"… monetary actions affect economic conditions only after a lag that is both long and variable."
Walter Isaacson pointed out in his biography of Leonardo Da Vinci, “history’s most creative genius”, who maybe said it best: “Before you make a general rule of this case, test it two or three times and observe whether the tests produce the same effects”
Thereby economists and acolytes took the archetypal “Hook Line & Sinker”, viz., “Nobody Can Teach Anybody Anything” W.R. Wees
Syncing money flows, volume X’s velocity, with gDp was for me like the artisan, Dr. Ernest G. Schwiebert Jr, who was Director of the Theodore Gordon Flyfishers and his attempts to:”Match the hatch”.
American Yale Professor Irving Fisher's transaction's concept of money velocity, or the "equation of exchange", is an algebraic way of stating a truism; that the product of the unit prices, and quantities of goods and services exchanged P*T, is equal, for the same time period, to the product of the volume, and transactions velocity of money.
Thus mechanically: M*Vt is synonymous with aggregate monetary purchasing power, AD, and is = P*T (where N-gDp is ≈, a subset).
In Professor Irving Fisher’s – 1920 2nd edition: “The Purchasing Power of Money” as “Digitized for FRASER”:
https://fraser.stlouisfed.org/scribd/?title_id=3610&filepath=/files/docs/meltzer/fispur20.pdf
Neither superfluous financial transactions (no “tax needed”) nor John Maynard Keynes’ “animal spirits” are random:
“If the principles here advocated are correct, the purchasing power of money — or its reciprocal, the level of prices — depends exclusively on five definite factors:
(1)the volume of money in circulation;
(2) its velocity of circulation;
(3) the volume of bank deposits subject to check;
(4) its velocity; and
(5) the volume of trade.
“Each of these five magnitudes is extremely definite, and their relation to the purchasing power of money is definitely expressed by an “equation of exchange.”
“In my opinion, the branch of economics which treats of these five regulators of purchasing power ought to be recognized and ultimately will be recognized as an EXACT SCIENCE, capable of precise formulation, demonstration, and statistical verification.”
Taking Irving Fisher’s *KATALLACTIC* approach (the science of exchanges), viz., as George Garvy spells out in his: “DEPOSIT VELOCITY AND ITS SIGNIFICANCE” published in Nov. 1959 (as: “Digitized for FRASER”):
https://fraser.stlouisfed.org/files/docs/meltzer/gardep1959.pdf
George Garvy: “Ideally, only balances subject to check or, even better, balances shown on checkbook stubs of depositors should be used to compute velocity rates.”
This is analogous to Dr. Richard G. Anderson’s, Ph.D. Economics, Massachusetts Institute of Technology (the world’s leading guru on bank reserves) explanative: “legal reserves are driven by payments”, payments being “total checkable deposits”.
Documentary proof of this demarcation is given within the G.6 release, Debit and Demand Deposit Turnover, discontinued in Sept. 1996 (discontinued for spurious reasons: “The usefulness of the FR 2573 data in understanding the behavior of the monetary aggregates has diminished in recent years as the distinction between transaction accounts and savings accounts has become increasingly blurred. Further, the emphasis on monetary aggregates as policy targets has decreased.”). Ed Fry was its manager. William G. Bretz (of Juncture Recognition), told Fry he had an error in his statistics. That’s the value of a “knowledge worker”, and not an “arm chair” economist.
This explanation disabused the significance of bank debits (money actually exchanging counterparties):
“Changes in business activity are closely linked with changes in the volume of money payments made by check, of which bank debits provide the best available single indicator. The debit figures cover payments for the purchase of goods in the various channels of production & distribution, for wages ^ salaries, for dividends ^ interest; but they also include payments for property ^ other financial transactions that do not necessarily arise for current production & distribution [which e.g., reflect both new & existing residential & commercial real-estate sales/purchases]. They include, in addition, man duplications arising from a series of payments of identical goods at different stages of production & consumption. Only I a very broad way therefore, do these data reflect changes in general business conditions by showing, among other things changes in the attitude of the public toward holding or spending money.”
Of course, this is just the "unified thread" of algebra, estranged from "general field theory" of macro-economic modeling, where the chorus is: "All analysis is a model" - Ken Arrow.
The NBFIs, non-banks, are the DFI’s customers. Thus all demand drafts originating from the NBFIs clear thru the payment’s system (unified theory). Bank reserves are driven by payments (bank debits). Legal reserves are based on transaction type deposit classifications 30 days prior. 95 percent of all demand drafts clear thru demand deposits (see G.6 release).
Banking and Monetary Statistics, 1914-1941, Part I | FRASER | St. Louis Fed
[section 5]
Of course, money flows registered a (-) negative RoC during the S&L crisis; “the failure of 1,043 out of the 3,234 savings and loan associations in the United States from 1986 to 1995”, during the July 1990-Mar 1991 recession.
Monetary Flows (MVt)
But we knew this already:
In 1931 a commission was established on Member Bank Reserve Requirements. The commission completed their recommendations after a 7 year inquiry on Feb. 5, 1938. The study was entitled "Member Bank Reserve Requirements -- Analysis of Committee Proposal" It's 2nd proposal: "Requirements against debits to deposits"
http://bit.ly/1A9bYH1
After a 45 year hiatus, this research paper was "declassified" on March 23, 1983. By the time this paper was "declassified", Nobel Laureate Dr. Milton Friedman had declared RRs to be a "tax" [sic].
See: “New Measures Used to Gauge Money supply”, WSJ 6/28/83
You don't have to be a NASA rocket scientist (like Dr. William A. Barnett, of: “Divisia Monetary Aggregates”). What he does is laborious. Changes in “divisia” are automatically captured, real-time, in RRs. “Instead of totaling all types of money and treating them equally, the Divisia numbers assign different weights to assets according to the extent they serve as spending, rather than savings, vehicles.”
“The ‘debit-weighted’ money figures developed by the Fed’s Dr. Paul Spindt, support Prof. Barnett’s conclusion. They assign different weights to various categories of money according to how often they turn over, or are spent.”
See Dr. William Barnett:
“The fact that simple sum monetary aggregation is unsatisfactory has long been recognized, and there has been a steady stream of attempts at weakening the implied perfect substitutability assumption by constructing weighted average monetary aggregates.”
http://www2.ku.edu/%7Ekuwpaper/2013Papers/201312.pdf
Note #1: “a KATALLACTIC approach—as distinguished from a national income and product approach—places as much emphasis on production and finance as it does on income and final demand. Every agreement to exchange comes to the economist's attention, rather than simply the net of those agreements aimed at final demand. This is important because if one does not consider the intermediate stages of production and financing, it becomes more difficult to isolate the possible sources and paths of disturbance in the exchange nexus. In this connection, the highly distilled, final demand focus of national income and product accounting in particular—while valid—provides only a narrow view into the overall market process.”
In the transactions velocity of circulation: “Money is spent and re-spent.” Whereas with income velocity, inflation analysis is delimited to wages and salaries spent. To the Keynesians, aggregate monetary demand, AD, is N-gDp, the demand for services (human) and final goods. This concept excludes the common sense conclusion that the inflation process begins at the beginning (with raw material prices and processing costs at all stages of production) and continues through to the end, (“raw materials, intermediate goods and labor costs, which comprise the bulk of business spending are not treated in N-gDp”), etc.
Thus what Milton Friedman had printed on his car license plate: [ M * Vi =P * Q ]was dead wrong for two important reasons.
See the Federal Reserve Bank of New York: “The Money Supply”
To wit: “Thus, in July 1993, when the economy had been growing for more than two years, Fed Chairman Alan Greenspan remarked in Congressional testimony that "The historical relationships between money and income, and between money and the price level have largely broken down, depriving the aggregates of much of their usefulness as guides to policy. At least for the time being, M2 has been downgraded as a reliable indicator of financial conditions in the economy, and no single variable has yet been identified to take its place."
In a 2006 speech about the historic use of monetary aggregates in setting Federal Reserve policy, Chairman Bernanke pointed out that, "in practice, the difficulty has been that, in the United States, deregulation, financial innovation, & other factors have led to recurrent instability in the relationships between various monetary aggregates & other nominal variables".
The Money Supply - FEDERAL RESERVE BANK of NEW YORK
Money should be defined exclusively in terms of its means-of-payment attributes. The present array of interest-bearing checking accounts has confused the distinction between means-of-payment accounts, and saving-investment accounts, and created a dilemma as to what portion, if any, of these interest-bearing accounts should be considered as savings. This dilemma is resolved when the transactions velocity of demand deposits is taken into account; i.e., deposit classifications are analyzed in terms of monetary flows. Obviously, no money supply figure standing alone is adequate as a "guide post" to monetary policy.
Scientific evidence "is proof, which serves to either support or counter a scientific theory or hypothesis. Such evidence is expected to be empirical evidence and in accordance with scientific method" - Wikipedia
Scientific method is "a method or procedure…consisting in systematic observation, measurement, and experiment, and the formulation, testing, and modification of hypotheses" - Wikipedia
The scientific evidence for the last 100 years is irrefutable. I.e., the trajectory in the roc (proxy for inflation indices), for M*Vt (the scientific method), projected a top in the inflation indices in January (signal to sell commodities and buy bonds). Every year, the seasonal factor's map, or scientific proof, is demonstrated by the product of money flows.
The only tool at the disposal of the monetary authority in a free capitalistic system through which the volume of money can be controlled is legal reserves.
The FOMC's monetary policy objectives should be formulated in terms of desired RoC's in monetary flows, volume X’s velocity, relative to roc's in real-gDp - Y. Roc's in N-gDp, P*Y, can serve as a proxy figure for roc's in all transactions P*T. RoC's in E-gDp have to be used, of course, as a policy standard.
Lest we are to believe the pundits (those responsible for our condition):
"I know of no model that shows a transmission from bank reserves to inflation" - DONALD KOHN - former Vice Chairman of the Board of Governors of the Federal Reserve System
"Reserves don't even factor into my model, that's not what causes inflation and not how the Fed stimulates the economy. It's a side effect." - LAURENCE MEYER - a Federal Reserve System governor from June 1996 to January 2002
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