The Distributed Lag Effect: {M*Vt}

* Go inquire, and so will I, where the money is - The Merchant of Venice.

* Money along sets all the world in motion - Publilius Syrus (c. 42 B.C.).

* If money go before, all ways do lie open - The Merry Wives of Windsor.

Rates-of-change in monetary flows, volume X's velocity = RoC's in P*T in American Yale Professor Irving Fisher's truistic: "equation of exchange" [where R-gDp, inflation, and N-gDp are subsets or proxies]. Whereas, the Fed’s monetary transmission mechanism, as epitomized by Keynes' "Liquidity Preference Curve" [demand-for-money], is a False Doctrine.

Interest is the price of loan-funds [the free market’s deterministic clearing rate]. The price of money is the reciprocal of the generalized price-level [the FRB_NY’s “trading desks” bailiwick].
The Fed’s dismal record: what cost one dollar bill in 1913, today costs $25.57.

Inflation, accompanied by term premiums, is the most destructive force capitalism encounters.

Responsible monetary policy can never be achievable when our money stock is managed by attempts, incongruous stair-stepping and cascading pegs, i.e., a price mechanism, to control the cost of credit.
Using R * as the Fed’s monetary transmission channel is thus non sequitur. It defiles and desecrates the tenets of monetarism. The Ph.Ds. on the Fed’s research staff, as Chicago School’s Jacob Viner famously exclaimed: "don't belong in this economic class".

Professor Irving Fisher's transaction's concept of money velocity 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 circulation or M*Vt.

It is self-evident from the equation that an increase in the volume, and/or velocity of money, will cause a rise in unit prices, if the volume of transactions increases less, and vice versa.
The "transactions" velocity (a statistical stepchild), is the rate of speed at which money is being spent, i.e., real money balances actually exchanging counter-parties. E.g., a dollar bill which turns over 5 times can do the same "work" as one five dollar bill that turns over only once.

In contradistinction, the mainstream Keynesian-economic variant, income velocity or Vi, which is a contrived figure, is calculated by dividing N-gDp for a given period, by the average volume of the money stock (M1, M2, & MZM), for the same period (viz., make believe / contrived). A decline in the income velocity of money (like during the Great-Recession), is supposed to suggest that the Fed initiate an expansive, or less contractive, monetary policy.

This signal could be right - by sheer accident. I.e., the historical trend of Vt vs. Vi, at various intervals, moved in absolutely divergent paths - giving the income velocity economists false signposts.

The theoretical bias and confusion is compounded, as Nobel Laureates Dr. Milton Friedman’s and Dr. Anna J. Schwartz’s: “A Monetary History of the United States", 1867–1960, claimed that money has long and variable leads and lags. Not so, the distributed lag effects for monetary flows have been mathematical constants > 100 years, therefore the equation of exchange’s *time periods* become accurately demarcated and conterminously, positively synchronized.

Economists’ quest for answers, linking flows to output, as personified in the maestro Alan Greenspan’s “The Map and the Territory; Risk, Human Nature, and the Future of Forecasting”:

(1) “But leading up to the almost universally unanticipated crisis of September 2008, macro-modeling unequivocally failed when it was needed most, much to the chagrin of the economics profession. The Federal Reserve Board’s highly sophisticated forecasting system did not foresee a recession until the crisis hit. Nor did the model developed by the prestigious International Monetary Fund…”
(2) “JPMorgan, arguably America’s premier financial institution projected on September 12, 2008 –three days before the crisis hit—that the U.S. GDP growth rate would be accelerating into the first half of 2009.” The Maestro chalked up these errors to Keynes’ quirky “Animal Spirits”.

As I boasted in July 2007: “I need no disclaimer”.

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

Because interest rates top in July, the exchange value of the dollar should resume its decline. A very good time to buy gold!

The “Holy Grail” has no disclaimer.

Posted by flow5 at 7:50 AM on 06/29/07
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No, we even knew the "Minsky Moment":

POSTED: Dec 13 2007 06:55 PM |
The Commerce Department said retail sales in Oct 2007 increased by 1.2% over Oct 2006, & up a huge 6.3% from Nov 2006.
10/1/2007,,,,,,,-0.47.….. -0.22 * temporary bottom
11/1/2007,,,,,,, 0.14,,,,,,, -0.18
12/1/2007,,,,,,, 0.44,,,,,,,-0.23
01/1/2008,,,,,,, 0.59,,,,,,, 0.06
02/1/2008,,,,,,, 0.45,,,,,,, 0.10
03/1/2008,,,,,,, 0.06,,,,,,, 0.04
04/1/2008,,,,,,, 0.04,,,,,,, 0.02
05/1/2008,,,,,,, 0.09,,,,,,, 0.04
06/1/2008,,,,,,, 0.20,,,,,,, 0.05
07/1/2008,,,,,,, 0.32,,,,,,, 0.10
08/1/2008,,,,,,, 0.15,,,,,,, 0.05
09/1/2008,,,,,,, 0.00,,,,,,, 0.13
10/1/2008,,,,,,, -0.20,,,,,,, 0.10 * possible recession
11/1/2008,,,,,,, -0.10,,,,,,, 0.00 * possible recession
12/1/2008,,,,,,, 0.10,,,,,,, -0.06 * possible recession
Trajectory as predicted.

Debating knuckleheads is tiresome.

The Maestro:

(3) “What constitutes money, or more exactly, a universal transaction balance, has been far more elusive”…”I tested a number of choices for money supply and even a number of debt instruments as a substitute for money.”…”The closeness of fit of unit M2 and price over the decades is impressive.”…”But starting in the late 1980’s, unit M2 seemed to have lost its closeness of fit to the price level”…”The breakdown of M2 spawned a flurry of analyses”.

(4) ”Money supply, of course, 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”…”The greater the degree of inflationary pressure, the more likely people will be to accelerate their turnover of transaction balances; the higher the interest rate or rate of return on equity, the more likely people are to hold income-earning assets in lieu of cash, thereby reducing M2 and raising money velocity."

(5) "Combining these determinants of money turnover with money itself portrays an even closer historical fit to the general price level. Thus, in summary, money supply is by far the dominant determinant of price over the long run but in the short run, other variables are important as well.”

Recognizing the difficulty in explaining income velocity, the Maestro calculates his own proprietary velocity metric, pg. 342 (not necessarily clarifying). Relative to other forecasters, I will give the

Maestro high marks for his rigorous empirical approach.
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While GDP is calculated on final products, or different dimensions, and is tabulated in quarters, or different intervals, and is Seasonally mal-adjusted, and also subject to disparate measurement slippages, there is nonetheless a recognizable fit or symmetry in Fisher's equation: M*Vt = P*T [ i.e., when the pundits are expecting disparity ]

Using a rate-of-change, in the flow of funds, for real variables:

01/1/2017 ,,,,, 0.13
02/1/2017 ,,,,, 0.08
03/1/2017 ,,,,, 0.06
04/1/2017 ,,,,, 0.08
05/1/2017 ,,,,, 0.09
06/1/2017 ,,,,, 0.08
07/1/2017 ,,,,, 0.11
08/1/2017 ,,,,, 0.09
09/1/2017 ,,,,, 0.08
10/1/2017 ,,,,, 0.03
11/1/2017 ,,,,, 0.08
12/1/2017 ,,,,, 0.12
01/1/2018 ,,,,, 0.09
02/1/2018 ,,,,, 0.07
03/1/2018 ,,,,, 0.02
04/1/2018 ,,,,, 0.04
05/1/2018 ,,,,, 0.05
06/1/2018 ,,,,, 0.05
07/1/2018 ,,,,, 0.06

The deceleration (-) in 1st qtr. of 2017 is matched by a deceleration in money flows.
The acceleration (+) in 2nd qtr. of 2017 is matched by an acceleration in money flows.
The acceleration (+) in 3rd qtr. of 2017 is matched by an acceleration in money flows.
The deceleration (-) in 4th qtr. of 2018 is matched by a deceleration in money flows.
The deceleration (-) in 1st qtr. of 2018 is matched by a deceleration in money flows.
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Therefore the economy reversed in April of 2018. But in this case, it doesn’t prove there will be an increase in gDp over the 1st qtr. during the 2nd qtr. of 2018, only that there was a correction in the economic downswing.

Q1 2018: 2.2 (-)
Q4 2017: 2.9 (-)
Q3 2017: 3.2 (+)
Q2 2017: 3.1 (+)
Q1 2017: 1.2 (-)

As the archetype of the Renaissance man, Leonardo Da Vinci, said:

“Before you make a general rule of this case, test it two or three times and observe whether the tests produce the same effects”.

Knowing monetary flows trajectory permits us to trade the trend. Whereas Vt began accelerating in 2016, Vi didn’t reverse until the 2nd qtr. of 2017.

Short-term money flows peak in July 2018. Ergo:

{A} Stocks could peak by the end of the month
{B} Rates should fall by the end of the month

Then long-term money flows peaked in May 2018:

{C} This should prevent rates from rising and support stocks
{D} It should support the U.S. $
{E} It should reduce inflation

And by improving the statistic’s “conforming” properties, the Federal Reserve can steer our ship.

Data dependency depends upon accurate definitions. William Barnett (Divisia Monetary Aggregates) is right, in that the Fed should establish a “Bureau of Financial Statistics”.

The figures used for determining economic flows are non-conforming, as determined by the limitations on all analyses based upon broad statistical aggregates, namely, data is not currently being compiled accurately, or in a manner which conforms to rigid theoretical concepts.

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" – Nobel Laureate in Economics Dr. Ken Arrow.

It is the triumph of good theory over inadequate facts.