Martin Wolff (chief economics’ commentator at the Financial Times, London) defines secular stagnation as “chronically deficient AD”. The deceleration in R-gDp and inflation stems from not putting savings back to work outside of the payment’s system (a decline in money velocity, AD, and N-gDp). The 35 year bull market in bonds parallels this deceleration.
This “blue print” was presented in “Should
Commercial Banks Accept Savings Deposits?”, Savings and Loan League’s,
proceedings of the 1961 Conference on Savings and Residential Financing,
May 11 & 12, 1965, pg. 40-48, by Professor Lester V. Chandler in
his theoretical approach.
Chandler: “But surely a more basic
and, over a longer run, a far more important objective is to secure some
desired behavior of the level of spending for output—to achieve a
certain level of gDp, or to cause the level of gDp to increase at some
desired rate (sounds analogous to Scott Sumner’s N-gDp targeting on his
blog “Money Illusion”?).
Chandler’s theoretical explanation was:
(1) that monetary policy has as an objective a certain level of spending
for gDp, and that a growth in time (savings) deposits involves a
decrease in the demand for money balances, and that this shift will be
reflected in an offsetting increase in the velocity of demand deposits,
Leland James Pritchard, Ph.D., economics, Chicago 1933:
“This hypothesis rests upon the fact that the payment’s velocity of
funds shifted into time deposits becomes zero, and remains at zero so
long as funds are held in this form. The stoppage of the flow of these
funds generates adverse effects in our highly interdependent pecuniary
economy, as would any stoppage in the flow of funds however induced. It
is quite probable that the growth of time deposits shrinks aggregate
demand and therefore produces adverse effects on gDp.”
stoppage in the flow of monetary savings, which is an inexorable part of
time-deposit banking, would tend to have a longer-term debilitating
effect on demands, particularly the demands for capital goods”.
other words, from the standpoint of the commercial banks, DFIs, the
monetary savings practices of the public are reflected in the velocity
of their deposits and not in their volume. Whether the public saves, or
dis-saves, chooses to hold their savings in the CBs, or transfers them
to the NBs, will not, per se, alter the total assets, or liabilities of
the CBS - nor alter the forms of these assets and liabilities.
Chandler’s theory was obviously denigrated by Cambridge economist,
Alfred Marshalls’ “Money Paradox”. Thus Alfred Marshall’s “Cash Balances
Approach”, P = M/KT, came to fruition in 1981 with the saturation in DD
As SA author WYCO Researcher said: “The velocity stayed
fairly stable for decades, but then increased sharply partially because
technology dramatically changed the payment methods/speed.”
the financial innovation on commercial bank deposits, reflected by its
deposit rate of turnover (95% of all demand drafts clear thru
transaction accounts), plateaued with the widespread introduction of
ATS, NOW, and MMDA accounts in 1981. Money velocity has decelerated
ever since (as savings increasingly became impounded and ensconced
within the payment’s system - as encouraged by the complete removal of
Reg. Q deposit ceilings):
cash balances approach points out that the desire to hold more or less
cash, rather than non-monetary assets, has its repercussions on the
supply of, and the demand for, money. Adjustments in prices relative to
the volume of money and real balances continue, unless interrupted,
until a point of indifference is reached.
However, if the
public on balance considers the real worth of its cash balances
deficient, this will bring about an increase in the demand for money and
a decreasing in its supply. The velocity of money will decline, and if
prices tend to be sticky, sales, production, employment, and payrolls
will fall off. This will lead to reduced bank lending, a decline in the
volume of money (and this will not be compensated by an appropriate
decline in prices). Under these circumstances equilibrium is never
reached, and the public in seeking to increase its real balances so
reduces its effective purchasing power as to create a condition of
What happened (the subpar R-gDp performance
and slow recovery) was that Bankrupt u Bernanke destroyed non-bank
lending/investing by the remuneration of excess reserve balances, IBDDs
(inducing dis-intermediation for the non-banks exclusively). Thus, the
non-bank’s, assets (& corresponding liabilities), dropped $6.2
trillion, vs. the CB system's growth of $3.6 trillion. The 1966 S&L
credit crunch is the economic paradigm and precursor (lack of funds,
not the cost of funds).
This is the cause of Larry Summers’
secular stagnation or an excess of savings over investment opportunities
as originally described by Alvin Hansen in 1938 (as predicted in 1958
by Dr. Pritchard).
Keynesian economists have finally achieved their objective: that there is no difference between money and liquid assets.
way to increase money velocity and force investors to buy riskier
assets (risk-on) would have been, and still is, to get the CBs out of
the savings business.
- Michel de Nostredame