Wednesday, June 30, 2021

Structural defects — Peter Radford

The Bank for International Settlements issued its annual report yesterday. Perhaps the central banks are feeling a little insecure, or perhaps they are a little more sensitive to economic reality, but the BIS felt compelled to use one third of its report to tackle inequality. Here’s the summary as given in the report: 
The Radford Free Press
Structural Defects
Peter Radford


Footsoldier said...

Doesn’t inflation still follow money growth…?"

The parallel is uncanny. But you have to measure the money stock correctly. And that means you have to incorporate the distributed lag effect of the money stock (which absolutely no Ph.D. in economics does).

Economists rely on William Barnett's Divisia M4. The "degree of moneyness" metric is wrong. You have to “isolate money intended for spending, from the money held as savings”. Virtually all demand drafts clear through one aggregate.

As an example, the price of oil troughed in Jan 2016 as lONG TERM money flows fell by 80 percent from 1/2013 to 1/2016.

Oil fell by 70 percent during the same period. The Trade Weighted U.S. Dollar Index: Broad, Goods and Services rose from 1/2/13 to 1/4/16 from 90.6941 to 114.1596.

Gold fell by 57 percent from 1681.50 to 1072.70.

And the real rate of interest rose dramatically off 2012’s lows (from -0.87 on 12/10/2012 to 0.86 on 9/10/2013).

It is not as Jerome Powell claims:

In his testimony with Congress on Wednesday, Federal Reserve Chairman Jerome Powell said that historically, changes in the money supply level have not affected levels in inflation.
In response to a questions posed by Congressman Warren Davidson about whether “M2 [money supply] going up by 25% in one year” is going to “diminish the value of the U.S. dollar,” Powell responded, “there was a time when monetary policy aggregates were important determinants of inflation and that has not been the case for a long time.”
Powell added that “the correlation between different aggregates [like] M2 and inflation is just very, very low, and you see that now where inflation is at 1.4% for this year. Inflation dynamics evolve over time, but they don’t tend to change overnight.

When asked about his views on inflation as a whole, Powell commented that “we do expect inflation to move up both because of base effects…and also because we could have a surge in spending as the economy re-opens, we don’t expect that to be a persistent, longer-term force, so while you could see prices move up, that’s a different thing from persistent, high inflation, which we do not expect. If we do get it, we have the tools to deal with it.”

No, there are short-term and long-term monetary flows, volume times transactions' velocity. I.e., the distributed lag effect of money flows (which is ignored by all the Ph.Ds in economics), predetermines economic growth and inflation.

Long-term money flows are still accelerating (further stimulating inflation). Short-term money flows, or the real output of goods and services, are receding. That poses a conundrum. This causes FOMC schizophrenia: Do I stop because inflation is increasing? Or do I go because R-gDp is decelerating?

In the present case it will determine whether inflation is transitory or long-lasting.

Footsoldier said...

Inflation is a monetary phenomenon. Inflation simply results from a long-term excessive flow of money relative to the volume of real output of goods and services offered in the markets.

Inflation occurs when there is a chronic across-the-board increase in prices. or, looking at the other side of the coin, depreciation of money. Inflation is not a temporary increase in the price level, nor a long-term increase in any particular prices.

The evidence of inflation cannot be conclusively deduced from the monthly changes in the price indices. From the standpoint of the economy no overall index, or average of all prices, exists.

Therefore, no single figure exists which represents the value of money. Prices reflect, in only a marginal amount, the inflation that took place in hard assets - real estate, gold, stocks, etc. Soaring real estate prices of course, have been "validated" by these enormous flows.

Rampant speculation and a deluge of irresponsible borrowing and lending have, as a consequence, characterized hard and paper asset prices. The government inspired price indices are passive indicators; of the average change; of a group of prices. They do not reveal why prices rise or fall.
Only price increases generated by demand, irrespective of changes in supply, provide evidence of inflation. There must be an increase in aggregate monetary purchasing power, AD, which can come about only as a consequence of an increase in the volume and/or transactions' velocity of money.
The volume of money flows must expand sufficiently to push prices, up, irrespective of the volume of financial transactions consummated, the exchange value of the U.S. $ (reflected in FX indexes and currency pairs), and the flow of goods and services into the market economy.

Inflation cannot destroy real property nor the equities in these properties. But it can and does capriciously transfer the ownership of vast amounts of these equities thus unnecessarily accelerating the process by which wealth is concentrated among a smaller and smaller proportion of people. The concentration of wealth ownership among the few is inimical both to the capitalistic system and to democratic forms of government.

Footsoldier said...

During the last five decades this country has experienced, in tandem, two types of inflation. One characterized by a relentless rise in consumer and producer prices. Inflation, at varying rates, has persisted irrespective of the cycles of the business economy. This phenomenon enabled economists to coin a new term stagflation; business stagnation accompanied by inflation. The other inflation has been largely confined to rampant speculation in urban and rural real estate and stock ownership. This inflation has been so excessive it has produced the “boom and bust” characteristic of all past speculative orgies.

It's about the triumph of good theory over inadequate facts. Negative real rates of interest, NIRP (the lowest since 1975), erode the future opportunities for real capital investment (inducing diminishing returns, negative fiscal multipliers).

There's no such thing as R *. Investment “hurdle rates” are idiosyncratic. IRRF is negative (interest rate response to fiscal stimulus). There's a liquidity trap, like in the 90’s in Japan (a flight to safety, an increase in the demand for money, a flattening of the yield curve).
As Dr. Philip George says: "The velocity of money is a function of interest rates".

Negative real rates of interest will destroy the private bond market. Asset bubbles will be reinforced as bond holders are forced to switch investments and assume risks (as in Japan between 1988 and 1991). Current assets are more attractive than investment in future assets. Hard assets, like real estate (with negative real 30-year mortgage rates), become the primary beneficiaries.

Negative real rates will reduce the interest rate differential between our trading partners. In the longer run, they will exacerbate the twin deficits (our current-account and fiscal deficits). It will induce stagflation (business stagnation accompanied by inflation).

Dimartino Booth, in her book, gets backwards: “Fed Up”, pg. 218
“Before the financial crisis, accounts were insured up to the first $100,000 by the FDIC. That limit kept enormous sums *in the shadow banking system*

Historical FDIC’s insurance coverage deposit account limits (commercial banks):

• 1934 – $2,500
• 1935 – $5,000
• 1950 – $10,000
• 1966 – $15,000
• 1969 – $20,000
• 1974 – $40,000
• 1980 – $100,000
• 2008 – $unlimited
• 2013 – $250,000 (caused taper tantrum)

It’s stock vs. flow. The jump to $100,000 started the decline in money velocity.

As Dr. Philip George, in his E-Book “The Riddle of Money Finally Solved” diagnoses these recessions as a cash-imbalance phenomenon (which corroborates Dr. Pritchard's thesis):

“When interest rates go up, flows into savings and time deposits increase” ( the ratio of M1 to the sum of 12 months savings ).

The "optical illusion" is that banks don't loan out deposits. I.e., all bank-held savings are frozen.

The U.S. Golden Era in Capitalism was where 2/3 of GDP was financed by velocity, and 1/3 by money.

Footsoldier said...

Gresham’s law: “a statement of the least cost “principle of substitution” as applied to money: that a commodity (or service) will be devoted to those uses which are the most profitable (most widely viewed as promising), that a statement of the principle of substitution: “the bad money (IBDDs) drives out good (total checkable deposits)”.

Saver holders will divert their bond holdings to higher risk assets.

What every single economist missed was the distributed lag effect of money.Then Bernanke destroyed the nonbanks by remunerating IBDDs. That major policy blunder was the coup de grâce, destroying the housing market's funding, destroying velocity.

We knew in advance, the precise "Minsky Moment" of the GFC:
POSTED: Dec 13 2007 06:55 PM |

RoC trajectory of the flows as predicted. Nothing has changed in > 100 + years.
Every recession since WWII (except Covid-19) was entirely the FED's fault.

10/1/2007,,,,,,,-0.47 * temporary bottom
11/1/2007,,,,,,, 0.14
12/1/2007,,,,,,, 0.44
01/1/2008,,,,,,, 0.59
02/1/2008,,,,,,, 0.45
03/1/2008,,,,,,, 0.06
04/1/2008,,,,,,, 0.04
05/1/2008,,,,,,, 0.09
06/1/2008,,,,,,, 0.20
07/1/2008,,,,,,, 0.32
08/1/2008,,,,,,, 0.15
09/1/2008,,,,,,, 0.00
10/1/2008,,,,,, -0.20 * possible recession
11/1/2008,,,,,, -0.10 * possible recession
12/1/2008,,,,,,, 0.10 * possible recession

In the U.S. Golden Era in Capitalism, 2/3 was financed by velocity instead of new money (by putting savings back to work, by the thrifts/nonbanks, and backstopped by the FSLIC, NCUA etc.). M1's average growth was 1.5% each year (from 142.2 to 176.9). CPI inflation averaged 2.5% during the same period (from 23.7 to 33.1).

The nonbanks grew faster than the commercial banks (which made Citicorp’s Walter Wriston jealous). The DIDMCA of March 31st 1980 destroyed the nonbanks thereby destroying velocity (bottling up monetary savings). Disintermediation is made in Washington.

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, not optimized, averaged 5.9% during 1950-1966 (in spite of the 3 recessions).
It is much more desirable to promote prosperity by inducing a smooth and continuous flow of monetary savings into real investment, than to rely, as we have done c. 1965, on a vast expansion of bank credit with accompanying inflation to stimulate production.

Footsoldier said...

You have to “isolate money intended for spending, from the money held as savings”. Virtually all demand drafts clear through one aggregate.

Measure both short term and long term monetary flows.

Percentage of time (savings-investment type deposits) to transaction type deposits:

1939 ,,,,, 0.42
1949 ,,,,, 0.43
1959 ,,,,, 1.30
1969 ,,,,, 2.31
1979 ,,,,, 3.83
1989 ,,,,, 3.84
1999 ,,,,, 5.21
2009 ,,,,, 8.92
2018 ,,,,, 4.87 (declining mid-2016 with the increase in Vt)

It’s stock vs. flow.
Frozen savings ,,,,, Reg Q ceiling %

11/01/1933 ,,,,, 0.0300
02/01/1935 ,,,,, 0.0250
01/01/1957 ,,,,, 0.0300
01/01/1962 ,,,,, 0.0350
07/17/1963 ,,,,, 0.0400
11/24/1964 ,,,,, 0.0450
12/06/1965 ,,,,, 0.0550
07/20/1966 ,,,,, 0.0500
04/19/1968 ,,,,, 0.0625
07/21/1970 ,,,,, 0.0750

Gross Private Savings:

Bank debits never lie (as financial transactions are not random). Velocity figures were taken directly from the Federal Reserve Bulletin in the archives of the Federal Reserve Bank of Kansas City research department.

John Maynard Keynes couldn’t do it:

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

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

Monetary policy objectives should be formulated in terms of desired rates-of-change in monetary flows, M*Vt, volume X’s velocity, relative to RoC's in R-gDp. RoC's in N-gDp (though "raw materials, intermediate goods and labor costs, which comprise the bulk of business spending are not treated in N-gDp"), can serve as a proxy figure for RoC's in all transactions, P*T, in American Yale Professor Irving Fisher's truistic: "equation of exchange".

economists are “Know-Nothings”. The stagflationists don’t know money from mud pie. Rates-of-change in monetary flows, volume X’s velocity (for the same time intervals or distributed lags), equal RoC’s in P*T (where N-gDp is a subset of “aggregate nominal spending”).

The distributed lag effect of money flows have been mathematical constants for greater than 100 years.

Thus we know several things, that money is robust, that the RoC in R-gDp = exactly 10 months, trough to peak. And we know whether money is robust because we know when inflation accelerates relative to inflation, whose distributed lag is exactly 24 months, trough to peak.

Since the distributed lag effects of monetary flows are mathematical constants (which no economist understands or even knows about), you know in advance, what th trade-off between R-gDp and inflation, or the monetary fulcrum, will be. So we know when interest rates will respond to the monetary fulcrum, based on fixed money lags, and the "arrow of time".

So to target N-gDp is stupid. It maximizes inflation and minimizes real-output. IF you can target R-gDp, why try targeting N-gDp? R-gDp accelerates before inflation. And we know when the teeter-totter tips.

That’s why you target R-gDp as a policy standard, and obviously, not the other way around. The debit and deposit turnover time series is documentary proof.

Footsoldier said...


An introspective review of the six seasonal inflection points in monetary flows for 2018 and 2019.

Economic flows are driven by payments: bank debits to deposit accounts, principally thru “total checkable deposits”, as all payments clear thru the Federal Reserve System.

There are 6 seasonal, endogenous, economic inflection points each year. These seasonal factors are pre-determined, based on the distributed lag effect of money flows, by the FRB-NY’s "trading desk" operations, executing the FOMC's monetary policy directives.

Monetary flows (volume X’s transactions velocity) measures money flow’s impact on production, prices, and the economy... it is an economic indicator (not necessarily an equity barometer). -

Footsoldier said...

The "trading desk" uses repos (gov'ts or Treasuries), not: excess reserves (close-substitutes for payments, clearings, and settlements), not interbank demand deposits, (IBDDs or alternative clearing balances) to inject and drain (or simultaneously redistribute and sterilize) liquidity into the member banks and financial markets.

Dr. Richard G. Anderson (the world’s leading guru on bank reserves): “There is general agreement that, for almost all banks throughout the world, statutory reserve requirements are not binding. But banks need “central bank deposits” for clearing checks and making other interbank payments, which gives the central bank leverage over money and bond markets.”

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 “costless" excess reserve balances).

Dr. Richard G. Anderson: “As I tell many audiences, the FOMC targets the federal funds rate, nominally the rate banks charge each other on overnight loans of deposits at the Fed. In fact, what the NY Open market Desk sets each day is the one-day repo rate on Treasuries, that is, the one-day cost-of-carry on government bonds. This is the true policy instrument -- and it affects huge amounts of money (essentially, the one-day return on all government securities), while fed funds transactions daily, in comparison, are a trivial amount. Folks who actually deal in money markets know this; others usually do not.”

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 on even a quarter-to-quarter basis. FOMC policy has now been capriciously undermined by turning excess reserves into bank earning assets.

The Fed has emasculated its “open market power”, the power to instantaneously alter the money stock and aggregate monetary purchasing power, AD. “Pushing on a string” should have only applied prior to the nominal legal adherence to the fallacious "Real Bills Doctrine" which was terminated in 1932 - due to a paucity of eligible (hopelessly impaired), commercial and agricultural paper for the 12 District Reserve bank’s discounting purposes.

Unfortunately, the FOMC didn’t couch its instructions / directive in terms of reserves available for private non-bank deposits (RPDs), 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. Nor did it use the FOMC's Sept 1966 – Sept 1969 proviso: "bank credit proxy" consisting of daily average member bank deposits subject to reserve requirements, because, according to Dr. Richard Anderson, legal reserves “are driven by payments”.

No, the Manager of System’s Open Market Account at the FRB-NY’s “trading desk” (executing purchases and sale operations on behalf of the system), doesn’t gauge the volume and timing of its OMOs in terms of the amount and desired rate of increase of member bank’s gratis and complicit reserves (aka, “RICCI” flow), but rather in terms of the levels of an administered policy rate (explicitly, the interest rates banks charge other banks on excess balances with the Federal Reserve, implicitly, the one-day cost of credit on all gov’t securities).

Footsoldier said...

All the latest updates above from the monetary flows debates taking place right now. So you can Have them in one place. Take a look.

I kinda agree.

The deficit tells you nothing apart from savings.

You need to know much more than just the size of the deficit.

Some people claim they have done just that. Isolated and measured the flows that really count.

Footsoldier said...

May 27, 2019 8:41 AM ET

Seasonal inflection points (they may vary a little from year to year):

Pivot ↓ #1 3rd week in Jan.

Pivot ↑ #2 mid March

Pivot ↓ #3 May 5th

Pivot ↑ #4 mid-June

Pivot ↓ #5 July 21st

Pivot ↑ #6 2-3 week in October

There are 6 seasonal, endogenous, economic inflection points each year. These seasonal factors are pre-determined, based on the distributed lag effect of money flows, 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).

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 economic flows are driven by payments: bank debits to deposit accounts, principally thru “total checkable deposits”, as all payments clear thru the Federal Reserve System). It is an economic indicator (not necessarily an equity barometer). 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.

As Nobel Laureate Dr. Ken Arrow says: “all analysis is a model”.

Footsoldier said...

May 27, 2019 8:41 AM ET

Note the 2019 seasonal decline in the deposits, the primary money stock (which should include the Treasury’s General Fund Account, but by an accounting mistake, doesn’t), where legal reserve requirements, i.e., account maintenance (complicit reserves), must be applied after the 30 day computation period; for the Pivot ↑ #4 mid-June. It is no happenstance that markets turn mid-June.

Federal Reserve System Reserve Maintenance Period Calendar for Quarterly FR 2900 Reporters

See: Figure 3.1. Timeline--the reserve maintenance cycle for weekly reporters

The Fed - Calculation of Reserve Balance Requirements

Link: Aggregate Reserves of Depository Institutions and the Monetary Base - H.3

The Fed - Aggregate Reserves of Depository Institutions and the Monetary Base - H.3 - May 23, 2019

Total Checkable Deposits (WTCDNS)

2019-03-04 2154.3

2019-03-11 1978.1

2019-03-18 2037.5

2019-03-25 2171.5

2019-04-01 2300.5

2019-04-08 2041.8

2019-04-15 2085.6

2019-04-22 2214.5

2019-04-29 2335.1

2019-05-06 2063.6

2019-05-13 1988.1

Footsoldier said...

May 27, 2019 8:41 AM ET

M1 Money Stock (WM1NS)

2019-03-04 3791.4

2019-03-11 3617.9

2019-03-18 3678.2

2019-03-25 3814.1

2019-04-01 3945.7

2019-04-08 3690.3

2019-04-15 3734.4

2019-04-22 3863.8

2019-04-29 3986.0

2019-05-06 3718.1

2019-05-13 3643.3

Factors Absorbing Reserve Funds: Deposits with Federal Reserve Banks, Other Than Reserve Balances: U.S. Treasury, General Account


2019-03-06 213611

2019-03-13 238381

2019-03-20 314749

2019-03-27 295593

2019-04-03 270470

2019-04-10 245664

2019-04-17 369365

2019-04-24 398916

2019-05-01 368764

2019-05-08 344461

2019-05-15 294969

2019-05-22 264581

Follow the "yellow brick road". Thus, 6/20/19 is 2019's 4th seasonal inflection point. A point at which stocks Dow Jones will be supported.

Footsoldier said...

29 May 2019, 8:27 AM

long-term money flows (the bond proxy), the 24 month moving average of the 24 month proxy for inflation, has been breaking hard.

The bond proxy:
01/1/2019 ,,,,, 0.183
02/1/2019 ,,,,, 0.182
03/1/2019 ,,,,, 0.181
04/1/2019 ,,,,, 0.177
05/1/2019 ,,,,, 0.172
06/1/2019 ,,,,, 0.167
07/1/2019 ,,,,, 0.162
08/1/2019 ,,,,, 0.156
09/1/2019 ,,,,, 0.149
10/1/2019 ,,,,, 0.142
11/1/2019 ,,,,, 0.134
12/1/2019 ,,,,, 0.128

Rate of change in real GDP. the 10 month moving average of the 10 month proxy for short term money flows. Take a look at that also.

Salmo Trutto.

lastgreek said...

Voluminous and extensive commentary by Footsoldier.

You know there is a condition known as "hepergraphia." :)

lastgreek said...


Ahmed Fares said...

I know Salmo Trutto well from Seeking Alpha. Long comments over at Seeking Alpha also. I was surprised that, despite the internet being a very large space, he found his way here.


Less is more.

Peter Pan said...

Nothing wrong with using MNE and its audience as a whiteboard.