N-gDp Targeting's Unresolvable Dilemma

I decrypted: the preparatory-school macro-economic puzzle in July 1979. As such, I satirize the miscreant McCarthyites who desecrate our Republic. (older followers can skip between the lines):
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Dr. Leland J. Pritchard (a man 30 times smarter than the theoretical physicist Albert Einstein), Ph.D., Economics, Chicago 1933, M.S. Statistics, Syracuse, told me in his letter 9/8/81:

“You may have a predictive device nobody has hit on yet”.

The distributive lag effect of monetary flows, volume X’s velocity, have been, contrary to Nobel Laureates Milton Friedman’s and Anna J. Schwartz’s in their: “A Monetary History of the United States, 1867–1960) not characterized by long and variable, leads and lags, but demonstrably demarcated by mathematical *constants*.

Contrary to Friedmanites, there is no "fool in the shower".

“Fool in the shower is the notion that changes or policies designed to alter the course of the economy should be done slowly, rather than all at once. This phrase describes a scenario where a central bank, such as the Federal Reserve acts to stimulate or slow down an economy. The phrase is attributed to Nobel laureate Milton Friedman, who likened a central bank that acted too forcefully to a fool in the shower. When the fool realizes that the water is too cold, he turns on the hot water. However, the hot water takes a while to arrive, so the fool simply turns the hot water up all the way, eventually scalding himself.” - Investopedia


www.investopedia.com/...


See: “History and forms. Irving Fisher (1925) was the first to use and discuss the concept of a distributed lag. In a later paper (1937, p. 323), he stated that the basic problem in applying the theory of distributed lags “is to find the ’best’ distribution of lag, by which is meant the distribution such that … the total combined effect [of the lagged values of the variables taken with a distributed lag has] … the highest possible correlation with the actual statistical series … with which we wish to compare it.” Thus, we wish to find the distribution of lag that maximizes the explanation of “effect” by “cause” in a statistical sense”.


www.encyclopedia.com/...


See: Econometrics Beat: Dave Giles' Blog


“The note in question is titled, "Irving Fisher: Pioneer on distributed lags", and was written by J.N.M Wit (of the Netherlands central bank) in 1998. If you don't have time to read the full version, here's the abstract:”


"The theory of distributed lags is that any cause produces a supposed effect only after some lag in time, and that this effect is not felt all at once, but is distributed over a number of points in time. Irving Fisher initiated this theory and provided an empirical methodology in the 1920’s. This article provides a small overview."
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I should be awarded the Nobel Prize in Economics. My model is worth trillions of economic $s. My contribution is the most important discovery since man’s invention of the wheel.


@ Kevin A. Erdmann: “Unfortunately, it appears that they may be erring on the side of reducing the balance sheet while maintaining policy that is too tight.”


Another stagflationist, to wit, Erdmann: “the crisis could be blamed on tight monetary policy”.


You don’t, as Kevin A. Erdmann pontificates, add to the FOMC’s schizophrenia i.e., target N-gDp: Do I stop -- because inflation is increasing? Or do I go -- because R-gDp is falling? [Stagflation’s dilemma, viz., the FOMC’s policy mix].


No, you gradually drive the commercial banks out of the savings business, you increase non-inflationary money velocity, not stagflationary money, and simultaneously tighten monetary policy, or money flows, thereby increasing the RoC in real-output, relative to the increase in inflation (the opposite of stagflationist’s posits, i.e., producing the exact opposite impact as stagflation).


It is axiomatic. The rate-of-change in the historical distributed lag effect of monetary flows, volume X’s velocity, its inflection point, coincided with the peak in real-estate speculation.


See: Alan S. Blinder: “After the Music Stopped”, pg. 32: “That historical comparison reveals a stunning—and virtually unknown—fact: On balance, the relative prices of houses in American barely changed over more than a century! To be precise, the average annual relative price increase from 1890 to 1997 was just 0.09 of 1 percent. You don’t get rich on that.”


Then things changed dramatically. After 2000 the graph gives the visual impression of a rocket ship taking off. According to the Case-Shiller index, real house prices soared by an astounding 85 percent between 1997 and 2006---and then came crashing down to earth from 2006 to 2012. America had never seen anything like it. Did this huge run-up and crash constitute a bubble? I think Mr. Justice Stewart would have said yes. It was certainly large, long-lasting, and a sharp deviation from fundamental value.”


The pertinent fact is that economists are categorically vacuous. Bankrupt-u-Bernanke devastated America and defiled Americans. Americans are now saddled with another $9.6 trillion of indebtedness, the direct outcome of Bankrupt-u-Bernanke’s incompetence.
Bankrupt-u-Bernanke, whose Ph.D. dissertation was on the causes of the Great Depression: “Long-Term Commitments, Dynamic Optimization, and the Business Cycle”, destroyed America (caused the Federal Deficit to double), by (1) contracting long-term monetary flows, volume X’s velocity for 29 contiguous months (< than zero), just like the contraction in monetary flows from period March 1930 -> April 1934, and (2) remunerating IBDDs (causing another credit crunch, where the size of the non-banks shrink, but the size of the payment’s system remains unaffected).


This Romulan cloaking device, #2, vastly exceeded the level of short term interest rates which is still illegal. The 1966 Savings and Loan credit crunch (when the term was coined), is the antecedent and paradigm.


Disintermediation, which Bankrupt-u-Bernanke mis-diagnosed as a “capital crunch” (a prelude to his policy response to counter the GFC or TARP [to issue equity warrants, to stabilize bank capital ratios], occurs because the inventory of outstanding loans is funded at levels which can no longer be supported by rolling over older funding: short-term, retail and wholesale funding.


In other words, the non-banks do not compete with the commercial banks for loan-funds. The prosperity of the DFIs is codependent upon the prosperity of the NBFIs.


Disintermediation for the DFIs can only exist in a situation in which there is both a massive loss of faith in the credit of the banks and an inability on the part of the Federal Reserve to prevent bank credit contraction, as a consequence of its depositor’s withdrawals. Ever since 1933, the Federal Reserve has had the capacity to take unified action, through its "open market power", to prevent any outflow of currency from the banking system (i.e., before the remuneration of IBDDs). In contradistinction to the NBFIs, dis-intermediation for the DFIs isn’t predicated on the prevailing level of market clearing interest rates or the administration of policy rates.


Dis-intermediation, an outflow of funds or negative cash flow, for the commercial banks ended with the numerous reforms in the Glass–Steagall Act; also ending: "pushing on a string" as only applied prior to the nominal legal adherence to the fallacious "Real Bills Doctrine" when terminated in 1932 - due to a paucity of eligible (hopelessly impaired), commercial and agricultural paper for the 12 District Reserve bank’s discounting purposes.


This is Bankrupt-u-Bernanke on “credit crunches”, 1991:


"However, we also argue that a shortage of equity capital has limited banks' ability to make loans, particularly in the most affected regions. Thus we agree with Richard Syron, president of the Boston Federal Reserve, that the credit crunch might better be called a "capital crunch." We present evidence for the capital crunch hypothesis using both state-level data and data on individual banks. The most difficult issue is whether the slowdown in bank lending has had a significant macroeconomic effect. Although it is likely that a bank credit crunch (or capital crunch) has occurred and has imposed costs on some borrowers, we are somewhat skeptical that the credit crunch played a major role in worsening the 1990 recession."


That explains TARP!


“Another important goal of TARP is to encourage banks to resume lending again at levels seen before the crisis, both to each other and to consumers and businesses. If TARP can stabilize bank capital ratios, it should theoretically allow them to increase lending instead of hoarding cash to cushion against future unforeseen losses from troubled assets”


BuB should be in Federal Prison.


See: "The 2006 Financial Services Regulatory Relief Act gives the Fed permission to pay interest on reserves. The IOR rate was always higher than "the general level of short-term interest rates" which is imposed in the Law. "A Legal Barrier to Higher Interest Rates," The Wall Street Journal, Sept. 28, p. A13.


The resultant dis-intermediation for the NBFIs (where the size of the NBFIs shrank by $6.2T), an outflow funds or negative cash flow, left the DFIs unaffected (the size of the DFIs grew by $3.6T), and thus exacerbated the depth and duration of the GFC.
I.e., since Roosevelt’s 1933 Banking Act, dis-intermediation is a term that only applies to the non-banks.


Why did Bankrupt-u-Bernanke misjudge the economy? It is because Bankrupt-u-Bernanke thinks that money is neutral, and not robust.

-Michel de Nostredame