You find that (in the savings-investment paradigm), only the short-end segment of the yield curve (money-market "borrowing" rates) has increased, while longer-dated issues have fallen (capital-market "lending" rates). So NIMs (profitability) for non-bank investments have subsequently fallen (or will shortly). However, the commercial banks are not so constrained (lending/investing by the DFIs is not predicated on the level of market clearing interest rates).
With the Fed's first rate hike on 12/15/15, the 10yr CMT rates didn't bottom until July 8, 2016 (almost 7 months after the Fed hiked its policy rate). But now we've had an additional 2 hikes (virtually back to back), largely without any allowance for balance sheet restructuring (wholesale funding rollover). The contractionary impact of the last 2 rate hikes on 12/15/16 and 3/16/17 is still pending.
I.e., without looking at the change one could say that the yield curve was flattening, as opposed to examining the differences, where one could interpret that the yield curve was in the process or trajectory of eventually inverting (without further hikes, c. 2nd qtr of 2018).
The economy cannot afford to lose its grip on tax receipts:
My work is in market direction (not levels). Prices can reflect overbought and oversold levels (EMH not). But see - Larry Summers on secular strangulation:
"One thing you should pay attention to is the yield on 10-year TIPS [Treasury Inflation-Protected Securities] because I think the interesting part is not the short-run dynamics but averaging over the cycle. If you look at the real interest rate decade by decade, it’s been going down for five decades.”
And then nominal rates, along with N-gDp, have been decelerating since 1981 (an accelerating decline after remunerating IBDDs beginning in Oct. 2008).
Martin Wolf’s (chief economics commentator at the Financial Times) “structurally deficient aggregate demand” is incremental (Alvin Hansen’s 1938 chronic condition of “sagging investment & buoyant savings”). Thus, the excess of savings over investment outlets will continue.
N-gDp, or incomes will thereby drag and decay, and any debt loads will then be aggravated and trigger more defaults (a debt-bred, increasingly income deficient, downward economic spiral).
Valuations then depend upon Gresham’s dynamic, viz., a statement of substitution as applied to money: that a commodity (or service) will be devoted to those uses which are the most profitable. Maybe that explains his paradox of money that: “the bad drives out the good”, where investment grade vs. high yield instruments currently reflect a narrowing of credit spreads.
The more valuable money is held, if possible, as a “store of value” and the less valuable is used as a “medium of exchange”. The tendency of coins of the “vilest die and basest metal” to replace in circulation those of “perfect die and metal” was noted by Aristophanes (448-380 B.C.) in “The Frogs”.
Under the assumption that inflation and inflation expectations are the most important supply side factors determining interest rates, then 2018 marks another long-term low in long-duration rates (esp. after Feb. 2018). But there are contrary forces at work. I think it will eventually depend upon the U.S. twin deficits. Demand side factors (our fiscal deficits), are already too large and are displacing otherwise more efficient uses and allocations by the private sector.
Note also that in 1932, "the interest rate on U.S. Treasury bills became negative because investors were willing to take a loss if they knew that their money was safe." Jun 5, 2017. 04:47 PMLink
Interest is the price of loan funds (the level of free-market clearing rates), not the price of money. The price of money is the reciprocal of Yale Professor Irving Fisher’s price-level (the Fed’s bailiwick).
Raising once again, virtually back-to-back (largely without any allowance for the NBFI’s refinancing, rollover, restructuring, and matching of cheap, short-term, wholesale liabilities with their earlier established earning assets, or dynamic ALM), the remuneration rate on FRB-District Reserve IBDDs (clearing balances or outside/exogenous money balances, i.e., costless Federal Reserve bank credit or “Manna from Heaven”, and not whatsoever a tax), will precipitate an economic recession (lower the trajectory of extant money flows).
As I have repeatedly said: "The economy is behaving exactly as it is programmed 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 AMLink
There are no “primary” deposits to the commercial banking system. There are only “derivative” or retail “core” deposits. DFIs pay for their new earning assets with new money. If an individual bank buys its liquidity, instead of following the old fashioned practice of storing their liquidity (e.g., sells CDS or “attracts” savings), existing deposits are extracted from other competing banks all endogenous to the system. I.e., with immaterial exceptions, the source of time (savings) deposits is other bank deposits, directly or indirectly via the currency route, or thru the DFI’s undivided profits accounts.
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 given 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 nor adds anything to N-gDp (paying for what the banks already own, just increases a bank’s expenses without a concomitant increase in income). In fact, increasing the proportion of saved deposits to non-interest bearing transaction deposits destroys money velocity, shrinking AD, thereby shrinking N-gDp. This “U-turn” of the savings-investment direction lowers the *real* rate of interest (produces an excess of savings over investment), and increases bad debt.
As a result of the Fed’s hiking its policy rate, money velocity is destroyed - as savings become increasingly idled, un-used and un-spent. I.e., hiking the remuneration rate induces non-bank dis-intermediation, an outflow of funds or negative cash flow (where the size of the NBFIs provisionally shrink, but the size of the commercial banking system remains unaffected).
Contrary to all economists, savings flowing through the non-banks never leaves the commercial banking system. The non-banks, NBFIs, are not in competition with the commercial banks, DFIs, for loan-funds. And the lending capacity of the DFIs is not predicated on the level of free-market clearing rates. It is dependent upon monetary policy, not the savings practices of the public. I.e., the DIDMCA of March 31st 1980 literally created the S&L crisis. This is John Maynard Keynes’ twisted “optical illusion” (pg. 81 New York: Harcourt, Brace and Co.).
Driving the DFIs out of the savings business will eliminate stagflation and secular strangulation. It will increase the ROE & ROA for the DFIs and increase NIMs for the NBFIs. It will increase investment outlets, overall incomes, R-gDp, and produce higher and firmer *real* rates of interest for saver-holders. The 1966 S&L credit crunch was the prologue and paradigm.
An excess of "real-investment" outlays over the volume of monetary savings (the recipients of income), is stimulative, while an excess of savings over "real-investment" outlets is contractive (non-use of savings).
From a system’s perspective (macro-economics, not micro-economics), bank financing injects new money into the economy. Bank credit does not constitute a utilization of existing savings (+ $10 trillion, which does not include “saved” transaction deposits).
I.e., the geographical mismatch and redistribution of deposit-taking and lending activities should be minimized and banks should be required to make loans in the communities where they collect deposits (analogous to the 1920’s endogenous redistribution of deposits between former Central Reserve City Banks, vs., Reserve City Banks, vs. Country Banks, or the oligarchic skewing of IBDDs by money center banks and foreign bank branches, once they became remunerated)
Voluntary savings (funds held beyond the income period in which received), require prompt activation if the circuit flow of funds, and the effective demand for output, or AD, is to be maintained (propagating other’s incomes, the redistribution of income from the upper quintiles to the lower quintiles), and consequently any intensification of economic drag and decay is to be avoided.
However, to promote R-gDp (real incomes), not only requires a speedy rate of utilization of savings, but a flexible structure of asked prices (restriction of oligopoly, monopsony, and monopoly), abundant natural resources, technological prowess, and the speedy matching jobs with the skills of the workforce, and the “democratization of credit” (high *real* rates of interest for savers but uniformly mandated non-exploitative ceilings for borrowing consumers, viz., Deuteronomy 23:19-20), etc., all of which are components of high levels of production, employment, and incomes. I.e., we necessarily have regulated and adaptive capitalism.
It’s not just regulatory gridlock that’s hurting businesses. The deceleration in R and D investment and CAPEX ratio expenditures, which are necessary for higher productivity (deceleration which has become pronounced since the GR), is a long-standing economic problem (beginning in 1981).
It’s not about per capita demographics (aging, outsourcing, globalization, and trade liberalization, e.g., NAFTA’s presupposed “division of labor/specialization”). It’s about per capita productivity (more bang for the buck and working smarter). It’s not about the price of capital expenditures (di shrink or Moore’s law, where equipment today costs less), or the shortened length of the product cycle, or average service-life of the product, it’s about “potential” ROI and ROA. We’re not just talking corporation’s reinvestment of cash, but borrowing long-term, for the future.
Low interest rates do not stimulate business investment as investment decisions (hurdle rates) are chiefly idiosyncratic. Sustained investment weakness is being driven by the cessation in the circular flow of incomes (political-economic errors, e.g., maximizing share-holder value, CEO-to worker compensation, and the non-use of savings, etc.). Lower incomes depress investment and interest rates.
Income redistribution (or our welfare state with its entitlements) is an unsustainable political strategy. Although refinancing usurious debt (e.g., tolerance of payday loan sharks), is an obvious exception. It our standard of living, not the number of jobs, but the quality of jobs and average hourly earnings (the matching of skills and education of the work force) that impacts our standard-of-living. And entitlements (related to gross domestic savings as a percentage of GDP) encroach, crowding out, $ for $, net investment outcomes (the net foreign savings glut offset notwithstanding - related to current account balance is also unsustainable).
It is the circuit income velocity of savings that offsets income inequality (where S = I ). Stagflationists advocating increasing the rate of inflation (where the *real* rate of interest must sometimes be negative, or NAIRU mandates, or minimum wage laws), simply compounds the on-going problem.
It’s a myth that “high-income households tend to accumulate savings rather than consuming or investing”. There are $10 + of commercial bank held savings which are remunerated (just like IBDDs), without any matching product and service outlet. Bank-held savings are un-used and un-spent, lost to consumption, production, and investment.
See the trend which was predicted in the late 1950's, viz., "the stoppage in the flow of monetary savings, which is an inexorable part of time-deposit banking, would tend to have a longer-term debilitiating effect on demands, particularly the demands for capital goods":
The deceleration in aggregate demand is the direct result of the drop in money velocity (literally savings velocity), which in turn is the result of savings that are increasingly frozen and dormant (DFIs always create new money whenever they lend/invest, they do not loan out existing deposits saved or otherwise). Thus, as was predicted in the late 1950's ("In general, a shift of savings deposits from commercial banks to non-banks will improve the net earnings of the former...and "implies an increased demand for loan-funds, higher and firmer interest rates, and a lower loss from bad debt", Altman Z-Score’s are falling (lower today than in 2007
Maybe you should trade based on the number of participating counterparties. I.e., there was a "problem" with short-term rates. The one month rate fell from .9% to .76% from the 14th to the 23rd (reflecting Yellen's rate hike's impact on the economy). The tightening initially caused stocks to fall. The revesal, the subsequent easing, is stoking them.
This is a 4th of July sponsored rally (long weekend & month-end commercial bank, & Central bank squaring). It represents the injection of reserves and depositing / transfer of funds from the Treasury's General Fund account, etc.
Interest rates reflect the supply and demand for loan-funds (so they are not necessarily related to just N-gDp trajectories). The future course of the dollar will be down, unless the payments gap is filled by foreign investment. The $'s sell off in international markets (FX, & carry trade returns) is driving domestic interest rates higher. The $ is dropping as our trade deficits are accelerating. "The U.S. deficit is running about 13% higher through the first five months of 2017: $233.1 billion vs. $206 billion in the same period in 2016" (MarketWatch). As soon as DXY started falling on the 26th, interest rates started rising on the 26th.
Money flows (volume Xs velocity), have rebounded in the 3rd qtr. of 2017 - the July holidays being the main impetus (viz., c. a $90B swing in the Treasury’s General Fund account). That RR level should boost velocity (or keep it from falling until the 4th qtr.).
The seasonal pattern is that the 3rd week in July is typically a peak in economic activity (reflecting the 5th seasonal inflection point), and thus also, the peak in bond yields and stock prices). But there are countervailing factors at work in 2017 (raising the remuneration rate on IBDDs on March 16th and June 15th).
Maybe the Fed would have better luck if they targeted the transactions velocity, Vt, of money. As Arthur Burns testified before Congress: "Money has a 'second dimension’, namely, velocity".
Unexpected changes in money velocity (which Keynes called “animal spirits” or behavior analysis, i.e, copycat/herding behavior), have resulted in money/price illusion, a confusion of nominal vs. real values (a term which Yale Professor Irving Fisher coined). And Fisher wrote a book about it: “The Money Illusion, in 1928. Keynes referred to it as: “a spontaneous urge to action rather than inaction, and not as the [rational] outcome of a weighted average of quantitate benefits multiplied by quantitate probabilities.”
However, income velocity, Vi is a contrived metric. And as I previously stated, Vt is a transactions concept, not an income concept. Contrary to Henry Hazlitt in his 1968: “The Velocity of Circulation”, and Ludwig von Mises in "Human Action", the transactions velocity, Vt, is an “independent” exogenous force acting on prices. But I think they’d both agree that Alfred Marshall’s "K", which they endorse (their "cash holdings" approach), is the reciprocal of Vt.
And financial transactions, viz., the Jan. 1st 1981 “time bomb” (as reflected by a 50 percent increase in demand deposit turnover during 5 successive quarters), aren’t random, as the 19.1 percent increase in 1st qtr. 1981 demonstrated. The decline in money velocity was what Greenspan’s “Great Moderation” characterization was all about.
Money exchanging counterparties is exhibited in several economic statistics:
See: "Strength In Tax Data Tells Us: Panic Now, Avoid the Rush" by Lee Adler • July 5, 2017
"It’s boom time again in America. The tax data for June tells us that animal spirits have returned. Data from the US Treasury’s Daily Treasury Statement showed that taxes zoomed higher virtually across the board, after a weak start to the month.”
There is no such rate as a hypothesized/predictable natural rate of interest. Capital-goods and R& real-investment hurdle rates (production and productivity factors), are largely idiosyncratic. Interest is the price of loan-funds. The price of money is the reciprocal of the price level. I.e., residential and business fixed-investment are not a function of the gross private savings rate (a source of mathematical econometric modeling errors). And therein lies the subpar economic performance problem: the impoundment and ensconcing of monetary savings.
All commercial bank held savings are dormant, indeed frozen, lost to: both consumption and investment (definitely to any type of payment or expenditure). The only way to activate voluntary savings and put these funds back to work in the economy, completing the circuit income and transactions velocity of funds, is for the saver holder to invest/spend their funds themselves, directly, or indirectly via non-bank conduits.
The omnipresent theoretical/conceptual error (yes the 300 Ph.Ds. on the Fed’s technical staff are inherently stupid), is that commercial banks loan out the savings placed with them. However, from the standpoint of the entire economy and the domestic banking system, DFIs pay for their new earning assets, with new money (that’s how all new money is created). Take the “Marshmallow Test”: (1) banks create new money, and incongruously (2) banks loan out the savings that are placed with them.
All savings originate within the confines of the commercial banking system. And DFIs are never intermediaries in the savings-investment process (viz., S "≠" I). Contrary to the DIDMCA of March 31st 1980 theoretical and empirical error (the onset of secular strangulation, increasing total credit-market indebtedness, and therefore bad debt), the NBFIs are the DFI’s customers.
Savings flowing through the non-banks never leaves the commercial banking system. And savers never transfer their savings outside of the commercial banking system (there is just a transfer of ownership of existing deposit liabilities within the payment’s system). Remunerating IBDDs is thus regressive, inducing non-bank dis-intermediation (an economist’s word for going broke).
And aggregate monetary purchasing power, AD, is measured by monetary flows, volume Xs velocity (not Central Bank policy rates nor the prevailing level of market clearing interest rates, here or abroad). Keynes Liquidity Preference Curve (demand for money), is a false doctrine given, for example, the homogeneity or substantial substitutability, liquidity, of portfolio assets, short and long term debt on an increasingly flattened yield curve). Rates-of-change in money flows = roc's in P*T (where N-gDp is a subset and a proxy).
Ex-ante trajectories of long-term money flows = inflation. In 2018, the rate of inflation will decelerate (as money velocity continues to drop and monetary flows fall).
The Federal Reserve Bank's biggest mistake (and all other professional economists), is that they don't understand that savings flowing through the non-banks increase the supply of loan-funds, or the distribution of available credit (but not the supply of money). Lending by the NBFIs is a velocity relationship.
That's why money velocity has fallen since 1981, and will continue to fall as the Fed remunerates IBDDs and continues to raise the payment of interest on member bank's master accounts and respondent bank's pass thru accounts at their correspondent bank (identified by a primary nine-digit Routing Transit Number, RTN), at their District Reserve banks.
Thus, the Fed, Congress, and the FDIC, have increasingly incentivized consumers and businesses to hold idle balances in the payment's system (as the NBFIs are not in competition with the DFIs, but have a symbiotic economic relationship). Because of the payment of interest on IBDDs, the commercial banks are able to, and do, outbid the non-banks for loan-funds (inducing non-bank dis-intermediation). That destroys money velocity. It reduces N-gDp growth rates (resulting in stagnant, or falling, overall incomes).
It is so spectacularly perverse and pertinacious because the DFIs legal and economic lending capacity is not predicated on the prevailing level of market clearing interest rates, rather on the volume of business associated with credit worthy borrowers. And net changes in Reserve Bank credit (not a tax but Manna from Heaven), since the Treasury-Federal Reserve Accord of 1951, are determined by monetary policy, not the savings practices of the non-bank public. The DFIs could continue to lend even if the non-bank public ceased to save altogether.
As all savings originate within the payment's system, there cannot be an inflow of funds (savings) for the system as a whole. NIMs are not applicable to the DFIs (NIMs are “fake news”), as the DFIs pay for their earning assets from the system’s belvedere, by creating, ex-nihilo, new money - demand deposits somewhere in the system.
Keynes’ “optical illusion” was that the lending equation for an individual commercial bank, its lending capacity, is the same as that of an intermediary (where all newly created deposits flow to other banks in the system). This assumes that the initial inflow of funds, a bank’s positive balance of payments, is a primary deposit to the recipient bank, though it actually represents a derivative deposit coming from a competing bank within the system (the dimensional confusion of stock vs. flow).
We are saddled with a bunch of morons running our country and destroying our constitutional freedoms. It is an indisputable fact. The escalating murder rates and our social unrest are being ratified by the Federal Reserve Board of Governors period.
The regulation of banks is dictated by the charter under which each bank operates. But any FDIC insured bank should have a Federal charter under the guidance and supervision of the BOG. Regulatory fragmentation and overlap should be consolidated. The OCC, fifty state banking authorities, and National Credit Union Association should be eliminated. And the provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 should be repealed. All bank examination should be supervised by the Fed and administered by the FDIC.
Chain banking and branch banking, should be restricted from allowing banks to operate branches beyond state borders. And the availability of credit should identical with the "democratization of credit" (not the elimination of usury ceilings and unlimited credit card charges, or the 2009 CARD Act). Banks need anti-trust laws (as TBTF and G-SIBs, have been the outcome). Congress should reinstate usury ceilings across the board. High interest rates and restrictive ceilings leading to reduced lending were entirely the Fed’s fault.
The most important reason for lodging supervisory powers over the banks with a central monetary authority is the need for coordinating bank supervision with monetary policy.
Lending by the commercial banks, DFIs, is not predicated on the level of market clearing interest rates. It is dependent on the volume of their business: credit worthy borrowers and bankable opportunities, e.g., inexhaustible Federal gov’t debt. “Pushing on a string” only applied to the nominal legal adherence to the fallacious “real bills” doctrine (pre-1933).
I.e., the DFIs, from Messari accounts (the entire system’s balance sheet, income, and expense statements, i.e., flow vs. stock), and not from the standpoint of an individual commercial bank’s ledgers, never loan out existing deposits, saved or otherwise. They always pay for their new earning assets – with newly created deposits (S ≠ I) That’s how the money stock conterminously and endogenously expands ex-nihilo in the macro-economy, viz., loans + investments = deposits.
However, raising the remuneration rate, the Fed’s policy administered rate, absorbs the NBFI’s existing savings, or their loanable: wholesale and pooled funds, in the borrow-short, to lend out higher and even longer, savings-investment paradigm (but not the DFI’s deposits). The prologue and precursor was the 1966 S&L credit crunch (where the term credit crunch was first coined). This obviously causes stagflation (as the volume of DFI credit then becomes, by necessity, exaggerated relative to the volume of goods and services proffered (thereby debunking the “Phillips curve’s” tradeoff).
The initial payment of interest on IBDDs during the GFC, resulted in dis-intermediation for the NBFIs, an outflow funds or negative cash flow, but left the DFIs unaffected (where the size of the NBFIs shrank by $6.2T while the size of the DFIs grew by $3.6T), and thus exacerbated the depth and duration of the GFC. I.e., since Roosevelt’s 1933 Banking Act, dis-intermediation is a term that only applies to the non-banks.
And this Romulan cloaking device (remunerating IBDDs), exceeds the level of short term interest rates which is not supposed to be higher than: "the general level of short-term interest rates" as imposed by the 2006 Financial Services Regulatory Relief Act.
Raising the remuneration rate retards the “credit impulse” and destroys money velocity, intermediary lending/investing, where ( S = I ). N-gDp subsequently decelerates immediately and for some time afterwards (for 6 months after the 1st rate hike on 12/15/15), once the FOMC decides to hike rates. It compresses credit spreads flattening the yield curve (narrowing the profit curve).
I.e., the commercial bankers (unlike the non-banks), cannot attract savings (buy their liquidity), so as to expand the total volume of commercial bank credit outstanding, as all savings originate, and never leave, the payment’s system (unless saver-holders convert to other National currencies or decide to hold more cash).
Thus the Fed’s insouciant entropy (output gap) perversely metastases. It’s called secular strangulation.
Changing the size of the Fed’s balance sheet, where the present holdings of IBDDs is un-necessarily and monopolistically skewed towards 2 money center and foreign banking organizations (vastly unlike it would be if higher reserve ratio and reservable liability requirements had been uniformly applied across-the-board), is déjà vu. Under monetarists’ guidelines, the first rule of reserves and reserve ratios should be to require that all money creating institutions have the same legal reserve requirements, both as to types of assets eligible for reserves, as well as the level of reserve ratios. Monetary policy should limit all reserves to balances in the Federal Reserve banks (IBDDs), and have uniform reserve ratios for all deposits, in all banks, irrespective of size.
The only tool at the disposal of the monetary authorities, in a free capitalistic society, through which the volume of money can be controlled is legal reserves (not interest rate manipulation). The complete deregulation of interest rates and requirements against time deposit banking encourages oligopoly, monopsony, and monopoly or the exploitation of consumers. Why do you think there are no usury capping of ceilings on credit cards, etc. The ABA is public enemy #1.
It is analogous to what happened in the geographical mismatch, and maligned redistribution of deposit-taking and lending activities (mal-investment), in the 1920’s and during the Great Depression, between the former Central Reserve City Banks, vs., Reserve City Banks, vs. Country Banks. This structure precipitated bank panics, accumulated pressures between respondent/correspondent relationships, as the Fed’s country banks classification held upwards of ½ of all vault cash. See 1959 inclusion of vault cash for determining applied / complicit reserves.
This geographic and wholesale funding roll-over (6 months?), restocking, replenishing, and rebalancing of deposits vs. loans is inherently destabilizing even given District Reserve bank backstopping. It develops asset maturity mis-matches in maturity transformation. The liquidity ill-effects are quickly transmitted throughout the system (what anti-trust laws were designed for). It is un-American and treasonable.
It is axiomatic that the smaller the degree of price competition in a market and the greater the degree of private unregulated monopoly power over prices and output, then the higher the amount of unit prices, the greater the tendency for restricted output and employment and the smaller the degree of downward price flexibility. Under these conditions, unless money (and money flows) expands at least at the rate prices are being pushed up, incomes will fall, output can't be sold, and jobs will be lost.
It is no happenstance that “The Community Reinvestment Act (CRA), enacted by Congress in 1977 (12 U.S.C. 2901) and implemented by Regulations 12 CFR parts 25, 228, 345, and 195, is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate.”
"Neutrality of money is the idea that a change in the stock of money affects only *nominal* variables in the economy such as Prices, Wages, and Exchange rates, with no effect on *real* variables, like Employment, Real GDP, and Real consumption." - Wikipedia
Money flows (volume Xs velocity), short and long distributive lags, have turned positive. Thus (contrary to BuB, as evidenced by his FAVAR 2002 paper), since money flows are robust (not neutral), R-gDp should increase in the 3rd qtr.
R*, the Wicksellian natural rate, is fictitious (homeostasis not). So is the Fisher equation (“relationship between nominal and *real* interest rates under inflation”). Budget driven investment hurdle rates for R& and CAPEX, viz., MARR (net present value capital projections & IRR), are idiosyncratic (as incentivized by, e.g., MACRS).
Presently, there is an excess of voluntary savings over profitable real-investment outlets (Alvin Hansen’s 1938 chronic condition of “sagging investment & buoyant savings”). And Professor Phillip George got it right: “the fall in investment is a consequence of the fall in consumption, not the cause of it.” Martin Wolf’s (chief economics commentator at the Financial Times) labels this: “structurally deficient aggregate demand” (which has been incremental and cumulative).
This is exactly what Dr. Leland James Pritchard (Ph.D. - Economics, Chicago School, 1933) had predicted in 1958, based on his formulated savings-investment symbiosis: “will have a longer-term debilitating effect on demands, particularly the demands for capital goods. I.e., the demand for loan funds reflects the advantages of spending borrowed money. And Phillip George has independently figured this mathematically out: “To measure money accurately, we also need to measure the amount of savings contained in M1, and subtract the savings from M1.” All Pritchard’s perspectives on the macro puzzle today fit perfectly in place.
Note: Durable goods is the most volatile component of personal consumption expenditures. And the most volatile of the 4 gDp components is gross private domestic investment, used either to replace or add to the stock of real capital goods, which are: new construction, producers’ durable equipment; and changes in the value of business inventories.
Interest is the price of loan-funds. The price of money is the reciprocal of the price level. Thus residential and business fixed-investment have not been, according to Alan Greenspan, a function of the gross private savings rate (a source of mathematical econometric modeling errors).
Economic fluctuations reveal dynamic lags and concentrations. So the stagflationists (advocates of targeting N-gDp), will inevitably get their comeuppance (as inflation accelerates relative to real-output). The distributed lag effect of money flows, both short and long term impulses, have bottomed and are headed higher until Sept-Oct.
The root cause of the economic staccato is Gresham’s law: a statement of the “principle of substitution” as applied to money: that a commodity (or service) will be devoted to those uses which are the most profitable. I.e., the bad drives out the good - is apropos. So is Alfred Marshall’s “Cash Balances” approach, viz., the differentiation between ex-ante expectations and ex-post realizations).
Business expenditures depend largely on profit-expectations, and favorable profit-expectations depend primarily on cost/price relationship of the recent past and of the present. Cost/price relationships are crucial, and they are particular; they cannot be adequately treated in terms of broad-aggregates or statistical weighted “averages”.
There are no budgeted “money illusions”. The “asked” prices aren’t synonymous with the cost and orbit of production (disputation of Says law).
The "Second Law of Thermodynamics" is obviously wrong (and Chicago School’s Eugene Fama right). That’s how I predicted the September 1981 AAA Corporate bottom in bonds (top in yields). Statistical mechanics is more like “lies, damned lies, and statistics”. It is not Boltzmann’s constant “Kb“, but Alfred Marshall’s “K” (cash-balances approach).
The cosmological "arrow of time" (re: secular strangulation), becomes ever more certain (causality), and convergent (see Stephen Hawking’s anthropic principle), and – not staccato – not asymmetric – not intertemporal – not a black swan – not absolute “S”.
That’s the problem with an economist with a concentration in math and not accounting. As I’ve repeated said: John Cochrane doesn’t know a credit from a debit. And correlation doesn’t prove causality.
And Cochrane wouldn’t post any comment I make on his blog. Self-serving, arm chair economists are more interested in their reputations, any almighty $ which the internet might send their way, and the artificial appearance of intelligence. Censorship on the web takes the form of either “approval”, edits, or articles without comment sections, or a delimited # of characters.
It is completely unknown. Economists are categorically morons. They all fail the “Marshmallow Test”: (1) banks create new money, and incongruously (2) banks loan out the savings that are placed with them.
Never are the commercial banks financial intermediaries (conduits between savers and borrowers), in the savings-investment process. It is not just that paying interest on IBDDs is illegal as practiced (see George Selgin), it is also contractionary. Remunerating IBDDs guarantees a prolonged economic depression and the repudiation of the Federal debt (no exaggeration).
Interest is the price of loan-funds. The price of money is the reciprocal of the price level. Therefore the Fed’s transmission mechanism, interest rates, is non-sense.
Savings flowing through the non-banks never leaves the commercial banking system (there is just a transfer of ownership in existing DFI deposit classifications). The NBFIs are the DFI’s customers. Savings flowing through the non-banks increases the supply of loan-funds (but not the supply of money).
Remunerating IBDDs destroys money velocity (it exacerbates the idling of savings). The 1966 S&L credit crunch (where the term “credit crunch” was first coined), is the antecedent and paradigm.
I’ve cited Thornton 74 times in the last couple of years. He’s worth reading (so is Cochrane).
bit.ly/yUdRIZ Quantitative Easing and Money Growth: Potential for Higher Inflation? Daniel L. Thornton (retired)
See also: Daniel L. Thornton, Vice President and Economic Adviser: Research Division, Federal Reserve Bank of St. Louis, Working Paper Series, “Monetary Policy: Why Money Matters and Interest Rates Don’t” bit.ly/1OJ9jhU
After this discussion with Thornton, George Selgin banned me (and he’s absurdly one of my “followers”).
And as I pointed out, Thornton doesn’t understand money and central banking either. I.e., Keynes’ “optical illusion” is universally mis-understood:
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
George Selgin Mod Spencer Hall • 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.
Then not knowing my moniker:
June 3 at 10:27am Just read your Dec. 16, 2016 post here. I'm glad to find someone else who understands the relation between IOER and banks' extraordinary demand for excess reserves, which I have been pounding away at for several years now.
The "end game" comes with higher bankruptcies, aka: David Stockman’s “healthy purge of busted assets”, or an ABCT economic depression (the direct result of erroneous public policies, not peak debt, not FOMC schizophrenia). Monopolistic price practices, esp. in commercial banking, are regressive (Schumpeter's creative destruction compounded, viz., shades of Karl Marx and Friedrich Engels).
The German paradigm of 1,500 community banks is the appropriate model. And we can, if we get religion, go back to the days when a savings account was just that - and not an adjunct to our checking accounts (gate-keeping). Money creation by private profit institutions is not self-regulatory – the “unseen hand” simply does not function in this area.
It is unethical and indeed undemocratic for special interest groups / lobbyists, to have preferential, indeed a crony self-serving privilege, i.e., sovereign right, to profit from the creation of the publics’ legal tender. Full reserve banking is an option.
As Willie Sutton said: his reason for robbing banks is 'That's where the money is'.
The great German poet and playwright Bertolt Brecht would have agreed and once said it was "easier to rob by setting up a bank than by holding up (one)."
Thomas Jefferson's my favorite: "I sincerely believe the banking institutions having the issuing power of money are more dangerous to liberty than standing armies."
The axiom is that if private profit institutions are to be allowed the “sovereign right” to create money, they must be severely circumscribed in the management of both their assets & their liabilities - or made quasi-gov't institutions. The American Bankers Association, ABA, is public enemy #1.
Remunerating IBDDs was a monumental theoretical public policy error (“where’s my bailout”). It literally destroyed non-bank lending/investing. The 1966 S&L credit crunch (where the term “credit crunch” was first coined), is the antecedent and exemplar. It will create a prolonged economic depression and a sovereign debt default. It emasculated the Fed’s “open market power” (the power to instantly create new money and credit ex-nihilo). The expiration of FDIC’s unlimited transaction deposit insurance (not a “taper tantrum, not budget “sequestration”) is yet another example (my Dec. 2012 “market zinger”).
Any institution whose liabilities can be transferred on demand, without notice, & without income penalty, via negotiable credit instruments (or data pathways), & whose deposits are regarded by the public as money, can create new money, provided that the institution is not encountering a negative cash flow.
Fractional reserve (or prudential reserve), banking is a function of the velocity of its repositories’ deposits (based on payments, clearings, & settlements). Money creation is not a function of the volume of deposits.
Whether the pubic saves or dis-saves, chooses to hold their savings in the DFIs, or to transfer them to a NBFI, will not, per se, alter the total assets or liabilities of the DFIs, nor alter the forms of these assets and liabilities.
From the standpoint of the non-banks (PayPal, ApplePay, Amazon Pay, etc.), the savings-investment process involves the transfer of ownership of existing DFI deposits (which have been saved), within the member banks. The non-banks warehouse large profitable commercial bank balances and generate revolving-commercial bank credit borrowings (they are the customers of the DFIs).
The DFIs and NBFIs have a symbiotic relationship. The soundness, prosperity, and interest of the DFIs is dependent upon the soundness, prosperity, and interest of the NBFIs. The NBFIs are the DFI’s undervalued and non-competitive customers. Savings flowing through the non-banks never leaves the payment’s system.
The sui generis nature of the payment’s system, where the whole is not equal to the sum of its parts in the credit creation process is not a zero-sum game, one bank’s gain by attracting more “core” or “derivative” deposits, is less than the losses sustained by other banks in the system. The whole (the forest), is not the sum of its parts (the trees), in the money creating process. All time (savings) deposits are derived from demand deposits. The DFIs could continue to lend even if the non-bank public ceased to save altogether.
The 300 Ph.Ds. on the Fed’s technical/research staff don’t’ understand the difference between a debit and a credit (confuse money with liquid assets).
See the destruction of the U.S. $ ("Foreign-related institutions held 13.4 percent of the total assets):
4th waves are slow grinding and choppy. Jul 21, 2017. 01:08 PMLink
Top's in (5th seasonal inflection point). Sell stocks (and sell stocks short). Probably a good time to get out of long-term positions as well. The trend is down going into 2018. The Fed now must ease (not tighten) monetary policy. A recession (start of negative growth), is possible by the 2nd qtr. of 2018.
As I have repeatedly said: "The economy is behaving exactly as it is programmed 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 AMLink Jul 20, 2017. 06:09 PMLink
Ben Bernanke: In his paper "The Credit Crunch", referring to the 1990-1991 recession: "In order to lend, banks must have funds: the bank's capital, its checking and saving deposits, or its managed liabilities, like large certificates of deposit (CDs)"
There you have it. The reason why Bankrupt u Bernanke failed.
The stagflationists are swarming as the economy decelerates. David Beckworth: "An inflation driven by the central banks creation of extra money, on the other hand, should increase prices and wages very close to proporitonately."..."That alternative would stabilize the growth of nominal spending: the total amount of dollars spent throughout the economy..."
Most economists use the wrong money metric (but the correct math, rates-of-change, Δ , and not “absolutes”). However, 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. Note that this is an economic indicator, not a stock barometer.
So, an increase in non-M1 components may also be deflationary (destroying money velocity), not inflationary (the difference being an expansion in “bank credit proxy” or the DFI’s loans and investments, synonymous with total bank credit).
Time deposits for the DFIs, are not a source of loan-funds, rather they are the indirect consequence of prior bank credit creation, a shift in the “mix” of DFI deposit liabilities. An increase in time/savings accounts depletes transactions deposits by the same amount - and the source of demand deposits can largely be accounted for by the expansion of commercial bank credit.
So if the proportion of time to transactions deposits increases, ↑, but bank credit proxy remains unchanged, Ø ,“look out below”.
The fact is that all demand drafts in the payment’s system clear predominately thru transaction deposits. The volume that clears thru time/savings/investment deposit account classifications is truly insignificant.
There are problems with nearly all metrics (esp. money with the transfer of balances between TT&L accounts, tax receipts, and the Treasury’s General Fund accounts, disbursements), and the Fed has never been cooperative in supplying continuous (uniformly defined, collected, and reported), i.e., conterminously spliced, and timely data.
Money matters, contrary to Bankrupt u Bernanke, money is robust. The pundits are all wrong.
From June 2000:
CHAIRMAN GREENSPAN. The problem is that we cannot extract from our statistical database what is true money conceptually, either in the transactions mode or the store-of-value mode. One of the reasons, obviously, is that the proliferation of products has been so extraordinary that the true underlying mix of money in our money and near money data is continuously changing. As a consequence, while of necessity it must be the case at the end of the day that inflation has to be a monetary phenomenon, a decision to base policy on measures of money presupposes that we can locate money. And that has become an increasingly dubious proposition.
The fact that every $ spent for output is received by someone as an “income receipt” does not prove the existence of equilibrium (a quantum leap). It is not a statistical validation of “Say’s Law”. Aggregate demand does not equal gDp. A balance sheet snapshot, stock (the basic accounting equation: Assets = Liabilities + Owners' Equity), may reveal that accounting income is equal to accounting expense, but not reveal that the structure of asked prices tends to outrun the costs of production, or flow.
Open market operations between the Central bank and a commercial bank only increase interbank demand deposits owned by the member banks held at their District Reserve bank. This doesn't require as Bill Mitchell says, ZIRP. These weren’t interest rate operations. However OMOs between the Central bank and the non-bank public create both new money and new IBDDs.
Most of the LASPs were between non-bank counterparties. The non-bank public includes every institution (including shadow-banks), the U.S. Treasury, the U.S. Government, State, & other Governmental Jurisdictions, & every person, etc., except the commercial & the Reserve banks.
And contrary to the FOMC’s directive which in 1972 was couched in terms of (RPDs), the belligerent bifurcation (the mis-aligned distribution of sales and purchases of debt by the FRB-NY’s trading desk and its customers/counter-party) was largely unpredictable, so too now is the volume and rate of expansion in the money stock on even a quarter-to-quarter basis. FOMC policy has now been capriciously undermined by turning excess reserves into bank-earning assets.
Bankrupt u Bernanke made numerous policy errors. And one of them was a Federal crime, the remuneration rate on IBDDs. George Selgin just testified before Congress about this mistake. This emasculated the FRB_NY”s “open market power”. This theoretical policy error, contrary to another Bowery Boy, Scott Fullwiler’s paper is contractionary. I.e., there are also “leakages” in sectorial analyses.
And the money multiplier is predicated on the assumption that the commercial banks will immediately buy some type of earning asset with their “Manna from Heaven”, IBDDs. This they always did between 1942 and Oct. 6, 2008’s enactment.
By mid 1995 (a deliberate and misguided policy change by Alan Greenspan), legal (fractional) reserves ceased to be binding – as increasing levels of vault cash/larger ATM networks, retail deposit sweep programs (c. 1994), fewer applicable deposit classifications (including allocating "low-reserve tranche" & "reservable liabilities exemption amounts" c. 1982) & lower reserve ratios (requirements dropping by 40 percent c. 1990-91), & reserve simplification procedures (c. 2012), combined to remove reserve, & reserve ratio, restrictions.
BuB was stupid. He didn’t even know that an increase in bank capital accounts, c. $1 trillion, destroys the money stock $ for $. So any counter-cyclical increase in bank capital when prices and the economy are collapsing is tantamount to declaring war on that country. See:
Among the many problems was that there was no Treasury-Federal Reserve collaboration. Treasury Secretary Jack Lew: “Treasury’s decisions about how to manage government debt are made independently of the Fed’s monetary policy choices, he said". Thus there was a shortage of “safe-assets” necessitating the Treasury Supplementary Financing Program -SFP), etc.
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.
N-gDp is determined by the volume of goods & services coming on the market relative to the actual, transactions, flow of money. RoC's in 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 Professor Irving Fisher's truistic: "equation of exchange".
RoC's in R-gDp serves as a close proxy to RoC's in total physical transactions, T, that finance both goods and services. And Alfred Marshall's cash-balances approach: "bridges the gaps of transition periods" in Yale Professor Irving Fisher’s model. RoC's in R-gDp have to be used, of course, as a policy standard.
The "unified theory" is: (1) that the non-banks are the customers of the commercial banks according to Dr. Leland James Pritchard (“Chicago School” - 1933). Thus (2) all demand drafts originating from the NBFIs clear thru the DFIs. (3) “Bank reserves are driven by payments” (bank debits, former G.6 release) according to Dr. Richard G. Anderson, world’s leading guru on reserves. And (4) legal reserves are based on transaction type deposit classifications 30 days prior see:
“Quantitative Easing and Money Growth: Potential for Higher Inflation?” according to Dr. Daniel L. Thornton.
Scientific evidence "is proof, which serves to either support or counter a scientific theory or hypothesis. Such evidence is expected to be empirical evidence and in accordance with scientific method" - Wikipedia
Scientific method is "a method or procedure…consisting in systematic observation, measurement, and experiment, and the formulation, testing, and modification of hypotheses" – Wikipedia
See my “The Distributed Lag Effect Of Monetary Flows” (akin to: Yale Professor Irving Fisher’s pioneering calculation):
Eric Basmajian: “There are, however, shorter periods of time, most often at the tail end of a business cycle, where the stock market can detach itself from the fundamentals of the underlying economy, a period of time I believe we happen to be in currently.”
The divergence is primarily between the trend rate in real and nominal variables, R-gDp and not N-gDp. N-gDp contracted in the first part of 2017 and is expanding in the 2nd part.
You can learn a lot from Jeffrey Snider (but he’s not always “on point”, though I’m not infallible). Thomas Jefferson: “"I have not failed. I've just found 10000 ways that won't work.”
Banks create new money. Non-banks lend existing money. The DFIs are outbidding the NBFIs for loan funds (the reverse of this flow is impossible for the NBFIs to do). It's abstractly that simple (grunt work un-necessary).
The savings-investment paradigm has been altered by the cataclysmic theoretical error of remunerating IBDDs. Remunerating IBDDs induces non-bank dis-intermediation, a term, like “intermediation”, contrary to George Selgin, is only applicable to the NBFIs. 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." Stuck-like-Chuck (John Maynard Keynes' "optical illusion" pg. 81 New York: Harcourt, Brace and Co.).
Izabella Kaminska also wrong: “the fails are happening despite the presence of the 3 per cent fails charge and despite the presence of the Fed's new Reverse Repo Facility“. No, the O/N RRP facility doesn’t supply liquidity, it drains bank reserves or liquidity. No, contrary to Bankrupt u Bernanke: “Money is fungible”…“One dollar is like any other”, pg. 357, but oddly enough, akin to the “Marshmallow test”, we had a “credit crunch”, pg. 180.
I’ve run across this before with Zoltan Pozsar who is “Director in the Global Economics and Strategy” research group at Credit Suisse (and esp. the cult of “Bowery Boys). They both can’t comprehend, and have never studied, the symbiotic relationships between the DFIs and the NBFIs. It’s 1950's old-school.
Get a grip. A “rising” $, or contraction of the prudential reserve E-$ market (a superfluous addition to the world’s money stocks), “dysfunction” is due to several factors…
But “the buying panic on October 15, 2014, which was in every way related to repo fails and collateral difficulties” was due exclusively to Chairman Dr. Janet Yellen’s error. From: Spencer (@hotmail.com) Sent: Thu 9/18/14 12:42 PM To: FRBoard-publicaffairs@... (frboard-publicaffairs... Dr. Yellen: Rates-of-change (roc’s) in money flows (our “means-of-payment” money times its transactions rate-of-turnover) approximate roc’s in gDp (proxy for all transactions in Irving Fisher’s “equation of exchange”). The roc in M*Vt (proxy for real-output), falls 8 percentage points in 2 weeks. This is set up exactly like the 5/6/2010 flash crash (which I predicted 6 months in advance and within 1 day).
There is nothing more disgusting than perverted fake news and censorship.
Take George Selgin. "A Monetary Policy Primer, Part 11: Last-Resort Lending"
"banks by their very nature are vulnerable to runs"
If he was talking about the Great Depression he was right.
"The few U.S. states that allowed branch banking also had significantly lower bank failure rates"
That's called mental diffusion, aka, the homeostasis of fractional reserve banking.
"One need only consider the relatively recent history of the Fed's last-resort lending operations, especially before 2003 (when it finally began setting a "penalty" discount rate) and during the subprime crisis, to uncover one flagrant violation Bagehot's basic principles after another."
Monetary confusion compounded. Volcker violated Bagehot because inflation was predominant. Bernanke violated Bagehot because deflation was predominate.
DFIs pay for their new earning assets with new money - not existing deposits. What the DFIs need is a positive balance of payments (not deficits in their balance of payments). The individual DFI is an intermediary in only this sense. Then, savings deposits need not precede loans.
A net inflow of funds increases deposits and clearing balances (un-used lending capacity). The receiving bank is thus in a position to expand loans. But all such inflows involve a decrease in the lending capacity of other banks, unless this results from a return flow of currency to the payment’s system, or is a consequence of an expansion of Reserve Bank credit.
All savings originate within the framework of the commercial banking system (due to a transfer from transaction deposits). Deposits in commercial banks can be reduced in several ways, but not by being transferred to a non-bank. Here are the principal ones: (1) repayment of loans or securities held by the CBs, (2) payments for interest or other services provided by CBs, (3) increase in CB capital accounts thru retention of profits, and (4) by the non-bank public increasing its holdings of currency. Note: all of the above apply to the CBs as a System, not to any given transaction with a particular CB.
From the standpoint of the 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 commercial banks or to transfer them to intermediary institutions will not, per se, alter the total assets or liabilities of the commercial banks nor alter the forms of these assets and liabilities.
Any institution whose liabilities can be transferred on demand by a negotiable credit instrument, and whose deposits are regarded by the public as money, can create new money provided that the institution is not encountering a negative cash flow. And if other banks are competing for time/savings deposits, the individual banker has to compete, or lose deposits and earning assets.
Money creation is a system process. No bank, or a minority group of banks (from an asset standpoint) can expand credit (create money) significantly faster than the majority banks expand, or they’d lose their: “due from other bank items” correspondent bank balances, and excess reserves (not a tax, rather Manna from Heaven).
The drive by the commercial bankers to expand their savings accounts has a totally irrational motivation, since it has meant, from a system’s belvedere, competing for the opportunity to pay higher and higher interest rates on deposits that already exist in the payment’s system. But it does profit a particular bank, to pioneer the introduction of a new financial instrument, such as the negotiable CD - until their competitors catch up; and then all are losers.
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 payment’s system... This is not a zero sum game. One bank’s gains is less than the losses sustained by other banks. Thus a larger proportion of a larger volume of money simply becomes interest bearing (thereby inducing secular strangulation, a decline in savings' velocity).
Under pressure from the ABA, public enemy #1, the Fed gradually raised and finally eliminated its Regulation Q interest rate ceilings on time deposits. The banks were then free to pay what the market dictates. With interest rate ceilings eliminated and legal reserve and reserve ratio requirements on time/savings deposits all but eliminated, there was both an increased incentive to hold time deposits, and no legal restrictions on their growth.
At the same time the Fed permitted institutional changes which enabled demand deposit holders to shift into interest bearing time deposits with little or no decrease in the liquidity of their assets. These changes took the form of negotiable CD’s, automatic transfer services, negotiable orders of withdrawal, and money market deposit accounts. Since time deposit growth is directly (or indirectly thru the currency route), at the expanse of demand deposits (an increase in time deposits depletes demand deposits by the same amount), the Fed received false signals as to the real means-of-payment money.
The savings held in the payment’s system, whether in the form of time or demand deposits, can only be spent by their owners; they are not, and cannot, be spent by the banks.
Thus, the DIDMCA eliminated the essential legal differences that differentiate money creating, from intermediary, financial institutions. By the S&L crisis, the intermediaries were destroyed and a money creating system was fostered which the Fed couldn’t control (viz., the GFC as predicted in May 1980).