There is something in this more than natural - Hamlet

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Secular strangulation, or chronically deficient aggregate demand, results from the impoundment and ensconcing of monetary savings, funds held beyond the income period in which received, within the framework of the payment's system. This destroys money, actually savings, velocity, Vt.

CB Time deposits vs. demand deposits:
1939........15~~~~~~ 33
1954........47~~~~~ 121
1964......126~~~~~ 156
1974......421~~~~~ 274
1979......676~~~~~ 401
1986...1,215~~~~~ 491
1996...1,271~~~~~ 420
2006...3,696~~~~~ 317
2016...8,222~~~~1,233
The ratio of TD/DD in 1939 = 0.45
The ratio of TD/DD in 2016 = 6.67

All bank-held savings are un-used and un-spent. Why? Because from the system’s belvedere, DFIs always create new money whenever they lend/invest. DFIs do not loan out existing deposits, saved or otherwise. So it takes increasing infusions of Reserve bank credit to generate the same inflation adjusted $ amounts of gDp.

The 300 Keynesian Ph.Ds. in economics that dominate the Fed’s research staff are vacuous, not knowing a debit from a credit. I.e., Contrary to Alan Greenspan, who attributes the deceleration to the acceleration in dis-savings due to entitlement spending, it was the 5 successive rate hikes in Reg. Q ceilings for the ABA, public enemy #1, culminating in the disastrous hike in Dec. 1965, that initially caused both the S&L credit crunch (when the term credit crunch was coined), and stagflation (business stagnation accompanied by inflation), as predicted in the late 1950’s.

Greenspan:

“From 1959 to 1966, the federal government’s net savings was in rate surplus”.
“Between 1965 and 2012, the average annual rate of increase of social benefits exceeded 9.4%, as benefits’ share of gDp rose from 4.7% to 14.9%...diverting savings from investment…”

“Between 1965 and 2012, as a consequence of falling government savings, total gross domestic savings (as a percent of gDp), declined from 22% to 12.9%, or 9.1 percentage points."

“Only because we borrowed savings from abroad were we able to limit the decline in domestic capital investment (as a percent of gDP) to 5 percentage points, from 21.4% in 1965 to 16.2% in 2012”

The Fed’s technical staff is not alone in their delusions (Keynes' "optical illusion").

Greenspan: “Much later came the evolution of finance, an increasingly sophisticated system that enable savers to hold liquid claims (deposits), with banks and other financial intermediaries [sic]. Those claims could be invested by bank in financial instruments that, in turn, represented the net claims against the productivity-enhancing tools of a complex economy. Financial intermediation was born. The system financed the industrial revolution and modern capitalism.”

Never are the commercial banks intermediaries (conduits between savers and borrowers), in the savings-investment paradigm.

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Stagflation was predicted in the late 1950’s by Dr. Leland James Pritchard (1933-Chicago School):

“We may assume, therefore, that the initial response of the monetary authorities to a shift from demand to time deposits, ceteris paribus, is to effect a volume of sales in the open market sufficient to extinguish the excess reserves brought into being by this shift. If, in due course, it is decided to maintain excess reserves at a higher level, that is, to follow an easier (or less restrictive) monetary policy, this is presumably undertaken to counteract recessionary tendencies in the economy. This being so, it must be presumed that the growth of time deposits could not induce a shift toward a relaxation of monetary restraints unless such growth has a dampening effect on the economy, a not unlikely possibility since savings held in the form of time deposits are lost to investment (and to any other type expenditure), so long as they are so held”

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 correct 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 “time bomb” created by Congress at the behest of public enemy #1, the ABA, permitting unrestricted access to interest bearing savings deposits).

This represented the monetization of time deposits or the elimination of gate-keeping restrictions, structural (liquidity) changes which made virtually all time (savings) deposits the equivalent of low velocity demand deposits, the largest single factor contributing to the increased rate of money turnover up until 1981.

I.e., the saturation of DD Vt according to Marshall D. Ketchum (Chicago School): It seems to be quite obvious that over tie the demand for money cannot continue to shift to the left as people buildup their savings deposits; if it did, the time would come when there would be no demand for money at all” (aka Alfred Marshall’s “money paradox”, viz., Money thus is truly a paradox – by wanting more the public ends up with less, and by wanting less it ends up with more”.

Thus began the secular decline in money velocity (and secular strangulation) as predicted in IMTRAC on May 1980 by Dr. Leland J. Pritchard (1933, Chicago School).

Saver-holders can invest their money directly, e.g., by buying Treasury’s. If their funds were held as commercial bank CDs, then there is an increase in the supply of loan-funds (but not the money stock), and said savings are matched with investment (S = I). The banks can’t buy bonds without increasing the money stock (S "≠" I). And the remuneration of IBDDs exacerbated this error.

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

Daily Treasury Yield Curve Rate differential since the last rate hike:
1 mo ,,,,, 0.05
3 mo ,,,,, -0.01
6 mo ,,,,, -0.01
1 yr ,,,,, 0.04
2 yr ,,,,, -0.03
3 yr ,,,,, -0.02
5 yr ,,,,, 0.02
7 yr ,,,,, 0.05
10 yr ,,,,, 0.04
20 yr ,,,,, 0.01
30 yr ,,,,, -0.01

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The current staccato movements are largely the result of a mis-classification of DFI liabilities, and the movement of commercial bank held deposits between Treasury receipts (its TT&L accounts), and the Treasury’s General Fund Account (from which payments are issued and then redeposited).

It is inaccurate (for the cataloguer of economic statistics) to exclude the Treasury’s General Fund Account from the assets included in M1 (with the exception of WWII). No one has established any unique price effect of federal outlays, as compared to state and local government outlays, or expenditures by the private sector.

Of course, the shifting of funds to and out of the Federal Reserve banks has a dollar for dollar effect on member bank legal reserves, but that is another problem that can be, and is dealt with through smoothing the receiving and making of interbank payments by using the FRB-NY’s open market power.

I.e., “The Nattering Naybob’s” ELEPHANT TRACKS.

fred.stlouisfed.org/series/WTREGEN

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If we are to believe the economists, a reduction in the Fed’s balance sheet beginning in Sept. (and thus IOeRs and IOrRs), eliminates any tax on the commercial bankers. LOL. Paying interest on required reserves was supposed to take care of their "tax" [sic]. Paul Volcker (& Milton Friedman) thought the member banks should be paid interest on reserves "based on rounds of equity” - WSJ 1983. No joke.

A brief “run down” will indicate just how costless, indeed how profitable – to the participants, is the creation of new money (not a tax at all). If the Fed puts through buy orders in the open market, the Federal Reserve Banks acquire earning assets by creating new inter-bank demand deposits. 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 free reserves, the commercial banks created a multiple volume of credit & money. And, through this money, they acquired a concomitant volume of additional earnings assets. How much was this multiple expansion of money, credit, & bank earning assets? Thanks to fractional reserve banking (an essential characteristic of commercial banking) for every dollar of legal reserves pumped into the member banks by the Fed, the banking system acquired about 93 (c. 2006), dollars in earning assets through credit creation.

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

seekingalpha.com/article/3152196-bank-reserves-and-loans-the-fed-is-pushing-on-a-string

See: “Quantitative Easing and Money Growth: Potential for Higher Inflation” - Daniel L. Thornton, Vice President and Economic Adviser

files.stlouisfed.org/files/htdocs/publications/es/12/ES_2012-02-03.pdf

“The Financial Services Regulatory Relief Act of 2006 authorized the Federal Reserve Banks to pay interest on balances held by or on behalf of depository institutions at Reserve Banks, subject to regulations of the Board of Governors, effective October 1, 2011. The effective date of this authority was advanced to October 1, 2008, by the Emergency Economic Stabilization Act of 2008.”

In the 1980 Chase Business in Brief this statement appears”…the fed has never made a convincing economic case that reserve requirements are needed at all. This opinion seems to be widely held in the banking community. Such opinions ignore the dynamics of money creation. As long as it is profitable for borrowers to borrow & commercial banks to lend, money creation is not self-regulatory. This observation would be valid even though the fed did not use the federal funds bracket device as a guide to open market operations.

With the use of the bracket device the fed since 1964 has actually pursued a policy of automatic accommodation. This is, additional reserves and excess reserves were made available to the payment’s system whenever the bankers & their customers saw an advantage in expanding loans. The member banks lacking excess reserves would bid up the fed funds rate to the top of the pegged bracket thus triggering open market purchases, more bank reserves, more money creation, larger money flows, higher rates of inflation—higher fed funds rates, more open market purchases, etc.

Excess reserve balances are largely idle and un-used. There is little reserve velocity or activity in the Federal Funds interbank market (and IBDDs are heavily skewed towards FBOs and larger money center banks (c. 40%).

See: “Reserve Balances, the Federal Funds Market and Arbitrage in the New Regulatory framework”

www.federalreserve.gov/econresdata/feds/2016/files/2016079pap.pdf

See: “Who Is Holding All the Excess Reserves?”

www.clevelandfed.org/newsroom-and-events/publications/economic-trends/2015-economic-trends/et-20150811-who-is-holding-all-the-excess-reserves.aspx

See: “Who’s Lending in the Fed Funds Market?”

libertystreeteconomics.newyorkfed.org/2013/12/whos-lending-in-the-fed-funds-market.html

Because the payment’s system hasn’t been reserved constrained since c. 1995, excess reserve balances aren’t required as a precondition for the system as a whole, to make new loans and investments. 85 percent of all required reserves are being met by using a bank’s applied vault cash (the primary or working reserves of a member bank consist of deposits in other banks, vault cash, and deposits in the Reserve bank that are in excess of the bank’s reserve requirements).

See: “Modern Money Mechanics -A Workbook on Bank Reserves and Deposit Expansion”

www.rayservers.com/images/ModernMoneyMechanics.pdf

The gradual decline in the payment’s system excess lending capacity will likely result in a corresponding tightening of correspondent and respondent bank balances. Any excessive reserve demand pressure will likely be immediately reflected in higher effective federal funds rates (and thus reserve draining operations, a reduction in Federal Reserve Bank credit, are likely to be counteracted daily by open market operations of the buying type, or other legal reserve smoothing operations by the FRB-NY’s trading desk). Why worry? …just because: “term premia in the Treasury market and spreads for agency MBS are likely to rise.”

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).

Most of this activity can be tracked based on the weekly H.4.1 release “Factors Affecting Reserve Balances”

www.federalreserve.gov/releases/h41/current/h41.htm

Note: use the “screen reader” option.

The expansion of currency (virtually doubled since the dated start of the GFC), has absorbed $731b of interbank demand deposits, owned by the member banks, held at their District Reserve bank, IBDDs. And the c. $1 trillion expansion of bank capital requirements (due to higher bank capital cushions and the ultimate recognition of bad debt on bank’s balance sheets), has released required reserves and increased excess reserves (a movement that since the compliance with new Basel requirements should be ending).

There are $344b in loans maturing (to be ultimately “monetized”, and not resold in the secondary market), in less than 1 year (Maturity Distribution of Securities, Loans, and Selected Other Assets and Liabilities, August 16, 2017)

Time tables are irrelevant, or pace of unwinding, to the reduction in Fed Credit. The Fed is a central bank, and its capacity to absorb losses depends upon: Article IV, Section 1 of the United States Constitution, known as the "Full Faith and Credit Clause". The Central Bank doesn’t have “norms”. The Fed and its member banks have been adequately backstopped since Roosevelts’ “banking holiday”, viz., The Glass-Steagall Act, also known as the Banking Act of 1933.

See: July 10, 2017 “How the Fed Changes the Size of Its Balance Sheet”

libertystreeteconomics.newyorkfed.org/2017/07/how-the-fed-changes-the-size-of-its-balance-sheet.html

See: “Understanding the Fed’s Balance Sheet” - By Manoj Singh

www.investopedia.com/articles/economics/10/understanding-the-fed-balance-sheet.asp

Only stupid people talk like that. The shortage in safe assets is the direct result of remunerating IBDDs. What do you think the FRB-NY's "trading desk" bought? They bought safe assets and gave the banks a floating, inflation protected, gov't guaranteed, pegged rate of interest. It’s an alternative to negative real rates of interest.

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15% correction when? Trades depend upon your timeframe, your portfolio, or your leveraged short-term speculative vehicle (90 percent of stock options due to time-decay expire worthless).

But who looks at levels? You trade direction (not flat-lined support or resistance). Markets go from being overbought to being oversold. A trade might not hit your target when you expect it to - for various unpredictable reasons.

Any decline will be telegraphed (just like the last couple of weeks). Opportunistic “Elephant Tracks”.

There isn't a sharp drop in AD forthcoming. It is a gradual drop, and a persistent quarter-to-quarter deceleration in economic activity. The 2nd qtr. of 2018 right now looks like the beginning of the next recession.

As Caldaro says" "Trade what is in front of you."

Or follow the money - short-term money flows already peaked in August (sell equities). Long-term money flows peak in Sept. (sell commodities). M*Vt, or AD, is an economic indicator, not necessarily a stock market barometer. However, fundamental (s’) precede technical (s’).

It's clear that the Fed will have to ease monetary policy (or there will be a recession going forward). The best way would be to lower the remuneration rate on IBDDs.

Look what interest rates did today (not supportive):

bit.ly/2q6FJdu

Rates changes since the last rate hike on June 15:
01 mo,,,,, 0.05
03 mo,,,,, -0.01
06 mo,,,,, -0.01
01 yr ,,,,, 0.03
02 yr ,,,,, -0.03
03 yr ,,,,, -0.02
05 yr ,,,,, 0.02
07 yr ,,,,, 0.04
10 yr ,,,,, 0.03
20 yr ,,,,, -0.01
30 yr ,,,,, -0.02
ALM rebalancing isn't over until Dec/Jan.

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Everyone follows the same wrong recipe. "We are all Keynesian's now". This theoretical mistake is pervasive:

In "The General Theory of Employment, Interest and Money", pg. 81 (New York: Harcourt, Brace and Co.): John Maynard Keynes 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 and 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. This is the source of the pervasive error that characterizes the Keynesian economics, the Gurley-Shaw thesis, the elimination of Reg Q ceilings, the DIDMCA of March 31st, 1980, the Garn-St. Germain Depository Institutions Act of 1982, the Financial Services Regulatory Relief Act of 2006, the Emergency Economic Stabilization Act of 2008, sec. 128. “acceleration of the effective date for payment of interest on reserves”, etc.

See e-mail response from former 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
My reply: "Never are the commercial banks intermediaries (conduits between savers and borrowers), in the savings-investment process."
------
Or take George Selgin’s: Testimony on July 20, 2017 Before the U.S. House of Representatives Committee on Financial Services Monetary Policy and Trade Subcommittee Hearing on “Monetary Policy v. Fiscal Policy: Risks to Price Stability and the Economy” Director, Center for Monetary and Financial Alternatives, Cato Institute
July 20, 2017

"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."

bit.ly/2vGB9Gz

I.e., the universal misconception (BuB’s theoretical rror), that the payment’s system is capable of loaning out existing deposits.

This country is literally doomed if the remuneration of IBDD isn't rescinded.

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See my “blog posts”

seekingalpha.com/instablog/7143701-salmo-trutta/3861116-remunerating-excess-reserves

seekingalpha.com/instablog/7143701-salmo-trutta/4942313-remunerating-excess-reserve-balances

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 and Euro-Dollar CDs (liabilities of a non-U.S. banks).

The money market is differentiated by its position on the yield curve (i.e., short-term borrowing and lending with original maturities from one year or less). Domestic liquidity funding was (before Basel changes), customarily benchmarked by the London interbank market LIBOR indexes and foreign exchange swaps.

In turn, money market paper funds the capital market in maturity and risk transformation (earning assets greater than 1 year). Non-bank financial intermediaries in the capital market include hedge funds, SIVs, conduits, money funds, pension funds, selective mutual funds, hedge funds, sovereign wealth funds, insurance companies, banks , foundations, universities, and individuals as well etc.

IOeR’s invert the non-bank’s short-end wholesale funding segment of the yield curve. They reduce the spread, or net interest rate margin between borrowing short and lending long (between the weighted-average interest earned on loans, securities, and other interest-earning assets, and the weighted-average interest paid on deposits and other interest-bearing liabilities). A flatter yield curve and/or lower rates shrink bank profit margins (reduce profits on new loans and new investments).

Whereas the commercial banks could continue to lend/invest even if the non-bank public ceased to save altogether. For the DFIs, deposits are the result of lending and not the other way around.
-------------

Selgin’s right about the level of the remuneration rate being illegal per the FSRRA of 2006. As the remuneration rate now exceeds all money market rates @ 1.25%, this negative impact is exceedingly pronounced. This collisional theoretical error (Romulan cloaking device), unless offset by gov’t/Fed intervention, will cause a recession in 2018.

But Selgin doesn’t understand the differences between money and liquid assets either. And he is one of my “followers” on SA. As Edgar Allan Poe said: "You eccentric fools who prate about method without understanding it".

George Selgin, referring to commercial banking theory: "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."

Déjà vu: “Obviously it was the lack of funds rather than the cost of funds that spawned the credit crisis of 1966…”The ‘credit crunch’ of 1966 was not a general across-the-board credit crisis. It was on the contrary quite limited, its impact being largely confined to the residential-mortgage market.” –L.J.P., The Commercial and Financial Chronicle.

However, because of remunerating IBDDs during the GFC, the repo and commercial paper wholesale funding markets were destroyed. Thus, the NBFIs proceeded to shrink by $6.2T, and the DFIs to be expanded (necessitated as a monetary offset), by $3.6T. This theoretical monetary policy blunder has prevented both the commercial paper market, and the repurchase agreements from recovering.

The inverted remuneration rate inverts the short-end segment of the wholesale non-bank funding yield curve which destroyed the commercial paper market, and prime money market funds. It has made it harder for foreign banks that use commercial paper to raise dollar funding and results in diminished international trade.

Just like the DIDMCA (which created the Savings and Loan crisis, viz., “the failure of 1,043 out of the 3,234 savings and loan associations in the United States from 1986 to 1995”, and the July 1990 –Mar 1991 recession): “the revolutionary and disastrous consequences of this act are clearly not recognized”, so too was the remuneration of interbank demand deposits, IBDDs.

From a system’s belvedere, the Reserve and commercial banks can outbid the non-banks for loan-funds. However, the reverse of this operation by the NBFIs, which are the DFI’s customers, is impossible.

Savers (contrary to the premise underlying the DIDMCA of March 1980, in which DFIs are assumed to be intermediaries and in competition with non-banks) never transfer their savings out of the payment’s system (unless they are hoarding currency or convert to other National currencies). This applies to all investments made directly or indirectly through intermediaries (i.e., non-banks).

Shifts from time deposits to transaction deposits within the DFIs and 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) and 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 nor the volume of their earnings assets. I.e., the non-banks are customers of the deposit taking, money creating, DFIs.

In the context of their lending operations it is only possible to reduce bank assets, and 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.

From a system’s belvedere, “the commercial banks do not loan any existing deposits, demand or time; nor do they loan out the equity of their owners, nor the proceeds from the sale of capital notes or debentures or any other type of security. It is absolutely false to speak of the commercial banks as financial intermediaries not only because they are capable of “creating credit” but also because all savings held in the commercial banks originate within the banking system. The source of time deposits is demand deposits, either directly or indirectly via the currency and undivided profits accounts of the banks…” - L.J.P.

The financial intermediaries can lend no more (and in practice they lend less) than the volume of savings placed at their disposal; whereas the commercial banks, as a system, can make loans (if monetary policy permits and the opportunity is present) which amount to several times the initial excess reserves held.

Financial intermediaries (non-banks) lend existing money which has been saved, and all of these savings originate outside the intermediaries; whereas the DFIs lend no existing deposits or savings; they always, as noted, create new money in the lending process, i.e., pay for their new earning assets with new money.

Saved TRs that are transferred to the NBFIs, etc., are not transferred out of the DFIs; only their ownership is transferred. The reverse process, which is called “disintermediation”, has the opposite effect: the intermediaries shrink in size, but the size of the payment’s system remains the same.

This was the fundamental and monumental theoretical error Bankrupt u Bernanke executed which deepened and prolonged the GFC, as well as resulted in subpar economic growth.

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A gradual upward movement of prices engenders and is associated with increased incomes and increased stability of employment. The elements of certainty combined with the expectation of higher prices makes goods more attractive and cash less attractive with the result that people spend their balances with greater alacrity. The more rapid utilization of balances causes demand to increase even though there has been no increase in the total means of payment. Thus an increase in the velocity of currency and deposits could, and often does, bring about the very conditions which foster an expansion in the volume of currency and demand deposits.
Aug 2, 2017. 01:24 PMLink

GDPNowcast:  Latest forecast: 3.8 percent — August 16, 2017

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DXY has fallen from 103.28 on 12/28/16 to 93.23 today. The Treasury’s Daily Yield Curve Rates reports that 10yr maturities were yielding 2.45% on 1/3/17 and 2.17% on 8/23/17.

I.e., other things equal, with the U.S. $ falling, rates should have moved higher (reflecting a decline in the supply of international loan funds, or foreign short-term claims against the $).

Fisherian money illusion? (confusion of nominal vs. real values)

N-gDp
01/1/2016 ,,,,, 0.8
04/1/2016 ,,,,, 4.7 peak
07/1/2016 ,,,,, 4.2
10/1/2016 ,,,,, 3.8
01/1/2017 ,,,,, 3.3
04/1/2017 ,,,,, 3.6

R-gDp
01/1/2016 ,,,,, 0.6
04/1/2016 ,,,,, 2.2
07/1/2016 ,,,,, 2.8 peak
10/1/2016 ,,,,, 1.8
01/1/2017 ,,,,, 1.2
04/1/2017 ,,,,, 2.6
07/1/2017 ,,,,, 3.8 GDPNow estimate

Deflator
01/1/2016 ,,,,, 0.2
04/1/2016 ,,,,, 2.4
07/1/2016 ,,,,, 1.4
10/1/2016 ,,,,, 2.0
01/1/2017 ,,,,, 2.0
04/1/2017 ,,,,, 1.0
07/1/2017 ,,,,, peak?

Maybe Atlanta's forecast is too high?

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The basic premise for the complete deregulation of interest rates (on savers and borrowers), and Reg. Q ceilings, policies fostered by bankers and the ABA, is vitiated on John Maynard Keynes’ “optical illusion” in his 1936 book: “The General Theory of Employment, Interest and Money.”

The mistaken belief is that commercial banks, at least insofar as their time deposit business is concerned, act as intermediaries between savers and borrowers; and that every dollar of savings placed with a non-bank deprives the commercial banks of a corresponding amount of loanable funds.

This error, the DIDMCA, was directly responsible for the S&L crisis, the failure of 1,043 out of the 3,234 savings and loan associations in the United States from 1986 to 1995 as well as the July 1990 –Mar 1991 recession. The remuneration of IBDDs was directly responsible for the depth and drawn-out GFC and subsequent subpar economic growth. It is responsible for both stagflation and secular strangulation.

The DFIs and their customers, the NBFIs, have a symbiotic fiduciary relationship. The soundness and prosperity of the DFIs is dependent upon the NBFIs putting savings back to work. And savings flowing through the non-banks (completing the circuit income velocity of redistribution), never leaves the payment’s system.

See: Dean Carson “In general, a shift of savings deposits from commercial banks to non-banks, will improve the net earnings of the former.”

Because a larger proportion of a larger volume of DFI deposits become interest bearing (all monetary savings are un-used and un-spent), this destroys money velocity, thereby:
(1) Reduces bank profits
(2) Arrests the flow of monetary savings into investment
(3) Retards the growth of non-bank financial intermediaries
(4) Impedes economic activity

Bank profits are reduced because the banks, by paying interest on time deposits, are paying for something they already own. And interest is their largest single expense item. See: “Analyzing a Bank's Financial Statements”

www.investopedia.com/articles/stocks/07/bankfinancials.asp

The net source of time deposits is demand deposits, and demand deposits are largely derived from the credit-creating activities of the commercial banks. In other words, the earning assets which are erroneously regarded as being derived from time deposits actually were in existence before the time deposits came into being.

Therefore the implicit and false premise in this question is that time deposits are a source of loan funds to the payment’s system. Actually, when a bank attracts savings, it comes from another bank, as all savings originate within the framework of the commercial banking system, and saver-holders never transfer their savings outside the payment’s system unless the hoard currency or convert to other national currencies.

Alton Gilbert, a retired senior economist and V.P. at FRB-STL wrote: “Requiem for Regulation Q: what it did and why it passed away”, 2/1986 Review. Alton Gilbert assumed that any potential primary deposit (funds acquired from other DFIs within the system), were newfound funds to the banking system as a whole.

This cataclysmic error is universal. George Selgin ”Director, Center for Monetary and Financial Alternatives, Cato Institute” July 20, 2017:

"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."

The net effect of the growth in the proportion of interest bearing to non-interest bearing deposit classifications within the payment’s system therefore, is to depress incomes, to retard economic growth, and to accentuate unemployment and underemployment.

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Charles Hugh Smith: "Business-cycle recessions are not just inevitable, they are necessary to flush bad debt and marginal investments/projects from the system." and "We have filled the widening gap between stagnant household income and rising expenses with debt."
-----------

Income is the ingredient from which the charges on debt must inevitably be paid. Income will increase when savings are activated, and vice versa. There are $10 trillion + of bank-held savings lost to both consumption and investment, impounded and ensconced, within the framework of the payment's system. Unless saver-holders spend/invest directly, or indirectly via a non-bank conduit, said savings are frozen, and represent an un-recognized leakage in National Income Accounting.

From the standpoint of the commercial banks, the monetary savings practices of the public are reflected in the velocity of their deposits, and not in their volume. Where the public saves or dis-saves, chooses to hold their savings in the commercial banks or to transfer them to non-banks will not per se, alter the total assets or liabilities of the commercial banks nor alter the forms of these assets and liabilities. The experience of any individual bank (micro-economics), may be at variance with this conclusion (macro-economics).

The expiration of the FDIC’s unlimited transaction deposit insurance is prima facie evidence, hence my “market zinger” forecast:
As I said on 12-16-12, 01:50 PM “Jan-Apr could be a market zinger”, representing a predictive success.

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Dailly Treasury Yield Curve Rate change since Yellen last hiked rates:

01 mo ,,,, 0.08
03 mo ,,,, 0.04
06 mo ,,,, 0.03
01 yr ,,,,, 0.01
02 yr ,,,, -0.08
03 yr ,,,, -0.10
05 yr ,,,, -0.11
07 yr ,,,, -0.08
10 yr ,,,, -0.10
20 yr ,,,, -0.13
30 yr ,,,, -0.13

As I said, raising the remuneration destroys money velocity.

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Forecast on 8/26/17 for the 2 weeks from 8/31:

Some background;

“money illusion” is in part and parcel with: “geometric-mean aggregation” of price quotes, “hedonic” estimation, or the construction of measures that “account for the vast changes (and substitutability), in the quality and range of goods and services that we consume.”

“In economics, money illusion, or price illusion, refers to the tendency of people to think of currency in nominal, rather than real, terms. In other words, the numerical/face value (nominal value) of money is mistaken for its purchasing power (real value) at a previous point in the general price level (in the past)…The change in this real value over time is indicated by the change in the Consumer Price Index over time.” -The term was coined by Irving Fisher in “Stabilizing the Dollar” - Wikipedia

In dealing with ex post aggregates, such as income and expense, it is easy to fall into the trap (because of the equality of these quantities), of assuming that price is synonymous with cost, that aggregate demand is offset by aggregate cost (expenditure), that savings are all spent, etc.

The income expenditure type of monetary theory has its roots in classical economic theory, but as a body of theory it has largely been developed since WWI and especially since the onset of the Great Depression in 1929. The writings of Wicksell, D. H. Roberson, Hawtrey, Hicks, Schumpeter, Hansen, Aftalion, and others have contributed to the development of the theory.

Its present dominant position is mostly attributable to the publication of Keynes’ “General theory of Employment, Interest and Money” in 1936, and to the efforts of the National Bureau of Economic Research, the United States Department of Commerce, and other agencies to collect and compile statistics in accord with the framework and concepts of the theory.

“There are three ways of measuring gross domestic product (GDP) – by the value of production (GDP(P)), by the total incomes generated (GDP(I)), or by the value of spending on the goods and services produced (GDP(E)). When all foreign transactions are excluded, then in theory the three sums should be the same.” But the underground economy is ignored (likewise the demonetization of cash).

GDP reflects both changes in the volume (annual rate) of output and the prices of output. In summating the value of output two primary methods are possible: either add the final value of product plus or minus inventory valuation adjustments at the various stages of production, or add the “value added” to product at each stage of production. If we are interested in the composition of the final output of goods and services, in what final users spend their money on, the “final-product” approach is warranted. If interest is in the incomes received in particular industries or sectors or in the relative importance of different kinds of income payments, then the “value-added” approach is warranted.

GDP includes output during a given period once and only once. It is therefore not a transactions concept (e.g., absent leakages from the main income stream). Disposable income which is held in idle bank balances, or is used up on financial investment, or for transfer payments, or to retire bank-held debt, will make no direct contribution to GDP of the next period. It is because current savings do not at times find their way to the same extent, or with these same rapidity, into real investment - that is one of the root causes of unemployment and underemployment (and over time, educing secular strangulation).

www.dallasfed.org/research/basics/nominal.aspx

Deflating Nominal Values to Real Values

“To transform a series into real terms, two things are needed: the nominal data and an appropriate price index. The nominal data series is simply the data measured in current dollars and gathered by a government or private survey. The appropriate price index can come from any number of sources. Among the more prominent price indexes are the Consumer Price Index (CPI), the Producer Price Index (PPI), the Personal Consumption Expenditure index (PCE) and the GDP deflator.”

“Common price indexes measure the value of a basket of goods in a certain time period, relative to the value of the same basket in a base period. They are calculated by dividing the value of the basket of goods in the year of interest by the value in the base year. By convention, this ratio is then multiplied by 100.”

“Generally speaking, statisticians set price indexes equal to 100 in a given base year for convenience and reference. To use a price index to deflate a nominal series, the index must be divided by 100 (decimal form). The formula for obtaining a real series is given by dividing nominal values by the price index (decimal form) for that same time period:”


“The one-for-one relation between the inflation rate and the nominal interest rate is called the Fisher Effect” (Mankiw, 2012, p. 111).

Irving Fisher’s The Theory of Interest (1930)

files.libertyfund.org/files/1416/Fisher_0219.pdf

“IN CHAPTER XIV OF THE RATE OF INTEREST "VIRTUAL," OR "REAL," RATES OF INTEREST WERE COMPUTED FROM "NOMINAL," OR "MONEY," RATES OF INTEREST BY MAKING ADJUSTMENTS FOR APPRECIATION IN THE VALUE OF MONEY CALCULATED FROM INDEX NUMBERS OF PRICES. IN THIS BOOK, THE MONEY RATES OF INTEREST ARE ADJUSTED DIRECTLY TO THE RATES OF CHANGE IN THE GENERAL PRICE LEVEL. THESE TWO METHODS, OF COURSE, YIELD IDENTICAL RESULTS, SINCE THE ONE IS THE OBVERSE OF THE OTHER.

THE AVERAGE ANNUAL PERCENTAGE CHANGES IN THE GENERAL PRICE LEVEL, GIVEN IN THE TABLES VII TO XI INCLUSIVE, ARE COMPUTED FROM THE WHOLESALE PRICE INDEXES OF THE SEVERAL COUNTRIES. THE INDEX NUMBERS FOR TWO DATES, AS 1825 AND 1834, GIVE US A MEASURE OF THE PRICE LEVEL AT THOSE TWO DATES, AND FROM THESE IT IS EASY TO CALCULATE THE AVERAGE ANNUAL PERCENTAGE CHANGE. THE METHOD IS THE SAME AS THAT EMPLOYED FOR FINDING THE RATE OF INTEREST BY WHICH $1, BY COMPOUNDING, WILL AMOUNT TO A GIVEN SUM IN A GIVEN TIME.”

…“THE REAL INTEREST RATES ARE OBTAINED BY SUBTRACTING FROM THE MONEY RATE FOR ANY PERIOD THE RATE OF ANNUAL CHANGE IN THE PRICE LEVEL FOR THE SAME PERIOD.”


Parse; (1) date, (2) R-gDp, (3) N-gDp, (4) inflation

10/1/2015 ,,,,, 0.5 ,,,,, 1.3 ,,,,, 0.8
01/1/2016 ,,,,, 0.6 ,,,,, 0.8 ,,,,, 0.2
04/1/2016 ,,,,, 2.2 ,,,,, 4.7 ,,,,, 2.5
07/1/2016 ,,,,, 2.8 ,,,,, 4.2 ,,,,, 1.4
10/1/2016 ,,,,, 1.8 ,,,,, 3.8 ,,,,, 2.0
01/1/2017 ,,,,, 1.2 ,,,,, 3.3 ,,,,, 2.1
04/1/2017 ,,,,, 3.0 ,,,,, 4.0 ,,,,, 1.0

In 4 out of the last 7 quarters, inflation outstripped real-output. But Janet Yellen’s last 3 rate hikes have preemptively stripped, what otherwise would have been, higher rates of inflation.
Prices for the last 6 months have remained quiescent;
Consumer Price Index for All Urban Consumers: All Items (CPIAUCSL)
01/1/2017 ,,,,, 244.16
02/1/2017 ,,,,, 244.46
03/1/2017 ,,,,, 243.75
04/1/2017 ,,,,, 244.16
05/1/2017 ,,,,, 243.85
06/1/2017 ,,,,, 243.79
07/1/2017 ,,,,, 244.05

“The growth rate of real gross domestic product (GDP) is a key indicator of economic activity, but the official estimate is released with a delay. Our GDPNow forecasting model provides a "nowcast" of the official estimate prior to its release.” --Latest forecast: 3.2 percent — September 1, 2017

It would only take a mild resurgence in inflation to boost N-gDp and create a financial market’s apex.

Equities should decline in the next two weeks, as liquidity is drained. Short-term money flows peaked in August and are now decelerating. Long-term money flows peak in Sept (but because of frequency in which the data is reported, they could have peaked in August too).

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"Regardless, the idea that they represent some unused, bottled-up financial resource is illogical"

Not illogical but cerebral (the source of the pervasive error that characterizes the Keynesian economics, viz., the Gurley-Shaw thesis). Given that all savings originate within the framework of the commercial banking system (the indirect consequence of prior bank credit creation), via a transfer from other deposit classifications [the source of time “savings” deposits is demand deposits, directly or indirectly via the currency route or the DFI’s undivided profits accounts], and said savings can never be used (are not a source of loan-funds, not primary deposits, for lending/investing, but are derivative deposits to the system), said savings are obviously frozen in time.

I.e., commercial banks cannot expand their earning assets by attracting something that they collectively already own. 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. Whether the public saves or dis-saves, chooses to hold their savings in the commercial banks or to transfer them to non-banks will not per se, alter the total assets or liabilities of the commercial banks nor alter the forms of these assets and liabilities.

The experience of any individual bank (micro-economics), may be at variance with this conclusion (macro-economics). The individual commercial bankers view the savings-investment process (Keynes’ “optical illusion”) from the standpoint of their idiosyncratic bank operations (micro-economics), believing that savings are primary deposits, originating outside of their particular banks (as opposed to derivative deposits to the payment’s system cooperatively).

The expansion of time “savings” deposits, per se, adds nothing to universal bank liabilities, assets, or earning assets nor adds anything to gDp. Paying for what the banks already own, just increases a bank’s expenses without a concomitant increase in income. By buying their liquidity (financialization), instead of following the old fashioned practice of storing their liquidity (core deposits), it is tantamount to an oligarchic redistribution of assets, resulting in a maldistribution and misallocation of available credit (aka reverse redlining).

Bank-held savings are frozen because they cannot be lent out. And they are not extinguished or withdrawn unless currency is hoarded or converted to other national currencies. Savings can only be lent by their owners (directly or indirectly), if they are activated by transferring those funds through (not to), a non-bank conduit (which represents an increase in the supply of loan-funds, but no increase in the existing supply of money), as savings flowing through the non-banks never leaves the commercial banking system (there is just a transfer of ownership in existing DFI deposit classifications).

Shifts from time “savings” deposits, TDs, to transaction type deposits, TRs, within the DFIs & the transfer of the ownership of these deposits to the NBFIs, involves a shift in the form of bank liabilities (from TD to TR) & a shift in the ownership / title of existing TRs (from savers to NBFIs, et. al.). I.e., saver-holders never transfer their savings outside the payment’s system. The NBFIs are the DFI’s customers. So savings are indeed bottled up while domiciled in the payment’s system.

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

Not only are commercial bankers losing money on the time deposit operations, bank-held savings are lost to both investment and consumption (their “means-of-payment” velocity is zero), indeed to any type of payment or expenditure. Savings held in the payment’s system are a form of stagnant money (frozen), and in a pecuniary economy such as ours, stagnant money breeds economic strangulation.

This is the incontestable reason why money velocity has declined since 1981. 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, 1961, pg. 40-48,).

The more DFIs succeed to attract savings in stemming the flow of funds to the non-bank intermediaries, the more costly will be their “pyrrhic victory” both to themselves and to our pecuniary economy.

The expiration of the FDIC’s unlimited transaction deposit insurance is prima facie evidence, hence my “market zinger” forecast:

As I said on 12-16-12, 01:50 PM “Jan-Apr could be a market zinger”, representing a predictive success.

[flow5]

As Eric Basmajian shows with the graph of 10yr vs. N-gDp, AD, aggregate monetary purchasing power, is decelerating. Note: secular strangulation is defined as chronically deficient AD.

This is entirely due to a decline in money velocity (actually confined to savings velocity). The remuneration of IBDDs exacerbates this stoppage in the flow of funds. A higher proportion, of a larger volume, of the money stock is not only interest-bearing, but is being held and not spent/invested in the payment's system.

This is entirely political:

Historical FDIC deposit insurance limits
• 1934 – $2,500
• 1935 – $5,000
• 1950 – $10,000
• 1966 – $15,000
• 1969 – $20,000
• 1974 – $40,000
• 1980 – $100,000
• 2008 – unlimited
• 2013 – $250,000

CB Time deposits vs. demand deposits:
1939........15~~~~~~ 33
1954........47~~~~~ 121
1964......126~~~~~ 156
1974......421~~~~~ 274
1979......676~~~~~ 401
1986...1,215~~~~~ 491
1996...1,271~~~~~ 420
2006...3,696~~~~~ 317
2016...8,222~~~~1,233

The ratio of TD/DD in 1939 = 0.45
The ratio of TD/DD in 2016 = 6.67

I.e., the DFIs do not loan out existing deposits, saved or otherwise. The DFIs always create new money whenever they lend/invest. I.e., all bank-held savings are frozen (until their owners spend/invest directly or indirectly). For R-gDp to expand, the DFIs must be driven out of the savings business.

You'd better read Economist Phillip George:

bit.ly/2u3xiBV

"The riddle of money, finally solved" (it's about the use or non-use of savings).

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 correct up until 1981 – up until the saturation of financial innovation for commercial bank deposit accounts (the widespread introduction of ATS, NOW, and MMDA accounts).

The saturation of DD Vt according to Marshall D. Ketchum (Chicago School): “It seems to be quite obvious that over tie the demand for money cannot continue to shift to the left as people buildup their savings deposits; if it did, the time would come when there would be no demand for money at all”.

Alfred Marshall’s “money paradox”, viz., Money thus is truly a paradox – by wanting more the public ends up with less, and by wanting less it ends up with more”.

Thus began the secular decline in money velocity (and secular strangulation) climaxing as predicted in IMTRAC on May 1980 by Dr. Leland J. Pritchard (1933, Chicago School) as the direct result of the DIDMCA of March 31st 1980.

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Lending by the DFIs is inflationary (increases the volume of new money). Lending by the NBFIs is non-inflationary (matches existing savings with investment). Asking the DFIs to depreciate our currency, i.e., targeting N-gDp (capping real-output and maximizing inflation), represents the opposite of the desired effect

(1) “Income Redistribution is an economic practice which is aimed at leveling the distribution of wealth or income in a society through a direct or indirect transfer of income from the rich to the poor.”
(2) “The purpose of Income Redistribution is to solve or at least minimize the gap between the poor and the rich.”

However, the distributional efficiency of gov’t legislated / targeted groups’ transfer programs, e.g., progressive taxation, or earned-income tax-credit, etc. is dubious. See Milton Friedman’s “Four Ways to Spend Money”. As Margaret Thatcher said: "The problem with socialism is that eventually you run out of other people's money [to spend]."

During the U.S. Golden Era in Economics, savings were put back to work (existing money, funds held beyond the income period in which received, was predominately matched with new residential housing mortgages, or non-inflationary real-investment outlets), completing the virtuous circuit income and transactions velocity of funds (in contradistinction to the deregulation of Reg. Q ceilings).

And capital is one of the four factors of neo-classical economic production. The use or non-use of capital (“the circuit velocity of money”, or savings velocity) is tantamount to Adam Smith’s “invisible hand” (pursuit of profits). This was an apolitical and laissez-faire redistribution (not a social mechanism). See:

bit.ly/2yiojQ5
pdf/1803148.pdf?refreq...

The non-bank’s (CU’s, S&L’s, MSB’s) gate-keeping restrictions required depositors to furnish 30, 60, or even 90 days’ notice before withdrawing a balance, though in actual practice, the thrifts maintained a fairly substantial balance of currency and deposits with the commercial banks (cash assets) and were able to waive notice and pay depositors on demand.

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. 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.

All of the net earnings of the MSBs were distributed to the depositors pro rata, after providing for the expenses of operation, as well as for a surplus reserve for protection of depositors. And voluntary savings accounts (participating contractual relationships between debtors and creditors) increased by 13 percent during 1929-1933.

And federally chartered S&L accounts were “shared accounts” and payments to the members constituted dividends. Both property taxes and insurance were included in monthly payment schedules. ½ of S&L mortgages were insured by the FHA or guaranteed by the Veterans Administration. Additional liquidity was provided through the “secondary” market facilities afforded by FNMA (originating out of the Reconstruction Finance Corporation). Members of the FHLB system (which held 95 percent of all assets), could borrow from one of the 11 FHLBs in their district.

And the pooled savings of CUs allowed its members to circumvent the usurious practices of money lenders through the capping of interest rates on small loans. Unlike today’s pay-day loan sharks, and subprime auto loans to buyers who can't afford them, the loan-loss record of the CUs was extremely low, c. 1/5 of 1%.

As the DFI’s customers, the NBFIs held large and profitable commercial bank balances. And these non-bank savings were 90% insured (incentivized) by the FSLIC and expeditiously influenced (directly or indirectly by their owners), the rate at which money was utilized. Consequently, N-gDp, and employment were higher, business profits were greater, and bankable opportunities were expanded.

The unrestricted intermediaries, by providing specialized, convenient, efficient, and safe means for transmitting savings into investment, reduced the volume of monetary savings (bank-held savings), and increased the volume of loan-funds (decreasing long term interest rates).

Note: the transfer of savings through the NBFIs does not increase the money stock, but represents a transfer of ownership of existing DFI 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.

But then the Keynesian economists, not knowing the difference between money and liquid assets, via the DIDMCA of March 31st 1980, laid the legal basis for the addition (conversion) of 38,000 commercial banks to the 14,000 we already had, and the abolition of 38,000 financial intermediaries (conduits between savers and borrowers). The S&L crisis, the GFC, and declining money velocity were the predicted outcomes. Remunerating IBDDs exacerbates this savings investment volte-face

[flow5]

Even with the recent resurgence of M1, transactions classification money:

2017-09-04: ,,,,, 3,603.30
2017-08-28: ,,,,, 3,707.20
2017-08-21: ,,,,, 3,590.10
2017-08-14: ,,,,, 3,439.80
2017-08-07: ,,,,, 3,435.30

It's clear that R-gDp activity peaked in August. N-gDp (the economic apex) peaks in September (with oil prices). The 4th qtr.’s economic trajectory will be lower than the 3rd qtr. (given the small House’s $15.25 billion hurricane relief package). Notwithstanding reducing the Fed’s balance sheet, the trajectory going into 2018 (immediately after December) is unpromising (much lower without countervailing gov’t intervention).

See the rest of the world's rates:

tradingeconomics.com/country-list/interest-rate

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As long as the U.S. continues to act as the world's policeman (involving an insupportable drain on the $), the trend of the U.S. $ will be down, robbing those whose incomes are stagnant, or in a fixed # of $s (the Federal Reserve’s depreciation of the $ notwithstanding).
Overseas defense spending (our far flung 800 military bases in at least 160 countries adding $156b in 2015 to both the Federal deficit and the current account deficit), adds nothing to civilian productive capacity or to the supply of goods available in the marketplace. It was solely the Pentagons fault that the U.S. $ ceased to be convertible into gold, as the private sector, contrary to the public sector, ran trade surpluses up until that time.

The funds being borrowed do not increase our productive capacity, nor increase the efficiency of the work force. Rather the funds are used largely to finance transfer payments to non-productive recipients and to finance “dead-weight” military hardware (note: The U.S. military budget for FY 20018 is $824.6 billion). Since the goods and serves being finance by these monstrous deficits are not offered in the marketplace, additional and un-necessary inflationary and interest rate pressures are generated in the economy. And the magnitude of these deficits guarantees that a significant proportion of these deficits will need to be monetized. They are war economy budgets and therefore, require the controls dictated by a war economy in order to be properly funded.

And the mal-distribution and mis-allocation of available savings, or mal-investment, is exacerbated thereby reducing future gains in productivity and incomes.

The one factor that explains our paradoxical situation is the continuing high demand for dollars by foreigners for long-term investment in the U.S. (bridging the payment's gap in our trade deficits).

It is in fact unprecedented that a country could have chronic foreign deficits and not have its currency drop sharply in the foreign exchange markets. This is the first time that a reserve currency country could operate with chronic international deficits and not have its currency “dethroned”.

No country has become and remained a world power if it is a world debtor nation and has a weak currency. When Britannia “ruled the waves”, it had an industrial structure capable of meeting world competition; the pound sterling was as good as gold (the price of gold remained constant in terms of pound sterling from 1816-1914); and Great Britain was a creditor nation.

When the pound sterling lost its preeminence as reserve and transactions currency of the world, the U.S. dollar took over. Today there is no one capital market capable of absorbing the vast volume of funds seeking a safe and profitable haven. Today there is no individual “takeover” country, but a consortium of anti-dollar alliance, or “monetary union”, e.g., China, Russia, Venezuela, South Korea, France, Iran, etc., in global de-dollarization’.

To be effectively competitive in foreign markets, requires that we sell lower unit costs and higher quality products. This means concentrating on production, innovation, and product quality. It means giving workers a financial stake in increased productivity (share in profits, etc.).

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Former Chairman Alan Greenspan: "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."

Simply false. See: "New Measures Used to Gauge Money supply" - WSJ 6/28/83 "The experimental measures are designed to resolve some of the confusion by isolating money intended for spending, the money held as savings. The distinction is important because only money that is spent-so-called "true money" - influences prices and inflation."

And we knew this already:

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

bit.ly/1A9bYH1

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

See my blog post “Surrogates”:

The "unified theory" is: (1) that the non-banks are the customers of the commercial banks. Thus (2) all demand drafts originating from the NBs clear thru the CBs. (3) Bank reserves are driven by payments (bank debits). And (4) legal reserves are based on transaction type deposit classifications 30 days prior.

The sine qua non of monetary management is total current control by a central monetary authority over the volume of legal reserves held by all money creating institutions, and over the reserve ratios applicable to their deposits.

Prima facie evidence that the Reserve banks and the commercial banks have created credit, as with all bank credit creation, is an expansion in the money stock. Prima facie evidence that the money stock, transaction based accounts, has expanded, is given by the roc in legal, RRs - the definitive adjusted monetary base.

See: Phillip George:

“we can state categorically that both the Friedmanian and the Austrian definitions of money are incorrect because they both include savings deposits” and “To measure money accurately, we also need to measure the amount of savings contained in M1, and subtract the savings from M1.”

bit.ly/2u3xiBV

See: Monetary Flows (rates-of-change, Δ, in commercial bank debits to transaction deposit classifications):

bit.ly/2sW5vGi

[flow5]

Vi (income velocity) is a seasonally mal-adjusted # (for both the money stock and N-gDp figures). And Vi includes the currency component (the same error as with the monetary base). If you remove currency, and use NSA #s, then you get an increase, the first in several years, in Vi beginning in the 2nd qtr. 2017. That explains a lot. The Trump bump has been resurrected.

In the last 10 years, there’s been a huge shift in the volume and ratio of currency held by the non-bank public to commercial bank transaction based accounts (from .78% in 9/2007 to 1.39% in 8/2017). So if currency turns over slower than transactions based account balances (non-m1 components rate-of-turnover is negligible), then the Fed’s income velocity figures are understated. And RR’s underweight changes to Vt, as the seasonal pattern just signified.

In the transactions velocity of circulation: “Money is spent and re-spent.” Whereas with income velocity, inflation analysis is delimited to wages and salaries spent. To the Keynesians, aggregate monetary demand is N-gDp, the demand for services (human) and final goods. This concept excludes the common sense conclusion that the inflation process begins at the beginning (with raw material prices and processing costs at all stages of production) and continues through to the end, (“raw materials, intermediate goods and labor costs, which comprise the bulk of business spending are not treated in N-gDp”), etc

bit.ly/2yrcZEa

“There is a positive relationship between the currency ratio and income velocity”

bit.ly/2zyoKWZ

Bank debits reflect the ratio of transaction account payments to balances. “The hybrid and invalid nature of income velocity is affirmed by Keynes”: “A Treatise on Money”, New York, Harcourt Brace, 1930, vol. 2, pg. 24.

“It is though we are to divide the passenger miles traveled in an hour by the passengers in trams, by the aggregate number of passengers in trams and trains and to call the result velocity.”

“Quantity leads and velocity follows”. Cit. Dying of Money -By Jens O. Parsson

P*T “≠” Milton Friedman’s (nY).

“Bank transactions are not limited to transactions in connection with current production…they reflect the sale of capital assets, income transfers, and money market dealings…”

See: bit.ly/2zDsNl5

“A Federal Reserve survey, for example, that finds that physical currency turns over 55 times per year, i.e. about once a week.1”

As the article states, cash is spent slower than transactions based bank deposits. And bank debits to transactions based accounts already count for some volume of cash transactions (duplicative) as it’s debited to those accounts for withdrawals in preparation for spending.

[flow5]

Money flows, volume X’s velocity, is robust. Otherwise, there wouldn’t be distributed lags and concentrations in M*Vt. Since the distributed lag effect of money flows reflects mathematical constants for over 100 years, monetary policy, as Yale Professor Irving Fisher pontificated, should be an exact science.

parse: dt; proxy for real-output, proxy for inflation

01/1/2017 ,,,,, 0.13 ,,,,, 0.19
02/1/2017 ,,,,, 0.08 ,,,,, 0.16
03/1/2017 ,,,,, 0.06 ,,,,, 0.13
04/1/2017 ,,,,, 0.08 ,,,,, 0.18
05/1/2017 ,,,,, 0.09 ,,,,, 0.23
06/1/2017 ,,,,, 0.08 ,,,,, 0.21
07/1/2017 ,,,,, 0.11 ,,,,, 0.20
08/1/2017 ,,,,, 0.09 ,,,,, 0.23
09/1/2017 ,,,,, 0.08 ,,,,, 0.25
10/1/2017 ,,,,, 0.06 ,,,,, 0.27 peak
11/1/2017 ,,,,, 0.08 ,,,,, 0.24
12/1/2017 ,,,,, 0.10 ,,,,, 0.17

Note that demand side factors peak in Oct.

[flow5]

Forrest Gump said it best: "Stupid is as stupid does."

Lending by the DFIs is inflationary, where S "≠" I (expands the volume and turn-over of new money). Absent mal-investment, the mal-distribution and mis-allocation of available savings, lending by the NBFIs is non-inflationary, S “=” I (matches borrowers with savers), and worse, is deflationary if savings are not put back to work (and contrary to Larry Summers, George Selgin, and Dan Thornton), is directly responsible for secular strangulation).

Remunerating IBDDs induces non-bank dis-intermediation, an outflow of funds, or negative cash flow (where the size of the NBFIs shrink, but the size of the DFIs remains unaffected). Both the DIDMCA and consequent S&L crisis, “the failure of 1,043 out of the 3,234 savings and loan associations in the United States from 1986 to 1995”, and the 1966 S&L credit crunch, where the term “credit crunch” originated (the lack of funds, not their cost), are the antecedents and paradigm.

Remunerating IBDDs, just like the impoundment and ensconcing of monetary savings within the payment system (the freezing of savings, aka the FDIC’s unlimited transactions deposit insurance), destroyed non-bank lending/investing (83 percent of the lending market pre GFC), where the non-banks shrank by $6.2T – exacerbating the depth and duration of the recession, necessitating that the money stock, and thus reflation, expand as a monetary offset by $3.6T.

It is a fact that the Fed’s 300 Ph.Ds. in economics don’t know the differences between money and liquid assets (can’t tell a debit from a credit from a macro-economic perspective). R. Alton Gilbert, a retired senior economist and former V.P. at FRB-STL wrote: “Requiem for Regulation Q: what it did and why it passed away”, 2/1986 Review. Alton Gilbert assumed that any potential primary deposit to the recipient bank (funds acquired from other DFIs within the system), were newfound funds to the banking system as a whole (and not derivative system deposits).

The non-banks are not in competition with the DFIs. The NBFIs are the DFI’s customers. Money flowing through the NBFIs never leaves the payment’s system. These transactions simply involve a shift in the form of bank liabilities (from time to demand deposits) and a shift in the ownership of demand deposits (from savers to Savings and Loan Associations, et. al.).

Paying interest on excess reserve balances destroys money velocity and thereby delivers subpar aggregate demand, m*vt, and thus delivers lower levels of N-gDp (its proxy). It produces lower *real* rates of interest for saver-holders and discourages business spending, CAPEX.

WSJ: "In a letter of March 15, 1981, Willis Alexander of the American Bankers Association claims that: 'Depository Institutions have lost an estimated $100b in potential consumer deposits alone to the unregulated money market mutual funds.' As any unbiased banker should know, all the money taken in by the money funds goes right back into the banks, in the form of CDs or bankers acceptances or other money market instruments; there is no net loss of deposits to the banking system. Complete deregulation of interest rates would simply allow a further escalation of rates by the banks, all of which compete against each other for the same total of deposits."

Written by Louis Stone whom the movie "Wall Street" was dedicated to - Vice President Shearson/American Express

The U.S. “Golden Era” in economics would have been '24 Carat Magic' regardless of demographics. During the U.S. “Golden Era” in economics savings were “put to work”. However, after 5 successive hikes in Reg. Q ceilings, at the behest of the ABA, for exclusively the commercial bankers (the non-banks were previously un-regulated), an inordinate volume of savings became impounded and frozen within the framework of the payment's system, and the CBs outbid the non-banks for loan-funds (just like remunerating IBDDs). From that point forward, as Alan Greenspan says, there was a persistent savings shortfall.

Residential real-estate, a real-investment outlet, was incentivized (savings were put back to work), by the depression era created authority, the FSLIC’s guaranteeing of non-bank pooled deposits within the S&Ls and the MSBs. Today, the DIDMCA of March 31st 1980 has turned those 38,000 non-banks, into 38,000 commercial banks, and now pooled commercial bank deposits are guaranteed by the FDIC (but not so the non-banks).

But Jeffrey Lacker, FRB-Richmond President, said that "channeling the flow of credit to particular economic sectors is an inappropriate role for the Federal Reserve."

The error is traceable to the dank esoterica of Keynesian exegesis. In "The General Theory of Employment, Interest and Money", pg. 81 (New York: Harcourt, Brace and Co.): John Maynard Keynes 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 and 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, viz., the Gurely-Shaw maligning thesis.

[flow5]

Since Nov. 24, 1960, the Federal Reserve authorities have conflated liquidity: “primary or working” reserves (applied vault cash), reserves utilized to meet the demands for currency, etc., (based on the estimates to be made of deposit stability and volatility and the bank’s prospective balance of payments) vs. legally required reserves (a credit control device); conflating endogenously or commercial bank created money, vs. exogenously, or Central bank deposits.

Banks are also concerned with the problem of arranging and staggering maturities of earning assets so that the bank will never be forced to sell a security under adverse condition before it matures, considering such factors as loan demand, and seasonal patterns.

IBDDs, contingency reserves, are now used to comply with the LCR (“equal to or greater than their net cash outflow less the projected cash inflows over a 30-day stress period, having at least 100% coverage”).

Secondary reserves consist of those earning assets which can be converted into cash quickly and without loss (principally gov’t securities).

Complicit and excess reserves (cash assets), have been remunerated
since Oct. 6, 2008. As a result, banks have shifted as many non-earning assets, e.g., their surplus vault cash into excess reserves at their District Reserve bank, IBDDs (increasing total and “free” / non-borrowed reserves and maximizing their returns on un-used cash). This has also drawn funds away from trading in “federal” funds.

Note1 - surplus vault cash is not included in total reserve figures.
Note2 - vault cash is a subtraction from tabulations of the money stock. Note3 - the truistic monetary base, required reserves, subtracts currency held outside the banks by the non-bank public (representing 92 percent of “MO” in Oct. 2008).
Note4 - By the end of 1945, investments (as opposed to loans), represented approximately 80 per cent of total commercial bank earning assets.

The very fact that the Fed emasculated its "open market power" is telling. Little wonder the money multiplier has vacillated.

[flow5]

"As spending and debt accelerated, the savings rate declined"

It makes absolutely perfect sense. The DIDMCA laid the legal basis for turning 38,000 financial intermediaries (non-banks) into 38,000 commercial banks, viz., the widespread introduction of ATS, NOW, and MMDA accounts for the CUs, MSBs, and S&Ls. As predicted (“Considering the paucity and nature of the comments in the financial press, the revolution and disastrous implications of this Act clearly are not recognized”), this un-equal and un-necessary “competition” (the removal of Reg. Q ceilings), precipitated the S&L crisis (“the failure of 1,043 out of the 3,234 savings and loan associations in the United States from 1986 to 1995”). The DIDMCA also denoted the start of secular strangulation.

Savers (contrary to the premise underlying the DIDMCA in which DFIs are assumed to be intermediaries and in competition with thrifts / NBFIs) never transfer their savings out of the payment’s 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). Shifts from time-deposits, TDs, to demand-deposits, DDs, within the DFIs and the transfer of the ownership of these DDs to the thrifts involves a shift in the form of bank liabilities (from TDs to DDs) and a shift in the ownership of DDs (from savers to thrifts, et al). The utilization of these DDs by the thrifts has no effect on the volume of DDs held by the DFIs or the volume of their earnings assets.

In the context of their lending operations it is only possible to reduce bank assets and DDs by retiring bank-held loans, e.g., the only way to reduce the volume of demand deposits is 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.

As Senator Nancy Landon Kassebaum wrote me back: 11/4/81: “Today, less than two years since the DIDMCA was established, most of the liabilities have been deregulated with no change in the asset structure that would enable payment of higher rates to depositors”. The response of the monetary authorities and state legislatures was to give the thrifts more and more discretion in lending (opportunities for self-dealing, where greed and fraud reached monumental levels in the thrift industry). And Michael Hudson’s definition of *financialization* is apropos: "a lapse back into the pre-industrial usury and rent economy of European feudalism").

The operations of commercial banks and all other involved institutions cannot be fostered by deregulation. The operations of these institutions must be severely circumscribed and subject to rigorous and informed supervision. In reorganizing our financial institutions the first requirement is to recognize that the competitive freedoms of the mercantile marketplace cannot be applied to the institutions that create our money, or protect our savings. More than 84 years ago this wisdom was recognized by the inauguration of the FDIC, the FSLIC, and many other changes in our banking structure. It is much more desirable to promote prosperity by inducing a smooth and continuous flow of monetary savings into real investment, than to rely, as we have done c. 1965 (after 5 successive rate hikes in Reg. Q ceilings for the commercial bankers exclusively, as the non-banks were previously deregulated, our Congressmen concocted stagflation, as predicted in the late 1950’s), on a vast expansion of bank credit with accompanying inflation to stimulate production.

In order to compete, the NBFIs had to act like the DFIs. Thus dis-intermediation accelerated (which began in the early 60’s), a term that applies to only the non-banks since 1933, an outflow of funds or negative cash flow. Thereafter it took increasing infusions of Reserve Bank credit to generate the same inflation-adjusted dollar amounts of R-gDp (as *savings* velocity decelerated).

Martin Wolf (chief economics commentator at the Financial Times) defines this as: “structurally deficient aggregate demand” (which has been incremental and metastases). Aggregate monetary purchasing power, AD = money times its velocity of circulation.

Thus, in order to jump start the July 1990 –Mar 1991 recession, Alan Greenspan reduced reserve requirements by 40 percent and then thru reserve avoidance, sweep accounts further reduced reservable liabilities (transaction based accounts). Déjà vu!

See: “Are U.S. Reserve Requirements Still Binding?” (that which accelerated the GFC).

nyfed.org/2yv1ziW

Of course this was made worse, as our anemic recovery demonstrated, by the remuneration of interbank demand deposits (paying interest on exogenous money). Déjà vu!

Lending by the DFIs is inflationary. Lending by the non-banks is non-inflationary. No, contrary to Bankrupt u Bernanke, money is not fungible. One dollar is not like any other. Never are the commercial banks intermediaries (conduits between savers and borrowers), in the savings-investment modus operandi. Voluntary savings require prompt utilization if the circuit flow of funds is to be maintained and the deflationary effects avoided.

“The growth of time “savings” accounts within the payment’s system shrinks aggregate demand and therefore produces adverse impacts on N-gDp” (as predicted in the late 1950’s). “It must be presumed that the growth of time deposits could not induce a shift toward a relaxation of monetary restraints unless such growth has a dampening effect on the economy, since savings held in the form of time deposits are lost to investment (and to any other type expenditure) as long as they are so held”.

From a macro-economic perspective (the forest), the utilization of commercial bank credit to finance real-investment or gov’t deficits does not constitute a utilization of savings since bank financing is accomplished by the creation of new money. This cataclysmic error is universal. George Selgin ”Director, Center for Monetary and Financial Alternatives, Cato Institute” July 20, 2017:

"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."

The net effect of the growth in the proportion of interest bearing to non-interest bearing deposit classifications within the payment’s system therefore, is to depress incomes, to retard economic growth, and to accentuate unemployment and underemployment.

Whether the public saves, dis-saves, chooses to hold their savings in a DFI, or transfers their savings to a NBFI (invest directly or indirectly), does not determine the lending capacity of the DFIs. The use or non-use of savings held by the commercial banks is a function of the velocity, not the volume, of their deposit liabilities. The decisions of the public to invest their bank-held savings will not, per se, change the aggregate liabilities of the payment’s system.

No surprise that debt has replaced earnings, esp. as interest rates move lower. But this, like our twin deficits, is not sustainable.

[OldCoyote]

There is a discussion over in Current events, Democratic Victories,

which has turned into a discussion about trickle down economics.

Can some of the experts here explain to me, Why "Trickle Down" works or doesn't work?

With the small search that I have done It appears to me at least that if "Trickle Down' does not work it is because the Government has less revenues to redistrubite.

Please point me in a direction,  Thank, O.C.

[djAdvocate]

there is a study on it.  here you go:

www.theatlantic.com/business/archive/2012/09/tax-cuts-dont-lead-to-economic-growth-a-new-65-year-study-finds/262438/

this has been studied for a long time.  if you want me to paraphrase, unless wealth CAN be gainfully employed in a growing economy, rich people like me would rather just hoard it, to our own benefit.  the ONLY reason i will create a job for you is if i can make money off you.  and the only way that happens is if consumers have disposable income.  i am not running a charity. 

the problem with supply side is that it assumes that rich people consume proportionately, and that is not true.  i probably consume 2-3x as much as someone making 1/10th what i do, not 10x.  so, if you want to stimulate the economy, it should be demand-side- from the BOTTOM UP.  that is what creates real, sustainable growth in the economy, jobs, and wages.  and that, in fact, is how it worked in the 200 years leading up to 1973.

we have done a shitty job since then, and it shows.

PS- congratulations for being curious enough to ask the question.  you crossed the first hurdle.

[OldCoyote]

www.theatlantic.com/business/archive/2012/09/tax-cuts-dont-lead-to-economic-growth-a-new-65-year-study-finds/262438/   

On the first chart, Clinton tax increase, it looks like the economy grew for 18 month , 24 months, then starts falling off the cliff till 2000!

On the other charts showing increased income for the different groups , the .01 or 1 % grew vastly compared to the rest.

But 1% would only mean 3,250, 000,, that's not a large group of people that we think should, hold up the economy!

[djAdvocate]

Nov 19, 2017 22:07:14 GMT -5 OldCoyote said:

www.theatlantic.com/business/archive/2012/09/tax-cuts-dont-lead-to-economic-growth-a-new-65-year-study-finds/262438/   

On the first chart, Clinton tax increase, it looks like the economy grew for 18 month , 24 months, then starts falling off the cliff till 2000!

On the other charts showing increased income for the different groups , the .01 or 1 % grew vastly compared to the rest.

But 1% would only mean 3,250, 000,, that's not a large group of people that we think should, hold up the economy!

the chart also shows that after the Bush 1 tax increases, the GDP growth grew continuously through Clinton.  edit: it also shows GDP GROWTH PLUMMETING after the Bush 2 tax cuts.

here is something that the chart does NOT show:

in the (5) year period following the largest (5) tax increases since WW2, GDP averaged 3.4% growth
in the (5) year period following the largest (5) tax decreases since WW2, GDP averaged 3.4% growth

this would seem to indicate that taxes have little to no influence on GDP, which is precisely what the study concluded.

i don't know what your point is about the 1%, but they are using tax rates for the 1% as an example of tax policy since WW2.  they are illustrating that even though taxes have fallen significantly since WW2, economic growth has not improved.

that is kind of a duh for me, but apparently, many supply siders don't think it is a duh.

speaking PERSONALLY, i am a 10%'er, and my tax rates have no influence on my corporate investment.  but that might have to do with the fact that my corporate tax rate is 1.5%.  my personal tax savings have all gone into buying real estate for myself, and not gone into the business.  the reason is that i have plenty of mechanisms for putting money in my business PRE-TAX.  i always felt it was stupid (inefficient) to do it post-tax.

[Aman A.K.A. Ahamburger]

I think one of the reasons "Reganomics" is viewed as a failure stems from one very important line in the link dj posted: "For years after World War II, the U.S. was a singular economic powerhouse with an enormous manufacturing base that employed nearly 40% of the economy."

While it's not a popular situation, the trickle down was felt in China and other places more than in the USA. This in turn created demand in what is now the second largest economy in the world - which has the largest consumer base on the planet. Wages have been rising in China which has started to drive the trend of reshoring.

The other issue with trickle down is the idea that both personal and corporate taxes need to be cut. The following article outlines how taxes can be as detrimental to business as lack of demand: calgaryherald.com/news/local-news/corbella-death-of-another-iconic-restaurant-a-sign-of-bad-times-in-calgary

It's not hard to imagine if business have more money, they have more money to invest... I think on the other side dj is correct in that wealthy people don't spend personal tax savings; they invest in their personal wealth.

Personally, this is why I don't hold modern economic theories in high regard and - ImO - the answers are in a combination of classical and german theories. History show that both taxes and income inequality kill economies. The liberalism of trade and finance at the start of the industrial revolution until now has trickled more wealth to the common person than at any point in human history. From this point forward we need to be thinking more along the lines of; "what's old is new."

[djAdvocate]

the real problem (for the US, in terms of GDP growth) is that wages have not kept up with productivity.  that is worth a long discussion, but i think it takes us pretty far from OldCoyote 's question.

edit: i don't think corporate tax cuts will stimulate demand, for the record.  why would they?  where does demand come from?  it comes from the bottom, not the top.  this whole discussion ends up sounding like Marie Antoinette.