Money has a second dimension

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“I often say that when you can measure what you are speaking about, and express it in numbers, you know something about it.” - William Thomson, Scottish physicist (1824-1907)

• Lecture on "Electrical Units of Measurement" (3 May 1883), published in Popular Lectures Vol. I, p. 73

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Velocity: Money's Second Dimension - By. Bryon Higgins


"Money has a 'second dimension’’, namely, velocity . . .. " Arthur F. Burns in Congressional Testimony.


“The rapid growth in M1 velocity for the past three years is particularly surprising when one considers the accompanying pattern of increases in market interest rates. One of the primary factors contributing to the normal increase in velocity during periods of economic expansion is the rise in market interest rates that typically accompanies rapid economic growth. Businesses and households intensify their efforts to economize on cash balances as the opportunity cost of holding money rises. A substantial portion of the increase in velocity during the current expansion occurred in 1975 and 1976, however, a period in which market rates were generally declining. Thus, the interest sensitivity of the demand for money does not provide a complete explanation of the behavior of velocity in the current recovery.”


www.kansascityfed.org/PUBLICAT/ECONREV/EconRevArchive/1978/2q78higg.pdf

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Richard G. Anderson (monetary service index, June 2015: “Money and Velocity During Financial Crisis: From the Great Depression to the Great Recession” (or spreads between yields, risk premia, and increasing opportunity costs vis-à-vis bond yields).


Dr. Richard G. Anderson’s “real user cost index” was wrong: “Although the evidence is mixed, the MSI (monetary services index), overall suggest that monetary policy was *accommodative* before the financial crisis when judged in terms of liquidity. —Richard G. Anderson & Barry Jones.

Link: “Building New Monetary Services Indexes: Concepts, Data and Methods”


“We discuss the issue of *weak separability*, and we define the groupings of monetary assets for which we construct indexes. These groupings correspond to the assets contained in M1, M2, M3, and L, as well as the assets contained in M1A and MZM.3 Because the aggregates are nested—each broader aggregate contains all the components of the previous, narrower aggregate—we refer to the groupings as levels of aggregation. M1A is the narrowest level of aggregation and L the broadest.”


files.stlouisfed.org/files/htdocs/publications/review/97/01/9701ra3.pdf


Link: “Monetary Aggregation Theory and Statistical Index Numbers”


files.stlouisfed.org/files/htdocs/publications/review/97/01/9701ra2.pdf


Link: “Money and Velocity During Financial Crisis: From the Great Depression to the Great Recession”


www.dallasfed.org/~/media/documents/research/papers/2015/wp1503.pdf

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Interest rates alone do not completely explain income velocity, Vi. Neither does financial innovation, e.g., new money substitutes. Neither does the “The periodicity of income flows”, Vt, e.g., being paid salaries and wages on the 1st and the 15th. Neither does Philip George’s: “12 months of savings in deposits as precautionary buffers”.


“The reader who observes Fig 3.3 carefully will note that changes in velocity always lag behind changes in interest rates. This again indicates that it is changes in observed interest rates that make people change the quantum of their precautionary buffers.” - George, Philip. “Macroeconomics Redefined”.


“Changes in the velocity of money have nothing to do with the speed at which money moves from economic entity to economic entity and are entirely the result of movements of dollars between demand deposits and other kinds of deposit.”

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William Barnett, 2003: “Friedman and Divisia Monetary Measures”


William Barnett: Center for Financial Stability


“Divisia Inside Money Aggregates - The Center for Financial Stability


“This [simple summation] procedure is a very special case of the more general approach. In brief, the general approach consists of regarding each asset as a joint product having different degrees of ‘moneyness,’ and defining the quantity of money as the weighted sum of the aggregated value of all assets, the weights for individual assets varying from zero to unity with a weight of unity assigned to that asset or assets regarded as having the largest quantity of ‘moneyness’ per dollar of aggregate value. The procedure we have followed implies that all weights are either zero or unity. The more general approach has been suggested frequently but experimented with only occasionally. We conjecture that this approach deserves and will get much more attention than it has so far received.”


www2.ku.edu/~kuwpaper/2013Papers/201312.pdf

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“Was the 1982 Velocity Decline Unusual?” – by JOHN A. TATOM


The nation’s GNP growth in 1982 was so weak relative to the pace of monetary expansion that the velocity of money — the ratio of GNF to Ml — fell significantly. This decline contrasts sharply with the steadily rising trend in velocity over the past 35 years


Explanations that focus on declining interest rates also do not match up well with the recent pattern of velocity declines. In the first quarter of 1982, corporate AAA bond yields averaged 15.01 percent and had risen from 14,62 percent one quarter earlier or 14.92 percent two quarters earlier. During the remaining quarters of1982, the bond yield declined to 14.51 percent, 13.75 percent and 11.88 percent. 9 The pattern in the second half of 1982 is consistent with a decline in velocity. What remains unexplained, however, is the largest decline in velocity, which occurred in the first quarter.


files.stlouisfed.org/files/htdocs/publications/review/83/08/Velocity_Aug_Sep1983.pdf


My prediction for AAA corporate yields for 1981 was 15.48%. AAA Corporate yields rose to 15.49%. You can verify this with James Sinclair (whose father started the OTC stock market).

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Besides financial innovation and the development of new money substitutes there are other structural factors, the impoundment of savings. Higher rates are both a cause and effect of higher money velocity

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Alan Greenspan Subcommittee on Domestic and International Monetary Policy; Committee on Banking and Financial Services; House of Representatives, July 19. 1995

The St. Louis Federal Reserve reports that since January 1994, hundreds of banks and depository institutions reduced the amount of required reserves by classifying demand deposits as savings deposits (known as a “sweep” transaction). Unlike demand deposits, savings do not have capital reserve requirements.


In his July 1995 Humphrey-Hawkins Act testimony to Congress, Alan Greenspan, former chairman of the Federal Reserve Bank, indicated retail sweep programs have substantially distorted the growth of M1, total reserves, and the monetary base.


Anderson and Rasch (2001) estimated that sweep programs from 1994-1999 reduced required reserves by $34.1 billion.

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The same could be said of the distortions created by the sweeping of funds into the Treasury’s General Fund Account. There wasn't much deviation in the rate-of-change of monetary flow figures until the Treasury Borrowing Advisory Committee’s decision to immediately transfer funds to the Treasury’s General Fund Account at one of the 12 District Reserve Banks. This speciously reduces both the money stock and legal reserve figures.


“In the past the Treasury did impact the money stock figure by allowing commercial banks to hold Treasury funds in Treasury Tax and Loan accounts, but since January 3, 2012, funds in these accounts must be transferred to the Fed by the close of business on the day they are received so the end-of-day balance is always zero”


"This reminded us of a subject discussed by the Treasury Borrowing Advisory Committee (OTCPK:TBAC) in the second half of 2016 in the wake of the change in money market fund regulations. This led to a repatriation of money MM funds previously lent out in the euro-dollar market to European issuers of commercial paper (mainly European banks)."

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


A decline in the income velocity of money (like during the Great-Recession), is supposed to suggest that the Fed initiate an expansive, or less contractive, monetary policy.


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

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Monetary flows:



parse, dt; real-ouput; inflation



01/1/2019 ,,,,, 0.04 ,,,,, 0.15

02/1/2019 ,,,,, 0.01 ,,,,, 0.14

03/1/2019 ,,,,, 0.02 ,,,,, 0.09

04/1/2019 ,,,,, 0.02 ,,,,, 0.09 bottom

05/1/2019 ,,,,, 0.06 ,,,,, 0.10

06/1/2019 ,,,,, 0.06 ,,,,, 0.10

07/1/2019 ,,,,, 0.07 ,,,,, 0.11

08/1/2019 ,,,,, 0.06 ,,,,, 0.10

09/1/2019 ,,,,, 0.06 ,,,,, 0.12 top

10/1/2019 ,,,,, 0.02 ,,,,, 0.09

11/1/2019 ,,,,, 0.05 ,,,,, 0.07

12/1/2019 ,,,,, 0.05 ,,,,, 0.05

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Wikipedia:



"In monetary economics, the demand for money is the desired holding of financial assets in the form of money: that is, cash or bank deposits rather than investments. It can refer to the demand for money narrowly defined as M1 (directly spendable holdings) , or for money in the broader sense of M2 or M3.



Money in the sense of M1 is dominated as a store of value (even a temporary one) by interest-bearing assets. However, M1 is necessary to carry out transactions; in other words, it provides liquidity. This creates a trade-off between the liquidity advantage of holding money for near-future expenditure and the interest advantage of temporarily holding other assets.



The demand for M1 is a result of this trade-off regarding the form in which a person's funds to be spent should be held. In macroeconomics motivations for holding one's wealth in the form of M1 can roughly be divided into the transaction motive and the precautionary motive. The demand for those parts of the broader money concept M2 that bear a non-trivial interest rate is based on the asset demand. These can be further subdivided into more microeconomically founded motivations for holding money.



Generally, the nominal demand for money increases with the level of nominal output (price level times real output) and decreases with the nominal interest rate. The real demand for money is defined as the nominal amount of money demanded divided by the price level. For a given money supply the locus of income-interest rate pairs at which money demand equals money supply is known as the LM curve.



The magnitude of the volatility of money demand has crucial implications for the optimal way in which a central bank should carry out monetary policy and its choice of a nominal anchor."

[mroped]

That right there is gibberish to me. I understand many a things but when it comes to finances I’m zilch! Nada!😂

Money velocity- definition: a)how fast can I spend the money that I just made! b) am I making money fast enough for what I spend?😂
And the likes!

[Value Buy]

Jun 9, 2019 10:08:07 GMT -5 mroped said:

That right there is gibberish to me. I understand many a things but when it comes to finances I’m zilch! Nada!😂

Money velocity- definition: a)how fast can I spend the money that I just made! b) am I making money fast enough for what I spend?😂
And the likes!

You have to check out the thread origination.
There were several old threads there with valuable info. Unfortunately many have disappeared from there over the years, and the board is quiet, but if you dig into some details, and dig deep, you can learn something.
I agree it is hard to understand, but still truthful.
IDNK some of the stuff that was discussed there.

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There are 6 seasonal, endogenous, economic inflection points each year. These seasonal factors are pre-determined by the FRB-NY’s "trading desk" operations, executing the FOMC's monetary policy directives (in the present case just reserve "smoothing" and “draining” operations, the oscillating inflows and outflows, the making and or receiving of interbank and correspondent bank payments by and large using their “free" excess reserve balances).


These are the 6 seasonal inflection points (they may vary a little from year to year):


Pivot ↓ #1 3rd week in Jan.

Pivot ↑ #2 mid Mar.

Pivot ↓ #3 May 5,

Pivot ↑ #4 mid Jun.

Pivot ↓ #5 July 21,

Pivot ↑ #6 2-3 week in Oct.


Each and every year, the seasonal factor's map (economic time series’ cyclical trend), or scientific proof, is demonstrated by the product of money flows, our means-of-payment money X’s its transaction’s velocity of circulation (the scientific method).


Monetary flows (volume X’s velocity) measures money flow’s impact on production, prices, and the economy (as flows are driven by payments: “bank debits”). It is an economic indicator (not necessarily an equity barometer). Double-derivative rates-of-change Δ, in M*Vt = RoC’s Δ in AD, aggregate monetary purchasing power.


Thus M*Vt serves as a “guide post” for N-gDp trajectories. 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 R-gDp serves as a close proxy to RoC's in total physical transactions, T, that finance both goods and services. Then RoC's in P, represents the price level, or various RoC's in a group of prices and indices.


Monetary flows’ propagation, are a mathematically robust sequence of numbers (sigma Σ), neither neutral nor opaque, which pre-determine macro-economic momentum (the → “arrow of time” or "directionally sensitive time-frequency de-compositions").


For short-term money flows, the proxy for real-output, R-gDp, it's the rate of accumulation, a posteriori, that adds incrementally and immediately to its running total.

Its economic impact is defined by its rate-of-change, Δ "change in". The RoC, is the pace at which a variable changes, Δ, over that specific lag's established periodicity.


And Alfred Marshall's cash-balances approach (viz., a schedule of the amounts of money that will be offered at given levels of "P"), viz., where at times "K" is the reciprocal of Vt, or “K” has the dimension of a “storage period” and "bridges the gaps of transition periods" in Yale Professor Irving Fisher’s model.


“According to Dr. Milton Friedman, the main reason for the non-neutrality of money in the short-run is the variability in the time lag between money and the economy.”


Money and money flows are robust, not neutral, i.e., up to a point. That saturation point is determined by the rate of inflation, the monetary fulcrum. This is perfectly clear. It is aptly demonstrated by the distributed lag effect of money flows being mathematical constants, volume X's velocity, for > 100 years.

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Economists being wordsmiths, often rephrase and revise history. Take the word “re-intermediation”, to wit: “defined as the movement of investment capital from non-bank investments, back into financial intermediaries” [sic]. This is a horrific confusion of money-stock vs. money-flow.


As defined, re-intermediation applied to: the FIDC’s Temporary Liquidity Guarantee Program (TLGP), or unlimited transaction deposit insurance, from October 14, 2008 until December 31, 2012, which siphoned funds from the nonbanks.


The TLGP induced nonbank disintermediation (where the size of the nonbanks shrank by $6.2 trillion, whereas the commercial banks were unaffected, growing by $3.6 trillion during the same period – even while higher countercyclical bank capital cushions drained c. $1 trillion).


www.fdic.gov/regulations/resources/tlgp/index.html

Link: Steve H. Hanke in his article: “Basel’s Capital Curse” was the first I came across to know that the countercyclical increase in Basel bank capital cushions was contractionary. An increase in bank capital accounts destroys the money stock $ for $.


bit.ly/2mZChDl


Link: PRITCHARD, Leland J. “A note on the relationships of bank capital to the lending ability of the commercial banks," AMERICAN ECONOMIC REVIEW, XLIII, June 1953, pp. 362-66.


Bankrupt-u-Bernanke on “Credit Crunches”, 1991:


www.brookings.edu/wp-content/uploads/1991/06/1991b_bpea_bernanke_lown_friedman.pdf

"However, we also argue that a shortage of equity capital has limited banks' ability to make loans, particularly in the most affected regions. Thus we agree with Richard Syron, president of the Boston Federal Reserve, that the credit crunch might better be called a "capital crunch." We present evidence for the capital crunch hypothesis using both state-level data and data on individual banks. The most difficult issue is whether the slowdown in bank lending has had a significant macroeconomic effect."


"Although it is likely that a bank credit crunch (or capital crunch) has occurred and has imposed costs on some borrowers, we are somewhat skeptical that the credit crunch played a major role in worsening the 1990 recession."


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

That explains TARP! TARP destroyed the money-stock and thereby money-flow.


In contradistinction, the term “dis-intermediation” is characterized as: “the massive movements of funds away from bank investments in the 20th century”. “The term was originally applied to the banking industry in 1967” (after the 1966 Savings and Loan Credit Crunch, where the term was coined, which contrary to professional economists, only applied to the thrifts).


To elaborate: “The competition from outside money instruments against the maximum savings rate allowed by Regulation Q caused both the creation of countless new financial investment instruments and a mass movement of savings away from federal depositories and into non-bank investments. Withdrawal of funds out federally insured financial intermediaries and depositing those funds into money market instruments can be attributed mainly to the relation of interest yielded by these instruments and interest yielded in bank savings.”


Commercial bank disintermediation (hiding cash under a mattress), was stopped by the Banking Acts of 1933 and 1935, when the Federal Deposit Insurance Company was formed.


As Luca Pacioli, a Renaissance man, "The Father of Accounting and Bookkeeping” famously quipped: (debits on the left and credits on the right, don’t go to sleep with an imbalance).


The shift by the public from indirect investment through financial intermediaries to direct investment, does not apply to the commercial banks ever since Franklin D. Roosevelt’s 1933 Bank Holiday. Savings flowing through the nonbanks never leaves the payment’s system as anyone who has applied double-entry bookkeeping on a national scale should already know. There is just a change in the ownership of existing DFI deposits within the payment’s system.


Importantly, this return of bank-held cash destroys money velocity. DFI held savings do not circulate (as from the standpoint of the payment’s system, the DFIs do not loan out existing deposits, saved or otherwise).


Steve Keen was right: "Banks don’t “intermediate loans”, they “originate loans”.


bit.ly/2GXddnC


Savings are temporarily frozen in the DFIs, idled in the payment’s system. This is a horrific macro-accounting error. It is the direct cause of secular strangulation, the direct cause of our low “net natural real safe rates” of interest, the direct cause of low money velocity, the direct cause of subpar R-gDp.

[flow5]

Professional economists are one-dimensionally confused.


R. Alton Gilbert (who wrote – “Requiem for Regulation Q: What It Did and Why It Passed Away”), in his letter back to me on December 11, 1978:

“Such savings are invested in many ways, including deposits at commercial banks.”


How delusional.

Gilbert: “In the summer of 1977, yields on short-term U.S. Treasury bills rose above the maximum interest rates that commercial banks and most thrift institutions are legally permitted to pay on passbook savings deposits.’ By the end of that year, interest rates on U.S. Treasury securities had risen above ceiling interest rates on time deposits with longer maturities. In the past, when market interest rates have risen above legal ceiling rates on time and savings deposits by similar margins, *the growth of these deposits has slowed sharply*. This is called disintermediation.”


It's too bizarre. You can’t make this up.


See: Barron’s dictionary “Disintermediation was at its peak in 1966 when Regulation Q interest rate ceilings prevented banks and savings institutions from competing effectively with nondepository institutions, such as brokers, disrupting the banks’ ability to lend.”


Disintermediation for the DFIs: deposit-taking, money-creating, financial institutions; can only exist in a situation in which there is both a massive loss of faith in the credit of the banks and an inability on the part of the Federal Reserve to prevent bank credit contraction, e.g., as a consequence of its depositor’s withdrawals.


Ever since 1933 (Roosevelt's "Bank Holiday"), the Federal Reserve has had the capacity to take unified action, through its "open market power", to prevent any outflow of currency from the banking system (i.e., before the remuneration of IBDDs). In contradistinction to the NBFIs, dis-intermediation for the DFIs isn’t predicated on the prevailing level of market clearing interest rates or the administration of policy rates.


“Pushing on a string" only applied prior to the nominal legal adherence to the fallacious "Real Bills Doctrine" when terminated in 1932 - due to a paucity of eligible (hopelessly impaired), commercial and agricultural paper for the 12 District Reserve bank’s discounting purposes.


The remuneration of interbank demand deposits, IBDDs, by Bankrupt-u-Bernanke emasculated the FRB-NY’s “open market power”, the power to inject ex-nihilo, and gratis, showering free lunch money both exogenously and endogenously, into the payment’s system -- by Simon Potter, Manager of SOMA as well as Executive Vice President of the New York Fed’s Markets Group’s “trading desk”.


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


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


This adds up to an obdurate apparatus that the Fed cannot monitor, much less control, even on a month-to-month basis.


What the net expansion of the money stock will be, as a consequence of any given addition or subtraction in Federal Reserve Bank credit, nobody can forecast until long after the fact.


And the whole process is now initiated by the member banks, via proffered bankable opportunities, not by the monetary authorities.

R. Alton Gilbert said: “the growth of these deposits has slowed sharply. This is called disintermediation.”


Au contraire! Prima facie evidence that disintermediation had taken place for the payment’s system would be a contraction in commercial bank credit (contraction in their loans and investments). It would have nothing to do with the decline in the proportion of its savings-investment accounts.


The only way to reduce the volume of bank 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 banks service, or for the purchase from their banks of any type of commercial bank security obligation, e.g., bank stocks, debentures, etc.


What it is called is secular strangulation.

[flow5]

As Dr. Philip George explains: “When interest rates go up, flows into savings and time deposits increase.”



Link: “The riddle of money, finally solved” by Philip George



www.philipji.com/...



#1 The accompaniment of rising nominal interest rates with rising inflation, causes Scott Sumner’s (NGDPLT) policy, unleashing the monetary spigots to offset the impoundment and ensconcing of savings, to exacerbate stagflation (business stagnation accompanied by inflation).



#2 And if the Fed pursues a rather restrictive monetary policy, e.g., QT, interest rates also tend to rise. This places a damper on the creation of new money but likewise, paradoxically, drives existing money (savings) out of circulation into frozen DFI deposits (un-used and un-spent).



In a twinkling, the economy begins to suffer. This eventually results in FOMC schizophrenia: Do I stop because inflation is increasing? Or do I go because R-gDp is falling?



Example #1: Long-term money flows, proxy for inflation, peaked in July 2008 - which was reported with a lag on Aug 14, 2008 · when the government announced that the annual inflation rate surged to 5.6% in July - the highest point in 17 years. Immediately following this inflationary apex, i.e., after July, both the RoC in short-term money flows (where R-gDp is a proxy) and long-term money flows (which impact asset prices), instantaneously, fell precipitously in a Wile E. Coyote Moment.



Example #2: When long-term money flows, volume X’s transactions velocity, reached its zenith in January 1980, both the RoC in short-term money flows and long-term money flows simultaneously fell in another Wile E. Coyote Moment, after the price of gold spiked @ $843 on 1/21/1980.



This economic dyslexia perplexed both Chairman Paul Volcker (producing back-to-back economic recessions in 1980 and 1981-1982), and Chairman Ben Bernanke (provoking naively, marginal QE on the asset side of the Fed’s balance sheet).



It’s like Plato said: "We seem to find that the ideal of knowledge is irreconcilable with experience”. Readers obviously haven’t yet grasped the significance of “The Nattering Naybob’s” apt coinage - { ELEPHANT TRACKS }.



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



bit.ly/1A9bYH1



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



Link: “Extrait du Bulletin de ISI of 1937”. - History and forms. Irving Fisher (1925) was the first to use and discuss the concept of a distributed lag.



In a later paper (1937, p. 323), American Yale Professor Irving Fisher stated that the basic problem in applying the theory of distributed lags:



“is to find the ’best’ distribution of lag, by which is meant the distribution such that … the total combined effect [of the lagged values of the variables taken with a distributed lag has] … the highest possible correlation with the actual statistical series … with which we wish to compare it.”



...Thus, we wish to find the distribution of lag that maximizes the explanation of “effect” by “cause” in a statistical sense”.



We know whether and when an injection of new money is robust, neutral, or harmful. Scott Sumner's (NGDPLT) is "fool's gold".



I should be awarded the Nobel Prize in Economics. My discoveries are worth trillions of economic $s.



-- Michel de Nostredame

[flow5]

We are now at the 4th seasonal inflection point.



These are the 6 seasonal inflection points (they may vary a little from year to year):



Pivot ↓ #1 3rd week in Jan.

Pivot ↑ #2 mid Mar.

Pivot ↓ #3 May 5,

Pivot ↑ #4 mid Jun.

Pivot ↓ #5 July 21,

Pivot ↑ #6 2-3 week in Oct.



These are all pre-driven by the FRB-NY's "trading desk" operations.



Monetary policy objectives should be formulated in terms of desired rates-of-change in monetary flows, relative to RoC’s in R-gDp. R-gDp is the nominal anchor ("not the nominal price level or its path").



There are 6 seasonal, endogenous, economic inflection points each year. These seasonal factors are pre-determined by the FRB-NY’s "trading desk" operations, executing the FOMC's monetary policy directives (in the present case just reserve "smoothing" and “draining” operations, the oscillating inflows and outflows, the making and or receiving of correspondent and interbank payments by and large using their “free" excess reserve balances).



Each and every year, the seasonal factor's map (economic time series’ cyclical trend), or scientific proof, is demonstrated by the product of money flows, our means-of-payment money X’s its transaction’s velocity of circulation (the scientific method).



Monetary flows (volume X’s transactions velocity) measures money flow’s impact on production, prices, and the economy (as flows are driven by payments: “bank debits”). It is an economic indicator (not necessarily an equity barometer). Double-derivative rates-of-change Δ, in M*Vt = RoC’s Δ in AD, aggregate monetary purchasing power.



Thus M*Vt serves as a “guide post” for N-gDp trajectories. 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 R-gDp serves as a close proxy to RoC's in total physical transactions, T, that finance both goods and services. Then RoC's in P, represents the price level, or various RoC's in a group of prices and indices.



Monetary flows’ propagation, are a mathematically robust sequence of numbers (sigma Σ), neither neutral nor opaque, which pre-determine macro-economic momentum (the → “arrow of time” or "directionally sensitive time-frequency de-compositions").



For short-term money flows, the proxy for real-output, R-gDp, it's the rate of accumulation, a posteriori, that adds incrementally and immediately to its running total.



Its economic impact is defined by its rate-of-change, Δ "change in". The RoC, is the pace at which a variable changes, Δ, over that specific lag's established periodicity.



And Alfred Marshall's cash-balances approach (viz., a schedule of the amounts of money that will be offered at given levels of "P"), viz., where at times "K" is the reciprocal of Vt, or “K” has the dimension of a “storage period” and "bridges the gaps of transition periods" in Yale Professor Irving Fisher’s model.



“According to Dr. Milton Friedman, the main reason for the non-neutrality of money in the short-run is the variability in the time lag between money and the economy.”



Money and money flows are robust, not neutral, i.e., up to a point. That saturation point is determined by the rate of inflation, the monetary fulcrum. This is perfectly clear. It is aptly demonstrated by the distributed lag effect of money flows being mathematical constants, for > 100 years.



--Michel de Nostradame

[flow5]

Jeffrey P. Snider Jeff is the Head of Global Research at Alhambra: "As had become Ben Bernanke's habit, it was full of praise - for his own work."



That’s an extraordinary understatement. Bankrupt-u-Ben Bernanke should be doing hard time in Federal Prison with the MS-13. B-u-B was treasonous.



One theoretical underpinning is that B-u-B conflated the GFC’s credit crunch with a capital crunch (as evidenced from his response to the crisis he alone created and his early dissertations).



Earlier dissertation: Bernanke, Ben S., and Cara S. Lown (1991). "The Credit Crunch," Brookings Papers on Economic Activity, 1991:2, pp. 205-39.



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



It is an incontrovertible macro-accounting flow-of-funds fact, the NBFIs are not in competition with the DFIs. The NBFI’s are the DFI’s customers. Savings flowing through the nonbanks never leaves the payment’s system as anyone who has ever applied double-entry bookkeeping on a national scale should have already known.



Then B-u-B later recanted (after his tenure as Chairman).



“the most damaging aspect of the unwinding bubble was that it ultimately touched off a broad-based financial panic, including runs on wholesale funding and indiscriminate fire sales of even non-mortgage credit.”



www.brookings.edu/...



Another underpinning was that B-u-B learned nothing from his study of the Great Depression (his Ph.D. thesis). Link: “The Macroeconomics of the Great Depression: A Comparative Approach” BEN S. BERNANKE



noehernandezcortez.files.wordpress.com/2010/11/the-macroeconomics-of-the-great-depression-a-comparative-approach.pdf



Bankrupt-u-Bernanke: “I would like to say to Milton and Anna: Regarding the Great Depression, you’re right. We did it. We’re very sorry.” Bernanke lied. He learned absolutely nothing studying the Great Depression. Bernanke made the same mistake again.



Link: “The Liquidity Effect and Long-Run Neutrality”



“We find little basis for rejecting either the liquidity effect or long-run neutrality.” However, B-u-B was unable to distinguish between the two.



www.nber.org/...



Also link #1: January 2004 “Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach” – with Jean Boivin, Piotr Eliasz: w10220

Link #2: “Measuring The Effects Of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach,” Quarterly Journal of Economics, 2005, v120(1,Feb), 387-422.



Leastways, the neutrality of money is denigrated by secular strangulation. I.e., the quantity of money does not just: “determine only absolute prices and their level”



Link: Conference on the Legacy of Milton and Rose Friedman's Free to Choose, Dallas, Texas October 24, 2003



“The proposition that money has no real effects in the long run, referred to as the principle of long-run neutrality, is universally accepted today by monetary economists. When Friedman wrote, however, the conventional view held that monetary policy could be used to affect real outcomes--for example, to lower the rate of unemployment--for an indefinite period. The idea that monetary policy had long-run effects--or, in technical language, that the Phillips curve relationship between inflation and unemployment could be exploited in the long run--proved not only wrong but quite harmful.”



www.federalreserve.gov/...



What B-u-B discloses in his extensive research (knowledge is not intelligence), is that he doesn’t understand either money or money flows (discussing Friedman’s "The Counter-Revolution in Monetary Theory"). Contrary to B-u-B and Friedman, the distributed lag impact from money flows have been math constants for > 100 years. How could one miss that over 100 years?



Rates-of-change in monetary flows, volume X’s transactions velocity = RoC’s in P*T in American Yale Professor Irving Fisher’s truisitic “equation of exchange”. Ergo, one knows in accurate terms whether, when and for how long, an injection of new money is robust, neutral, or harmful.



What B-u-B did was contract the domestic price-level for 29 contiguous months. The RoC in long-term money flows, the proxy for inflation, a proxy for tangible asset prices, was continuously negative (-), less than zero - for a string of 29 months (no contrary to BuB, money is not long-run neutral). That is the FOMC’s contractionary monetary policy was directly responsible for the GFC.



Asset prices are most impacted by the pro-rata share of Gresham’s law



The impact of this monetary policy blunder was to turn otherwise safe assets (real-estate assets), upside down and underwater. It was an unforgivable crime of historic proportions. It bankrupt America.



As Thomas Jefferson said: “There should be a revolution in government every 20 years”.



Link also:Link SA author Ed Dolan, 10/11/12



seekingalpha.com/...



Forward Guidance: Does Bernanke Talk Too Much About How Good His Exit Strategy Is?

[flow5]

BIS: "Stakeholder scrutiny of banks has intensified, while technology has empowered new non-bank, challengers to banks’ businesses, thus adding to competitive pressure."



Economist’s propaganda. The NBFIs are not in competition with the DFIs. The NBFIs are the DFI’s customers. Savings flowing through the NBFIs never leaves the payment’s system. The prosperity of the commercial DFIs, is contingent upon the prosperity of the non-banks, NBFIs. It is this misconception in the savings-investment process (that the DFIs loan out existing deposits), which ineluctably destroys money velocity, reducing aggregate demand (where R-gDp is a subset). On the other hand, the growth of any intermediary, e.g., MMMF, does deny investable funds to other intermediaries, NBFIs.


If the commercial banks are both: #1 operating with an inordinate volume of excess reserves (have excess legal lending capacity, are not operating at their economic limits), and #2 inflationary pressures are below the Central Bank’s targets (as at present), then it could be said that the volume of bankable investments was inadequate, and that the intermediaries (nonbanks) were acquiring investments or loans the DFIs (commercial banks) would otherwise hold. But the volume of bankable opportunities (credit worthy borrowers), includes government debt, which is at historic highs.


Treasury and Agency Securities, All Commercial Banks (USGSECNSA)


fred.stlouisfed.org/series/USGSECNSA


The volume of commercial bank credit (loans + investments), conceals the portfolio composition of the DFIs, their loan pie, or an increasing volume of government debt, a harbinger of loan demand. But “pushing on a string” only applied to depression era times. It is the Central Bank’s responsibility to regulate money flows, aggregate monetary purchasing power.


Bank Credit of All Commercial Banks (TOTBKCR)


fred.stlouisfed.org/series/TOTBKCR


If AD is chronically deficient, then the Central Bank has within its power, the capacity to inject new money and credit ex-nihilo and gratis. Open market operations of the buying type, between the Central Bank and nonbank counterparties, increases both the money stock and interbank demand deposits. There is nothing in the law to prevent the Central Bank from directing their buying operations at nonbank targets, like the nominal issuance objectives, e.g., coupon issue sizes, in U.S. Treasuries’ funding operations (net privately-held marketable borrowing).


Current TBAC Report Press Release


www.treasury.gov/press-center/press-releases/Pages/current_TBACReportPressRelease.aspx


Effective monetary management is impossible without the cooperation of the U.S. Treasury. The open market operations of the Fed require a depth of market that will enable the Fed to buy or sell billions of dollars’ worth of treasury bills on any given day without deeply disturbing the bill rates. The Treasury, Steven Mnuchin, can exercise a segmented control of their sales, and the “desk” can, and does, buy “on-the-run” treasuries (the most recently issued U.S. Treasury bonds or notes of a particular maturity).


The Fed should always collaborate with the Treasury on the type of debt to be issued. Not only may the U.S. Treasury exercise important monetary powers through the timing of their borrowing, and the size of their borrowing, but specific monetary objectives may be achieved through a choice of the types of issues to float. Within board limits the Treasury can plan on the types of securities to be sold and decide whether they should be short-term, long-term, marketable, or redeemable, eligible or ineligible for bank investment, etc. I.e., the U.S. Treasury can decide who will buy a given issue.

[flow5]

Subpar economic growth is axiomatic (but in academia, universally misunderstood), or the “1.6% new R-gDp normal” (“averaged 1.67% over the past 12 years”).


Harvard professor Alvin Hansen called Mohamed El-Erian’s “trifecta” secular stagnation: based on the diminishing “factors of production”, or as Martin Wolf, chief economics commentator at the Financial Times, London says: “chronically deficient AD”. But it is secular strangulation, a chronic degenerative condition (based on the Keynesian macro-economic persuasion that maintains that a commercial bank is a financial intermediary).


“Disintermediation is made in Washington” (as perpetrated by ABA – e.g., the 13 leading bankers who dominated Wall Street, between 1998 and 2008, spent $1.7 billion on election campaigns and $3.4 billion on lobbying).


It’s a fundamental macro-economic accounting error based on double-entry bookkeeping as originally conceived by Italian mathematician Luca Pacioli in 1494.

As Luca Pacioli, a Renaissance man, "The Father of Accounting and Bookkeeping” famously quipped: “debits on the left and credits on the right, don’t go to sleep with an imbalance”.


Leonardo di ser Piero da Vinci, the “Father of modern science”, was friends with Pacioli during the “Age of Enlightenment”.


And Florence’s cleverest young diplomat: Niccolò di Bernardo dei Machiavelli the Father of modern political philosophy and political science was friends with Leonardo: “Machiavelli had a smile right out of a Leonardo pointing: enigmatic, at times laconic, always appearing to hide a secret”.


"It is double pleasure to deceive the deceiver" - Niccolo Machiavelli - re: George Selgin 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." What a Renaissance! – another break from the intellectual past.


But then we get to Dr. Leland Prichard, a man 30Xs smarter than Albert Einstein (Ph.D. Economics, Chicago 1933). Albert Einstein in his 1919 essay “Induction and Deduction in Physics”:


"The truly great advances in our understanding of nature originated in a way almost diametrically opposed to induction"..."The intuitive grasp of the essentials of a large complex of facts leads the scientist to the postulation of a hypothetical basic law or laws From these laws, he derives his conclusions".


Einstein: "The deeper we penetrate and the more extensive our theories become the less empirical knowledge is needed to determine those theories."


The answer to secular strangulation is to gradually drive the commercial banks out of the savings business, e.g., by reducing the FDIC’s deposit insurance back to $100,000 (but per individual). 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.


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


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

See Steve Keen: "Banks don’t “intermediate loans”, they “originate loans”.


bit.ly/2GXddnC


Thus the BOE is right by another empirical technique. The Bank of England:


bit.ly/2sphBHD


Working Paper No. 529 "Banks are not intermediaries of loanable funds — and why this matters" --Zoltan Jakab and Michael Kumhof May 2015


BOE: “Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. The amount of money created in the economy ultimately depends on the monetary policy of the central bank”


From a system’s perspective, commercial banks (DFIs), as contrasted to financial intermediaries (non-banks, NBFIs): never loan out, and can’t loan out, existing deposits (saved or otherwise) including existing non-noninterest-bearing transaction deposits, or interest-bearing time “savings” deposits, or the owner’s equity, or any liability item.


When DFIs grant loans to, or purchase securities from, the non-bank public, they acquire title to earning assets by initially, the creation of an equal volume of new money (demand deposits) - somewhere in the payment’s system. I.e., commercial bank deposits are the result of lending, not the other way around. The lending capacity of the DFIs is dependent upon monetary policy, not the savings practices of the nonbank public. The DFIs could continue to lend/invest even if the public ceased to save altogether.


The non-bank public includes every institution (including shadow-banks), the U.S. Treasury, the U.S. Government, State, and other Governmental Jurisdictions, and every person, etc., except the commercial and the Reserve banks.


Secular strangulation is not about higher indebtedness, shrinking demographics, or labor replacing robotics.


An increase in savings-investment accounts, in non-M1 components within the payment’s system, adds nothing to gDp. It is an unrecognized leakage in Keynesian National Income Accounting procedures since day 1. Where are the GAAP auditors "in all material respects"?


See also: Link: Philip George: “The riddle of money, finally solved” (where a proportion of cash is commonly represented as { k }, a portion of nominal income), as in Alfred Marshall’s “cash balance” approach)


www.philipji.com/...


"For nearly a century the progress of macroeconomics has been stalled by a single error, an error so silly that generations to come will scarcely believe that it could have persisted for as long as it has done. It is an error that has been committed by John Maynard Keynes and Milton Friedman, John Hicks and James Tobin, Franco Modigliani and Ludwig von Mises, Murray Rothbard and Paul Krugman, and continues to be taught to every economics undergraduate today."


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


Since time deposits, savings-investment accounts (all monetary savings) originate within the banking system (and there is a one-to-one relationship between time and demand deposits. An increase in TDs depletes DDs by an equivalent amount), 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 economist's accounting error increases income inequality. All commercial bank-held deposits are un-used and un-spent, lost to both consumption and investment, indeed to any type of payment or expenditure. An increase in time deposits destroys money velocity, where M*Vt = P*T in American Yale Professor Irving Fisher’s truistic “equation of exchange”. It subverts AD (where N-gDp is a subset). The remuneration of interbank demand deposits has exacerbated this phenomenon. The 1966 Savings and Loan Credit Crunch (when the term “credit crunch” was coined), is the antecedent and paradigm.


This concept is somewhat like the physics principle of *superposition*:


“The general principle of superposition of quantum mechanics applies to the states [that are theoretically possible without mutual interference or contradiction] ... of any one dynamical system…”that every quantum state can be represented as a sum of two or more other distinct states.”


The capacity of a single bank to create credit as a consequence of a given primary deposit is identical to a financial intermediary. L = S (1-s). The superposition is that all primary deposits are actually derivative deposits from a system’s context.


In other words, there is an increase in the supply of loan-funds, but no change in the money stock, a velocity relationship, where pooled savings are matched with loans and investments (a non-inflationary relationship). Savings flowing through the NBFIs never leaves the payment’s system. There is just a change in the ownership of existing DFI liabilities.


Unless savings are activated, put back to work, a dampening economic impact, a deceleration in money velocity, is engendered and metastases, resulting in secular strangulation. The expiration of the FDIC’s unlimited transactions deposit insurance in December 2012 is prima facie evidence (it caused the “taper tantrum”), as I predicted in Dec. 2012 (re: my “market zinger” forecast).


To repeat again what I said; Prima Facie Evidence:


The 2018 pivot:


The interest-bearing character of the DFI’s deposits which result in any sudden larger proportion of commercial bank deposits in the interest-bearing category destroys money velocity.


2018-11-05 0.49

2018-11-12 0.49

2018-11-19 0.56 [spike]

2018-11-26 0.57


This is also an excellent device for the banking system to reduce its aggregate profits.


It is hard for the average person to believe that banks do not loan out savings or existing deposits – demand or time. But the DFIs always create money by making loans to, or buying securities from, the non-bank public.


This results in a double-bind for the Fed (FOMC schizophrenia: Do I stop because inflation is increasing? Or do I go because R-gDp is falling?


It’s like Athenian philosopher Plato -- whose "first fruits of his youth infused with hard work and love of study" said: "We seem to find that the ideal of knowledge is irreconcilable with experience”


Example #1: Long-term money flows, proxy for inflation, peaked in July 2008 - which was reported with a lag on Aug 14, 2008 · when the government announced that the annual inflation rate surged to 5.6% in July - the highest point in 17 years. Immediately following this inflationary apex, i.e., after July, both the RoC in short-term money flows (where R-gDp is a proxy) and long-term money flows (which impact asset prices), instantaneously, fell precipitously in a Wile E. Coyote Moment.


Example #2: When long-term money flows, volume X’s transactions velocity, reached its zenith in January 1980, both the RoC in short-term money flows and long-term money flows simultaneously fell in another Wile E. Coyote Moment, after the price of gold spiked @ $843 on 1/21/1980.


This economic dyslexia (whether an injection of money is robust, neutral, or harmful), perplexed both Chairman Paul Volcker (producing back-to-back economic recessions in 1980 and 1981-1982), and Chairman Ben Bernanke (provoking naively, marginal QE on the asset side of the Fed’s balance sheet).


If it pursues a rather restrictive monetary policy, e.g., QT, interest rates tend to rise:


This places a damper on the creation of new money but, paradoxically drives existing money (savings) out of circulation into frozen deposits (un-used and un-spent). In a twinkling, the economy begins to suffer.


% Deposits vs. large CDs on "Assets and Liabilities of Commercial Banks in the United States - H.8"


Jul ,,,,, 12227 ,,,,, 1638.6 ,,,,, 7.46

Aug ,,,,, 12236 ,,,,, 1629.4 ,,,,, 7.51

Sep ,,,,, 12268 ,,,,, 1662.4 ,,,,, 7.38

Oct ,,,,, 12318 ,,,,, 1685.8 ,,,,, 7.31 (twinkling)

Nov ,,,,, 12313 ,,,,, 1680.1 ,,,,, 7.33

Dec ,,,,, 12425 ,,,,, 1698.6 ,,,,, 7.31

Jan ,,,,, 12465 ,,,,, 1732.9 ,,,,, 7.19

Feb ,,,,, 12494 ,,,,, 1744.6 ,,,,, 7.16

--------------------|


See: Dr. Philip George - October 9, 2018: “At the moment, one can safely say that the Fed's plan for three more rate hikes in 2019 will not materialise. The US economy will go into a tailspin much before that.”


Calafia Beach Pundit: “"think of M2 as a proxy for the amount of cash (or equivalents) that the average person, company, or investor wants to hold at any given time. Think of GDP as a proxy for the average person's annual income. The ratio of the two is, therefore, a proxy for the percentage of the average person's or corporation's annual income that is desired to be held in safe and relatively liquid form (i.e., cash or cash equivalents)”


See chart # 3 “savings deposit growth” in the SA article “An Emerging And Important Secular Trend” Sep. 26, 2018

seekingalpha.com/...


"As Chart #3 shows, the main reason for the big slowdown in M2 growth is a big slowdown in its main component, savings deposits. This, despite the fact that banks have been increasing - albeit slowly - the interest rate they pay on deposits."


See: “Should Commercial banks accept savings deposits?” Conference on Savings and Residential Financing 1961 Proceedings, United States Savings and loan league, Chicago, 1961, 42, 43.

[flow5]

It is not a Keynesian money demand function (liquidity preference curve), presupposing “the determination of interest rates” [sic]. It is not as Dr. Philip George posits, the Marshallian’ market equilibrium (“use mathematics as shorthand language”), supply and demand curve for “cash balances”. It is simply the acknowledgement of net debits and net credits (double-entry bookkeeping on a national scale).


This is the fundamental nature of stock (an absolute quantity) vs. flow (a rate-of-change). The study of economics is based on the accurate measurements: of rates-of-change -> in the flows-of-funds.


From the Carol A. Ledenham’s Hoover Institution Archives: Nobel Laureate Dr. Milton Friedman was one-dimensionally confused. So was R. Alton Gilbert who wrote: “Requiem for Regulation Q: what it did and why it passed away”, 2/1986 FRB-STL Review. Friedman pontificated that:


“I would (a) eliminate all restrictions on interest payments on deposits, (b) make reserve requirements the same for time and demand deposits”. Dec. 16, 1959.


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

As Luca Pacioli, a Renaissance man, "The Father of Accounting and Bookkeeping” famously quipped: “debits on the left and credits on the right, don’t go to sleep with an imbalance”
.

You have to retain cognitive dissonance capacity, like Walter Isaacson described Albert Einstein’s ability: to hold two thoughts in your mind simultaneously – “to be puzzled when they conflicted, and to marvel when he could smell an underlying unity”. It’s also like Athenian philosopher Plato -- whose "first fruits of his youth infused with hard work and love of study" said: "We seem to find that the ideal of knowledge is irreconcilable with experience”.


In almost every instance in which John Maynard Keynes wrote the term bank in his bible: “The General Theory of Employment, Interest and Money”, it is necessary to substitute the term nonbank in order to make Keynes’ statement correct.


Calafia Beach Pundit: “The current economic expansion remains by far the weakest in history”.


Subpar economic growth is axiomatic. The FDIC’s “standard insurance amount has been altered since the GFC, up to $250,000 per depositor, per insured bank, for each account ownership category”. Prior to the GFC the maximum insurance level was set at $100,000, the maximum level for all deposit taking, money creating, financial institutions.


And Bankrupt-u-Bernanke destroyed the nonbanks, using a Romulan Cloaking Device, remunerating interbank demand deposits. See: "The 2006 Financial Services Regulatory Relief Act gives the Fed permission to pay interest on reserves. The IOR rate was always higher than "the general level of short-term interest rates" which is imposed in the Law. "A Legal Barrier to Higher Interest Rates," The Wall Street Journal, Sept. 28, p. A13.


Thus with introduction of interest on reserves, disintermediation was induced (an outflow of funds or negative cash flow), resulting in the size of the nonbanks shrinking by $6.2 trillion, leaving the commercial banks unaffected, growing by $3.6 trillion during the same period). Since Roosevelt's banking holiday in 1933, disintermediation is a term that only applies to the nonbanks.


Calafia Beach Pundit: “money demand fell from mid-2017 to mid-2018 as confidence soared and the economy strengthened”


Link: September 25, 2018: “An Emerging And Important Secular Trend”


As Leonardo Da Vinci, the Father of modern science, said: “Before you make a general rule of this case, test it two or three times and observe whether the tests produce the same effects”.


The 1966 Savings and Loan Credit Crunch (where the term “credit crunch” was coined) is the antecedent and paradigm. “The term credit crunch had its origins in the unusually tight credit conditions that prevailed in the U.S. in the late summer of 1966, when reports of borrowers unable to obtain credit at any price were commonplace. Prior to 1966, the postwar U.S. experienced 3 periods of tight credit; the spring of 1953; the fall of 1957; and the last third of 1959. These periods were called “credit squeezes” or “credit pinches”.


Sidney Homer and Henry Kaufman, economists at Salomon Brothers in the 1960’s, coined the term “crunch” to describe how the 1966 episode differed from those in the 1950’s. Although Homer and Kaufman did not formally define a crunch, Homer (1966) offered the following explanation:


The words squeeze or pinch have gentle connotations. The prehensile male sometimes “squeezes” or “pinches”, with the most affectionate intentions. No bruises need result, no pain need be inflicted. A “crunch” is different. It is painful by definition, and it can even break bones.”


See: “Identifying Credit Crunches” by Raymond E. Owens and Stacey L. Schreft. Federal Reserve Bank of Richmond, March 1993.


As Dr. Philip George says: “When interest rates go up, flows into savings and time deposits increase.”


Prima Facie Evidence. The 2018 pivot:


The interest-bearing character of the DFI’s deposits which result in any sudden larger proportion of commercial bank deposits in the interest-bearing category destroys money
velocity.


2018-11-05 0.49

2018-11-12 0.49

2018-11-19 0.56 [spike]

2018-11-26 0.57


This is also an excellent device for the banking system to reduce its aggregate profits.


It is hard for the average person to believe that banks do not loan out savings or existing deposits – demand or time. But the DFIs always create money by making loans to, or buying securities from, the non-bank public.


This results in a double-bind for the Fed (FOMC schizophrenia: Do I stop because inflation is increasing? Or do I go because R-gDp is falling?). If it pursues a rather restrictive monetary policy, e.g., QT, interest rates tend to rise.


This places a damper on the creation of new money but, paradoxically drives existing money (savings) out of circulation into frozen deposits (un-used and un-spent). In a twinkling, the economy begins to suffer.


% Deposits vs. large CDs on "Assets and Liabilities of Commercial Banks in the United States - H.8"


Jul ,,,,, 12227 ,,,,, 1638.6 ,,,,, 7.46

Aug ,,,,, 12236 ,,,,, 1629.4 ,,,,, 7.51

Sep ,,,,, 12268 ,,,,, 1662.4 ,,,,, 7.38

Oct ,,,,, 12318 ,,,,, 1685.8 ,,,,, 7.31 (twinkling)

Nov ,,,,, 12313 ,,,,, 1680.1 ,,,,, 7.33

Dec ,,,,, 12425 ,,,,, 1698.6 ,,,,, 7.31

Jan ,,,,, 12465 ,,,,, 1732.9 ,,,,, 7.19

Feb ,,,,, 12494 ,,,,, 1744.6 ,,,,, 7.16

--------------------|


See: Dr. Philip George - October 9, 2018: “At the moment, one can safely say that the Fed's plan for three more rate hikes in 2019 will not materialise. The US economy will go into a tailspin much before that.”


Link: “The riddle of money, finally solved” BY PHILIP GEORGE


The expansion of time/savings deposits in the DFIs adds nothing to GDP period. The DFIs' savings deposits have a zero payment's velocity. The DFIs always create new money when they lend/invest with the nonbank public. The DFIs do not loan out existing deposits, saved or otherwise.


-– Michel de Nostradame

[flow5]

"The New York Fed provides limited investment services to its foreign official and international account holders. Principal among these is the foreign repurchase agreement pool (foreign repo pool). This investment service operates as follows: at the end of each business day, cash balances across these accounts are swept and invested in an overnight repurchase agreement using securities held in the System Open Market Account (SOMA). At maturity, on the following business day, the securities are repurchased at a repurchase price reflecting a rate of return tied to comparable market-based Treasury repo rates."

"Repo and Reverse Repo Agreements"


www.newyorkfed.org/aboutthefed/fedpoint/fed20



"In a reverse repo transaction, the opposite occurs: the Desk sells securities to a counterparty subject to an agreement to repurchase the securities at a later date at a higher repurchase price. Reverse repo transactions temporarily reduce the quantity of reserve balances in the banking system."



Overnight Reverse Repo Operations



"Currently, the Desk conducts overnight reverse repo operations daily as a means to help keep the federal funds rate in the target range set by the FOMC. The overnight reverse repo program (ON RRP) is used to supplement the Federal Reserve's primary monetary policy tool, interest on excess reserves (IOER) for depository institutions, to help control short-term interest rates. ON RRP operations support interest rate control by setting a floor on wholesale short-term interest rates, beneath which financial institutions with access to these facilities should be unwilling to lend funds."



------------|



Daily Treasury Yield Curve Rates



www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield


Jeffrey Snider: "liquidity pressures really are escalating globally"


seekingalpha.com/article/4285045-really-needed-yield-curve


This monetary policy blunder is partially responsible for the contraction of the E-$ market. It is also partially responsible for the inversion in the U.S. yield curve (where the 1mo yields more than all the maturities clear past the 20yr).





Note: "The Treasury's yield curve is derived using a quasi-cubic hermite spline function. Our inputs are indicative, bid-side market quotations (not actual transactions) for the on-the-run securities obtained by the Federal Reserve Bank of New York at or near 3:30 PM each trading day."