outside of the payment’s system (a decline in money velocity, AD, and N-gDp). The 35 year bull market in bonds parallels this deceleration.

This “blue print” was presented in “Should Commercial Banks Accept Savings Deposits?”, Savings and Loan League’s, proceedings of the 1961 Conference on Savings and Residential Financing, May 11 & 12, 1965, pg. 40-48, by Professor Lester V. Chandler in his theoretical approach.

Chandler: “But surely a more basic and, over a longer run, a far more important objective is to secure some desired behavior of the level of spending for output—to achieve a certain level of gDp, or to cause the level of gDp to increase at some desired rate (sounds analogous to Scott Sumner’s N-gDp targeting on his blog “Money Illusion”?).

Chandler’s theoretical explanation was: (1) that monetary policy has as an objective a certain level of spending for gDp, and that a growth in time (savings) deposits involves a decrease in the demand for money balances, and that this shift will be reflected in an offsetting increase in the velocity of demand deposits, DDs.

Leland James Pritchard, Ph.D., economics, Chicago 1933: “This hypothesis rests upon the fact that the payment’s velocity of funds shifted into time deposits becomes zero, and remains at zero so long as funds are held in this form. The stoppage of the flow of these funds generates adverse effects in our highly interdependent pecuniary economy, as would any stoppage in the flow of funds however induced. It is quite probable that the growth of time deposits shrinks aggregate demand and therefore produces adverse effects on gDp.”
And: ”the stoppage in the flow of monetary savings, which is an inexorable part of time-deposit banking, would tend to have a longer-term debilitating effect on demands, for durable consumer goods, and particularly the demands for capital goods”.

In other words, from the standpoint of the commercial banks, DFIs, the monetary savings practices of the public are reflected in the velocity of their deposits and not in their volume. Whether the public saves, or dis-saves, chooses to hold their savings in the CBs, or transfers them to the NBs, will not, per se, alter the total assets, or liabilities of the CBS - nor alter the forms of these assets and liabilities.

I.e., Chandler’s theory was obviously denigrated by Cambridge economist, Alfred Marshalls’ “Money Paradox”. Thus Alfred Marshall’s “Cash Balances Approach”, P = M/KT, came to fruition in 1981 with the saturation in DD Vt.

As SA author WYCO Researcher said: “The velocity stayed fairly stable for decades, but then increased sharply partially because technology dramatically changed the payment methods/speed.”

I.e., the financial innovation on commercial bank deposits, reflected by its deposit rate of turnover (95% of all demand drafts clear thru transaction accounts), plateaued with the widespread introduction of ATS, NOW, and MMDA accounts in 1981. Money velocity has decelerated ever since (as savings increasingly became impounded and ensconced within the payment’s system - as encouraged by the complete removal of Reg. Q deposit ceilings):

bit.ly/29rPfCj

The cash balances approach points out that the desire to hold more or less cash, rather than non-monetary assets, has its repercussions on the supply of, and the demand for, money. Adjustments in prices relative to the volume of money and real balances continue, unless interrupted, until a point of indifference is reached.

However, if the public on balance considers the real worth of its cash balances deficient, this will bring about an increase in the demand for money and a decreasing in its supply. The velocity of money will decline, and if prices tend to be sticky, sales, production, employment, and payrolls will fall off. This will lead to reduced bank lending, a decline in the volume of money (and this will not be compensated by an appropriate decline in prices). Under these circumstances equilibrium is never reached, and the public in seeking to increase its real balances so reduces its effective purchasing power as to create a condition of chronic stagnation.

This savings-investment, flow-of-funds, error is the cause of an excess of savings over investment opportunities (risk off). The way to increase money velocity and force investors to buy riskier assets (risk-on) is to drive the CBs gradually out of the savings business.
The upshot or policy implication will be a prolonged and pronounced lowering of real-rates of interest (a protracted flat-lining of both the yield curve and the economy).

This is the singular source of both British politician Iain Macleod’s stagflation and Great Depression era economist, Alvin Hansen’s secular strangulation in 1938 (chronic condition of “sagging investment & buoyant savings”).

There were 3 “artillery shots across the bow” prior to the GFR: (1) The 1966 S&L credit crunch, and (2)as David Andolfatto pointed out: “in 1979-81 it rendered insolvent about two-thirds of US thrift institutions, who were financing 30-year fixed-rate mortgages with 1- and 2-year deposits“, (3) The DIDMCA of March 31st 1980, which caused the S&L crisis, or failure of 1,043 out of the 3,234 savings and loan associations in the United States from 1986 to 1995.

The complete deregulation of interest rates for the CBs (the NBs were already deregulated prior to 1966), and the remuneration of IBDDs (& the DIDMCA of March 31st 1980), contributed to this regression.

Contrary to Keynesian exegesis and Austrian praxeology (human action/animal spirits), and business cycles, when you drive the CB's out of the savings business: Nominal and *real* interest rates become higher and firmer, and there is subsequently a lower loss from bad debt. I.e., the DFIs, NBFIs, their customers, and the economy, all have a symbiotic relationship. The prosperity of the DFIs is dependent upon the prosperity of the NBFIs which in turn benefits saver-holders, and all participants' incomes, the NBFI’s: NIMs, and the DFI’s: ROA, ROI, and pensioners’ *real* rates of interest.

Tier 4 understanding – Nirvana: "This course of action would not reduce the size of the banking system, the volume of earnings assets held by the banking system, the income received by the system, or the opportunities of the banks to make safe and profitable loans. Quite the contrary in fact. By promoting the welfare and health of such an important segment of the economy as is represented by the non-bank financial industry, the health and vitality of the whole national economy will improve. The aggregate demand for loan funds will expand, the volume of “bankable” loans will grow, and so will the banking system, - the Federal Reserve being willing." - L.J.P.

[flow5]

Like I said:

Bonds should be sold.
M1:
Feb. 27, 2017 ,,,,, 3,474.00
Mar. 6, 2017 ,,,,, 3,342.20
Mar. 13, 2017 ,,,,, 3,328.70
Mar. 20, 2017 ,,,,, 3,440.70
Mar. 27, 2017 ,,,,, 3,573.00
Apr. 3, 2017 ,,,,, 3,653.30
Apr. 10, 2017 ,,,,, 3,330.90
Apr 21, 2017. 06:41 AMLink

Like I said 30. April 2017 at 06:25:

The economy is likely to surprisingly: rebound – immediately after the contractionary impact of raising the remuneration rate altogether expires. The frequency of economic oscillations has increased. Stop-go monetary mis-management is now the norm.

Then Atlanta came out:

The initial GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2017 is 4.3 percent on May 1.

[flow5]

“Central argument: Long-term deflationary forces are pushing down long-run growth, inflation, and interest rates.” The author is “on point”.

Economic growth is increasingly subpar and has recently flat-lined. And the Fed is due to loosen the monetary spigots in late 2017 or early 2018, - not continue to tighten. So, as with previous temporary set-backs, stocks to the moon. However, in the ensuing years, the economic trajectory is a prolonged economic depression.

The last 60 years has provided documentary and certain co-referential proof. The economy has followed the abstract script “to a T”. See: “Profit or Loss From Time Deposit Banking”, Banking and Monetary Studies, Comptroller of the Currency, United States Treasury Department, Irwin, 1963, pp. 369-386

Alvin Hansen’s 1938: “Economic Progress and Declining Population Growth”, talk of secular regression has become empirically clear, HT SA contributor, Christopher Hamilton: “From 1981 to present, the Federal Reserve has undertaken five rate cycles, cutting rates but subsequently only partially hiking them back up. Each cycle cut rates deeper, held them at the cycle minimums longer, and subsequently hiked them less than before”.

Larry Summers’ (The robots are coming, whether Trump’s Treasury secretary admits it or not”), and Noah Smith’s (“America Is Forgetting Why We Share Things”), fallacy of secular strangulation is: it is impossible not to have money in some bank, regardless of where you hold it (unless it's at home in a safe, or under a mattress, or in your own hand). But a commercial bank, does not, and cannot, use your money (Keynes, in his “metaphysical cul-de-sacs”, mistakenly called this an "optical illusion" - as Keynes was not an accountant and couldn't follow the elongated money trail).

So as far as the economy goes, unless you act to invest, or spend your own funds, directly or indirectly (outside of the banks), then those funds are not available to be used, and are temporarily idle. Thus the funds are inextricably lost to all economic activity. Understand this paradox (micro vs. macro) is impossible for the “vulpine species” to comprehend, especially the ABA and their bankers, who make loans and investments, and who rely on an inflow of funds (acquired from perversely, other member banks), in order to procure new earning assets.

Savings-investment hysteresis metastases in the banker’s and political world. Jeremy Blum, a former community banker, to wit: Author’s reply »" Please explain how M2 grew to $12,662.9 trillion since 1939?" Blum’s answer: “1) Business profits and personal savings 2) Interest credited on deposits.” [sic]

I.e., since all time/savings deposits originate within the banking system, there cannot be an “inflow” of time deposits and the growth of time deposits cannot per se increase the size of the banking system.

If one chooses to invest in anything, then your money simply changes hands (exchanges counter-parties or ownership/title) within the payments’ system. Thus, saver-holders never transfer their funds out of the payments’ system of banks (the NBFIs are the DFI's customers), and all savings originate within the banks.

So from an economic standpoint, it is bad to hold savings in a bank (but the FDIC continues to increase deposit coverage), but is also a safe place to store funds. This dichotomy of views, is secular strangulation’s unforgiving “Achilles heel”, and an economist's modus ponens, paradox of circularity, viz., Curry's paradox of self-reference).

- Michel de Nostredame

[bimetalaupt]

May 2, 2017 6:45:28 GMT -5 flow5 said:

Like I said:

Bonds should be sold.
M1:
Feb. 27, 2017 ,,,,, 3,474.00
Mar. 6, 2017 ,,,,, 3,342.20
Mar. 13, 2017 ,,,,, 3,328.70
Mar. 20, 2017 ,,,,, 3,440.70
Mar. 27, 2017 ,,,,, 3,573.00
Apr. 3, 2017 ,,,,, 3,653.30
Apr. 10, 2017 ,,,,, 3,330.90
Apr 21, 2017. 06:41 AMLink

Like I said 30. April 2017 at 06:25:

The economy is likely to surprisingly: rebound – immediately after the contractionary impact of raising the remuneration rate altogether expires. The frequency of economic oscillations has increased. Stop-go monetary mis-management is now the norm.

Then Atlanta came out:

The initial GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2017 is 4.3 percent on May 1.

why?   10 YEAR t-NOTES INTEREST WAS DOWN ALMOST 5% TODAY.  USING 50/50 FIXED INCOME VS EQUITY TODAY ONE ELEMENT WAS UP AND YOU KNOW WHAT THAT WAS.
Published on Jan 6, 2015

MIT 18.S096 Topics in Mathematics with Applications in Finance, Fall 2013

View the complete course: ocw.mit.edu/18-S096F13

Instructor: Jake Xia



This lecture focuses on portfolio management, including portfolio construction, portfolio theory, risk parity portfolios, and their limitations.



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[bimetalaupt]

[flow5]

You're a day late and dollars short.  I've reversed the call (before bonds rose), as soon as momentum evaporated.  I got the last 2 moves perfectly.  If you remember bonds didn't top until 2016-07-05 @ 1.37% - after the 1st rate hike.  When the Fed raises the remuneration rate, money velocity falls.  The Fed's monetary policy blunder only temporarily ended the Trump rally. 

[flow5]

Professional economists matriculated at the wrong schools – certainly not in the real world combination of free and manipulated markets. Beckworth’s article/interview with “Mr. Friday the 13th”, is a joke (Barnett’s Divisia aggregates, Friedman’s monetary base, etc.).

And even if targeting N-gDp was a good idea, it is impossible under an IOR regime (as the latest policy rate hikes clearly demonstrate). And remunerating IBDDs exacerbates secular strangulation (chronically deficient AD). The 1966 S&L credit crunch (where the term was first coined), is the prologue and paradigm.

Targeting N-gDp caps real-output and maximizes inflation period. How stupid, esp. coming out of a recession (one that the monetary authority obviously didn’t see coming). You can’t hit a target that nobody even with their un-necessary sophisticated modeling (even a futures market), can’t see.  This is so even though money growth propagation is, contrary to Bernanke, markedly robust.

No, all economists theories have no clear nexus with the natural pulse of economic life. Economists are creating a permanent economic depression.

All voluntary savings originate within the commercial banking system. I.e., time (savings) deposits are not a source of loan-funds for the commercial banking system, rather bank-held savings are the indirect consequence of prior bank credit creation (derivative not primary deposits to any bank)– and the source of core bank deposits can largely be accounted for by the expansion of bank credit. In other words, an increase in time/savings accounts depletes demand deposits, etc., by the same amount. Since time deposits originate within the banking system, there cannot be an “inflow” of time deposits and the growth of time deposits cannot, per se, increase the size of the banking system. The expansion of time deposits, per se, adds nothing to total bank liabilities, assets, or earning assets.

Monetary savings are never transferred out of the system (unless currency is hoarded, or converted to other national currencies). But bank-held savings are idle, un-used and un-spent. Bank-held savings are lost to both consumption and investment.

The only way for the saver/holder to utilize/activate, directly or indirectly, the existing stock of savings is outside of the banking system through non-bank conduits (which increases the supply of loan funds, but not the supply of money). Said savings never leave the system. I.e., non-bank lending/investing is a velocity relationship – where title to commercial bank deposits is transferred (exchanges counter-parties).

Money velocity, MZM velocity, has fallen since 1981 because of two reasons: (1) an increasing proportion of savings have been bottled up. And (2) as professor Lester V. Chandler originally theorized in 1961, viz., that in the beginning: “a shift from demand to time/savings accounts involves a decrease in the demand for money balances, and that this shift will be reflected in an offsetting increase in the velocity of money”. His conjecture was indeed true up until 1981 – up until the saturation of financial innovation for commercial bank deposit accounts (the widespread introduction of ATS, NOW, and MMDA bank deposits).

The remuneration of IBDDs exacerbates the decline in Vt (subpar economic growth). The celestial pulse (what Krugman doesn’t understand and can’t do): As I said on 12-16-12, 01:50 PM (because of the expiration of unlimited FDIC Insurance coverage: “Jan-Apr could be a zinger”, or “predictive success”). As I said: “Raise the remuneration rate and in a twinkling, the economy subsequently suffers. – Apr 28, 2016

[flow5]

In 2016 the bottom in long-term money flows was in July. The same pattern is present in 2017.

[flow5]

Lower *real* rates of interest (as opposed to nominal cross-border interest rate differentials) should lead to a falling exchange rate.

[flow5]

see: www.themoneyillusion.com/?p=32036

Economists: “couldn’t find tits in a strip club”.

The commercial banks have been backstopped by numerous regulatory enhancements, including the “Shiftability theory” of assets and liabilities, or the “Banking Act of 1935”, and changes since Roosevelt’s “Banking Holiday” and “Emergency Banking Act” in 3/9/1933 (“de facto 100 percent deposit insurance in the reopened banks”). And they’ve had “grist for the mill” since WWII (no more of Nobel Laureate Paul Krugman’s nonsense of “pushing on a string” @ zero bound).

The “Golden Era” in U.S. economics, i.e., the increase in overall incomes (not the “Great Moderation”), was due to putting savings back to work outside of the commercial banking system (the only channel whereby savings can ever be “activated” by their owners/saver-holders). Savings are only matched with investments, directly or indirectly, through the NBFIs. Never are the DFIs intermediaries in the savings-investment paradigm. Keynes’ “Savings-Investment Identity” is fallacious (“General Equilibrium” model not).

It isn’t FDIC insurance coverage that keeps the “go-for-broke” looters from “slicing, dicing, and pureeing” and then laundering/fencing, e.g., “NAZI gold”, or in the words of William K. Black “The Best Way to Rob a Bank is to Own One”.

No, unlike the S&L crisis (where over 1,000 bankers were convicted by the Justice Department), the Great Financial crisis produced few indictments and no convictions (a change in group think). And unlike the S&L crisis, there was no FSLIC guaranteeing of deposits for the non-banks (where the whole GR problem existed). The non-banks were kicked to the curb (via the lobbying efforts of public enemy #1, the ABA), by the DIDMCA of March 31st 1980.

Like I already said:
“Qui Vive. You have to be able to observe ->to track. What’s happened is obvious. FDIC insurance was increased and the proportion of time (savings) deposit, commercial bank deposit classification ratios, have increased. Every time the ratio increases, gDp falls (and economic recoveries are stalled).
Historical insurance 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
Thus, “in a twinkling…” R-gDp is swallowed up.”
20 Apr 2017, 03:41 PM

No, the cost of funds in the “Bank Lending Channel” is zero (as all savings originate within the commercial banking system, i.e., savings deposits are core deposits which have been redistributed), regardless of whether funds are exogenous or endogenous. And Ellen H. Brown’s public-banking, Web-of-Debt: i.e., state banking is a good idea (but not the Bowery Boys’ MMT idea (Warren Mosler, L. Randall Wray, Bill Mitchell, Scott Fullwiler, etc. – as they don’t know a debit from a credit either).

The $23.6 billion lawsuit against R.J. Reynolds and the Sandy Hook lawsuit against the Remington Arms Co. (Bushmaster AR-15 — the type of semiautomatic rifle used in the attack), should be used as archetype lawsuits against the ABA.

[flow5]

DFI lending/investing expands both the volume and velocity of *new* money. Lending/investing by the NBFIs activates *existing* money (strictly a velocity relationship). So both DFI credit creation and NBFI credit transmission expand credit velocity, Vt.

An important point to understand is that all money turnover, for both commercial banks and financial intermediaries (non-banks), clear thru the payment’s system. Thus, bank debits broadly reflect all economic activity or aggregate monetary purchasing power, AD.

The protracted deceleration in money velocity is due to two principal factors. The first is the saturation in financial innovation within the commercial bank’s deposit classifications. This apex occurred with the widespread introduction of ATS, NOW, and MMDA accounts in the 1st qtr. of 1981. It is thus no happenstance that the bull market in bonds started in 1981.

The second factor is more obtuse. It has to do with the demise of Reg. Q ceilings (the complete deregulation of interest rates). In fact, it is completely mis-understood by every single professional economist, including the 300 Ph.Ds. on the Fed’s technical staff. Thus the enactment of the DIDMCA of March 31st 1980 was the direct cause (as predicted in May 1980), of the S&L crisis.

I.e., the payment’s velocity of bank-held savings deposits is zero. The payment’s velocity is zero because from the standpoint of the entire system and the economy, commercial banks do not loan out existing deposits, saved or otherwise (which paradoxically is at odds with an individual commercial bank’s operations/perspective). The DFIs always create new money somewhere within the banking system whenever they lend/invest. I.e., the DFIs pay for their new earning assets with newly created money.

Thus, as the proportion of bank-held savings accounts increases, money velocity is destroyed. There is now no “monetary offset” as occurred between 1965 and 1981. And the remuneration of IBDDs, which induces non-bank dis-intermediation (where the size of the non-banks shrink, but the size of the DFI system remains unaffected), exacerbates this decline in saving’s velocity (and is responsible for the subpar economic growth since Bankrupt u Bernanke destroyed the non-banks).

As I said: “Raise the remuneration rate and in a twinkling, the economy subsequently suffers. – Apr 28, 2016. Or conversely (with the expiration of unlimited transaction deposit insurance), as I said on 12-16-12, 01:50 PM “Jan-Apr could be a zinger”, or “predictive success”.

In other words, contrary to all economits, the growth of commercial bank-held time deposits shrinks aggregate demand, and vice versa (something you won’t find in any economic text book).