Saturday, June 26, 2021

Yellen: US “out of money!” in August


I don’t see it… they are supposed to have the TGA down to 450b area by end July and the deficit has been running about 150b to 200b per month… so they should be able to last 2 to 3 months till the TGA is zeroed… seems like rather Sept/Oct timeframe… which would coincide with regular order for a budget reconciliation…  unless there is an unforeseen fiscal increase then looks like extraordinary measures for a few months then a resuspension of the ceiling via reconciliation of FY22 budget with TGA near zero…  i.e. the usual brinkmanship…


Footsoldier said...

Banks don't loan out excess reserves, they are earning assets.

Any institution whose liabilities can be transferred on demand, without notice, and without income penalty, by data networks, checks, or similar types of negotiable credit instruments, and whose deposits are regarded by the public as money, can create new money, provided that the institution is not encountering a negative cash flow.

From a systems viewpoint, commercial banks as contrasted to financial intermediaries: never loan out, and can’t loan out, existing deposits (saved or otherwise) including existing transaction deposits (TRs), or time deposits (TDs) or the owner’s equity, or any liability item.

When CBs 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- (Transaction deposits -TRs) -- somewhere in the banking system.

I.e., commercial bank deposits are the result of lending, not the other way around.

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

The basic expansion coefficient (my definition), for the banking system as a whole (the correct source-base), is obtained by dividing commercial bank credit (or the Assets and Liabilities of Commercial Banks in the United States H.8), by primaryliy, the sum of the member bank’s:

(1) required reserves, plus (2) contractual clearing balances (reductions in required reserve balances have predominantly been accompanied by “offsetting increases” in the member bank’s contractual (required), clearing balances plus (3) supplemental reserves (daylight overdraft credit).

However figures for daylight credit are only available with a large lag - figures.

Historically, Black Monday was the largest contraction in legal reserves ever recorded (but not by the FED, by the monetary lag for real-growth). Monetary lags are always the same length. Have been for 100 yesrs.

It’s once again, FOMC schizophrenia: Do I stop -- because inflation is increasing? Or do I go -- because R-gDp is falling?

The problem is that this theoretical concept is back-asswards. Targeting nominal values is STUPID. Why? Because nominal values are contingent upon the rate-of-change in real values in that they are two sides of the same coin.

It may be said therefore, that an increase in the demand for money is concomitantly associate with an equal and opposite decrees it e supply of money, and vice versa; and that an increase in the supply of money is concomitantly associated with an equal and opposite decrees in the demand for money, and vice versa.”

It is axiomatic. You don't target N-gDp. You target R-gDp. And total spending, AD, does not equal N-gDp as the Keynesian economist claim.

If the Fed’s technical staff can't target R-gDp, how can they target N-gDp? And why would the Fed target N-gDp - when it could target R-gDp?

So the “nominal-anchor” prevents bond prices from rising - because “inflation is overshooting”, and interest rates from falling, slowing any recovery or slowing real output? No, that perpetuates income inequality. Stagflationist thinking is as ephemeral as their RX.

The fact is that these McCarthyite armchair 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.

Footsoldier said...

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.

The FED has no clue about the distributed lag effect of money flows.

Open market operations should be divided into 2 separate classes:

(#1) purchases from, and sales to: member commercial banks;
(#2) purchases from, and sales to: "other non-bank entities":
(#1) OMO transactions of the buying type between the FRB-NY's "trading desk" (the Central bank) and the member commercial banks directly affect the interbank demand deposit volumes in one of the 12 District Reserve banks without bringing about any change in the money stock.

The “trading desk” credits the master account of the clearing bank used by the primary dealer from whom the security is purchased. This alteration in the assets of the commercial banks (the banks’ IBDDs), increases - by exactly the amount the PD’s portfolios (or acting as dealer agents, NB’s portfolios), of Treasury and coupon securities was decreased.

(#2) Purchases and sales between the Reserve banks and non-bank investors directly affect both bank reserves (inside money) and the money stock (outside money).

So, the money multiplier is the money stock divided by SOMA (which no one has yet figured out).

The trading desk buys securities from the banks or nonbank public increasing interbank demand deposits (assets) at the District Reserve Banks and deposits (assets) at the commercial banks if the purchase if from nonbank public.

Only the nonbanks put savings back to work (matching savings with investments). And the savings used for financing should be government guaranteed.

Whereas the banks don't loan out deposits, they, from the standpoint of the system, create deposits (increase the money supply), when they lend. I.e., all bank-held savings are idled until their owners so decide. So, the nonbanks taking back over the residential mortgage market is good news. That increases money velocity.

The oscillations in rates and equities are due to the timing between the Treasury borrowing and the FED monetizing.

The money supply is still growing too fast (based on May's data).

Stocks top July 21st the 5th seasonal inflection point.

Salmon Trutto.....

Footsoldier said...

Why do you think stocks fell in Sept 2015 and oil bottomed in early 2016.

Parse dt; real-output; infation
01/1/2015 ,,,,, 0.05 ,,,,, 0.20
02/1/2015 ,,,,, 0.07 ,,,,, 0.19
03/1/2015 ,,,,, 0.07 ,,,,, 0.19
04/1/2015 ,,,,, 0.07 ,,,,, 0.21
05/1/2015 ,,,,, 0.07 ,,,,, 0.18
06/1/2015 ,,,,, 0.07 ,,,,, 0.19
07/1/2015 ,,,,, 0.06 ,,,,, 0.20
08/1/2015 ,,,,, 0.06 ,,,,, 0.18 China devalues Yuan
09/1/2015 ,,,,, 0.01 ,,,,, 0.15
10/1/2015 ,,,,, 0.02 ,,,,, 0.16
11/1/2015 ,,,,, 0.03 ,,,,, 0.13
12/1/2015 ,,,,, 0.04 ,,,,, 0.16
01/1/2016 ,,,,, 0.02 ,,,,, 0.14 oil bottoms
02/1/2016 ,,,,, 0.04 ,,,,, 0.12

In my application of this theory, the release of savings, was as I commented on 12-16-12, 01:50 PM (and again on Dec. 15th 2012) - when the FDIC's unlimited transaction deposit insurance was reduced to $250,000 on 12/31/2012.

"We’re close to seeing the real power of OMOs. R-gDp is likely to accelerate earlier and faster than anyone now expects. The roc in M*Vt before any new stimulus is already above average.

With low inflation (given some deficit resolution), Jan-Apr could be a zinger"

Thus, we got the "taper tantrum" and subsequently above average R-gDp and N-gDp growth rates by putting savings back to work (simply by increasing money velocity).

Zinger - a surprise, shock, or piece of electrifying news.
10-Year Treasury Inflation-Indexed Security, Constant Maturity (DFII10) | FRED | St. Louis Fed

2012-10-01 -0.75
2012-11-01 -0.77
2012-12-01 -0.76
2013-01-01 -0.61
2013-02-01 -0.57
2013-03-01 -0.59
2013-04-01 -0.65
2013-05-01 -0.36
2013-06-01 0.25
2013-07-01 0.46
2013-08-01 0.55
2013-09-01 0.66
2013-10-01 0.43
2013-11-01 0.55
2013-12-01 0.74

The increase in real rates was more widespread (unrelated to sentiment). That's why QE3 was unique (my market "zinger" forecast). In the US, Ben Bernanke was talking about tapering QE because economic fundamentals appeared to be improving rapidly (the unemployment rate most of all).

Footsoldier said...

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).

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). 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.

For long-term money flows, the proxy for inflation it's rate of change over a known lag.

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.

The money supply is still growing too fast (based on May's data).

Stocks top July 21st the 5th seasonal inflection point.

Salmon Trutto.....

Footsoldier said...

The FED discontinued the time series I had used for 48 years in March. That along with short term and long term money flow proxies allowed me to predict the tops and bottoms for 48 years.

Salmo Trutto...

I think it was legal reserves time series that the FED discontinued at the start of the pandemic that he is on about ?

Matt Franko said...

That was about the time they reduced the RRR from 10% to zero so maybe they don’t care any more…

“ Banks don't loan out excess reserves,”

Well yes but to think otherwise is a classic reification error nothing more … it’s a well known cognitive deficiency in people underdeveloped in their ability for abstraction…

ie they are not qualified… probably took the easy way via Art Degree where they don’t train hard enough…. ie pussies…

Footsoldier said...

Your are bang on Matt as per usual.

"reduced the RRR from 10% to zero"

Mr Tutto thinks it is very important. When calculating his version of the flows.

Footsoldier said...

1) “Money” is the measure of liquidity; the yardstick by which the liquidity of all other assets is measured;

(2) Income velocity is a contrived figure (fabricated); it’s the transactions velocity (bank debits - Vt) that’s statistically significant (i.e., financial transactions are not random). However, the G.6: Debit and Demand Deposit Turnover (longest running Federal Reserve statistical release up to that point), was discontinued in Sept. 1996 (money actually exchanging counter-parities within the payment’s system).

(3) N-gDp is a byproduct or proxy, of monetary flows, M*Vt, (or aggregate monetary purchasing power), i.e., our means-of-payment money, M, times its transactions rate of turnover, Vt. N-gDp ≠ AD as Keynesian economists define it.

(4) The rates-of-change, Roc’s (∆) used by economists are specious (always at an annualized rate; which never coincides with an economic lag). The Fed’s technical staff, et al., has learned their catechisms;

(5) Milton Friedman became famous using only half the equation (the means-of-payment money supply), leaving his believers with the labor of Sisyphus;

(6) Contrary to economic theory, & Nobel laureate, Dr. Milton Friedman and Anna J. Swartz (“Money and Business Cycles”), monetary lags are not “long & variable” (A Monetary History of the United States, 1867–1960, published in 1963).

The lags for monetary flows, M*Vt, i.e. the proxies for (1) real-growth, & for (2) inflation indices (for the last 100 years), are historically, mathematical constants. However, the FED's transmission mechanism, its target (pegging interest rates), is indirect, varies widely over time, and in magnitude. What the net expansion of money will be, as a consequence of a given injection of additional reserves, or change in policy rates, nobody knows until long after the fact. The consequence is a delayed, remote, and approximate control over the lending and money-creating capacity of the banking system;

(7) Roc’s in M*Vt are always measured with the same length of time as the specific economic lag (as its influence approaches its maximum impact (not an arbitrary date range); as demonstrated by the clustering on a scatter plot diagram;

(8) Not surprisingly, the companion series, non-seasonally adjusted member commercial bank “costless" legal reserves or “Manna from Heaven” (their Roc’s), corroborate both of monetary flows’ distributed lags –-- their lengths are identical (as the weighted arithmetic average of reserve ratios and reservable liabilities remains constant);

(9) Consequently, since the lags for (1) monetary flows, and (2) "costless" legal reserves, are synchronous & indistinguishable, economic prognostications (using simple algebra), are infallible (for less than one year);

(10) Asset inflation, or economic bubbles, are incorporated: including housing, commodity,, etc. This is the “Holy Grail” and it is inviolate and sacrosanct: See 1931 Committee on Bank Reserves Proposal (by the Board’s Division of Research and Statistics), published Feb, 5, 1938, declassified after 45 years on March 23, 1983.

Footsoldier said...

(11) The BEA uses quarterly accounting periods for R-gDp and the deflator. The accounting periods for gDp should correspond to the specific economic lag, not quarterly (apples to oranges). Because the lags for gDp data overlap Roc’s in M*Vt, the statistical correlation between the two is somewhat degraded. However the statistical correlation between Roc’s in M*Vt, & for example, the bond market is unparalleled;

(12) Monetary policy objectives should not be in terms of any particular rate or range of growth of any monetary aggregate. Rather, policy should be formulated in terms of desired Roc’s in monetary flows relative to Roc’s in R-gDp;

(13) Combining real-output with inflation to obtain Roc’s in N-gDp, can then be used as a proxy figure for Roc’s in all transactions. Roc’s in R-gDp have to be used, of course, as a policy standard;

(14) Because of monopoly elements, and other structural defects, which raise costs, and prices, unnecessarily, and inhibit downward price flexibility in our markets, it is advisable to
follow a monetary policy which will permit the Roc, rate-of-change, in money flows to exceed the Roc in R-gDp by c. 2 percentage points;

(15) Monetary policy is not a cure-all, there are structural elements in our economy that preclude a zero rate of inflation. In other words, some inflation is inevitable given our present market structure and the commitment of the federal government to hold unemployment rates at tolerable levels;

(16) Some people prefer the “devil theory” of inflation: It’s all “Peak Oil's fault", ”Peak Debt's fault", or the result of the “Stockpiling of Strategic Raw Materials/Industrial Metals” & Soaring Agriculture Produce. These approaches ignore the fact that the evidence of inflation is represented by "actual" prices in the marketplace;

(17) The "administered" prices (oligopoly, monopsony, and monopoly elements) would not be the "asked" prices, were they not “validated” by M*Vt (money Xs velocity), i.e., “validated” by the world's Central Banks;

Footsoldier said...

My 48 years of modeling ended in March 2020. I just used the wrong metric with my new time series. That has been corrected.

If interest rates rise, stocks will fall. Negative real rates of interest is the boogeyman.

The "base effect" was always wrong. The base is equal to the distributed lag effect of money flows. We won't return to Nov. 2020 levels until Nov. 2022.
Past July (with my newly revised time series), without an acceleration in the money stock, short-term money flows drop by 5 percentage points between July and Sept. It never dropped in Nov. 2020 as I originally thought.

David Stockman: "Before the Bernanke tsunami, however, total banking system reserves amounted to just $46 billion or a scant 0.3% of GDP. And that, in turn, represented a 50-year trend of declining bank reserves relative to GDP. The former had stood at about $30 billion and 2.5% of GDP when Nixon pulled the plug on gold-backed money in August 1971 and barely 1.2% of GDP when Greenspan cranked up the printing presses in October 1987 to bailout Wall Street from a 22% one-day meltdown.

By the end of April 2021, by contrast, bank reserves stood 17.7% of GDP, and for no valid reason of economics, finance or banking."

Economists literally have the economy running in reverse. Economists have learned their catechisms.

I'd tighten my trailing stop on bonds. The inflation overshoot (FAIT regime) is out of control.

Switching to an untested time series after 48 years causes some adjustments. I've made some and they correlate better.

All those predictions came from diluted numbers. Those past numbers fell. The new numbers rose.

Salmon Trutto.

Footsoldier said...

The thing about Mike and Matt is . Mike will do a video and explain things. Matt will spend time in the comment section explaining things.

Mike and Matt were the only guys that recognised what dumping loads of reserves in the banks meant.

These guys knew it as well but never explain things. They write paragraph after paragraph on the history of the changes to the monetary system and expect you to read in between the lines to figure out what they are doing.

All I really know and not even certain on even that. They use the rate of change in the ten year along with other things to measure the lag of short term flows.

The rate of change in real GDP and inflation to measure the lag on long term flows.

Trutto was trained by Dr. Leland James Pritchard, Ph.D., Economics, Chicago before Chicago was a right wing but house.

The G.6 Debit and Demand Deposit Turnover Release was discontinued in Sept. 1996 for spurious reasons. Trutto , and some others, William G. Bretz of “Juncture Recognition in the Stock Market”, “The Bank Credit Analyst”, etc., understood how to use the Fed’s figures (then, the longest running time series published).

No one at the Board of Governors understood how to use the figures (but the BOG discontinued it regardless). That included Paul Spindt’ debit weighted indices (who tried and failed). tutto once helped with the 4 year review, the justification for its continued use. He faxed several examples to Ed Fry, its manager.

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.

Footsoldier said...

Greenspan, in his book “The Map and the Territory, pg. 277: “I still find the money supply to price relationship of that period (during the S&L crisis) puzzling…money supply does not directly translate into price…the ratio of price to unit money supply is the virtual algebraic equivalent of what economists call money velocity, the ratio of nominal gDp to m2”.

Do not be bamboozled. Contrary to what the Austrian economists claim, Henry Hazlitt in his 1968: “The Velocity of Circulation”, and Ludwig von Mises in "Human Action", and Murray Rothbard, an American heterodox economist of the Austrian School, who wrote in Man Economy and State:

“But it is absurd to dignify any quantity with a place in an equation unless it can be defined independently of the other terms in the equation.”

These economists were debating Vi (which, for example, excludes intermediate goods), not Vt (or all physical transactions in American Yale Professor Irving Fisher’s truistic modeling). The transactions velocity, Vt, is an “independent” exogenous force acting on prices. And there is never any mention of money velocity in the FOMC deliberations.

The point is, obviously, because of the off-bank balance sheet risk transfer, no money stock figure acting alone, or even commercial bank credit, is adequate as a solitary “guide post” for monetary policy. That is why economists, e.g., William Barnett of Divisia Monetary Aggregates Index, brings the liquidity ex-post test of an asset to his modeling. That is why Shadow Stats reconstructs and reports M3.

Footsoldier said...

Here's the real kicker...

We can't just slag Salmo Trutto off and lump him in with the other crazies on zero hedge.


a) You need to figure out what he is doing first before we can judge.

b) His record speaks for itself. His predictions are the best I've ever seen.

Matt Franko said...

Well I agree reserve balances at depositories are a good measure to follow but that is because they are an important regulatory metric…

So what always happens is these Art degree morons we have at Treasury and the Fed think the reserve abstractions are real and they have to add them to bank balance sheets so the banks can lend them out then that causes the SLR to fall below threshold and the credit provision function shuts down and causes the crash.. this is what they did in sept 2008 and March 2020 …

And may be getting ready to do when we hit debt ceiling next month and the TGA balance has to be reduced by 700b here in a short period of time….

They should all be fired at a minimum or held criminally negligent… except all the lawyers are Art degree morons too and would never be able to figure it out…

Matt Franko said...

Just like in September 2019 you could’ve followed reserves and if you could have seen the federal reserve was oing to run reserves at depositories ro below their own 10% reserve requiremen you could have perhaps used euro dollars or something and then when the FF market locked up and the overnight rate spiked to over 4% you might’ve been able to make some munnie there…

Matt Franko said...

But none of this is because some account numbers move up and down or sideways… more or less you would be front running unqualified morons who cant even apply 8th grade algebraic functions…