Thursday, June 10, 2021

Bill Mitchell — MMT and Power – Part 2

This is Part 2 of a series that is developing here on the topic of Modern Monetary Theory (MMT) and power. I often read that Modern Monetary Theory (MMT) is defective because it has no theory of power relations. Some critics link this in their narrative to their claim that MMT also has no theory of inflation. They then proceed to attack concepts such as employment buffers, on the grounds, that MMT cannot propose a solution to inflation if it has no understanding of how power relations cause inflation. These criticisms don’t come from the conservative side of the policy debate but rather from the so-called Left, although I wonder just how ‘left’ some of the commentators who cast these aspersions actually are. The problem with these criticisms is that they have clearly adopted a partial approach to their understanding of what MMT is, presumably through not reading the literature widely enough, but also because of the way, some MMT proponents choose to represent our work. In Part 1, I examined how the economics discipline evolved from political economy to a narrow focus on the ‘economy’ as if it existed in a void of power. I also disabused readers of the notion that MMT ignores the link between money and the real economy, which is a regular claim offered by critics from the Left. I also questioned critics who seem to want MMT to be a theory of everything. As I regularly point out MMT cannot predict who wins the football this week, but that isn’t a criticism. In Part 2, I am going to complicate things a little by expanding on the MMT is the MMT is a lens narrative as if we can neatly separate values from facts. I will also explain how power enters into the dominant theory of inflation in MMT....
Bill Mitchell – billy blog
MMT and Power – Part 2
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Part 1 is here.

I hope Bill will  continue this series and perhaps write an article and then a book on it. 

Power relationships are foundation to the social, political, and economic asymmetry endemic in modern "capitalistic" societies in a way that resembles the role of land ownership the previous agricultural age. Political economy, which is what classical economics was called, acknowledge this role. Laissez-faire was about limiting the power of the state, however, in the historical period in which liberalism was challenging the power of church in imposing dogma and the state, dictates. 

Marx based his work on the role of power in economics, focusing on the power inherent in property relations instead. As result, Marx became anathema in economics and politics — but not sociology, which was left to study power. (See C. Wright Mills, The Power Elite.) Presently, the role of power in economics is chiefly pursued in economic sociology and political science rather than economics, and most conventional economists simply ignore it, as they do money, since wealth is one of the pillars of power relationships. This is rather incredible considering that asymmetrical power undermines key assumptions of neoclassical economics regarding the operation of market forces in ways that vitiate conventional modeling as representative of real-world systems and events.


Footsoldier said...

Does the budget deficit actually tell us anything ?

What issues do low interest rates cause ?

Footsoldier said...

I'm convinced more and more and more that just looking at the budget deficit and saying it will be good for all households and corporate profits and thus the stock market doesn't quite fit it anymore.

I'm convinced after 2 years of study that you need to look deeper than that. Study how much is saved and how saving increases with low interest rates see Japan for details. How bigger deficits have to be produced and feed on themselves just so consumption can continue at a minimum.

Study bank deposits and how many deposits are actually depleted - actually used to transactions in order to spend on goods and services.

For me without looking at other things as the link I posted above suggests the deficit doesn't really explain the health of the economy.

Footsoldier said...

I'm convinced because of the issues discussed in the link above. That zero rates are not the silver bullet MMT'rs think it is.

Footsoldier said...

Studying the flows from start to finish

How the velocity of money has slowed over time because of policy changes destroyed the number of transactions actually spent on buying goods and services and replaced it with time deposits.

Without studying the flows from start to finish which parts of the deficit and up where ?

Footsoldier said...

The discussion goes on and on and on and on and on.

Nobody comes up with a definitive answer

Footsoldier said...

" Interest is the price of loan funds. The price of money is the reciprocal of the price level. And your right, the money stock (quantity) can never be managed by any attempt to control the cost of credit (interest rates).
An increase in bank credit is synonymous with an increase in the supply of loan funds.

And the demand for loan-funds is not a demand for money, per se, but a demand which reflects the advantages of spending borrowed money (for credit worthy borrowers). Insofar as there is a relationship it may be said that an increase in the demand for loan-funds tends to be associated with a decrease in the demand for money.

To the Keynesian economists, there’s no difference between money (QE forever), and liquid assets (near money substitutes). That’s how we got into this mess, secular stagnation. Contrary to Bankrupt-u-Bernanke’s claim that: “Money is fungible”…“One dollar is like any other”, pg. 357 in "The Courage to Act", the utilization of savings is a catalyst, it has a positive economic multiplier, it simultaneously increases just the velocity of circulation, the circuit income velocity of funds (monetary savings), while holding inflation at bay (increasing the demand for loan funds, increasing the real rate of interest, and supporting the exchange value of the U.S $).
How could this be? It is because lending by the commercial banks is inflationary (increases the supply of new money), whereas lending by the nonbank public is non-inflationary (is a velocity relationship). And if savings are not expeditiously activated, put back to work, then a dampening economic impact is generated, secular stagnation.

I.e., money products increase the demand for money (precautionary savings), decreasing the velocity of circulation, decreasing the real rate of interest.

And if savings aren't activated, and $15 trillion in bank-held savings have been accumulated over the decades, velocity falls, AD falls, and the FED must inject digital dollars. Thus, interest rates have fallen since 1981. I.e., banks are black holes. Bank lending does not activate savings. Banks are not intermediaries as the Keynesian economists posit.

In the U.S. Golden Era in Capitalism, 2/3 was financed by velocity (by putting savings back to work, by the thrifts/nonbanks, backstopped by the FSLIC, NCUA etc.). A dollar of savings (income held beyond the income period in which received), is more potent than a dollar of the money stock. R-gDp averaged 5.9% during 1950-1966 (in spite of the 3 recessions).

The economy is running in reverse (backwards). Demand is being met by price, and not by supply (an increase in production). No happenstance that there is an increase in “Hoovervilles” and crime.

And an injection of money products (increase in money relative to goods and services), reduces the real rate of interest (nominal interest rates less inflation). It reduces the velocity of savings and income. I.e., inflation (inevitably stagflation, increasing the rate of inflation relative to the rate of real output) is the boogeyman for MMTers.

The mis-directed increase (mal-distribution and mis-allocation of available credit), in the supply of loanable funds first lands in the hands of those which increase asset prices (those that don’t need it), thereby exacerbating income inequality.

“Summers (2015) regards a “chronic excess of saving over investment” as “the essence of secular stagnation”. Secular stagnation is chronically deficient aggregate demand. AD is short because the activation of noninflationary savings is restricted by economists that don’t know a credit from a debit. All $15 trillion in chronically accumulated bank-held savings are lost to both consumption and investment.

Whereas the noninflationary matching of savings with investments increases the real rate of interest, it increases the velocity of circulation, the income velocity of funds, and therefore AD. "

Footsoldier said...

" K (the length of the period over whose transactions purchasing power in the form of money is held) under certain conditions in Alfred Marshall’s “cash balance” equation may be regarded as the reciprocal of Vt [which is a function of the volume of cash held and the level of prices]. And M is a “schedule,”, and not a “quantity” as in the transactions-velocity approach.

The one element binding the motives of individuals and firms for holding cash balances is the element of uncertainty. All the motives which induce the holding of a larger volume of money will tend to increase the demand for money – and reduce its velocity. Interest rates are function of money flows, debits to deposit accounts, or the transactions velocity - Vt, of money.

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.

In Alfred Marshall’s “Cash-Balances Approach” to the value of money, the same motives which induce the holding of a larger volume of money will tend to increase the demand for money – and reduce its velocity, for example – uncertainty, irregular income receipts, when prices are expected to fall, etc.

So “K”, the length of the period over whose transactions the public holds purchasing power in the form of money, their “holding period”, will be larger. Thus, low interest rates may induce people to hold onto their funds and not part with liquidity for such a small price. This will also tend to reduce the supply of funds and their velocity. "

See Japan for Details .....

Will zero interest rates work ?

Footsoldier said...

This debate that has raged on for several years and in my opinion cannot be ignored any longer.

Does budget deficits actually tell us anything if the flows are not analysed from start to finish ?

Footsoldier said...

Why many people at seeking alpha foam at the mouth about reserve balances, legal reserves and ratios and the national debt and bank deposits.

Footsoldier said...

Budget deficits are good for corporate profits ?

Not if those who gain from the budget deficits lock away 80% of the budget deficit in time deposits ?

Footsoldier said...

Yeah sure, the deficit ends up as corporate profits EVENTUALLY !

Eventually it is the only place they can end up and can be recycled back into time deposits or destroyed by taxes.

But that doesn't mean the stock market will continually move up without serious downturns that the time deposits cause and lower interest rates cause. With larger deficits.

Predicting when and how without studying the flows from start to finish is a very dangerous game as inflation will outstrip the production capacity eventually. As larger deficits are needed to offset the increasing number of time deposits at lower rates ???

Ahmed Fares said...

Marx based his work on the role of power in economics, focusing on the power inherent in property relations instead.

Quoting from Canadian political economist Blair Fix (Economics from the Top Down):

Communist revolutions end badly, I believe, because they are based on faulty ideas. The problem is that Marxists misunderstand the source of capitalism’s social ills. It all goes back to Marx himself.

Marx pinned the ills of capitalism on private property. I think this was a mistake. The real cause of most social ills, I believe, is not private property. It’s hierarchy. Why? Because hierarchy concentrates power. And concentrated power is the despot’s best friend. Concentrated power, I believe, leads to social ills like totalitarianism, inequality, mass violence, and oppression. True, private property is intimately linked with hierarchy and power. But, as communist states demonstrated, we can have hierarchy without private property. This is Marx’s fatal error.

So here’s what goes wrong with communist revolutions. Distracted by private property, Marxist revolutionaries make the problem of hierarchy worse than it was under capitalism. They abolish private property, thinking this will solve the problems of capitalism. But to achieve their goals, Marxists create a vanguard party that eventually becomes a single-party state.

So in the name of creating a more just and equitable society, these revolutionaries concentrate power. They replace capitalist hierarchies with an even larger communist hierarchy. Yes, private property is gone. But the problems of hierarchy are even worse than before. It’s an ironic twist. Marxist revolutionaries aim for a socialist utopia. But what they get is a totalitarian nightmare. And it’s all because they focus on private property and neglect the problem of hierarchy.

source: The Allure of Marxism … And Why It’s a Mistake

Peter Pan said...

An informed electorate has power. We don't have an informed electorate.

We have the trappings of democracy, but not its function. A functional democracy requires an informed electorate.

So power defaults to a parasitic elite.
Lo and behold, power relations equate to hierarchy.

Failure to educate the public regarding MMT, or on any topic of public interest, allows power to remain concentrated.

Academics have failed to educate the public. They fail to even inspire.
Academics earn a living by having endless debates that accomplish nothing for society. Collecting a paycheck is not the function of academia.

Some academics have given up on democracy, and hope for a benevolent elite to bring about a better world. Good luck with that.

A civilization comprised of ignorant sheep, is easily led down the garden path.
Where that path leads, is not up to us to decide.

That's all she wrote, folks.
The status quo we are in, represents the end of politics.
It's as disconcerting as everything that Orwell wrote.

Matt Franko said...

“ The problem with these criticisms is that they have clearly adopted a partial approach to their understanding of what MMT is, presumably through not reading the literature widely enough, but also because of the way, some MMT proponents choose to represent our work.”

Again where in the Socratic method does it say you ever have to agree with the other side?

Matt Franko said...

“ Academics earn a living by having endless debates”

Yo that’s what the liberal art side trains you to do… they are not degreed scientists they have Art degrees…. Its an inappropriate method for dealing with material matters …

Why do you think the one degree is called an Art Degree and the other degree is called a Science Degree?

The endless debates attract a lot of ears and eyeballs and eventually the next generation performs a synthesis of the different theories….

Peter Pan said...

Art picks up where science ends.
Medicine for example, is part science, part art.

Academic debates on economics are a waste of an art degree.
The current debates rehash existing paradigms.

The application of art requires "outside of the box" thinking.
There's no place for OOTB in economics.

Academia is supposed to think outside of the box, regardless of the field. It's about pushing the frontiers of knowledge, and questioning assumptions. It's about asking uncomfortable questions.

Matt Franko said...

“ Medicine for example, is part science, part art.”

I know and it’s a big fucking problem….

Tom Hickey said...

Engineering is part science, too, as is all applied science. Physicians acknowledge this by saying that they "practice" medicine, that is, combine knowledge and skill.

An antecedent is found in ancient Greek thought in the distinction between true knowledge(Greek epistēmē) and art (technē τέχνη). Technē involves making or doing but it also implies skill or craft, which is the basis of art and involves a specific type of knowledge, that is, practical knowledge or skill (craft). Technē is the etymological root of technology. The root of "science" is Latin "scientia," meaning "knowledge" which correlates with Greek epistēmē. See Wikipedia on teknē.

Applied science, especially when involving innovation, involves creative problem solving which involves art in the sense of craft. It's about crafting solutions to design problems based on knowledge and skill. Otherwise, applying science is mostly rote, just repeating the same procedures over and over mechanically, which robotics is now in the process of taking over.

Andrew Anderson said...

They abolish private property, thinking this will solve the problems of capitalism. But to achieve their goals, Marxists create a vanguard party that eventually becomes a single-party state.

Yes and I'll note that the Biblical ideal is roughly equal private land ownership with provisions in the OT Law (eg. Leviticus 25, eg Deuteronomy 23:19-20, eg Deuteronomy 15) to keep it that way in the long run (but less than 50 years).

So privately owned property is very much God's will with rent, debt and wage slavery the exception, not the rule (as it is currently in the US), for citizens.

I suppose the problem with Marxists is that when they threw away the Bible, they threw away wisdom too.

Peter Pan said...

I suppose the problem with Marxists is that when they threw away the Bible, they threw away wisdom too.

They threw away the communist manifesto as well.
A vanguard is an elite. The manifesto did not call for an elite to seize the means of production.

Peter Pan said...

I know and it’s a big fucking problem...

Compare medicine to managing an economy.
Which field has the biggest fucking problem?
And why?

Economics is an art in the sense that its practitioners are con artists.

The economy is working as designed - for the top end of town.

Footsoldier said...

The Dark Side Of The Moon: The Seasonal Clock

Read the comments we took also.

There are a group of half a dozen people who have nailed this. Thought it through end to end. Could you explain the Feds funny business over the last few weeks.

Footsoldier said...

Dr. Leland J. Pritchard told me in his letter 9/8/81: “you may have a predictive device nobody has hit on yet”.

See: Liberty Street Economics, July 11, 2018

Size Is Not All: Distribution of Bank Reserves and Fed Funds Dynamics

“In particular, we show that a measure of the typical trade in the market known as the effective fed funds rate (EFFR) could rise above the rate paid on banks’ reserve balances if reserves remain heavily concentrated at just a few banks.” (and who would have guessed?)

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

See: A Model of the Federal Funds Market: Yesterday, Today, and Tomorrow

At the beginning of the GFC, the DFIs satisfied 85 percent of their reserve requirements via applied vault cash (today its @ 34%), i.e., by using their *liquidity* or primary contingency reserves (by BOG policy mistake vault cash became eligible in 1959).

As QT proceeds (accelerated to $50b per month in July 2018), applied vault cash will grow, along with interbank lending. Note – legal reserves, statutory reserves, are a Central Bank’s credit control device. Monetary policy should never confuse *liquidity* reserves, e.g., vault cash, or pass-through correspondent account balances, etc., with complicit reserves.
There is no such marvel as an *implicit tax* imposed on member banks interbank demand deposits. Excess and required reserve balances are the functional equivalent of “Manna from Heaven”, costless and showered on the system by the FRB-NY’s “trading desk”.

By mid-1995 (a deliberate and misguided policy change by Alan Greenspan in order to jump start the economy after the July 1990 –Mar 1991 recession), legal / fractional reserves (not prudential), ceased to be binding – as increasing levels of vault cash/larger ATM networks, retail and wholesale deposit sweep programs (c. 1994), fewer applicable deposit classifications (including allocating "low-reserve tranche" & "reservable liabilities exemption amounts" c. 1982) & lower reserve ratios (requirements dropping by 40 percent c. 1990-91), & reserve simplification procedures (c. 2012), combined to remove reserve, & reserve ratio, restrictions. The reduction coincided with both starts of the real-estate boom and equities.

The volume of member bank excess reserves, as well as net changes in reserves, are almost entirely predicated on Reserve bank open market operations. I.e., the growth in the lending capacity of the CB system is not derived from the savings of the public, nor indeed from the savings effected by the banks themselves. Rather this great benefit is derived from the expansion of Reserve bank credit, which is gratis to the banks. Net changes in Reserve Bank Credit since the Treasury-Reserve Accord of March 1951 are determined by the FOMC.

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 (Manna from Heaven or the payment's system clearing balances).

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.

Given bankable opportunities, 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.

Footsoldier said...

William McChesney Martin Jr. re-established stair-step case functioning (and cascading), interest rate pegs (like during WWII), thereby abandoned the FOMC’s net free, or net borrowed, reserve targeting position approach in favor of the Federal Funds “bracket racket”.

I.e., the Fed once again, began targeting interest rates and accommodating the banksters and their customers whenever the banks saw an advantage in expanding loans, thereby usurping the Fed's "open market power", beginning in c. 1965 (in 1955 rhetoric, refilling the “punch-bowl”, coinciding with the rise in chronic monetary inflation & in anticipated inflation & stagflation).

Most of what an investor needs to know about money flows is covered in the article below:

See: 2015 FR 2900 Reporting and Reserve Central Reserve Account Administration Workshop

Vault Cash, Surplus (VAULTSUR)

Vault Cash Used to Satisfy Required Reserves (VAULT)

This is where you watch QT:

Reserve Balances Maintained; Balances Maintained That Exceed the Top of the Penalty-Free Band (RBMTETPFB)

Reserve Balances Required; Bottom of Penalty-Free Band (RESBRQBPFW)

AXEC / E.K-H said...

MMT and the staying power of stupidity/corruption
Comment on Bill Mitchell on ‘MMT and Power ― Part 2’*

MMT's sectoral balances equation has been refuted #1-#3 but Bill Mitchell stubbornly repeats the foundational blunder. This, of course, is well known as unscientific behavior: “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (Morgenstern, 1941)

In the section Description and Theory, Bill Mitchell states: “Another example of the ‘description’ story is that MMT is just about accounting relationships ― for example, deriving sectoral balances from the National Accounting framework and then concluding that a government deficit (surplus) must equal the non-government surplus (deficit).

In part, MMT certainly exploits accounting consistency to assemble an analytical framework This is part of the stock-flow tradition in heterodox economics that ensures consistency between flows of things and the stocks they flow into, period to period. …

So the statement: the Government deficit (surplus) equals the non-government surplus (deficit) dollar-for-dollar is a truism and must be true.”

Not at all, due to utter scientific incompetence, MMT gets even the most elementary economic truism wrong. It all depends on what MMTers put in their “non-government” top hat.

Axiomatically correct macroeconomics says for the 3-sector economy:

• Q≡−S i.e. profit of the business sector Q is trivially equal to dissaving/deficit-spending of the household sector −S, and loss of the business sector −Q is trivially equal to saving of the household sector S. The balances add up to zero, that is the accounting truism for the most elementary case.

• Q≡(G−T) i.e. profit of the business sector Q is trivially equal to the budget deficit of the government sector T−G<0.

• Q≡(G−T)−S is the general case, i.e. profit of the business sector Q is trivially equal to the combined deficit of the household and government sector. In other words: the profit of the business sector equals the combined deficit of the non-business sector and vice versa, the loss of the business sector equals the combined surplus of the non-business sector.

The “non-government” sector is an MMT construct that makes profit disappear. Isn't it a bit strange that Bill Mitchell applies in his post the foundational sociological concept of power but not the foundational economic concept of profit.#4 Except in this summarizing complaint: “I have seen many social media attacks on our work that claims that we are just part of the establishment and want to shore up profits.”#5

Yes, indeed. That's what MMT is all about. It is trivially true that the macroeconomic Profit Law implies Public Deficit = Private Profit. MMTers introduce the redundant non-government sector in order to hide macroeconomic profit from WeThePeople. The remarkable thing is that the rest of academic economics does not realize anything.

If there is a scientific hell, Bill Mitchell and his MMTers will spend an eternity there for political fraud.#6 The rest of academic economics will be there for negligence/complicity.

Egmont Kakarot-Handtke


Footsoldier said...

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, one of the 12 District Reserve banks has, depending upon the distribution of IBDDs, at its upper limit, a dollar for dollar impact on complicit reserves, but that is another problem that can be, and is dealt with, via the FRB–NY’s “open market operations”.

An injection of IBDDs, a member banks’ clearing balances, introduces market liquidity. Draining IBDDs, as in quantitative tightening, QT, withdrawals market liquidity. This is observable in both asset prices and bid/asked spreads for these assets.

What’s entirely overlooked in performing the seasonal outlook’s tests, is the fallacious use of measuring seasonality by one of the Gregorian calendar’s 12 whole months, as opposed to delimiting one of the 52 weeks during the yearly cycle.

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

#1) 3rd week in Jan.

#2) mid Mar.

#3) May 5,

#4) mid Jun.

#5) July 21,

#6) 2-3 week in Oct.

These are all driven by the Fed's "trading desk". And any week coincides with “bank squaring day”, bank’s adherence to reserve maintenance obligations.

The rate-of-change in the proxy for real-gdp (monetary flows MVt) peaks in July. The rate change in the proxy for inflation (monetary flows MVt) peaks in July. Therefore it should be obvious: interest rates peak in July.

As I previously explained: the upcoming weekly NSA category: “Total Checkable Deposits (WTCDNS)” on the FRB-STL’s “FRED” database, will determine the seasonal inflection point.

For example:

5/28/18 $2,2037

6/4/2018 $2,1601.

While it may appear from these figures, that money flows For of change has fallen, one cannot ignore the prospect that velocity is more than offsetting, as the cash-drain factor is bullish.

The "Δ" in large CDs on BOG's: "Assets and Liabilities of Commercial Banks in the United States" - H.8 release points towards higher money velocity (esp. prevalent this time of the year):

The "Δ" in the ratio of “total checkable deposits”:

to “total savings deposits:

is largely unchanged.

The impact on the financial markets is effectuated by a larger “footprint” (which should suddenly disappear).

Footsoldier said...

The most critical information has been discontinued.

The G.6 Debit and Demand Deposit Turnover Release was discontinued in Sept. 1996 for spurious reasons.

No one at the Board of Governors understood how to use the #s (but the BOG discontinued it regardless). That included Paul Spindt’ debit weighted indices (who tried and failed)

See: New Measures Used to Gauge Money supply WSJ 6/28/83. Neither Barnett nor Spindt, nor the St. Louis Fed's technical staff: “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. — use accurate money flow metrics reflecting changes to AD.
See: Fed Points

“Following the introduction of NOW accounts nationally in 1981, however, the relationship between M1 growth and measures of economic activity, such as Gross Domestic Product, broke down. Depositors moved funds from savings accounts—which are included in M2 but not in M1—into NOW accounts, which are part of M1. As a result, M1 growth exceeded the Fed's target range in 1982, even though the economy experienced its worst recession in decades. The Fed de-emphasized M1 as a guide for monetary policy in late 1982, and it stopped announcing growth ranges for M1 in 1987.”

The plateau in money velocity, the transactions velocity of recirculation, occurred because of the saturation in bank deposit classification in the 1-2 quarters of 1981 (the widespread introduction of ATS, NOW, SuperNOW, and MMDA bank accounts).

Stephen Goldfeld labeled this type of disparity: “instability in the demand for money function” (Keynes’ liquidity preference curve) as a “case of the missing money”, whereas it was simply related to, e.g., the “monetization” of commercial bank time deposits (ending gate-keeping restrictions), the daily compounding of interest, etc., all of which occurred within the payment’s system. It supposedly “presented a serious challenge to the usefulness of the money demand function as a tool for understanding how monetary policy affects aggregate economic activity.”

This misdirection charged that “advances in computer technology caused the payments mechanism and cash management techniques to undergo rapid changes after 1974. In addition, many new financial instruments (e.g., proliferation in the use of repurchase agreements) emerged and have grown in importance. This has led some researchers to suspect that the rapid pace of financial innovation since 1974 has meant that the conventional definitions of the money supply no longer apply. They searched for a stable money demand function by actually looking directly for the *missing money*; that is, they looked for financial instruments that have been incorrectly left out of the definition of money used in the money demand function.”

“Conventional” money demand functions over-predicted money demand in the middle and late 1970s; and under-predicted velocity since 1981, and not just (PY/M), or income velocity, Vi. Thereby M2 was substituted for M1. However, “broad money” substitute measures (vs. “narrow money” or “near money”), or highly liquid assets, “additional variables which do not accurately measure the opportunity cost of holding money”, conflate American Yale Professor Irving Fisher’s:“flows with funds”.

“The recent instability of the money demand function calls into question whether our theories and empirical analyses are adequate. It also has important implications for the way monetary policy should be conducted because it casts doubt on the usefulness of the money demand function as a tool to provide guidance to policymakers. In particular, because the money demand function has become unstable, velocity is now harder to predict, setting rigid money supply targets in order to control aggregate spending in the economy may not be an effective way to conduct monetary policy.”

Footsoldier said...

But opinions vary widely on what M1 and the other, broader Fed measures really mean. 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"

These half a dozen or so guys on seeking alpha have figured out a way to calculate The G.6 Debit and Demand Deposit Turnover Release that was discontinued.

Then use it along side Mike and Matts analysis.Then by Using the seasonal inflection points caused by the trading desk and bank squaring day to hit the Jack pot time and time again.

Mongering the flows from start to finish.

Footsoldier said...

They also follow the 10 year very closely.

Watch for the peak in interest rates that coincide with the seasonal peaks in the flows.

Footsoldier said...

Obviously the virus has messed a lot of this up for the time being.

However, in normal times what the FED does is not a random walk it can be predicted at certain times every year.

These guys have got it down to a fine art.

Footsoldier said...

If Mike and Matt would study what these guys are saying more closely they Could make an absolute killing.....An addition to what they know already.

Could make a fooking fortune.

Footsoldier said...

It is all there

In the many topics and comments section

Footsoldier said...

These guys have known MMT for decades. Said nothing for years

But taken the market analysis to the next level using that knowledge.

They know the " true money " part of the flows and how the trading desk influences things at certain times every year.

Matt Franko said...

Foot, the Fed has lowered required reserves to 0% now and has said it is pretty much a permanent policy…

Matt Franko said...

Matt Franko said...

I’m just going to get leveraged long when the Fed starts to let reserves come down… else equal…

While they are adding reserves it’s imo a high risk market…

The Basel3 gold thing is also interesting… that may help lower reserves if the Central banks start to sell the members their gold for debiting the bmember banks reserve accounts for the gold…

Iow the CB would reduce its liability to member banks in exchange for banks taking on the gold as assets…. reserve assets down and gold assets up at the banks… then banks can start to mark up the price of their gold in usd terms…

sths said...

So with reserve at 0 percent. QE is no longer in danger of crashing the system due to excess draining of reserves from reversing qe correct?

Matt Franko said...

No that was always bullish… and will still be imo…

SLR is of the form (A-L)/A so when Fed removes Reserve assets (QT) it first lowers the denominator (increases SLR well above minimum) and banks can replace those non risk assets with additional risk assets , as regulatory capital stays constant…

When they add the reserves (QE) it creates monetary drag and if they add a large amount in a short time it causes the crashes…

The thing about gold is under the Basel3 they can allegedly use 85% of their physical gold holdings as Tier1… so if they mark up the gold price it will have the effect of increasing (A-L) which increases Tier1… they can’t do that with any other Tier1 asset as reserves are reported in the unit (1 USD ) and govt bonds are valued via standard NPV equation which is subject to the risk free policy rate… currently only Tier1 assets are reserves and govt bonds… now alllegedly 85% of gold is going to qualify…

Gold price will be somewhat under their own independent control… and to them it’s going to perhaps be the higher the price the better..