The Nattering Naybob's "Elephant Tracks"

Notes:    Series ID:  REQRESNSW

“Effective February 2, 1984, reserve computation and maintenance periods have been changed from weekly to bi-weekly. Series with data prior to February 2, 1984 have [ *different values* ]reported from one week to the next. After February 2, 1984, the value repeats for 2 consecutive weeks.”  And the G.6 Debit and Deposit Turnover Release was the longest standing time series until it was discontinued in September 1996.

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In other words, like most of the Board of Governor’s data, the FRB-STL’s “time series”, there are constant revisions and various reconstructions, to both definitions, calibrations, and reporting frequencies, none of which you can “splice” seamlessly back together.

Readers obviously haven’t yet grasped the significance of “The Nattering Naybob’s” apt coinage -  { ELEPHANT TRACKS }.

The irony is that the FRB-NY “trading desk” (the U.S. Central Bank) blatantly “white washes” and thus surreptitiously “conceals” its previously reported #s, or banksters’ complicity (i.e., lagged maintenance accounting). 

There is an explosive political problem here (one that will certainly attract sharp criticism and the ABA’s reprisal).  The banksters, represented by the American Bankers Association lobbied to eliminate legal reserves, to wit: the “Financial Services Regulatory Relief Act of 2006”

The justification for the FSRRA of 2006 was: “These measures should help the banking sector attract liquid funds in competition with nonbank institutions and direct market investments by businesses”

That should scare readers because the non-banks don’t compete with the member banks.  The DFIs do not loan out deposits.  The NBFIs do.

One of the FSRR’s provisions” “the Board–as authorized by the act–could consider reducing or even eliminating reserve requirements, thereby reducing a *regulatory burden* [sic] for all depository institutions”

Not so. 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.

An injection of IBDDs is like “Manna from Heaven”, costless to, and showered on, the payments’ system.  A brief “run down” will indicate just how costless, indeed how profitable – to the participants, is the creation of new money (not a tax at all).

If the Fed puts through buy orders in the open market, the Federal Reserve Banks acquire earning assets by creating new inter-bank demand deposits. The U.S. Treasury recaptures about 98% of the net income from these assets. The commercial banks acquire “free” legal reserves, yet the bankers complained that they didn't earn any interest on their balances in the Federal Reserve Banks.

On the basis of these newly acquired free reserves, the commercial banks created a multiple volume of credit and  money. And, through this money, they acquired a concomitant volume of additional earnings assets. How much was this multiple expansion of money, credit, and bank earning assets? Thanks to fractional reserve banking (an essential characteristic of commercial banking) for every dollar of legal reserves pumped into the member banks by the Fed, the banking system acquired about 93 (c. 2006), dollars in earning assets through credit creation.

See: “Bank Reserves and Loans: The Fed Is Pushing On A String” - Charles Hugh Smith

https://seekingalpha.com/article/3152196-bank-reserves-and-loans-the-fed-is-pushing-on-a-string

See: “Quantitative Easing and Money Growth: Potential for Higher Inflation” - Daniel L. Thornton, Vice President and Economic Adviser

http://bit.ly/2viavlS

In the 1980 Chase: “Business in Brief”, this statement appears:

“…the fed has never made a convincing economic case that reserve requirements are needed at all.”

This opinion seems to be widely held in the banking community. Such opinions ignore the dynamics of money creation. As long as it is profitable for borrowers to borrow & commercial banks to lend, money creation is not self-regulatory. This observation would be valid even though the fed did not use R * as a device to guide open market operations.

 
See also: Lawrence K. Roos, Past President, Federal Reserve Bank of St. Louis & past member of the FOMC (the policy arm of the Fed) as cited in the WSJ April 10, 1986

"...I do not believe that the control of money growth ever became the primary priority of the Fed. I think that there was always & still is, a preoccupation with the stabilization of interest rates".

In other words, monetarism has never, anywhere, been previously tried.  Paul Volcker never changed the Fed's operating procedure, viz., targeting non-borrowed reserves, as Paul Meek’s (FRB-NY assistant V.P. of OMOs and Treasury issues), described and documented in his 3rd edition of “Open Market Operations” published in 1974. He let the economy simply burn itself out.

Paul Volcker’s version of monetarism (along with credit controls: the Emergency Credit Controls program of March 14, 1980), was limited to Feb, Mar, & Apr of 1980.  With the passage of the DIDMCA, total legal reserves increased at a 17% annual rate of change, & M1 exploded at a 20% annual rate (until 1980 year’s-end). 

By mid-1995 (a deliberate and misguided policy change by Alan Greenspan in order to jump start the economy after the July 1990 –Mar 1991 recession), legal, i.e., fractional reserves (not prudential), ceased to be binding – as increasing levels of vault cash/larger ATM networks after 1959’s liberalization, and retail deposit sweep programs (c. 1994), fewer applicable deposit classifications (including allocating "low-reserve tranche" and "reservable-liabilities exemption amounts" c. 1982) and lower reserve ratios (requirements dropping by 40 percent c. 1990-91), & reserve simplification procedures (c. 2012), combined to remove reserve, & reserve ratio, restrictions.

Monetary policy should delimit all legal reserves to balances in their District Reserve bank (IBDDs, like the ECB), and have uniform reserve ratios, for all deposits, in all banks, irrespective of size (something Nobel Laureate Dr. Milton Friedman advocated, December 16, 1959). 

Never are the commecial banks intermediaries in the savings-investment process. From a systems belvedere, member commercial banks, DFIs, as contrasted to financial intermediaries, non-bank conduits, NBF: never loan out, and can’t loan out, existing deposits (saved or otherwise) including existing transaction deposits, or times “savings” deposits, or the owner’s equity, or any liability item.

When DFIs 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 (demand deposits) - somewhere in the payment’s system. I.e., commercial bank deposits are the result of lending, not the other way around.

The non-bank public includes every institution (including shadow-banks), the U.S. Treasury, the U.S. Government, State, & other Governmental Jurisdictions, & every person, etc., except the commercial & the Reserve banks.

Take the “Marshmallow Test”: (1) banks create new money (macro-economics), and incongruously (2) banks loan out the savings that are placed with them (micro-economics).

F. Scott Fitzgerald: “The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.”

You have to retain the cognitive dissonance capacity, like Walter Isaacson described Albert Einstein’s ability: to hold two thoughts in your mind simultaneously – “to be puzzled when they conflicted, and to marvel when he could smell an underlying unity”.

Steve Keen: "A 'Loanable Funds' loan simply shuffles existing money from one person’s bank account to another: no new money is created (row 1 in Table 2). A “Bank Originated Money” loan creates a new asset for the Bank, and creates new money as well – which the recipient then spends."

http://bit.ly/2GXddnC

See: Philip George: “The riddle of money, finally solved”

http://bit.ly/2u3xiBV

The expiration of the FDIC's unlimited transaction deposit insurance is prima facie evidence, hence my "market zinger" call.

John Maynard Keynes couldn’t do it:

In "The General Theory of Employment, Interest and Money", John Maynard Keynes’ opus ", pg. 81 (New York: Harcourt, Brace and Co.), gives the impression that a commercial bank is an intermediary type of financial institution (non-bank), serving to join the saver with the borrower when he states that it is an “optical illusion” to assume that “a depositor & his bank can somehow contrive between them to perform an operation by which savings can disappear into the banking system so that they are lost to investment, or, contrariwise, that the banking system can make it possible for investment to occur, to which no savings corresponds.”

In almost every instance in which Keynes wrote the term bank in the General Theory, it is necessary to substitute the term non-bank in order to make his statement correct, viz., the Gurley-Shaw thesis.

Monetary policy objectives should be formulated in terms of desired rates-of-change in monetary flows, M*Vt, volume X’s velocity, relative to RoC's in R-gDp. RoC's in N-gDp (though "raw materials, intermediate goods and labor costs, which comprise the bulk of business spending are not treated in N-gDp"), can serve as a proxy figure for RoC's in all transactions, P*T, in American Yale Professor Irving Fisher's truistic: "equation of exchange".

And after Alan Greenspan After 1995, the commercial banks became non: “e-bound” (Dr. Richard G. Anderson’s term).

See: http://bit.ly/yUdRIZ

Quantitative Easing and Money Growth:
Potential for Higher Inflation?

Daniel L. Thornton (former senior economist, FRB-STL)
D.L. Thornton Economics LLC

A cogent example: If I remember right, the #s below were the *bi-weekly* figures I was confronting with prior to my gold post:

2007-01-31    47426

2007-02-07    39015

There was an $8.4 billion drop in complicit reserves before the financial markets even reacted.

But MSN Money's Jim Jubak reported that people thought Feb 27, 2007 started across the ocean. "On Feb. 28, Bernanke told the House Budget Committee he could see no single factor that caused the market's pullback a day earlier".  That’s how MSN refugees got tossed out, debunking MSN’s commentators.  Good propagandists and fake news rule, are relied upon as credible sources by the masses.

In fact, it was home grown. It was the seventh biggest one-day point drop ever for the Dow. On a percentage basis, the Dow lost about 3.3 percent - its biggest one-day percentage loss since March 2003.

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I didn't say stocks because the blog was about gold.

flow5 (2/26/07; 14:34:35MT - usagold.com msg#: 152672)

         

Suckers Rally   If gold doesn't fall, then there's a new paradigm

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But these are the #s that economists, like John Cochrane and Ben Bernanke, use to “prove” [sic] that money is neutral:

2007-01-01    44.607

2007-02-01    42.582

2007-03-01    40.671

2007-04-01    42.498

2007-05-01    44.075

2007-06-01    43.866

2007-07-01    42.909

You won’t find much difference in the seasonal variation using other yearly figures.  So it looks like nothing’s there, or anywhere, to upset the apple cart!

And contemporaneous reserve accounting was in effect during “Black Monday”.

So, if you couldn’t figure out why stocks were down today, then now you know.  This is the 4^th seasonal inflection point, on 6/20/18, a lower low in weekly NSA “total checkable deposits”.

 

----- Michel de Nostradame

 

Footnote:

 

To Spencer Hall

From:	Richard.G.Anderson@stls.frb.org
Sent:	Thu 11/16/06 9:55 AM
To:	Spencer Hall (sbh_home@hotmail.com)

Spencer, this is an interesting idea.  Since no one in the Fed tracks reserves, such a coincidence in the data perhaps confirms that the Fed funds rate settings have been correct.

Sounds like an essay topic.  I think I will examine it.

Thanks for the idea, and for writing.

rga

Richard G Anderson
Federal Reserve Bank of St Louis
anderson@stls.frb.org

 

Note aside: “Lagged reserve calculation was used from the late 1960s until 1984, when contemporaneous calculations were implemented. But the Fed decided to revert back to the lagged calculation in 1998 in order to obtain more accurate data” Investopedia reports

Note aside: “Effective with the reserve maintenance period beginning July 30, 1998, the required reserve system was shifted from CRR to new lagged reserve requirements (LRR) with reserve computation periods for weekly reporters starting thirty days before the corresponding reserve maintenance periods. Under the new LRR regime, the lag in counting vault cash toward required reserves was lengthened from sixteen days to thirty days for institutions reporting weekly on the FR2900. In other words, the average vault cash held during a reserve computation period would be applied toward required reserves in its corresponding reserve maintenance period.”