Monetary Flows (MVt)

Transactions vs. Income Velocity - can move in opposite directions

2011-07-31T13:08:00.000-07:00

Transactions Velocity of money (money actually exchanging hands)

The Fed calculates these velocity figures by dividing the aggregate volume of debits of these banks against their demand deposits:

1974-Oct. ,,,,,,, 77
1974-Nov. ,,,,,,, 70
1974-Dec. ,,,,,,, 75
1975-Jan. ,,,,,,, 75
1975-Feb. ,,,,,,, 67
1975-Mar. ,,,,,,, 72
1975-Apr. ,,,,,,, 75
1975-May ,,,,,,, 73
1975-June ,,,,,,, 73
1975-July ,,,,,,, 75
1975-Aug. ,,,,,,, 72
1975-Sep. ,,,,,,, 73

Income Velocity (the contrived figure)

1974-07-01 5.604
1974-10-01 5.680
1975-01-01 5.705
1975-04-01 5.747
1975-07-01 5.843
1975-10-01 5.984

"Velocity is a ratio of nominal GDP to a measure of the money supply. It can be thought of as the rate of turnover in the money supply--that is, the number of times one dollar is used to purchase final goods and services included in GDP."

=====================

One example of Milton Friedman's income velocity moving in the opposite direction of the transactions velocity of money (an actual figure).

=====================

SEE: Member Bank Reserve Requirements -- Analysis of Committee Proposal, February 27, 1938 - declassified March 23, 1983 (too late for any consideration).

In 1931 this committee recommended a radical change in the method of computing reserve requirements, the most important features of which were:

(2) "Requirements against debits to deposits"
(5)"the committee proposed that reserve requirements be based upon the turnover of deposits"

====================

"Changes in business activity are closely with changes in the volume of payments by check, by which the volume of bank debits provide the best available single indicator. That is not to say that bank debits and deposit turnover are by themselves accurate and trustworthy indices of business activity. The debit figures cover payments for the purchase of goods in various channels of production and distribution, for wages and salaries, for dividends and interest; but they also include payments for PROPERTY and other financial transactions that do not necessarily arise from current production and distribution. They include, in addition, many duplications arising from a series of payments for identical goods at different stages of production and consumption (i.e., do not conform to the Keynesian economics, e.g., gDp statistics). Only in a broad way, therefore, do these data reflect changes in general business conditions by showing, among other things, changes in the attitudes of the public toward holding, and spending money"

====================

No one ever asked the question: Are financial transactions random? And there was a paucity of academic discussion on the subject of bank debits.

====================

From the federal register, 1996:

Proposal to discontinue under OMB delegated authority the following
reports:

1. Report title: Survey of Debits to Selected Deposit Accounts
Agency form number: FR 2573
OMB control number: 7100-0081
Frequency: monthly
Reporters: selected commercial banks
Annual reporting hours: 3,000
Estimated average hours per response: 1.0
Number of respondents: 250
Small businesses are affected.

General description of report: This information collection is
voluntary (12 U.S.C.Sec. 248(a)(2)) and is given confidential
treatment (5 U.S.C. Sec. 552(b)(4)).
Abstract: The report collects the amount of debits (withdrawals
during the month) for three deposit categories, which cover the major
types of deposits that money stock holders can use directly or
indirectly for transaction purposes:

(1) demand deposits of individuals, partnerships, corporations, and
of states and political subdivisions;
(2) other checkable deposits (ATS, NOW, and telephone and
preauthorized transfer accounts); and
(3) savings deposits (including money market deposit accounts). The
Federal Reserve has used the FR 2573 data, together with deposit
balance data obtained in large part from weekly deposits reports, in
constructing universe estimates of bank debits and in calculating
deposit turnover rates, which are published in the Federal Reserve's
monthly statistical release, ``Debits and Deposit Turnover at
Commercial Banks (G.6).'' These data have aided in explaining the
behavior of the transaction accounts component of the monetary
aggregates.

"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. In addition, respondent
participation has declined over the last several years. For these
reasons, the Federal Reserve proposes to discontinue the survey and the
related statistical release."

IOeRs Artificially Invert the Yield Curve

2011-07-18T17:57:00.000-07:00

IOeRs have sopped up the excess liquidity of taking Treasury's off the market. I.e., they have proven contractionary. But that's not the big story. The commercial banks are unique in that they create new money when they lend & invest. In fact, the CBs could continue to lend even if the public ceased to save altogether. I.e., the lending capacity of the CBs is determined by, & limited solely by, monetary policy, not the savings practices of the public, not by the CBs ability to borrow loan-funds.

The problem is that when the member banks pay higher rates than the non-banks, they induce dis-intermediation (an outflow of funds from the financial intermediaries). I.e., IOeRs alter the construction of a normal yield curve, they artificially INVERT the short-end segment of the YIELD CURVE – otherwise known as the money market.

The non-banks are the most important lending sector in our economy -- or pre-Great Recession, 82% of the lending market (Z.1 release, sectors, e.g., MMMFs, GSEs, etc.). Proper economic rebalancing involves redirecting savings to the non-banks (the customers of the commercial banks). Doing so does not reduce the size of the CBs. Money flowing to the non-banks actually never leaves the CB system in the first place.

IOeRs are deflationary and stop the flow of existing funds originating in the dealer funding money market, reducing the supply of loan-funds, increasing the cost of loan-funds, and absorbing existing savings (stopping a vast stock of savings in the private sector from being matched with real investment). I.e., the IOR policy results in stagflation.

IOeRs Induce Dis-Intermediation

2011-06-22T07:49:00.000-07:00

The FED’s policy problem is with the payment of interest on inter-bank demand deposits. IOeRs are not the equivalent of short-term t-bills. IOeRs are the functional equivalent of required reserves (because the remuneration rate is the Central Bank's policy rate - & it floats (it’s adjusted for economic growth).

The BOG's new policy tool, IORs, are not just a contractionary open market device for conducting monetary policy within the CB banking system; IOeRs exert a profoundly deflationary force (a cessation of the circuit income & transactions velocity of funds), in both the highly interdependent domestic, & global economies.

Unlike raising reserve ratios during 1936 & 1937, IOeRs induce dis-intermediation (an outflow of funds) from the non-bank financial institutions (e.g., MMMFs, commercial paper market, etc.).

IOeRs compete with money market “paper” (the highly liquid, short-term, dealer funding market). The financial instruments traded in the money market include Treasury bills, commercial paper, banker’s acceptances, certificates of deposit, repurchase agreements (repos), municipal notes, federal funds, short-lived mortgage, and asset-backed securities & Euro-Dollar CDs (liabilities of a non-U.S. banks operating on narrower regulatory margins).

The money market is differentiated by its position on the yield curve (i.e., short-term borrowing & lending with original maturities within a one year period). The domestic money market is benchmarked internationally (by the London interbank market LIBOR indexes & foreign exchange swaps).

The money market collects & channels private savings thru the financial intermediaries (& rolls-over & refinances existing operations). The financial intermediaries include the Shadow Banks (“Paul McCulley of PIMCO’s non-bank investment conduits, vehicles, and structures”). In turn, the financial intermediaries invest their borrowings in longer-term, less liquid, earning assets (e.g., to the capital market - where money is provided for periods longer than a year).

IOeRs completely cut off the yield curve. Thus, they reduce the spread, or net interest rate margin between borrowing short & lending long (between the weighted-average interest earned on loans, securities, and other interest-earning assets, & the weighted-average interest paid on deposits and other interest-bearing liabilities). A flatter (truncated), yield curve and/or lower rates shrinks bank profit margins.

IOeRs remunerated @.25% encompass the entire short-end segment of the yield curve, & QE2's LSAP's effect is distributed on the other portion of the yield curve. The FED's flattening yield curve policy reduces profit opportunities & discourages the extension of new loans or the purchase of new investments.

In summary, IOeRs stop the flow of existing funds originating in the money market, reducing the supply of loan-funds, increasing the cost of loan-funds, and absorbing existing savings (stopping a vast stock of savings in the private sector from being matched with real investment). I.e., the IOR policy results in stagflation.

I.e., the Daily Treasury Yield Curve Rates show the 1 year rate is now @.17% Thus we (or Bernanke), shoot ourselves in the foot again.

IOeRs Are a Credit-Control Device

2011-05-24T05:53:00.000-07:00

On October 3, 2008, Section 128 of the Economic Stabilization Act of 2008 allowed the Fed to begin paying interest on both excess reserve balances as well as required reserves (making the opportunity cost of lending indifferent).

The Emergency Economic Stabilization Act of 2008 accelerated the effective date in the provisions for the Financial Services Regulatory Relief Act of 2006 (legislation whereby the Board of Governors of the Federal Reserve System (BOG), could pay interest on reserves - to October 1, 2008). The payment of interest on these accounts altered the character of the member bank's District Reserve Bank balances.

First, while the monetary base expands when the volume of excess reserves expands, the monetary base is not now, nor has ever been, a base for the expansion of new money & credit. Take currency, which comprised 92% of the base on Aug 2008, & subsequently fell to 43% of the base at present. An increase in the currency component of the base is contractionary - unless offset by open market operations of the buying type.

Second, with interest on reserves (IOeRs), (54% of the base), inter-bank demand deposits (IBDDs) held at the District Reserve banks (owned by the member commercial banks), have been transformed, from cash assets, to highly liquid bank earning assets.

Only excess & required reserves are remunerated. Contractual clearing balances receive earnings credits, but there is no FRB rebate (to the owner), associated with the currency component of the monetary base. I.e., neither currency held by the non-bank public, nor vault cash (& associated ATM networks), are paid interest on their holdings.

In this process, IOeRs have become the functional equivalent of required reserves, not short term T-bills. T-bills are settled upon maturity, or are liquidated at a discount.

IOeRs compete with money market “paper”. The financial instruments traded in the money market include Treasury bills, commercial paper, banker’s acceptances, certificates of deposit, repurchase agreements (repos), municipal notes, federal funds, short-lived mortgage and asset-backed securities & Euro-Dollar CDs (liabilities of a non-U.S. banks operating on narrower regulatory margins).

The money market is differentiated by its position on the yield curve (i.e., short-term borrowing & lending with original maturities from one year or less). The domestic liquidity funding is benchmarked by the London interbank market LIBOR indexes & foreign exchange swaps.

IOeRs flatten out the yield curve. They reduce the spread, or net interest rate margin between borrowing short & lending long (between the weighted-average interest earned on loans, securities, and other interest-earning assets, & the weighted-average interest paid on deposits and other interest-bearing liabilities). A flatter yield curve and/or lower rates shrink bank profit margins (reduce profits on new loans and new investments).

IOeRs sport a "floating", remuneration rate (currently consonant with the 1 year "Daily Treasury Yield Curve Rate"). Interest is paid on the Deposit-Taking Financial Institution’s (DFIs) IBDDs balances averaged over the reserve maintenance period (7 or 15 days, depending upon the institution), & credited 15 days after the close of the respective maintenance period (unlike overnight FFs or repos).

I.e., the BOG’s policy rate "floats" (like an adjustable rate mortgage), via a series of either, cascading, or stair-stepping, interest rate-pegs. I.e., as with ARMs, a "note is periodically adjusted based on a variety of indices". Similarly, "Among the most common indices (for ARMs), are the rates on 1-year constant-maturity Treasury (CMT) securities".

The remuneration rate is a monetary policy "tool", it is the Central Bank's target rate's "floor" in an interest rate corridor where the FFR is the target rate & the discount rate is the penalty rate).

IOeRs are not just an asset swap. IOeRs are assets defined by economists to be outside-of-the properties normally assigned to the money aggregates. I.e., IOeRs are not a medium of exchange. They do not circulate. They do not require Basel II regulatory capital.

In their present state, IOeRs are a credit control device. IOeRs absorb bank deposits (which offset the expansion of the FED’s liquidity funding facilities on the asset side of its balance sheet, as well as QE1’s & QE2’s MBS, & Treasury purchases). Or in effect, IOeRs sterilize open market operations of the buying type.

(1) I.e., if the BOG raised the average reserve ratios on member bank deposits, the VOLUME of required, or legal reserves would increase (as RR were raised in 1936 by 50%& then again in 1937 by another 33%). SEE: http://www.econ.ucdavis.edu/working_papers/03-10.pdf

(2) If the BOG raised the remuneration rate on excess, & required reserves (vis a’ vis other competitive financial instruments, yields, & returns (or investments)), the VOLUME of IBDDs would likewise increase.

The source of System Open Market Account (SOMA), holdings: agency debt, mortgage-backed securities, & Treasury’s ($1.7t - QE1), & Treasury securities ($.6t - QE2), were acquired thru open market operations of the buying type (via monetization between the Reserve Banks & the Commercial Banks, i.e., by simultaneously crediting member bank reserve account balances. The volume of FRB-IBDDs is almost exclusively related to the volume of Reserve Bank credit. I.e., Reserve Banks acquire earning assets (Treasury Bills, etc.), by creating IBDDs – the costless legal reserves of money creating, deposit taking, financial institutions.

By increasing the volume of un-used excess reserves outstanding (the ratio of reserves to deposits), the BOG absorbs, or reduces, the CB system’s lending capacity (either by siphoning the liquidity out of, or limiting the expansion of, the collective system of banks).. That's exactly like raising reserve ratios, or traditionally "tightening" monetary policy. Raising the volume of excess reserves held by the member banks is therefore contractionary, not inflationary.

If, on the other hand the FED lowered the remuneration rate on excess reserves (the FLOOR on interest rates, not the CEILING), the volume of excess reserves would fall (given the opportunity to make bankable loans & investments).

IOeRs are riskless, guaranteed, & are a hedge against higher interest rates (i.e., promise even higher, & safer returns as the economy expands). I.e., IOeRs are a defense against rising rates & falling prices, until the bank judges it is safe to capture higher yields).

I.e., IOeRs have made it unprofitable for the banks to lend within the short-end segment of the yield curve. The evidence is that: “Reserve velocity“ declined: from its peak in December 2007 of 353, to 2.4 as of December 2010. Reserve velocity is defined as the ratio of the average daily value of transactions on FEDWIRE, divided by the daily average value of IBDDs (reserves held at the Federal Reserve.

IOeRs are the bank’s primary liquidity reserves (clearing balance backstop), i.e., apart from the Central Bank's day-light credit backstop, & or System's Federal Funds Market, etc. I.e. as the volume of IOeRs grew -- FED-WIRE, Fed Funds, day-light credit, & contractual clearing balances have all declined conterminously

Monetary Flows (MVt) 1921-1996

2010-07-28T14:10:00.000-07:00

1921 Jan . . . -0.02 . . .
Feb . . . -0.13 . . . 0.16
Mar . . . -0.19 . . . 0.1
Apr . . . -0.23 . . . -0.01
May . . . -0.21 . . . -0.04
Jun . . . -0.21 . . . -0.11
Jul . . . -0.22 . . . -0.14
Aug . . . -0.24 . . . -0.16
Sep . . . -0.25 . . . -0.19
Oct . . . -0.19 . . . -0.18
Nov . . . -0.09 . . . -0.21
Dec . . . 0.02 . . . -0.2
1922 Jan . . . 0.05 . . . -0.19
Feb . . . -0.01 . . . -0.22
Mar . . . -0.01 . . . -0.22
Apr . . . 0 . . . -0.24
May . . . 0.06 . . . -0.2
Jun . . . 0.08 . . . -0.19
Jul . . . 0.06 . . . -0.17
Aug . . . 0.02 . . . -0.17
Sep . . . -0.03 . . . -0.18
Oct . . . 0.03 . . . -0.16
Nov . . . 0.1 . . . -0.15
Dec . . . 0.19 . . . -0.05
1923 Jan . . . 0.22 . . . 0.06
Feb . . . 0.16 . . . 0.14
Mar . . . 0.14 . . . 0.2
Apr . . . 0.11 . . . 0.16
May . . . 0.17 . . . 0.23
Jun . . . 0.18 . . . 0.24
Jul . . . 0.12 . . . 0.24
Aug . . . 0.06 . . . 0.21
Sep . . . -0.04 . . . 0.12
Oct . . . -0.04 . . . 0.13
Nov . . . -0.01 . . . 0.11
Dec . . . 0.04 . . . 0.19
1924 Jan . . . 0.05 . . . 0.23
Feb . . . -0.01 . . . 0.23
Mar . . . -0.03 . . . 0.21
Apr . . . -0.03 . . . 0.15
May . . . 0.03 . . . 0.15
Jun . . . 0.06 . . . 0.12
Jul . . . 0.02 . . . 0.13
Aug . . . -0.01 . . . 0.12
Sep . . . -0.07 . . . 0.08
Oct . . . -0.02 . . . 0.09
Nov . . . 0.01 . . . 0.05
Dec . . . 0.1 . . . 0.09
1925 Jan . . . 0.13 . . . 0.12
Feb . . . 0.11 . . . 0.12
Mar . . . 0.11 . . . 0.12
Apr . . . 0.09 . . . 0.05
May . . . 0.14 . . . 0.08
Jun . . . 0.15 . . . 0.1
Jul . . . 0.12 . . . 0.16
Aug . . . 0.09 . . . 0.2
Sep . . . 0.01 . . . 0.15
Oct . . . 0.03 . . . 0.17
Nov . . . 0.06 . . . 0.13
Dec . . . 0.12 . . . 0.19
1926 Jan . . . 0.14 . . . 0.21
Feb . . . 0.09 . . . 0.21
Mar . . . 0.07 . . . 0.21
Apr . . . 0.04 . . . 0.17
May . . . 0.07 . . . 0.21
Jun . . . 0.07 . . . 0.2
Jul . . . 0.04 . . . 0.23
Aug . . . 0.01 . . . 0.22
Sep . . . -0.06 . . . 0.15
Oct . . . -0.05 . . . 0.14
Nov . . . -0.02 . . . 0.08
Dec . . . 0.04 . . . 0.11
1927 Jan . . . 0.05 . . . 0.11
Feb . . . 0.02 . . . 0.11
Mar . . . 0.03 . . . 0.13
Apr . . . 0.02 . . . 0.1
. . . 0.06 . . . 0.12
Jun . . . 0.07 . . . 0.1
Jul . . . 0.06 . . . 0.1
Aug . . . 0.03 . . . 0.11
Sep . . . -0.02 . . . 0.06
Oct . . . 0.01 . . . 0.07
Nov . . . 0.05 . . . 0.04
Dec . . . 0.1 . . . 0.09
1928 Jan . . . 0.1 . . . 0.11
Feb . . . 0.04 . . . 0.09
Mar . . . 0.03 . . . 0.1
Apr . . . 0.05 . . . 0.08
. . . 0.13 . . . 0.17
Jun . . . 0.15 . . . 0.17
Jul . . . 0.1 . . . 0.16
Aug . . . 0.03 . . . 0.14
Sep . . . -0.05 . . . 0.09
Oct . . . 0 . . . 0.13
Nov . . . 0.07 . . . 0.12
Dec . . . 0.15 . . . 0.2
1929 Jan . . . 0.15 . . . 0.22
Feb . . . 0.06 . . . 0.2
Mar . . . 0.03 . . . 0.18
Apr . . . 0.03 . . . 0.13
. . . 0.09 . . . 0.16
Jun . . . 0.11 . . . 0.14
Jul . . . 0.08 . . . 0.18
Aug . . . 0.07 . . . 0.22
Sep . . . 0.01 . . . 0.19DJIA High 381.17
Oct . . . 0.05 . . . 0.21DJIA Bottom 230.07
Nov . . . 0.07 . . . 0.17
Dec . . . 0.09 . . . 0.16
1930 Jan . . . 0.02 . . . 0.11
Feb . . . -0.09 . . . 0.02
Mar . . . -0.09 . . . -0.01
Apr . . . -0.13 . . . -0.09
. . . -0.11 . . . -0.06
Jun . . . -0.13 . . . -0.05
Jul . . . -0.18 . . . -0.03
Aug . . . -0.22 . . . -0.04
Sep . . . -0.25 . . . -0.14
Oct . . . -0.19 . . . -0.16
Nov . . . -0.13 . . . -0.22
Dec . . . -0.08 . . . -0.21
1931 Jan . . . -0.09 . . . -0.22
Feb . . . -0.16 . . . -0.23
Mar . . . -0.21 . . . -0.27
Apr . . . -0.22 . . . -0.31
. . . -0.16 . . . -0.27
Jun . . . -0.11 . . . -0.29
Jul . . . -0.14 . . . -0.32 DJIA bottom 41.22
Aug . . . -0.16 . . . -0.35
Sep . . . -0.22 . . . -0.41
Oct . . . -0.2 . . . -0.42
Nov . . . -0.2 . . . -0.44
Dec . . . -0.14 . . . -0.39
1932 Jan . . . -0.15 . . . -0.36
Feb . . . -0.21 . . . -0.36
Mar . . . -0.27 . . . -0.4
Apr . . . -0.28 . . . -0.44
. . . -0.25 . . . -0.45
Jun . . . -0.23 . . . -0.45
Jul . . . -0.26 . . . -0.45
Aug . . . -0.25 . . . -0.43
Sep . . . -0.28 . . . -0.45
Oct . . . -0.25 . . . -0.44
Nov . . . -0.24 . . . -0.47
Dec . . . -0.15 . . . -0.44
1933 Jan . . . -0.13 . . . -0.42
Feb . . . -0.13 . . . -0.39
Mar . . . -0.44 . . . -0.6
Apr . . . -0.45 . . . -0.64
. . . -0.4 . . . -0.62
Jun . . . -0.03 . . . -0.38
Jul . . . 0.07 . . . -0.29
Aug . . . 0.12 . . . -0.24
Sep . . . 0.07 . . . -0.25
Oct . . . 0.05 . . . -0.24
Nov . . . 0.05 . . . -0.25
Dec . . . 0.7 . . . -0.2
1934 Jan . . . 0.83 . . . -0.16
Feb . . . 0.73 . . . -0.1
Mar . . . 0.11 . . . -0.05
Apr . . . 0.05 . . . -0.01
. . . 0.08 . . . 0.07
Jun . . . 0.12 . . . 0.14
Jul . . . 0.14 . . . 0.15
Aug . . . 0.13 . . . 0.17
Sep . . . 0.05 . . . 0.12
Oct . . . 0.06 . . . 0.16
Nov . . . 0.06 . . . 0.12
Dec . . . 0.11 . . . 0.21
1935 Jan . . . 0.09 . . . 0.24
Feb . . . 0.03 . . . 0.94
Mar . . . 0.02 . . . 1.09
Apr . . . 0.04 . . . 1.01
. . . 0.12 . . . 0.34
Jun . . . 0.17 . . . 0.23
Jul . . . 0.18 . . . 0.22
Aug . . . 0.18 . . . 0.25
Sep . . . 0.09 . . . 0.25
Oct . . . 0.08 . . . 0.28
Nov . . . 0.11 . . . 0.27
Dec . . . 0.19 . . . 0.36
1936 Jan . . . 0.19 . . . 0.38
Feb . . . 0.11 . . . 0.33
Mar . . . 0.09 . . . 0.27
Apr . . . 0.07 . . . 0.2
. . . 0.09 . . . 0.21
Jun . . . 0.13 . . . 0.25
Jul . . . 0.15 . . . 0.29
Aug . . . 0.12 . . . 0.36
Sep . . . 0.02 . . . 0.32
Oct . . . 0.04 . . . 0.36
Nov . . . 0.08 . . . 0.3
Dec . . . 0.21 . . . 0.41
1937 Jan . . . 0.21 . . . 0.42
Feb . . . 0.17 . . . 0.4
Mar . . . 0.12 . . . 0.34
Apr . . . 0.09 . . . 0.26
. . . 0.12 . . . 0.3
Jun . . . 0.11 . . . 0.24
Jul . . . 0.09 . . . 0.24
Aug . . . 0.04 . . . 0.24
Sep . . . -0.07 . . . 0.21
Oct . . . -0.08 . . . 0.17
Nov . . . -0.07 . . . 0.09
Dec . . . -0.01 . . . 0.12
1938 Jan . . . -0.05 . . . 0.09
Feb . . . -0.13 . . . 0.04
Mar . . . -0.16 . . . -0.03
Apr . . . -0.18 . . . -0.07
. . . -0.15 . . . -0.06
Jun . . . -0.13 . . . -0.09
Jul . . . -0.13 . . . -0.09
Aug . . . -0.12 . . . -0.06
Sep . . . -0.17 . . . -0.1
Oct . . . -0.11 . . . -0.1
Nov . . . -0.03 . . . -0.17
Dec . . . 0.13 . . . -0.09
1939 Jan . . . 0.15 . . . -0.09
Feb . . . 0.08 . . . -0.09
Mar . . . 0.03 . . . -0.14
Apr . . . 0.01 . . . -0.18
. . . 0.06 . . . -0.11
Jun . . . 0.08 . . . -0.1
Jul . . . 0.07 . . . -0.08
Aug . . . 0.04 . . . -0.06
Sep . . . -0.04 . . . -0.06
Oct . . . -0.02 . . . -0.03
Nov . . . 0.04 . . . -0.05
Dec . . . 0.17 . . . 0.06
1940 Jan . . . 0.21 . . . 0.15
Feb . . . 0.13 . . . 0.2
Mar . . . 0.07 . . . 0.17
Apr . . . 0.04 . . . 0.12
. . . 0.09 . . . 0.17
Jun . . . 0.08 . . . 0.16
Jul . . . 0.05 . . . 0.16
Aug . . . 0 . . . 0.15
Sep . . . -0.07 . . . 0.1
Oct . . . -0.05 . . . 0.12
Nov . . . 0.01 . . . 0.08
Dec . . . 0.17 . . . 0.19
1941 Jan . . . 0.21 . . . 0.25
Feb . . . 0.13 . . . 0.29
Mar . . . 0.14 . . . 0.31
Apr . . . 0.15 . . . 0.25
. . . 0.25 . . . 0.32
Jun . . . 0.29 . . . 0.33
Jul . . . 0.27 . . . 0.36
Aug . . . 0.22 . . . 0.37
Sep . . . 0.1 . . . 0.33
Oct . . . 0.12 . . . 0.35
Nov . . . 0.16 . . . 0.28
Dec . . . 0.27 . . . 0.37
1942 Jan . . . 0.26 . . . 0.39
Feb . . . 0.16 . . . 0.44
Mar . . . 0.09 . . . 0.4
week Apr . . . 0.06 . . . 0.33
month . . . 0.11 . . . 0.42
Jun . . . 0.13 . . . 0.43
Jul . . . 0.13 . . . 0.51
Aug . . . 0.12 . . . 0.54
Sep . . . 0.04 . . . 0.51
Oct . . . 0.09 . . . 0.5
Nov . . . 0.12 . . . 0.38
Dec . . . 0.25 . . . 0.44
1943 Jan . . . 0.31 . . . 0.53
Feb . . . 0.28 . . . 0.59
Mar . . . 0.31 . . . 0.64
Apr . . . 0.35 . . . 0.64
May . . . 0.4 . . . 0.68
Jun . . . 0.36 . . . 0.62
Jul . . . 0.28 . . . 0.57
Aug . . . 0.26 . . . 0.59
Sep . . . 0.26 . . . 0.62
Oct . . . 0.22 . . . 0.62
Nov . . . 0.21 . . . 0.51
Dec . . . 0.16 . . . 0.51
1944 Jan . . . 0.11 . . . 0.57
Feb . . . 0.08 . . . 0.66
Mar . . . 0.08 . . . 0.65
Apr . . . 0.08 . . . 0.53
May . . . 0.07 . . . 0.5
Jun . . . 0.04 . . . 0.5
Jul . . . 0.06 . . . 0.53
Aug . . . 0.04 . . . 0.51
Sep . . . -0.01 . . . 0.38
Oct . . . -0.02 . . . 0.36
Nov . . . 0 . . . 0.33
Dec . . . 0.09 . . . 0.37
1945 Jan . . . 0.14 . . . 0.36
Feb . . . 0.1 . . . 0.25
Mar . . . 0.03 . . . 0.14
Apr . . . -0.02 . . . 0.07
May . . . 0.02 . . . 0.13
Jun . . . 0.13 . . . 0.22
Jul . . . 0.14 . . . 0.23
Aug . . . 0.06 . . . 0.12
Sep . . . -0.11 . . . 0.01
Oct . . . -0.11 . . . 0
Nov . . . -0.04 . . . 0.04
Dec . . . 0.09 . . . 0.12
1946 Jan . . . 0.15 . . . 0.14
Feb . . . 0.08 . . . 0.13
Mar . . . 0 . . . 0.13
Apr . . . -0.01 . . . 0.13
May . . . 0.06 . . . 0.14
Jun . . . 0.17 . . . 0.11
Jul . . . 0.18 . . . 0.14
Aug . . . 0.16 . . . 0.22
Sep . . . 0.06 . . . 0.22
Oct . . . 0.06 . . . 0.21
Nov . . . 0.1 . . . 0.15
Dec . . . 0.21 . . . 0.2
1947 Jan . . . 0.23 . . . 0.27
Feb . . . 0.16 . . . 0.28
Mar . . . 0.15 . . . 0.31
Apr . . . 0.1 . . . 0.22
May . . . 0.12 . . . 0.2
Jun . . . 0.09 . . . 0.18
Jul . . . 0.09 . . . 0.23
Aug . . . 0.06 . . . 0.36
Sep . . . 0.01 . . . 0.36
Oct . . . 0.05 . . . 0.39
Nov . . . 0.1 . . . 0.29
Dec . . . 0.18 . . . 0.34
1948 Jan . . . 0.2 . . . 0.36
Feb . . . 0.15 . . . 0.38
Mar . . . 0.14 . . . 0.36
Apr . . . 0.1 . . . 0.28
May . . . 0.12 . . . 0.31
Jun . . . 0.1 . . . 0.27
Jul . . . 0.06 . . . 0.27
Aug . . . 0.05 . . . 0.28
Sep . . . -0.01 . . . 0.24
Oct . . . 0 . . . 0.23
Nov . . . 0.03 . . . 0.17
Dec . . . 0.09 . . . 0.21
1949 Jan . . . 0.1 . . . 0.22
Feb . . . 0.03 . . . 0.17
Mar . . . 0 . . . 0.16
Apr . . . -0.03 . . . 0.1
May . . . -0.02 . . . 0.14
Jun . . . -0.04 . . . 0.1 June DJIA 150
Jul . . . -0.06 . . . 0.09
Aug . . . -0.07 . . . 0.08
Sep . . . -0.11 . . . 0.02
Oct . . . -0.08 . . . 0.01
Nov . . . -0.03 . . . -0.04
Dec . . . 0.04 . . . 0
1950 Jan . . . 0.07 . . . 0.03
Feb . . . 0.02 . . . 0.03
Mar . . . 0.05 . . . 0.05
Apr . . . 0.04 . . . 0.02
May . . . 0.09 . . . 0.07
Jun . . . 0.12 . . . 0.07
Jul . . . 0.13 . . . 0.09
Aug . . . 0.16 . . . 0.13
Sep . . . 0.13 . . . 0.14
Oct . . . 0.17 . . . 0.17
Nov . . . 0.2 . . . 0.13
Dec . . . 0.24 . . . 0.18
1951 Jan . . . 0.3 . . . 0.28
Feb . . . 0.21 . . . 0.3
Mar . . . 0.21 . . . 0.34
Apr . . . 0.14 . . . 0.27
. . . 0.14 . . . 0.35
Jun . . . 0.1 . . . 0.33
Jul . . . 0.05 . . . 0.32
Aug . . . 0.04 . . . 0.32
Sep . . . -0.02 . . . 0.26
Oct . . . -0.01 . . . 0.31
Nov . . . 0.02 . . . 0.27
Dec . . . 0.04 . . . 0.31
1952 Jan . . . 0.08 . . . 0.33
Feb . . . 0.02 . . . 0.31
Mar . . . 0.04 . . . 0.32
Apr . . . 0.03 . . . 0.24
. . . 0.05 . . . 0.24
Jun . . . 0.07 . . . 0.2
Jul . . . 0.04 . . . 0.16
Aug . . . 0.01 . . . 0.13
Sep . . . -0.03 . . . 0.08
Oct . . . 0 . . . 0.11
Nov . . . 0.03 . . . 0.09
Dec . . . 0.1 . . . 0.12
1953 Jan . . . 0.11 . . . 0.13 Top DJIA
Feb . . . 0.09 . . . 0.11
Mar . . . 0.09 . . . 0.14
Apr . . . 0.04 . . . 0.06
. . . 0.09 . . . 0.11
Jun . . . 0.08 . . . 0.11
Jul . . . 0.09 . . . 0.17
Aug . . . 0.06 . . . 0.19
Sep . . . -0.01 . . . 0.12 Bottom DJIA
Oct . . . -0.01 . . . 0.1
Nov . . . 0 . . . 0.06
Dec . . . 0.05 . . . 0.11
1954 Jan . . . 0.07 . . . 0.11
Feb . . . 0.02 . . . 0.1
Mar . . . 0.03 . . . 0.12
Apr . . . -0.01 . . . 0.11
. . . 0.02 . . . 0.13
Jun . . . 0.02 . . . 0.1
Jul . . . 0.02 . . . 0.12
Aug . . . 0.02 . . . 0.13
Sep . . . -0.31 . . . -0.24
Oct . . . -0.3 . . . -0.25
Nov . . . -0.27 . . . -0.27
Dec . . . 0.08 . . . 0.09
1955 Jan . . . 0.1 . . . 0.11
Feb . . . 0.06 . . . 0.11
Mar . . . 0.08 . . . 0.15
Apr . . . 0.08 . . . 0.11
. . . 0.11 . . . 0.17
Jun . . . 0.58 . . . 0.11
Jul . . . 0.59 . . . 0.13
Aug . . . 0.57 . . . 0.16
Sep . . . 0.04 . . . 0.15
Oct . . . 0.04 . . . 0.16
Nov . . . 0.06 . . . 0.12
Dec . . . 0.11 . . . 0.18
1956 Jan . . . 0.14 . . . 0.23
Feb . . . 0.08 . . . 0.22
Mar . . . 0.07 . . . 0.2
Apr . . . 0.04 . . . 0.15
. . . 0.07 . . . 0.21
Jun . . . 0.08 . . . 0.21
Jul . . . 0.08 . . . 0.22
Aug . . . 0.07 . . . 0.74
Sep . . . 0 . . . 0.69
Oct . . . -0.01 . . . 0.68
Nov . . . 0.01 . . . 0.14
Dec . . . 0.08 . . . 0.17
1957 Jan . . . 0.12 . . . 0.21
Feb . . . 0.06 . . . 0.19
Mar . . . 0.05 . . . 0.18
Apr . . . 0.02 . . . 0.11
. . . 0.06 . . . 0.16
Jun . . . 0.08 . . . 0.14
Jul . . . 0.07 . . . 0.15
Aug . . . 0.06 . . . 0.16 Top DJIA 506.21
Sep . . . 0 . . . 0.13
Oct . . . -0.01 . . . 0.13
Nov . . . 0 . . . 0.07 Bottom DJIA 434.71
Dec . . . 0.04 . . . 0.08
1958 Jan . . . 0.07 . . . 0.11
Feb . . . 0 . . . 0.09
Mar . . . -0.02 . . . 0.07
Apr . . . -0.06 . . . 0.01
. . . -0.03 . . . 0.04
Jun . . . -0.02 . . . 0.04
Jul . . . 0 . . . 0.05
Aug . . . 0.01 . . . 0.08
Sep . . . -0.03 . . . 0.06
Oct . . . -0.01 . . . 0.08
Nov . . . 0.02 . . . 0.03
Dec . . . 0.11 . . . 0.07
1959 Jan . . . 0.15 . . . 0.1
Feb . . . 0.13 . . . 0.12
Mar . . . 0.1 . . . 0.12
Apr . . . 0.09 . . . 0.08
. . . 0.13 . . . 0.13
Jun . . . 0.13 . . . 0.12
Jul . . . 0.13 . . . 0.15
Aug . . . 0.12 . . . 0.15
Sep . . . 0.04 . . . 0.13
Oct . . . 0.02 . . . 0.13
Nov . . . 0.02 . . . 0.09
Dec . . . 0.09 . . . 0.14 Top DJIA 579.36
1960 Jan . . . 0.09 . . . 0.17
Feb . . . 0.06 . . . 0.22
Mar . . . 0.03 . . . 0.23
Apr . . . 0.01 . . . 0.2
. . . 0.03 . . . 0.2
Jun . . . 0.05 . . . 0.19
Jul . . . 0.06 . . . 0.18
Aug . . . 0.07 . . . 0.2
Sep . . . 0 . . . 0.15
Oct . . . 0.01 . . . 0.16
Nov . . . -0.01 . . . 0.08 Bottom DJIA 585.24
Dec . . . 0.04 . . . 0.11
1961 Jan . . . 0.04 . . . 0.1
Feb . . . 0 . . . 0.09
Mar . . . -0.01 . . . 0.08
Apr . . . -0.01 . . . 0.04
. . . 0.03 . . . 0.09
Jun . . . 0.06 . . . 0.08
Jul . . . 0.06 . . . 0.1
Aug . . . 0.07 . . . 0.11
Sep . . . 0.01 . . . 0.1
Oct . . . 0.04 . . . 0.13
Nov . . . 0.08 . . . 0.08
Dec . . . 0.13 . . . 0.13 Top DJIA 728.8
1962 Jan . . . 0.18 . . . 0.16
Feb . . . 0.08 . . . 0.14
Mar . . . 0.08 . . . 0.15
Apr . . . 0.03 . . . 0.1
. . . 0.1 . . . 0.16
Jun . . . 0.13 . . . 0.17 Bottom DJIA 535.76
Jul . . . 0.11 . . . 0.17
Aug . . . 0.09 . . . 0.18
Sep . . . 0.01 . . . 0.13
Oct . . . 0 . . . 0.17
Nov . . . 0.04 . . . 0.14
Dec . . . 0.08 . . . 0.2
1963 Jan . . . 0.13 . . . 0.25
Feb . . . 0.04 . . . 0.22
Mar . . . 0.03 . . . 0.22
Apr . . . 0 . . . 0.13
. . . 0.06 . . . 0.18
Jun . . . 0.1 . . . 0.17
Jul . . . 0.09 . . . 0.2
Aug . . . 0.08 . . . 0.22
Sep . . . 0.04 . . . 0.19
Oct . . . 0.04 . . . 0.2
Nov . . . 0.07 . . . 0.15
Dec . . . 0.13 . . . 0.17
1964 Jan . . . 0.16 . . . 0.21
Feb . . . 0.09 . . . 0.2
Mar . . . 0.07 . . . 0.21
Apr . . . 0.04 . . . 0.13
. . . 0.09 . . . 0.17
Jun . . . 0.08 . . . 0.17
Jul . . . 0.08 . . . 0.19
Aug . . . 0.07 . . . 0.22
Sep . . . 0.02 . . . 0.18
Oct . . . 0 . . . 0.18
Nov . . . 0.03 . . . 0.13
Dec . . . 0.09 . . . 0.17
1965 Jan . . . 0.15 . . . 0.25
Feb . . . 0.11 . . . 0.26
Mar . . . 0.09 . . . 0.27
Apr . . . 0.07 . . . 0.2
. . . 0.11 . . . 0.24
Jun . . . 0.13 . . . 0.23
Jul . . . 0.15 . . . 0.25
Aug . . . 0.13 . . . 0.23
Sep . . . 0.06 . . . 0.2
Oct . . . 0.02 . . . 0.2
Nov . . . 0.03 . . . 0.16
Dec . . . 0.09 . . . 0.2
1966 Jan . . . 0.11 . . . 0.22
Feb . . . 0.06 . . . 0.23
Mar . . . 0.05 . . . 0.24
Apr . . . 0.06 . . . 0.22
. . . 0.1 . . . 0.25
Jun . . . 0.11 . . . 0.24
Jul . . . 0.11 . . . 0.24
Aug . . . 0.12 . . . 0.28
Sep . . . 0.05 . . . 0.25
Oct . . . 0.04 . . . 0.24
Nov . . . 0.08 . . . 0.21
Dec . . . 0.15 . . . 0.24
1967 Jan . . . 0.16 . . . 0.28
Feb . . . 0.1 . . . 0.26
Mar . . . 0.09 . . . 0.26
Apr . . . 0.1 . . . 0.22
. . . 0.13 . . . 0.27
Jun . . . 0.15 . . . 0.25
Jul . . . 0.15 . . . 0.27
Aug . . . 0.14 . . . 0.3
Sep . . . 0.06 . . . 0.28
Oct . . . 0.04 . . . 0.28
Nov . . . 0.06 . . . 0.21
Dec . . . 0.09 . . . 0.25
1968 Jan . . . 0.11 . . . 0.29
Feb . . . 0.04 . . . 0.25
Mar . . . 0.04 . . . 0.23
Apr . . . 0.02 . . . 0.17
. . . 0.06 . . . 0.23
Jun . . . 0.08 . . . 0.24
Jul . . . 0.09 . . . 0.24
Aug . . . 0.11 . . . 0.28
Sep . . . 0.05 . . . 0.25
Oct . . . 0.04 . . . 0.25
Nov . . . 0.07 . . . 0.17
Dec . . . 0.11 . . . 0.17 Top DJIA 908.92
1969 Jan . . . 0.17 . . . 0.25
Feb . . . 0.1 . . . 0.24
Mar . . . 0.09 . . . 0.23
Apr . . . 0.07 . . . 0.18
. . . 0.11 . . . 0.24
Jun . . . 0.15 . . . 0.25
Jul . . . 0.15 . . . 0.26
Aug . . . 0.15 . . . 0.27
Sep . . . 0.12 . . . 0.26
Oct . . . 0.09 . . . 0.29
Nov . . . 0.11 . . . 0.26
Dec . . . 0.17 . . . 0.3
1970 Jan . . . 0.25 . . . 0.41
Feb . . . 0.23 . . . 0.46
Mar . . . 0.26 . . . 0.55
Apr . . . 0.25 . . . 0.49
May . . . 0.3 . . . 0.53 Bottom DJIA 631.6
Jun . . . 0.32 . . . 0.53
Jul . . . 0.31 . . . 0.53
Aug . . . 0.29 . . . 0.55
Sep . . . 0.21 . . . 0.5
Oct . . . 0.13 . . . 0.49
Nov . . . 0.09 . . . 0.44
Dec . . . 0.09 . . . 0.45
1971 Jan . . . -0.27 . . . -0.02
Feb . . . -0.61 . . . -0.46
Mar . . . -0.98 . . . -0.98
Apr . . . -0.98 . . . -0.98
May . . . -0.98 . . . -0.98
Jun . . . -0.98 . . . -0.98
Jul . . . -0.98 . . . -0.98
Aug . . . -0.98 . . . -0.98
Sep . . . -0.98 . . . -0.98
Oct . . . -0.98 . . . -0.98
Nov . . . -0.95 . . . -0.98
Dec . . . 0.16 . . . -0.98
1972 Jan . . . 0.14 . . . -0.98
Feb . . . 0.08 . . . -0.98
Mar . . . 0.06 . . . -0.98
Apr . . . 0.08 . . . -0.98
May . . . 0.11 . . . -0.98
Jun . . . 0.14 . . . -0.98
Jul . . . 0.16 . . . -0.98
Aug . . . 0.15 . . . -0.98
Sep . . . 0.08 . . . -0.98
Oct . . . 0.09 . . . -0.98
Nov . . . 0.12 . . . -0.98
Dec . . . 0.16 . . . -0.97
1973 Jan . . . 0.19 . . . -0.94 Top DJIA 1051.7
Feb . . . 0.13 . . . 0.4
Mar . . . 0.15 . . . 0.4
Apr . . . 0.15 . . . 0.36
May . . . 0.21 . . . 0.41
Jun . . . 0.24 . . . 0.42
Jul . . . 0.24 . . . 0.43
Aug . . . 0.27 . . . 0.49
Sep . . . 0.2 . . . 0.48
Oct . . . 0.18 . . . 0.5
Nov . . . 0.19 . . . 0.44
Dec . . . 0.2 . . . 0.48
1974 Jan . . . 0.22 . . . 0.53
Feb . . . 0.14 . . . 0.51
Mar . . . 0.14 . . . 0.5
Apr . . . 0.11 . . . 0.44
May . . . 0.15 . . . 0.5
Jun . . . 0.17 . . . 0.5
Jul . . . 0.15 . . . 0.51
Aug . . . 0.15 . . . 0.53
Sep . . . 0.11 . . . 0.5
Oct . . . 0.1 . . . 0.51
Nov . . . 0.12 . . . 0.46
Dec . . . 0.15 . . . 0.45 Bottom DJIA 577.60
1975 Jan . . . 0.14 . . . 0.45
Feb . . . 0.05 . . . 0.37
Mar . . . 0.02 . . . 0.32
Apr . . . 0 . . . 0.25
May . . . 0.03 . . . 0.27
Jun . . . 0.03 . . . 0.25
Jul . . . 0.03 . . . 0.23
Aug . . . 0.04 . . . 0.26
Sep . . . 0 . . . 0.23
Oct . . . 0.02 . . . 0.24
Nov . . . 0.03 . . . 0.17
Dec . . . 0.1 . . . 0.19
1976 Jan . . . 0.1 . . . 0.2
Feb . . . 0.08 . . . 0.2
Mar . . . 0.08 . . . 0.21
Apr . . . 0.1 . . . 0.18
May . . . 0.13 . . . 0.21
Jun . . . 0.13 . . . 0.21
Jul . . . 0.12 . . . 0.21
Aug . . . 0.17 . . . 0.24
Sep . . . 0.12 . . . 0.21
Oct . . . 0.12 . . . 0.21
Nov . . . 0.11 . . . 0.16
Dec . . . 0.15 . . . 0.22
1977 Jan . . . 0.14 . . . 0.28
Feb . . . 0.09 . . . 0.3
Mar . . . 0.07 . . . 0.3
Apr . . . 0.1 . . . 0.29
May . . . 0.31 . . . 0.56
Jun . . . 0.34 . . . 0.57
Jul . . . 0.34 . . . 0.56
Aug . . . 0.17 . . . 0.36
Sep . . . 0.09 . . . 0.31
Oct . . . 0.06 . . . 0.32
Nov . . . 0.09 . . . 0.29
Dec . . . 0.14 . . . 0.34
1978 Jan . . . 0.16 . . . 0.39
Feb . . . -0.07 . . . 0.34
Mar . . . -0.07 . . . 0.33
Apr . . . -0.06 . . . 0.3
May . . . 0.16 . . . 0.39
Jun . . . 0.22 . . . 0.43
Jul . . . 0.26 . . . 0.41
Aug . . . 0.27 . . . 0.46
Sep . . . 0.2 . . . 0.43
Oct . . . 0.19 . . . 0.49
Nov . . . 0.2 . . . 0.4
Dec . . . 0.2 . . . 0.4
1979 Jan . . . 0.23 . . . 0.47
Feb . . . 0.14 . . . 0.47
Mar . . . 0.14 . . . 0.49
Apr . . . 0.11 . . . 0.2
May . . . 0.16 . . . 0.26
Jun . . . 0.2 . . . 0.28
Jul . . . 0.18 . . . 0.5
Aug . . . 0.22 . . . 0.57
Sep . . . 0.18 . . . 0.57
Oct . . . 0.18 . . . 0.6
Nov . . . 0.18 . . . 0.52
Dec . . . 0.17 . . . 0.5
1980 Jan . . . 0.19 . . . 0.55
Feb . . . 0.13 . . . 0.53 Top DJIA 903.84
Mar . . . 0.14 . . . 0.55
Apr . . . 0.1 . . . 0.43 Bottom DJIA 759.13
May . . . 0 . . . 0.28
Jun . . . 0.02 . . . 0.28
Jul . . . 0.03 . . . 0.3
Aug . . . 0.16 . . . 0.47
Sep . . . 0.15 . . . 0.44
Oct . . . 0.15 . . . 0.48
Nov . . . 0.13 . . . 0.44
Dec . . . 0.18 . . . 0.48
1981 Jan . . . 0.22 . . . 0.53
Feb . . . 0.34 . . . 0.5
Mar . . . 0.32 . . . 0.51
Apr . . . 0.29 . . . 0.45 Top DJIA 1004.32
May . . . 0.23 . . . 0.51
Jun . . . 0.22 . . . 0.48
Jul . . . 0.22 . . . 0.47
Aug . . . 0.22 . . . 0.48
Sep . . . 0.15 . . . 0.44
Oct . . . 0.13 . . . 0.47
Nov . . . 0.12 . . . 0.45
Dec . . . 0.19 . . . 0.51
1982 Jan . . . 0.19 . . . 0.52
Feb . . . 0.12 . . . 0.48
Mar . . . 0.1 . . . 0.48
Apr . . . 0.1 . . . 0.62
May . . . 0.13 . . . 0.64
Jun . . . 0.14 . . . 0.6
Jul . . . 0.17 . . . 0.47
Aug . . . 0.21 . . . 0.53 Bottom DJIA 776.92
Sep . . . 0.15 . . . 0.52
Oct . . . 0.14 . . . 0.53
Nov . . . 0.14 . . . 0.43
Dec . . . 0.18 . . . 0.43
1983 Jan . . . 0.19 . . . 0.44
Feb . . . 0.13 . . . 0.4
Mar . . . 0.12 . . . 0.39
Apr . . . 0.08 . . . 0.29
May . . . 0.07 . . . 0.34
Jun . . . 0.06 . . . 0.33
Jul . . . 0.07 . . . 0.34
Aug . . . 0.11 . . . 0.38
Sep . . . 0.08 . . . 0.37
Oct . . . 0.08 . . . 0.38
Nov . . . 0.09 . . . 0.28
Dec . . . 0.12 . . . 0.3
1984 Jan . . . 0.17 . . . 0.36
Feb . . . 0.13 . . . 0.37
Mar . . . 0.12 . . . 0.35
Apr . . . 0.1 . . . 0.3
May . . . 0.11 . . . 0.34
Jun . . . 0.13 . . . 0.32
Jul . . . 0.12 . . . 0.27
Aug . . . 0.14 . . . 0.27
Sep . . . 0.08 . . . 0.24
Oct . . . 0.08 . . . 0.28
Nov . . . 0.05 . . . 0.23
Dec . . . 0.1 . . . 0.25
1985 Jan . . . 0.12 . . . 0.3
Feb . . . 0.08 . . . 0.29
Mar . . . 0.08 . . . 0.33
Apr . . . 0.08 . . . 0.29
May . . . 0.13 . . . 0.35
Jun . . . 0.17 . . . 0.35
Jul . . . 0.15 . . . 0.33
Aug . . . 0.17 . . . 0.33
Sep . . . 0.12 . . . 0.29
Oct . . . 0.09 . . . 0.29
Nov . . . 0.06 . . . 0.22
Dec . . . 0.11 . . . 0.26
1986 Jan . . . 0.12 . . . 0.28
Feb . . . 0.06 . . . 0.28
Mar . . . 0.02 . . . 0.25
Apr . . . 0.02 . . . 0.22
May . . . 0.09 . . . 0.29
Jun . . . 0.12 . . . 0.3
Jul . . . 0.14 . . . 0.3
Aug . . . 0.17 . . . 0.32
Sep . . . 0.11 . . . 0.3
Oct . . . 0.11 . . . 0.34
Nov . . . 0.09 . . . 0.26
Dec . . . 0.18 . . . 0.32
1987 Jan . . . 0.18 . . . 0.34
Feb . . . 0.15 . . . 0.36
Mar . . . 0.11 . . . 0.33
Apr . . . 0.12 . . . 0.28
May . . . 0.15 . . . 0.3
Jun . . . 0.15 . . . 0.29
Jul . . . 0.13 . . . 0.3
Aug . . . 0.16 . . . 0.31 High DJIA 2722.42
Sep . . . 0.09 . . . 0.32
Oct . . . 0.09 . . . 0.38 Bottom DJIA 1738.34
Nov . . . 0.04 . . . 0.28
Dec . . . 0.08 . . . 0.28
1988 Jan . . . 0.03 . . . 0.24
Feb . . . 0.02 . . . 0.3
Mar . . . 0.02 . . . 0.29
Apr . . . 0.03 . . . 0.22
May . . . 0.03 . . . 0.21
Jun . . . 0.04 . . . 0.2
Jul . . . 0.02 . . . 0.21
Aug . . . 0.06 . . . 0.23
Sep . . . 0.02 . . . 0.18
Oct . . . 0.06 . . . 0.21
Nov . . . 0.03 . . . 0.13
Dec . . . 0.09 . . . 0.18
1989 Jan . . . 0.17 . . . 0.24
Feb . . . 0.15 . . . 0.26
Mar . . . 0.16 . . . 0.25
Apr . . . 0.13 . . . 0.18
May . . . 0.19 . . . 0.27
Jun . . . 0.26 . . . 0.32
Jul . . . 0.3 . . . 0.36
Aug . . . 0.37 . . . 0.42
Sep . . . 0.26 . . . 0.37
Oct . . . 0.18 . . . 0.4
Nov . . . 0.13 . . . 0.32
Dec . . . 0.13 . . . 0.37
1990 Jan . . . 0.21 . . . 0.4
Feb . . . 0.11 . . . 0.38
Mar . . . 0.07 . . . 0.37
Apr . . . -0.02 . . . 0.29
May . . . -0.05 . . . 0.31
Jun . . . 0.01 . . . 0.35
Jul . . . 0.05 . . . 0.38 Top DJIA 2911.63
Aug . . . 0.15 . . . 0.49
Sep . . . 0.08 . . . 0.39
Oct . . . 0.01 . . . 0.38 Bottom DJIA 2381.99
Nov . . . -0.05 . . . 0.21
Dec . . . -0.05 . . . 0.12
1991 Jan . . . -0.04 . . . 0.08
Feb . . . -0.09 . . . 0.03
Mar . . . -0.13 . . . 0.05
Apr . . . -0.16 . . . -0.02
May . . . -0.18 . . . -0.03
Jun . . . -0.13 . . . -0.07
Jul . . . -0.12 . . . -0.11
Aug . . . -0.06 . . . -0.1
Sep . . . -0.06 . . . -0.11
Oct . . . -0.03 . . . -0.08
Nov . . . -0.02 . . . -0.11
Dec . . . 0.02 . . . -0.11
1992 Jan . . . 0.02 . . . -0.1
Feb . . . -0.02 . . . -0.1
Mar . . . -0.01 . . . -0.07
Apr . . . -0.01 . . . -0.08
May . . . 0.02 . . . -0.1
Jun . . . 0.05 . . . -0.11
Jul . . . 0.08 . . . -0.13
Aug . . . 0.15 . . . -0.05
Sep . . . 0.11 . . . -0.04
Oct . . . 0.08 . . . 0.01
Nov . . . 0.05 . . . -0.01
Dec . . . 0.07 . . . 0.03
1993 Jan . . . 0.05 . . . 0.06
Feb . . . 0.04 . . . 0.07
Mar . . . 0.02 . . . 0.08
Apr . . . 0.03 . . . 0.09
May . . . 0.02 . . . 0.12
Jun . . . 0.03 . . . 0.12
Jul . . . 0.05 . . . 0.14
Aug . . . 0.12 . . . 0.18
Sep . . . 0.1 . . . 0.18
Oct . . . 0.12 . . . 0.2
Nov . . . 0.1 . . . 0.16
Dec . . . 0.12 . . . 0.2
1994 Jan . . . 0.09 . . . 0.2
Feb . . . 0.06 . . . 0.2
Mar . . . 0.06 . . . 0.2
Apr . . . 0.06 . . . 0.19
May . . . 0.06 . . . 0.19
Jun . . . 0.05 . . . 0.15
Jul . . . 0.05 . . . 0.1
Aug . . . 0.09 . . . 0.14
Sep . . . 0.05 . . . 0.16
Oct . . . 0.05 . . . 0.21
Nov . . . 0.03 . . . 0.16
Dec . . . 0.04 . . . 0.2
1995 Jan . . . 0.07 . . . 0.23
Feb . . . 0.04 . . . 0.21
Mar . . . 0.07 . . . 0.19
Apr . . . 0.07 . . . 0.16
May . . . 0.1 . . . 0.22
Jun . . . 0.13 . . . 0.24
Jul . . . -0.03 . . . 0.05
Aug . . . 0.01 . . . 0.05
Sep . . . -0.07 . . . 0
Oct . . . 0.08 . . . 0.21
Nov . . . 0.06 . . . 0.14
Dec . . . 0.06 . . . 0.16
1996 Jan . . . 0.07 . . . 0.17
Feb . . . 0.01 . . . 0.16
Mar . . . -0.01 . . . 0.17
Apr . . . 0.18 . . . 0.16
May . . . 0.22 . . . 0.22
Jun . . . 0.3 . . . 0.24
Jul . . . 0.1 . . . 0.22
Aug . . . 0.14 . . . 0.24
http://www.automationinformation.com/DJIA/dow_jones_highs_and_lows.htm
http://www.scribd.com/doc/7799766/DJIA-History
http://www.latrobefinancialmanagement.com/History-for_Dow_Jones_Industrial_Average.htm#1950-1959

Greenspan Never Tightened--Bernanke Never Eased

2010-07-11T15:49:00.000-07:00

MONETARISM HAS NEVER BEEN TRIED:

To counter what Greenspan described as “irrational exuberance (at the height of the Doc.com stock market bubble), Greenspan initiated a "tight" monetary policy (for 31 out of 34 months). A “tight” money policy is one where the rate-of-change in monetary flows (our means-of-payment money times its transactions rate-of-turnover) is no greater than 2-3% above the rate-of-change in the real output of goods & services.

Greenspan then wildly reversed his “tight” money policy (at that point Greenspan was well behind the employment curve), and reverted to a very "easy" monetary policy -- for 41 consecutive months (despite 17 raises in the FFR, -every single rate increase was “behind the curve”). I.e., the evidence shows that: (using a 3 qtr rate-of-change), nominal gDp progressively increased until it finally peaked in the 1st qtr of 2006. I.e., Greenspan NEVER tightened monetary policy.

Then, as soon as Bernanke was appointed to the Chairman of the Federal Reserve, he initiated a "tight" money policy (ending the housing bubble in 2006), for 29 consecutive months (out of a possible 29, or at first, sufficient to wring inflation out of the economy, but persisting until the economy collapsed).

The FOMC continued to drain liquidity despite its 7 reductions in the FFR (which began on 9/18/07). I.e., despite Bear Sterns two hedge funds that collapsed, the FED maintained its “tight” money policy(i.e., credit easing, not quantitative easing).

I.e., Bernanke didn’t initiate an “easy” money policy until Lehman Brothers filed for bankruptcy protection (& it was one the Federal Reserve Bank of New York’s primary dealers in the Treasury Market) & AIG’s credit rating was lowered (necessitating a $85b . unique credit facility by the FED).

Did you catch it??? Nobody got it. Greenspan didn't start "easing" on January 3, 2000, when the FFR was first lowered by 1/2, to 6%. Greenspan didn't change from a "tight" monetary policy, to an "easier" monetary policy, until after 11 reductions in the FFR, ending just before the reduction on November 6, 2002 @ 1 & 1/4%.

I.e., Greenspan was responsible for both high employment (June 2003, @ 6.3%), and high inflation (rampant real-estate speculation, followed by widespread commodity speculation – peaking in July 2008 – Greenspan’s inflection point).

Bernanke then drove the economy relentlessly into our Depression creating an unemployment rate nightmare of 10.1%.

The problem is that the Federal Reserve doesn’t gauge the volume and timing of its open market operations in terms of the amount and desired rate of increase of member commercial banks costless legal reserves, but rather in terms of the levels of the federal funds rates (the interest rates banks charge other banks on excess balances with the Federal Reserve).

By using the wrong criteria (interest rates, rather than member bank reserves) in formulating and executing monetary policy, the Federal Reserve became an engine of inflation.

================================

2000 jan ……. -0.08 ……. 0.01 top
……. feb ……. -0.06 ……. -0.04
……. mar ……. -0.13 ……. -0.12
……. apr ……. -0.13 ……. -0.04
……. may ……. -0.07 ……. 0
……. jun ……. -0.12 ……. -0.06
……. jul ……. -0.1 ……. -0.05
……. aug ……. -0.11 ……. -0.03
……. sep ……. -0.11 ……. -0.04
……. oct ……. -0.12 ……. -0.07
……. nov ……. -0.12 ……. -0.11
……. dec ……. -0.14 ……. -0.09
2001 jan ……. -0.14 ……. 0
……. feb ……. -0.14 ……. -0.04
……. mar ……. -0.13 ……. -0.11
……. apr ……. -0.12 ……. -0.02
……. may ……. -0.12 ……. -0.01
……. jun ……. -0.1 ……. -0.04
……. jul ……. -0.07 ……. 0
……. aug ……. -0.06 ……. 0.02
……. sep ……. -0.05 ……. 0.03
……. oct ……. 0.11 ……. 0.18
……. nov ……. -0.02 ……. 0.01
……. dec ……. -0.02 ……. 0.04
2002 jan ……. -0.01 ……. 0.16
……. feb ……. 0 ……. 0.1
……. mar ……. 0.01 ……. 0.01
……. apr ……. 0.01 ……. 0.07
……. may ……. -0.04 ……. 0.03
……. jun ……. -0.03 ……. -0.03
……. jul ……. -0.02 ……. -0.02
……. aug ……. -0.01 ……. -0.13
……. sep ……. -0.02 ……. -0.04
……. oct ……. -0.02 ……. -0.06 bottom
……. nov ……. -0.01 ……. -0.11
……. dec ……. 0.02 ……. -0.07
2003 jan ……. 0.07 ……. 0.06
……. feb ……. 0.05 ……. 0.01
……. mar ……. 0.07 ……. 0
……. apr ……. 0.06 ……. 0.06
……. may ……. 0.05 ……. 0.06
……. jun ……. 0.08 ……. 0.05
……. jul ……. 0.1 ……. 0.12
……. aug ……. 0.1 ……. 0.14
……. sep ……. 0.11 ……. 0.15
……. oct ……. -0.05 ……. 0.09
……. nov ……. 0.06 ……. 0
……. dec ……. 0.05 ……. 0.03
2004 jan ……. 0.04 ……. 0.13
……. feb ……. 0.04 ……. 0.08
……. mar ……. 0.09 ……. 0.05
……. apr ……. 0.11 ……. 0.1
……. may ……. 0.14 ……. 0.07
……. jun ……. 0.17 ……. 0.03
……. jul ……. 0.18 ……. 0.04
……. aug ……. 0.15 ……. 0.06
……. sep ……. 0.19 ……. 0.08
……. oct ……. 0.18 ……. 0.06
……. nov ……. 0.16 ……. -0.01
……. dec ……. 0.17 ……. 0.04
2005 jan ……. 0.18 ……. 0.15
……. feb ……. 0.13 ……. 0.03
……. mar ……. 0.13 ……. -0.01
……. apr ……. 0.13 ……. 0.03
……. may ……. 0.12 ……. 0
……. jun ……. 0.11 ……. 0.01
……. jul ……. 0.07 ……. 0
……. aug ……. 0.02 ……. -0.01
……. sep ……. 0.01 ……. 0
……. oct ……. 0.01 ……. -0.05
……. nov ……. 0.02 ……. -0.14
……. dec ……. 0.04 ……. -0.05
2006 jan ……. 0.04 ……. 0.03
……. feb ……. 0.01 ……. -0.04
……. mar ……. -0.02 ……. -0.08 top
……. apr ……. -0.03 ……. -0.03
……. may ……. -0.02 ……. -0.02
……. jun ……. -0.01 ……. 0
……. jul ……. -0.03 ……. 0
……. aug ……. -0.06 ……. -0.02
……. sep ……. -0.08 ……. -0.03
……. oct ……. -0.08 ……. -0.06
……. nov ……. -0.06 ……. -0.11
……. dec ……. -0.07 ……. -0.04
2007 jan ……. -0.11 ……. 0.05
……. feb ……. -0.09 ……. -0.04
……. mar ……. -0.11 ……. -0.1 bottom
……. apr ……. -0.09 ……. -0.05
……. may ……. -0.05 ……. -0.01
……. jun ……. -0.05 ……. 0.02
……. jul ……. -0.08 ……. 0.01
……. aug ……. -0.07 ……. 0
……. sep ……. -0.07 ……. 0 top
……. oct ……. -0.04 ……. -0.03
……. nov ……. -0.04 ……. -0.06
……. dec ……. -0.04 ……. 0
2008 jan ……. -0.07 ……. 0.08
……. feb ……. -0.05 ……. 0
……. mar ……. -0.04 ……. -0.07
……. apr ……. -0.03 ……. -0.01
……. may ……. -0.01 ……. 0.05
……. jun ……. -0.04 ……. 0.04
……. jul ……. -0.03 ……. 0.04
……. aug ……. 0.02 ……. 0.05
……. sep ……. 0.04 ……. 0.05
……. oct ……. 0.17 ……. 0.14
……. nov ……. 0.24 ……. 0.19
……. dec ……. 0.3 ……. 0.31
2009 jan ……. 0.45 ……. 0.57
……. feb ……. 0.4 ……. 0.39
……. mar ……. 0.38 ……. 0.25 bottom
……. apr ……. 0.4 ……. 0.38
……. may ……. 0.47 ……. 0.49

SEE THE PERIOD: FEB 2006 THRU SEPT 2008

Interest Rate Nostrum

2010-07-11T15:48:00.000-07:00

Our excessive rates of inflation (especially since 1965), has been due to an irresponsibly easy monetary policy. Between 1965 and June of 1989, the operation of the trading desk was dictated by the federal funds “bracket racket”.

Even when the level of non-borrowed reserves was used as the operating objective, the federal funds brackets were widened, not eliminated. Ever since 1989 this monetary policy procedure has been executed by setting a series of creeping, or cascading, interest rate pegs.

This has assured the bankers that no matter what lines of credit they extend, they can always honor them, since the Fed assures the banks access to costless legal reserves, whenever the banks need to cover their expanding loans – deposits.

Our monetary mismanagement is the assumption that the money supply can be managed through interest rates. We should have learned the falsity of that assumption in the Dec. 1941-Mar. 1951 period. That was what the Treas. – Fed. Res. Accord of Mar. 1951 was all about.

The effect of tying open market policy to a fed Funds rate is to supply additional (and excessive and costless legal reserves) to the banking system when loan demand increases.

Since the member banks have no excess reserves of significance the banks have to acquire additional reserves to support the expansion of deposits, resulting from their loan expansion.

Apparently, the Fed’s technical staff either never learned, or forgot, how Roosevelt got his “2 percent war”. This was achieved by having the Fed stand ready to buy (or sell) all Treasury obligations at a price which would keep the interest rate on “T” bills below one percent, and long-term bonds around 2 -1/2 percent, and all other obligations in between.

This was achieved through totalitarian means; involving the control of total bank credit and the specific rationing of that credit we had official price stability and “black market” inflation.

The production of houses and automobiles was virtually stopped, and credit rationing severely reduced the demand for all types of goods and services not directly connected to the war effort. This plus controls on prices and wages kept the reported rate of inflation down.

Financing nearly 40% of WWII’s deficits through the creation of new money laid the basis for the chronic inflation this country has experienced since 1945. Interest rates, especially long-term, would have averaged much higher had investors foreseen this inflation. This was reflected in the price indices as soon as price controls were removed.

There were recently 5 interest rates (ceilings tied to the Primary Credit Rate @.50%), that the Fed could directly control in the short-run; the effect of Fed operations on all other interest rates is still INDIRECT, and varies WIDELY over time, and in MAGNITUDE.

The money supply can never be managed by any attempt to control the cost of credit (i.e., thru interest rates pegging governments, or thru "floors", "ceilings", "corridors", "brackets", etc). The Keynesian liquidity preference curve is a false doctrine (demand for money).

IOR's Induce Dis-Intermediation & Bank Credit Contraction

2009-11-19T10:38:00.000-08:00

The FED’s new policy tool, interest on reserves (IOR’s), the BOG's interest rebate on member bank reserve balances (which Congress made the taxpayers pay for), has induced widespread dis-intermediation among the non-banks (the most important economic sector in this recession/depression — or 82% of the lending market (e.g., hedge funds, investment banks, finance companies, insurance companies, mortgage companies, pension funds, MMMFs, GSEs, etc., source: Z.1 release).

Bernanke's monetary policy today, is even more restrictive than it ever was during the Great Depression (when the FED sterilized excess reserves, by raising reserve ratios by 50% in 1936 and then by another 33% in May 1st 1937).

Both (1) Raising reserve ratios, broadening the categories of reservable liabilities, and increasing the level of required reserves during 36 & 37, & (2) IORs (vis a’ vis other competitive instruments and yields), act to (1) induce dis-intermediation within the Shadow Banking System (& to (2) restrict bank credit creation (even to the point of forcing bank credit contraction). I.e., IORs sterilize the asset side of the FED's balance sheet expansion.

Because of IORs, the FED is "pushing on a string". I.e., we don't have a zero interest rate policy (ZIRP). The interest rate "floor" is the remuneration rate (the interest rate on excess & required reserves), now applied @ .25%. I.e., there is no "liquidity trap".

IORs (inter-bank demand deposits held at the District Reserve Banks, owned by the member hanks), have caused huge portfolio shifts in the earning assets (wrongly categorized as cash assets), among the commercial banks ($1,027,063T in new excess reserves as of June 30th).

These portfolio shifts eventually induced system-wide bank credit contraction (the remuneration rate on IORs will have exceeded all 4-week, 3-month & 6-month Treasury bills for 2 complete years as of this Nov 5th). The remuneration rate is too high and discourages lending and investment.

"Bill Gross (PIMCO Bond King), That 0% yield is not a joke. Almost all MONEY MARKET ACCOUNTS – totaling over $4 TRILLION DOLLARS, shown in Chart 1 – yield close to nothing, so close to nothing that I mistakenly did a double take when reviewing my monthly portfolio statement. “Yield on cash,” read the buried line on page 15 of the report, “.01%.” & "6-month Treasury rates hit lowest point on record".

The BOG's floor has induced an incalculable volume of dis-intermediation within the Shadow Banking system (the non-banks). Disintermediation is defined as an outflow of funds from the non-banks (or technically, a change in the ownership of banking deposits). Disintermediation is an economist's word for going broke, i.e., where the non-banks shrink in size, but the size of the member banks is unaffected. This process has vastly reduced the transactions velocity of existing money which is being transferred through the various financial intermediaries.

For various reasons, the financial intermediaries (non-banks), have been liquidating their assets and liabilities (unwinding). Whether they can't roll over funding, have insufficient cash flow, have asset-liability miss-matches, deteriorating liquidity (or are already illiquid), are writing down more assets, increasing their provisions for bad debt, or have become insolvent (liabilities exceed assets), continue deleveraging (paying off existing debt), experiencing dis-intermediation (outflow of funds due to competition or higher returns), face unattractive alternatives & have postponed new lending & investment (insufficient margins or excessive risks), have unsecured assets, non-performing securities, have delayed loss recognition (mark-to-market), etc., the overall condition of the intermediaries has been weakening.

The source of IORs within the monetary system is other bank deposits, directly or indirectly via currency, or the bank's undivided profits accounts. IORs are lost to investment, consumption, or to any type of payment (if held in this form). I.e., IORs held within the monetary system have a transactions velocity of zero, and are a leakage in the Keynesian national income concept of savings. IORs exert a contractionary force upon the economy. Such a “cessation of circuit income” has adverse effects on production and employment, and requires large dosages of money to counter-act.

From a System standpoint, interbank demand deposits represent savings that have a velocity of zero. As long as these savings are impounded within the commercial banking system, they are lost to investment or to any type of expenditure.

From a system standpoint, excess reserves are not a source of loan-funds for the banking system as a whole. CBs do not loan out excess reserves. They always create new deposits when lending & investing.

Maynard Keynes's liquidity preference curve (i.e., IORs), is a false doctrine. (See Alfred Marshall's "money paradox").The money supply can never be managed by any attempt to control the cost of credit (whether the FFR & IORs), & the Taylor Rule is a fictitious "sign post".

I.e., increasing the remuneration rate (vis a’ vis other competitive instruments and yields), increases the volume of IORs (just as raising reserve ratios would), & decreases in the remuneration rate reverses these interbank balances and flows.

The non-banks are financial intermediaries - intermediaries between saver & borrower (where savings corresponds to investments). The member banks always create an equal volume of new money when lending & investing (member banks do not loan out existing deposits).

A trillion dollars + in monetary savings (if you count just the verifiable portion, i.e., just excess reserves), was siphoned out (via redemptions, etc.), of the non-banks (e.g., hedge funds, investment banks, finance companies, insurance companies, mortgage companies, pension funds, etc.).

I.e., interest-bearing deposits at the financial intermediaries were siphoned out of the economy (in the form of loans and investments at the non-banks (mortgages, etc.). I.e., net debt (or velocity), has contracted (but not net new money).

Non-banks (contrary to the FED’s technical staff), are not in competition with member commercial banks. Savers never transfer their savings out of the banking system (unless they are hoarding currency). This applies to all investments made directly or indirectly through intermediaries.

Shifts from time/savings deposits to other deposit types within the CBs (and the transfer of the ownership of these deposits to the thrifts/non-banks), involves a shift in the form of bank liabilities (and a shift in the ownership of (existing) deposits (from savers to thrifts, et al).

The utilization of these savings by the thrifts has no effect on the volume of deposits held by the CBs, or the volume of their earnings assets. I.e., the non-banks are customers of the member, money creating, depository banks.

The financial press has attributed this to deleveraging. However, the member banks (18% of the lending market, Z.1 release), has suffered no dis-intermediation (just portfolio readjustments).

Monetary savings (savings held beyond the income period), are impounded within the banking system. They are lost to investment, consumption, or to any type of payment (if held in this form). I.e., savings held within the monetary system have a transactions velocity of zero, and are a leakage in the Keynesian national income concept of savings.

Such a “cessation of circuit income” has adverse effects on production and employment, and requires large dosages of money to counter-act.

Thus under one view, the quantitative easing performed by the FED (an increase in legal reserves), has been substantially erased. But we are not done. If the FOMC raised the average reserve ratios on member bank deposits, the volume of required reserves would increase (which if large enough, could induce bank credit contraction), ceteris paribus.

This process is the same as if the FOMC raised the remuneration rate on excess & required reserves, vis a’ vis other competitive instruments and yields. It would also increase the volume of legal reserves, ceteris paribus (which also acts to reduce the monetary system’s lending capacity).

I.e., the BOG increased reserve-deposit ratios by increasing the volume of inter-bank deposits held in the District Reserve Banks, owned by the member banks (in the form of IORs). That is IORs are the functional equivalent of required reserves. If these idle deposits weren't sucked from the economy, their volume wouldn't be reserve bank balance sheet offsetting.

I.e., the FED has followed a downward spiraling contractionary policy in the midst of a recession/depression.

Quantitative easing was tried, but there were opposing forces that rendered it immeasurable.

The solution is to redirect savings to the non-banks, and velocity (consumption & investment), will rebound, without unnecessarily forcing prices (stagflation), higher.

Re-routing was successful in the housing crisis of 1966 (such targeted redirection, the channeling of, or legislating the allocation credit, Credit allocation is commonly used in a command economy. In 66, both the member banks and non-bank’s profits were revived, and the housing market (and the economy alongside it), recovered thereafter, etc.

Liquidity & Solvency

2009-09-23T09:42:00.000-07:00

1) A bank is liquid when it is able to exchange its assets for cash rapidly enough to meet the demands made upon it for cash and payments.

2) A bank is solvent when the realizable value of its assets is at least sufficient to cover all its liabilities.

3) A bank at any given time could meet a current test of liquidity (and not be solvent), and it could be solvent, and not have sufficient current liquidity.

4) But to satisfy the legal requirements for an operating bank, to qualify its deposits as money, to satisfy its creditors, and the various corps of examiners, a bank always must be both liquid & solvent.

5) In terms of the balance sheet, net worth is the margin between solvency and insolvency, but a forced and hasty liquidation of assets might result in a bank becoming insolvent whose condition ordinarily could be regarded as sound.

6) It is therefore all important to the banker to keep his bank sufficiently liquid so that its solvency will not be tested under the adverse conditions associated with a hasty and ill timed sale of assets.

7) Banks must balance their assets & liabilities between liquidity and income. Lower yields on bank assets reflect greater liquidity, while higher yields on bank assets reflect reduced liquidity. I.e., there is in the main, an inverse relationship between the yields on a bank’s earning assets & the liquidity of those assets.

8) Banks must also adjust the basis spread, or hedge their positions, with uniquely fitting derivatives, along an ever shifting (rising, flat, inverted), yield curve (amid constantly changing economic conditions).

9) It means arranging the relationship between the different classes of assets in its loan and investment portfolio against the distribution of the bank’s deposit liabilities (transaction & time deposit accounts). I.e., by matching the volume of its current/short-term liabilities (borrowings), against the volume of its long-term loans and investments (e.g., mortgages). They must remain ever cognizant of their current & future (expected cash flows).

10) The bank must match its assets & liabilities between liquidity and period to maturity. Assets should be structured so that the bank will never be forced to sell a security under unfavorable conditions before it matures (duration gap).

11) During 1939 thru 1962 the increase in bank capital ratios had been upward in spite of the continued expansion of bank liabilities,. This rise is almost entirely attributable to retention of earnings.

12) Primary reserves or “working reserves” are those cash assets that consist of due from other banks (excluding the District Reserve Banks), vault cash, and deposits in the Reserve bank that are in excess of the bank’s reserve requirements (currently 800b in member bank excess reserves).

13) In an emergency banks are allowed to dip into their vault cash to meet withdrawals even though this depletes their reserve assets below minimum legal requirements, but such deficiencies must be restored within a short period of time.

14) Under fractional-reserve banking a part of the member bank’s required reserves are available for withdrawals, since the cashing of deposits, or their transfer to other banks, releases required reserves, adding to excess reserves

15) Secondary reserves consist of earning assets which can be converted into cash quickly and without loss, e.g., U.S. Treasury obligations having about one year or less to go to maturity, commercial paper, repurchase agreements, etc.

16) The ratio of a bank’s non-earning assets relative to the proportion of its earning assets, as well as how much income the bank ends up forfeiting, depends on the degree of its reliance on short-term liquid securities. Contra wise banks assume credit risk, interest rate risk, market risk, and liquidity risk by overweighting its investment portfolio with longer-term assets.

17) For a member bank to remain fully “lent up” requires an accurate assessment of the (1) future balance of payments, (2) understanding its customer’s deposit volatility, (3) knowing the trend in interest rates, (4), and estimating the demand for loan funds.

18) It requires arranging its investment accounts by distributing maturing paper against the turnover in its deposit liabilities while maintaining the regulatory capital-asset ratio. It involves maintaining its margin, or its yield spread, along the slope (rising, flat, or inverted), of an ever shifting yield curve.

19) The function of bank capital or the aggregate of capital stock, notes and debentures, surplus, undivided profits, and all net-worth reserves provides a “cushion” to protect bank creditors. It measures the bank’s ability to absorb losses and still maintain solvency.

Bank Credit Contraction - Deposit Destruction

2009-09-23T09:40:00.000-07:00

The depth of any deposit contraction depends upon the volume and distribution of excess-reserves in the system (especially which banks, their aggregate size, & the volume of each bank’s excess reserves). It is also dependent upon the ability and willingness of the member banks to discount assets, or go into debt with the central bank.

Deposit destruction reverses the steps by which the creation of deposits in one bank is ultimately spread to the other banks in the system.

Bank credit contraction involves both the (1) transfer of deposits, and (2) transfer of excess-reserves, to the bank, or banks, initiating the contraction.

Contraction by any single member bank in the system will force additional member banks to tighten up, (curtail granting new loans, or purchasing new investments).

Since deposit destruction is mutually reinforcing, contraction will ultimately reduce a bank’s earning assets, and the bank’s regulatory capital-to-asset ratios.

In their lending operations, management is forced to reduce and retire bank assets by calling loans and selling securities, letting maturing investments run off without replacement, not renewing existing loans, reducing or not rolling over short term financing (e.g., repurchase agreements &commercial paper, & borrowing federal funds).

If the individual bank’s excess-reserve position is insufficient, or the individual bank is unable to restock its excess reserves through the FED’s liquidity funding facilities, contractions become cumulative. I.e., the effects are soon transmitted throughout the banking system.

The reinforcing nature of bank credit contraction is volatile, disorderly, and cumulative. It eventually results in the respondent banks closing their correspondent accounts.

This was one of the principle reasons that the Federal Reserve System was established, to avoid the reinforcing forces of bank credit contraction. This objective was not achieved until after 1933.
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In the context of their lending operations it is only possible to reduce bank assets, and TRs, by retiring bank-held loans, e.g., for the saver-holder to use his funds for the payment of a bank loan, interest on a bank loan for the payment of a bank service, or for the purchase from their banks of any type of commercial bank security obligation, e.g., banks stocks, debentures, etc.

Monetize private debt, and this proportion of the debt has been monetized, and has resulted in a concomitant injection of new money into the economy

2009-09-23T09:38:00.000-07:00

Cartesian coordinates: Contrary to economic theory, monetary lags are uniformly fixed in length. The statistical analysis of these crests and troughs confirm that the rates-of-change in these monetary flows (our means-of-payment money times its rate of turnover) are not random.

Specifically, the rates-of-change (roc’s), in the monetary lags (the proxies for real-growth, & for inflation), oscillate unvaryingly along the X axis. Their maximum and minimum reference frames (as demonstrated by the clustering on a scatter plot diagram) correspond to the economic lag, and not to any of our federal government agencies’ weekly, monthly, quarterly, or annual statistics.

These oscillations do however suffer from errant data. Errant data may originate from faulty theoretical interpretations, flaws in defining the data, and errors in the survey, collection, calculation, and publication of the government’s call reports, etc. (for both the (1) seasonal mal-adjusted data, as well as the raw (2) non-seasonally adjusted data). And it is problematic that there are also undetected mistakes in the raw data.

In the first sentence of the Federal Reserve Act of 1913 it calls for the Federal Reserve Banks to “furnish an elastic currency”. The Board of Governors has liberally interpreted this statement to support its policy of seasonal accommodation. The corresponding data is then reported using periodic revisions to seasonal factors (hence the mal-adjustments). The technical staff's economic justification for this practice (using last year’s seasonal factors for this year’s release), has its roots in the fallacious “Real Bills Doctrine”.

The problem with the “Real Bills Doctrine” is that an injection of new bank credit for financing inventories, or any other phase of merchandising, or processing, is obviously inflationary when the theory applied under the assumption that labor and facilities are fully employed, as for example, during the Christmas and New Year’s holidays (just as the price of the Hewlett Packard printer I was going to buy was raised $200.00 just after Thanksgiving).

And the raw data may be revised, reconstructed, or spliced, causing noticeable changes and distortions. Geographical statistical areas and sample sizes’ may change. The data might not conform to the data from original release. And when some statistical releases are revised, these time series overlay (wipe out), the original data. I.e., the government’s reporting agencies don’t always keep separate iterations of the old historical data. Reporting may also be delayed, published less frequently, or only available as seasonally mal-adjusted.

It is instructive that the FED has never cooperated by supplying continuous, comparable, and timely data. Supporting data is required for the proper investigation, the subsequent proof, and ending conclusion, for any economic research.

That understood: the roc’s in the Y coordinates for monetary flows (MVt), closely parallel the roc’s in GDP figures. I.e., the roc’s in bank debits closely correspond to the roc’s in monetary flows (for both real growth, & for inflation). Likewise, it is no accident that the roc’s in adjusted member bank “free” legal reserves corroborate these roc’s. The roc’s between both time series is synchronous (what is being compared is the rate-of-change, not the absolute figure).

That given: “reliance on the data compiled by the Government agencies is subject to the limitations of all analyses based upon statistical aggregates, i.e., data cannot be compiled accurately, or by a method which conforms to rigid theoretical concepts”(Dr. Leland James Pritchard, Chicago, Economics, 1933; Masters, Statistics, Syracuse).

It is more likely that statistical calculations are at odds with the real world, estranged from scientific economics, inconsistent with mathematical modeling, not because of faulty economic theories, but because of non-conforming, or non-existent, raw data. (“History is full of bad jokes”).

How accurate is the debit series? It is 100% within the range for any quarter. It is approximately 80% within the range of a single month. And I would guess that it is probably c. 50% within the range for any given week (for the period of time in which statistics were reported. Cartesian coordinates: Contrary to economic theory, monetary lags are uniformly fixed in length. The statistical analysis of these crests and troughs confirm that the rates-of-change in these monetary flows (our means-of-payment money times its rate of turnover) are not random.

If the catalogue of facts and their measurements (1) don’t correlate, (2) consistently compare, or (3) conclusively prove; the validity of a one’s arguments (theory), then there is a higher probability that the FED’s data is wrong, rather than the time series, or the theory supporting it.

The "M's"

2009-09-23T09:34:00.001-07:00

The net effect (from an accounting standpoint)

“Means-of-Payment” / “Primary-Money-Supply” The money-supply concept has been an area of wide disagreement among economists, and it well continue as such. It is not something that is fixed and definite. At present it is unknown and unknowable.

There has always existed professional sanction for a variety of bias and ignorance:

Prior to the DIDMC A of March. 31, 1980 both (1) Money transmitters/financial intermediaries & (2) New money & credit creators/member commercial banks, were legally separate financial institutions. In 1980, the DIDMCA legally commingled, and consequently blurred, the inter-relationships between these 2 distinct bank (macro-economic) lending operations, into a single organization, with few, or virtually unrestricted lending regulations (no interest rate ceilings, minimal or no legal reserves; as applied to a declining proportion, & a reduced number, of deposit classifications, as well as increasingly insignificant, reserve ratios, i.e., smaller & smaller fractions were required against new & existing bank deposits). I.e., the commercial banks are unencumbered in their lending operations.

It was a pyrrhic victory for these bankers, the U.S. economy, and its taxpayers. Coinciding with this new legislation, and this new banking infrastructure, the Fed’s research staff re-named both institutions (combined them in name and in practice), “Depository Institutions”. Thus by edict, the principle financial intermediaries were destroyed, and a money creating System was fostered, which the Fed cannot monitor, and has yet to bring under control.

The framework separating individual bank’s lending operations can be described and contrasted, using different constructions, of various classifications, of the monetary aggregates, i.e., by the turnover in the ownership of, or the transfer of deposits between, or the transactions velocity of bank debits (money is the measure of liquidity).

Our Depository Institution’s infrastructure is mélange. It’s impossible to uniquely identify the different and shifting types of bank balances. It can be assumed that the legislation’s net effect, is that, the new credit and money creators’ deposits/liabilities have been expanding pari passu (in lock step), with the former commercial banking systems’, expansion of loans-deposits. And during this evolutionary and expansionary process, the preponderance of all Depository Institution’s deposit liabilities are, being diverted, or shifted, by their owners/savers, into highly liquid, interest bearing deposits.
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1) As there is general agreement among almost all Central Bank economists throughout the world, that legal or statutory reserves are no longer binding/constrained, the money supply will be enlarged, and bank deposits will be transformed, or converted, until our means-of-payment, or primary money supply (currency-deposit structure), approximates the old monetary aggregate M3 - (Feb 2006).

In the beginning there was one M (the “primary” money supply), then three, then five; (M4 & M5), then “L”, “Debt”, & later, NOW, ATS, OCD, MZM, MMDA etc. It would be a burden to enumerate the components of these various concepts of money, the ones in vogue, or otherwise.

1) Since Mutual Savings Bank’s (MS B) inception, it has been illogical that their account balances in the Member Commercial Banks (MCB)were designated as inter-bank demand deposits (IBDD’s –balances maintained by customer banks in correspondent banks), presumably because MSBs were called banks (with the exception of 6 MSB banks that had MCB regulations) and were insured by the Federal Deposit Insurance Corporation (FDIC) and not the Federal Savings & Loan Insurance Corporation (FSLIC), and not counted in M1.

At the same time S&L’s deposits were insured by the FSLIC and their balances in the MCBs were not designated as IBDDs (were counted in M1); neither institution had the right to hold deposits transferable on demand, without notice, and without income penalty (the legal basis for becoming a MCB), prior to the Depository Institutions Deregulation & Monetary Control Act (DIDMCA); both were the customers of the MCBs; and neither had Regulation Q restrictions prior to 1965.

2) The M1 figure, even now, increasingly overstates the quantity of the means-of-payment money. This upward bias is the consequence of classifying Savings and Loan & Credit Union Deposits as commercial banks (but not Mutual Savings Bank deposits), as demand deposits, rather than inter-bank demand deposits. M1 thus includes both the Negotiable Order of Withdrawal (NOW) account balances, and the thrifts’ balances, in the commercial banks – a double counting of our means-of-payment money.

3) What goes for M2 also goes for M3. M2 erroneously includes MMMFs in its definition (a sizable #). MMMFs are the customer's of the commercial banks. They are financial intermediaries/transmitters. Monetary savings are never transferred from the commercial banks to the intermediaries; rather are monetary savings always transferred through the intermediaries. Whether the public saves or dis-saves, chooses to hold their savings in the commercial banks or to transfer them to intermediary institutions will not, per se, alter the total assets or liabilities of the commercial banks; nor alter the forms of these assets or liabilities.

4) Financial intermediaries (MMMFs) lend existing money which has been saved, and all of these savings originate OUTSIDE of the intermediaries (depend on an inflow of savings to finance loans). The utilization of these loan-funds, or the activation of monetary savings held by these financial intermediaries, is captured thru the velocity of their transactions in the commercial banking system (bank debits/withdrawals), and not thru the volume of their bank deposits. I.e., from the standpoint of the economy, MMMF deposits never leave the MCB System. And the growth of the MMMFs is prima facie evidence that existing funds/savings have already been invested/spent, i.e., transferred/transmitted by their owners/savers/creditors to borrowers/debtors. I.e., this currently (but not for ever) represents a double counting of the money stock, and will continue to be so, as long as these intermediary financial institutions aren’t capable of creating new money in their lending operations.

5) From the standpoint of the individual banker his institution is an intermediary. An inflow of deposits increases his bank’s clearing balances, and probably its legal reserves – and thereby it’s lending capacity. But all such inflows involve a decrease in the lending capacity of other banks, unless the inflow results from a return flow of currency to the banking System or is a consequence of an expansion of Reserve Bank credit. That is, the commercial banks “buy their liquidity” by out-bidding other commercial banks for the same fixed volume of deposits. This volume is determined exclusively by the FOMC through it’s control of “free/gratis” bank legal reserves and reserve ratios.

6) From a Systems viewpoint, member commercial banks as contrasted to financial intermediaries, never loan out, and can’t loan out, existing deposits (saved or otherwise) including existing transaction deposits, or time deposits, or the owner’s equity or any liability item. When MCBs grant loans to, or purchase securities from, the non-bank public (which includes every institution, the U.S. Treasury, the U.S. Government, State, and other Governmental Jurisdictions), and every person, (except the commercial and the reserve banks), they acquire title to earning assets, by initially, the creation of an equal volume, of new money-transaction deposits.

7) Any institution whose payments (liabilities) can be transferred/transmitted on demand, without notice, without income penalty, or without equivocation, by data network clearing (under the NACHA rules, Regulation E, Check Clearing for the 21st Century Act, & the Expedited Funds Availability Act – reduce hold periods), for example:
a. debit-card,
b. credit-card,
c. ACH network…automated clearing house,
d. EFTs…electronic funds transfer,
e. Fedwire transfer System,
f. check21 clearing,
g. micro-line payments,
h. RTG real-time gross settlements
i. CHIPs
j. Payments System Risk

8) or similar methods & types of negotiable credit instruments/drafts/debits, and whose deposits are regarded by the public as money, can create new money, provided that the institution is not encountering a negative cash flow or balance of payments (Rivlin Committee payment study to assess Fed’s role ).

9) Bank Credit (loans-deposits) increased by a factor of 2.7x from 04/01/89 to 11/01/07. Since commercial banks create new money (demand deposits) why didn’t demand deposits increase by over 764b rather than 15b in this period? The answer is largely because of the massive diversion of approximately 217b of demand deposits into time deposits (less the expansion in bank net worth & the sale to the public of various types of non net-worth securities). Demand deposits were also reduced by an expansion of 547b in the nonblank public’s holding of currency.

10) It is inaccurate (for the cataloguer of economic statistics) to exclude the Treasury’s General Fund Account from the assets included in M1 (with the exception of WWII). No one has established any unique price effect of federal outlays, as compared to state and local government outlays, or expenditures by the private sector. Of course, the shifting of funds to and out of the Federal Reserve banks has a dollar for dollar effect on member bank reserves, but that is another problem that can be, and is dealt with through open market operations.

11) It is a succulent irony that professional economists, (those who confuse the supply of money with the supply of loan-funds), thus conclude that increases in the old monetary figure “L”, (or M2, or M3), are inflationary. The conclusion is tantamount to saying, “don’t save money” as savings (which we don’t have enough of) adds to “L” and therefore has an inflationary bias, when in fact, savings (a large portion of “L”) is evidence of money that has already been saved/spent/invested. Savings-investment accounts have been lumped into the Keynesian inspired concept of money (as are MMMF funds).

(Note: “L” measures M3 plus all other liquid assets such as Treasury bills, savings bonds, commercial paper, bankers’ acceptances and Eurodollar holdings of US residents (non-bank).

12) Other mistakes involve the intermittent errors in the reporting by the banks sampled, e.g., (1) as-of adjustments up to 45 days, (2) 4% carry-over provision on reserves, (3) applied, or excess clearing balances, or excess reserves & (4) deposit liabilities (FR 2900 reporting errors).

13) If the “store of purchasing power” attribute of money, when applied to a given asset, is to have significant meaning, it ought to be defined in terms which are applicable to the whole economy. That is, no asset really has a “monetary store of purchasing power” quality unless there can be a net conversion of that asset into money, ceteris peribus. In other words it must be possible to effect this conversion without necessitating that any present money holder reduce/liquidate his holdings/assets. Any other interpretation becomes mired in a futile discussion of relative degrees of confidence and liquidity. But much more than monetary liquidity for the individual holder is necessary if an asset can be said to have the “store of purchasing power” quality; it must be simultaneously monetarily liquid for society as a whole.

14) From the standpoint of monetary authorities, charged with the responsibility of regulating the money supply, none of the current definitions of money make sense. The definitions include numerous items over which the Fed has little or no control (e.g., M2), including many the Fed need not and should not control (currency). The definitions also assume there are numerous degrees of “moneyness”, thus confusing liquidity with money (money is the “yardstick” by which the liquidity of all other assets is measured). The definitions also ignore the fact that some liquid assets (time deposits) have a direct one-to-one, unvarying , relationship to the volume of demand deposits (DDs), while others affect only the velocity of DDs. The former requires direct regulation; the latter simply is important data for the Fed to use in regulating the money supply.

15) The essence of a managed-currency System, is a System in which the volume of currency in circulation is impersonally determined by the total effective demands of the public. This procedure is in fundamental opposition to a fiat System in which the volume of currency issued is dictated by the deficit-financing requirements of the issuing government.

16) The non-inflationary and self-regulatory aspect of our currency supply derives from the fact that in obtaining currency, the public has to give up an equal amount of another type of money, namely, bank deposits. An increase in the volume of currency held by the non-bank public indicates, ceteris paribus, that the public is decreasing deposits, while a decrease in currency held by the public will build up deposits. Thus, whether the public increases or decreases its holdings of currency, the total money supply, per se, remains the same. Obviously in such an arrangement it is impossible to attribute inflationary developments to an expansion of currency (cash drain factor) or (monetary base/high powered money). Actually the issuance of Federal Reserve Notes is deflationary, ceteris paribus, since the issuance diminishes the clearing balances and legal reserves of the member commercial banks. The Fed recognizes this fact and uses its open market power to replenish bank reserves and prevent any unwarranted contraction of bank credit. I.e., a dollar of currency “supports” only one dollar in the money supply, whereas a dollar reduction in bank reserves may force a multiple contraction of deposits.

17) 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 (the primary money supply) 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 (MVt). Obviously, no money supply figure standing alone is adequate as a “guide post” to monetary policy.

18) In defining the money supply, a distinction should be made between the public and the monetary authorities. From the public viewpoint currency and checkable deposits, credit cards, traveler’s checks, ATS accounts, MMDA accounts etc., serve directly or indirectly as money. From the monetary authority’s point of view, money has to be confined to assets that constitute means-of-payment and are controllable. Currency is not such an asset. Fortunately it is an asset the Fed does not, should not, and cannot control. There is no inflationary bias in an expansion of currency, and the deflationary bias resulting from its growth (the decrease in an equal amount of legal reserves in the System), can, and is, offset through the expansion of Reserve Bank credit.

19) The demand deposit component of our means-of-payment money supply (M1, currency plus checking accounts) is created by private profit financial institutions. The creation process is an inevitable consequence of their lending operations. All currency gets into circulation, directly or indirectly, through the liquidation of time deposits, by the cashing of demand deposits. There is one exception in demand deposit creation: those rare instances when the U.S. Treasury borrows from the Federal Reserve Banks.

20) The bankers, Congress, and most of the banking authorities have simply not been able to dissect and to construct our financial institutions in a System’s context. From a System standpoint the financial intermediaries and the commercial banks are not competitive, but have an inter-relationship that can be mutually beneficial to the economy. The much larger question with which we should be concerned, therefore, is the raison d'etre of an institutional arrangement whose benefits to the banks are dubious and which undoubtedly exerts deleterious effects on the financial intermediaries and the economy. Time-deposit banking arrests the flow of monetary savings into investment because in their time-deposit function the commercial banks are neither intermediaries nor creators of loan funds; they are simply custodians of stagnant money. Monetary savings held in the form of time deposits are not irrevocably lost to investment until destroyed. But they cannot be used to finance investment until their owners (non-bank public) decides, and as long as the non-bank public chooses to hold savings in the form of time deposits, the means-of-payment velocity of these funds is zero and the funds are lost to investment. The expansion of member commercial bank held (impounded/bottled up) monetary savings deposits is prima facie evidence of a leakage which collects in the form of unspent balances.

21) All the devices which have in effect made time deposits an integral part of demand deposits, viz, daily compounding of interest, automatic fund transfers, debit cards, etc., have enabled people to economize on demand deposits, and has resulted in the sharp increase in the transactions velocity since 1967. In other words, under existing institutional arrangements, an increase in time deposits results in an offsetting increase in transactions velocity, therefore no, or limited dampening results. If there is to be a growth in time deposits there should be an offsetting increase in velocity. Our problem has been an excessive increase in both the volume and velocity of money.

22) Time deposits standing alone are not inflationary. In fact, they are the equivalent of demand deposits with a transactions velocity of zero. But they are inflationary when they become in effect interest-bearing demand deposits. Neither the bankers nor the Fed seemed to realize the economics of making time deposits so liquid, that they were, for all practical purposes, a net addition to the effective money supply.

23) It is obvious that demand deposits, which have been saved, cannot be beneficial to the economy unless they are invested. As long as savings are held in the commercial banks in the form of demand or time deposits, these deposits are not financing investment, or indeed anything; their transactions velocity is zero. If, on the other had, these deposits are transferred through the thrifts, or any other financial intermediary, they are invested or otherwise put to work. Such use of deposits does not change the volume of deposits in the commercial banks, merely their ownership. In other words the commercial banks could continue to lend if the public ceased to save altogether. The lending capacity of the commercial banks is dependent on monetary policy, not the savings practices of the public.

24) The unique and inflation-causing changes in monetary policy and the structure of the banking System were the consequence of a universal misconception of the economics of time deposits banking, and the basic differences between commercial banks and the financial intermediaries. The cumulative effect has been to transform virtually all time deposits into the economic equivalent of demand deposits, since the holders of these accounts can on demand, or in the marketplace, convert these holdings without significant delay into demand deposits.

25) The utilization of commercial bank credit to finance real investment or government deficits does not constitute a utilization of savings, since bank financing is accomplished through the creation of new money. Contrariwise, the activation of deposits within the financial intermediaries increases employment, the demand for varieties of goods and services – and the opportunities of the commercial bankers to make bankable loans. The “loan pie” is not a fixed entity; it grows when the economy grows.

26) Trillions of deposits have been diverted/shifted into time deposits; not because they were saved, but because of the structural changes in the banking System that made most of these time deposits a type of auxiliary money (banks began to manage their liabilities, and corporations began managing (minimizing) their non-interest bearing cash balances). Bank customers were induced to shift out of non-interest bearing demand deposits into time deposits by the introduction of various financial innovations.

27) The DICMCA encouraged a massive shift from transaction deposits, to time deposits, within the newly created depository institutions to the extent that the new money supply’s properties and characteristics, have become obscured or unclear. That is, there has become no logical dividing line.

28) It is impossible for time deposits to grow or shrink without causing, ceteris paribus, an equal and opposite change in our means-or-payment money.

29) From a System standpoint, time deposits that represent savings have a velocity of zero. As long as savings are held (impounded) in the commercial banking System, they are lost to investment. The means-of-payment velocity of time/savings deposits is zero and the funds are lost to investment, to consumption, and indeed to any type of payment. Such a cessation of the circuit income and transactions velocity of funds, funds which constitute a prior cost of production, cannot but have deleterious effects in our highly interdependent pecuniary economy (since 1964, stagflation, as evidenced by bank debits, was the inevitable result). The savings held in the commercial banks, whether in the form of time or demand deposits, can only be spent by their owners; they are not, and cannot, be spent by the banks.

30) The shifting about in the ownership of deposits will undoubtedly alter the lending ability of particular banks, but the lending ability of the System will not be altered unless deposits are shifted among banks having deferential reserve requirements, or a change in monetary policy by the Reserve authorities.

31) Time deposits, unlike savings accounts in the “thrifts”, bear a one-to-one, almost unvarying’ relationship to demand deposits. An increase in time deposits depletes demand deposits by the same amount, or (1) directly or indirectly via the currency route, or thru (2) the banks undivided profits, and vice versa. I.e., all time deposits are derived from demand deposits. This massive diversion of demand deposits into time deposits was wholeheartedly supported by the bankers, sanctioned by the monetary authorities, and “sanctified” by the Keynesian theories held by virtually all economists. Keynes’ General Theory of Employment, Interest and Money (1936) was their bible. On page 81 of Macmillians’s 1949 edition, Keynes informs us that it is an “optical illusion” to suppose “…that a depositor and 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…”.

32) The principle inflationary pressure on prices in the U.S. occurred from the colossal growth in commercial bank “liquid” time deposits together with bank practices with respect to the acquisition and management of time deposits.

33) The process of “monetizing” time deposits began in the early sixties. Citicorp was the first bank to use the negotiable certificate of deposit in 1961. Soon afterward, Citicorp pulled in deposits (Euro-deposits) from all over the world. But when interest rates finally rose above Reg Q ceilings in 1965, certain large New York City Banks couldn’t replace these borrowings, so the Fed stepped in and raised Reg Q. ceilings to bail out those banks ( & this was the first instance in which ceilings were raised above the levels assigned to thrift institutions. This in conjunction with an excessive expansion of the money supply, created the 1966 housing crisis.

34) Soon, all the major banks were in the act. To this incentive to expand time deposits, the Fed added higher and higher interest rates ceilings on time deposits under their Regulation Q. Today, all interest rate ceilings have been eliminated. Further incentives to time deposit growth were the introduction of ATS accounts, the reduction of reserve ratios against most time deposits, and their removal altogether for some types of time deposits.

35) The drive by the commercial bankers to expand their savings accounts has a totally irrational motivation, since it has meant, from a System standpoint, competing for the opportunity to pay higher & higher interest rates on deposits that already exist in the commercial banking System. This is because the source of time deposits is demand deposits, not the savings held in S&Ls, mutual savings banks or credit unions. But it does profit a particular bank, Citicorp for example, to pioneer the introduction of a new financial instrument such as the negotiable CD until their competitors catch up; and then all are losers. The question is not whether net earnings on CD assets are greater than the cost of the CDs to the bank; the question is the effect on the total profitability of the banking System. This is not a zero sum game. One bank’s gain is less than the losses sustained by other banks.

36) Professional economists have no such excuse for misinterpreting the savings-investment process. They are paid to understand and interpret what is happening in the whole economy at any one time. For the commercial banking System, this requires constructing a balance sheet for the System, an income and expense statement for the System, and a simultaneous analysis of the flow of funds in the entire economy. From a System standpoint, time deposits that represent savings have a velocity of zero. As long as savings are held in the commercial banking System, they are lost to investment. The savings held in the commercial banks, whether in the form of time or demand deposits, can only be spent by their owners; they are not, and cannot, be spent by the banks.

37) In an accounting sense, the Fed has an unlimited capacity to lend. It operates under no reserve or reserve ratio constraints. Nor does it need to be concerned with a new outflow of funds as a consequence of its lending activities. Advances to borrowers simply involve crediting the borrower’s inter-bank deposit account. These accounts are, however, “high-powered money” to use Milton Friedman’s term [sic]. They provide the basis for a multiple expansion of money. Can’t the Fed offset these advances with open market sales? Not on a very large scale without destroying the Treasury’s capacity to manage the national debt. Thus far, the Fed has been able to maintain the liquidity credibility of the banks and thrifts. How long can this necessary degree of confidence be maintained? There is no answer, but it is certain that the crucial test is yet to come.

38) Having the illusions that commercial banks are intermediaries, loaning out the savings of the public, the Fed attempted to “peg” at even higher levels the federal funds rate; allowed time deposits to balloon with no legal restrictions on their growth; and initiated, or allowed, institutional changes which converted an indeterminate, but large, share of time deposits into “primary money”.

39) The Fed and Congress allowed institutional changes which enabled demand deposit holders to shift into interest bearing time deposits with little or no decrease in the liquidity of their assets. These changes took the form of negotiable C.D.’s, ETF (Electronic Transfer of Funds); automatic transfer serves (ATS accounts), NOW (negotiable orders of withdrawal), and MMDA (money market deposit accounts). Since time deposit growth is directly (or indirectly through the currency route) at the expense of demand deposits, the Fed received false signals as to the real means-of-payment money supply.

40) Institutional changes have converted an indeterminate, but large, share of time deposits into primary money. I.e., institutional changes enabled demand deposits holders to shift into interest bearing time deposits with little or no decrease in the liquidity of their assets. With the elimination of Reg Q interest rate ceilings on the time deposits of the member commercial banks and with the elimination of reserve requirements on time deposits, there was both an increased incentive to hold time deposits, and no legal restrictions on their growth. These structural alterations and the practices thereby engendered, (to concentrate and channel loan-funds into narrow segments within our economy) has led to a mélange of excessively destabilizing price changes, especially of those assets, real estate, etc., which serve as loan collateral. The whole brew of ill-advised deregulation and regulatory permissiveness fostered an atmosphere in which greed seemed to triumph, especially if a little fraud was diluted with a heavy does of incompetent supervision by the authorities and their examiners.

41) From the standpoint of the individual banker there is some excuse for opting for negotiable CDs, MMDAs and ATS accounts; and for agitating for the removal of Regulation Q ceilings on interest rates. If other banks are competing for time deposits, the individual banker has to complete or lose deposits and earning assets. Transforming time deposits into an auxiliary money supply, besides having server adverse effects on the economy, has had a devastating effect on bank profits. Interest on time deposits, from the standpoint of the banking System, amounts to paying for something (deposits) the System already possesses. Lacking the interest incentive, holders of “saved” demand deposits would acquire investments outside the banking System. This, contrary to the conventional wisdom, would not result in the diminution of the demand deposits, or earning assets of the banking System. The confusion arises from a unique feature of the commercial banking System; the whole is not the sum of the parts in the money creating process

42) The individual commercial banker performs an intermediary role between savers and borrowers. By attracting an inflow of funds (time or demand deposits or currency), he enlarges his legal reserves and clearing balances plus his legal and economic capacity to expand loans and investments. From the standpoint of the banker, he has simply loaned out the funds acquired; from the System standpoint the added earning assets have been acquired through the creation of new money. To the individual commercial banker, thrifts were obviously competitors. Funds transferred from his bank to a financial intermediary usually resulted in a loss of deposits, and often the opportunity to make a bankable loan.

43) Disintermediation in the “thrifts” may be induced by the rates paid by the commercial banks. However induced, disintermediation results in a diminution of funds in the thrifts, and a transfer of existing deposits within the commercial banking System.

44) Savers (contrary to the premise underlying the DIDMCA in which CBs are assumed to be intermediaries and in competition with thrifts) never transfer their savings out of the banking System (unless they are hoarding currency). This applies to all investments made directly or indirectly through intermediaries. Shifts from TDs to DDs within the CBs and the transfer of the ownership of these DDs to the thrifts, involves a shift in the form of bank liabilities (from TD to DD) and a shift in the ownership of DDs (from savers to thrifts, et al). The utilization of these DDs by the thrifts has no effect on the volume of DDs held by the CBs or the volume of their earnings assets.

45) Monetary savings are never transferred to the intermediaries; rather monetary savings are always transferred through the intermediaries. Indeed, as evidenced by the existence of “float”, reserve credits tend, on the average, to precede reserve debits. Therefore, it is a delusion to assume that savings can be “attracted” from the intermediaries; for the funds never leave the commercial banking System.This applies to all investments made directly, or indirectly, through intermediaries. The only way to reduce the volume of demand deposits is for the saver-holder to use his funds for the payment of a bank loan, interest on a bank loan for the payment of a bank service, or the purchase from their banks of any type of commercial bank security obligation, e.g., bank stocks, debentures, etc.

46) Sweep accounts are a shift in the form of a commercial bank customer’s money balances. The volume of depository liabilities does not change, only their composition (deposit classification). The balances are swept from deposit liabilities having higher reserve ratios on a specific volume and type of deposit liability (10% on transaction deposits), to nonexistent ones (0% on MMDA accounts). These balances are exchanged and converted by the member banks, and consequently, overnight, these balances circumvent reserve requirements (reserve avoidance), and thereby making the job of monetary management, less effective (because as of 2002 70% + of the banks have become zero-bound).

47) Expanding the money supply essentially requires nothing more than “writing numerically larger figures in the books”.

48) . Monetary policy objectives should not be in terms of any particular rate or range of growth of any “M”, rather policy should be formulated in terms of desired rates of change in monetary flows (MVt) relative to rates of change in real GDP. Because of monopoly elements and other structural defects which raise costs and prices unnecessarily and inhibit downward price flexibility in our markets, it is probably advisable to follow a monetary policy which will permit the rate of monetary flows to exceed the rate of change in real GDP by c. 2-3 percentage points.

49) In other words, some inflation is inevitable given our present market structure and the commitment of the federal government to hold unemployment rates at tolerable levels (there is evidence to prove rates of change in Nominal GDP can serve as a proxy figure for rates of change in all transactions. Rates of change in real GDP have to be used, of course, as a policy standard).

50) And lastly the multiplier they use. Multiply total member bank reserves by a multiplier (M1 divided by adjusted total “free/gratis” member bank legal reserves). The bi-weekly figure on adjusted reserves is accurate since it involves only adding up member bank balances with the Federal Reserve banks and estimating the member bank’s vault cash. Of course, the multiplier used has to be extrapolated from past data. Alterations in the trend line should reflect changes in reserve ratios (incorporated in (RAM)) and structural changes that would alter the trend ratio of time to transaction deposits.

51) It is impossible for time deposits to grow or shrink without causing, ceteris paribus, an equal and opposite change in our means-of-payment money.

52) The functions of money are: a medium-of-exchange: The exchange of money is brokered into 2 transactions, goods are exchanged for money, and money in turn is exchange for goods. Each transactor indulges in two distinct operations, a sale & a purchase. Goods and serves are being sold for money, and money is used to purchase goods and services. In other words money has a “generalized purchasing power.”

53) Money as a store-of-value: The holder of money that is generally acceptable over time and fixed in price is provided with a store of value providing future purchasing power.

54) A unit-of-account: a “yardstick of value” by which people price commodities and serves exchanged and calculate wealth, income, and debts.

55) Money as a standard-of-value: standard money into which all other types are convertible and, being freely convertible, are thereby kept at a par with the standard money.

56) Money as a guarantor-of-liquidity-and-solvency: substantial quantities of money are held to give assurance that accruing obligations and unforeseen contingencies can be met as they materialize.

57) By raising reserve ratios to 100% the commercial banks would become financial intermediaries no longer able to create money, serving only as conduits between savers and borrowers. The funds for setting up savings accounts would then originate OUTSIDE the banks, just as the funds for setting up share accounts originate OUTSIDE the savings and loan associations. Even if the reserve ratios (minimum ratios of legal reserves to bank deposits) were raised to 100%, the debt would be monetized to the extent to which the Federal Reserve Banks increased their holdings of governments. That is to say, the public’s holdings of money increases pari passu (in lock step) with the expansion of Reserve Bank credit.

58) Gresham’s law is a statement of the “principle of substitution” applied to money or other words, that a commodity (or serve) will be devoted to those uses which are most profitable. It is another one of the paradoxes of money that, unlike articles in the market, the bad drives out the good. E.g., during the Civil War the less valuable paper money drove all types of coins out of circulation. The more valuable money is held, if possible, as a “store of value” and the less valuable is used as a medium of exchange. The demand for money as a store of value thus forces the more valuable types of money out of circulation. E.g., the “vilest die and basest metal” replaced those of “perfect die and metal” in circulation. Noted by Aristophanes (448-380 B.C).

59) Alfred Marshall, the Cambridge economists, is responsible for developing the cash-balances approach to money. For example, if individuals collectively desire expanding their cash balances (increasing the period over whose transactions purchasing power in the form of money is held), they will initiate a chain of events which will lead to a net reduction in their aggregate holdings of cash. That is, an over-all increase in the demand for money leads to falling prices, a decline in profit expectations, reduced borrowing from the banks -- and therefore a smaller volume of cash balances. Money thus is truly a paradox - by wanting more, the public ends up with less, and by wanting less, it ends up with more. All motives which induce the holding of a larger volume of money will tend to increase the demand for money - and reduce its velocity. Therefore, if there is a flight from the dollar, there will be hyperinflation in terms of dollar denominated assets.
60) Definitions of the money supply are not timeless. The extension of the scope and practices of the Federal Housing's Administration's Authority accompanied by Federal Government guarantees - assures a secondary market for housing - the "store of purchasing power" attribute of money. I.e, there are various types of "tertiary money". These assets possess general liquidity. They do not bear a direct, unit for unit, unvarying relationship, to the primary money supply. And to pass legislation that will establish a new classification of tertiary money is to make these Government guarantees inflationary. Underwritten with the credit of the U.S. Government. Federal insurance, underwriting and guaranteeing,

The Equation of Exchange

2009-09-15T10:17:00.000-07:00

For those who need a reminder, 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, is equal (for the same time period), to the product of the volume, and velocity of money. Velocity is the rate of speed at which money is being spent. 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. This is merely algebra, but it has an important economic application.

The economic question arises from differing opinions as to whether the monetary authorities (The Board of Governors of the Federal Reserve System and the Federal Open Market Committee) can control both the volume and velocity of money, and the effects of changes to the volume and velocity of money, in production and employment, as well as on prices:

Alan Greenspan’s profligacy ended with Ben Bernanke’s appointment to the Chairman of the Federal Reserve in February 2006. Coinciding with Bernanke’s instatement, the FOMC reversed Greenspan’s extremely “easy” money policy, and initiated a “tight” money policy (one aimed at reducing chronic inflation). At that point, correcting the Central Bank’s past excesses, required that the “trading desk” drain the existing volume of required (legal), reserves (thereby reducing the growth rate of the money stock).

From Feb. 2006 until July 2008, the FOMC pursued a consistently tighter money policy. In fact, the rate-of-change in the volume of legal reserves (the proxy for inflation), fell for 29 consecutive months (out of a possible 29, or sufficient to wring inflation out of the economy). It’s only been in the last 10 successive months (since Sept. 2008), that it was necessary for the FOMC to switch from its “tight” monetary policy, to the extraordinarily “easy” monetary policy in force at present. Easy money is here defined as a growth rate of aggregate monetary demand (money times velocity) in excess of the growth rate of product, and service output.

Coterminous with the economic contraction during the past 12 months, the money multiplier has varied (it collapsed) from 209 to 114. It collapsed because the rate of expansion in loans and investments plunged, as (1) credit worthy customers, and (2) investment grade securities – both disappeared. Interpreted, at this stage it means, that if the Manager of the Open Market Account, operating from his office in the Federal Reserve Bank of New York, bought $1 billion of Treasury bills, for the accounts of the 12 Federal Reserve banks (or if there was any other type of expansion of Reserve Bank credit by 1 billion), the money supply would expand almost immediately, by approximately $114b.

All of the data necessary to correctly estimate the 3 links (multiplier), that exist between the member bank’s “source base” and either (1) bank credit proxy, or (2) the 60 largest CBs on the Board’s H.8 release or (3) commercial bank credit -- are available to the FED’s technical staff. From these data the necessary computations can be made.

The basic expansion coefficient for the banking system as a whole (the correct source base), is obtained by dividing commercial bank credit, by the sum of the member bank’s (1) required reserves, plus (2) contractual clearing balances (reductions in required reserve balances have predominantly been accompanied by “offsetting increases” in the member bank’s contractual (required), clearing balances. Required reserves, and vault cash, can be used for deficits in contractual clearing balances used (as long as they are quickly replenished).

Contractual clearing balances are prudential reserves (1) reserves necessary for posting debits and credits resulting from both intra & inter-bank transactions, (2) reserves to meet the public’s demand for currency or (3) reserves to avoid deficits in the bank’s balance of payments). Contractual clearing balances function as “reserve requirements against debits to deposits”. They are reserve requirements based both upon the turnover of deposits, as well as upon their volume (See the 1931 Committee on Bank Reserves Proposal (by the Board’s Division of Research and Statistics). This study was declassified in March 1983.

Any changes (use of deposits), will trigger automatic adjustments in a bank’s requirement for either additional (1) contractual clearing balances (required), and or in, (2) supplemental reserves (daylight overdraft credit). Daylight credit is constrained by (1) “net debit caps” and (2) “interest rate charges on daylight overdrafts. Net-debit-caps are the bank’s maximum allowable daylight overdraft positions. Daylight credit figures (legal reserves), should be incorporated in the banking system’s source base (but the data on daylight credit is unavailable on an up-to-date release). Daylight credit & or overdrafts occur when a bank operates with negative legal reserves (not the same as borrowed reserves).

The number of small and medium sized banks which are “bound” (those banks where the expansion of “loans-deposits” are regulated, or constrained, by required (legal) reserves, has continued to decline (beginning with the Garn-St Germain Depository Act of 1982, and accelerating thereafter (in the 1990’s). However, even as the number of banks that are designated as “non-bound” continues to grow, the largest banks still hold the greatest percentage, (and number of), deposits and customers. And large banks are continuing to expand their market share (percentage of deposits), relative to the medium and small banks.

But even as the number of “non-bound” banks continues to grow, the “non-bound” banks will continue to need Central Bank deposits, for clearing (bank debits), and making other interbank payments, which notwithstanding, gives the Central Bank leverage (albeit limited control), over the money and bond markets. Nevertheless, over time, increasing amounts of vault cash (including ATM networks), plus retail deposit sweep programs, have effectively eliminated legal reserve requirements (for most medium and small size banks). I.e., reserve requirements for the banking system as a whole are not “binding” (emasculating the hard and fast correlation with the money multiplier).

The “trading desk” conducts their open market operations through the primary securities dealers. These government securities dealers have accounts at member clearing banks (money creating depository institutions). So when the “trading desk” buys and sells securities from the dealer’s accounts at their clearing bank, the “trading desk” adds or drains legal reserves in the banking system.

What the Federal Open Market Committee targets is the uncollateralized, interbank, federal funds rate, the rate banks charge each other on overnight loans, for their excess deposits, held at their District Reserve Bank. This is accomplished by the “trading desk” setting the daily, collateralized, repurchase agreement rate (repo) on Treasuries (effectively the one-day cost-of-carry, or one day return on, all government securities). This is how the FED actually (albeit temporarily), controls short-term money market interest rates.

The multiplication factor (for fractional reserve banking), can be altered by a number of variants, e.g., shifts in the ratio of M1 to total bank deposits; shifts in the cash drain factor, changes in the number of member banks in each size group (i.e., legally bound vs. non-bound banks); and the reserve ratio applicable to each size category (0% for the reserve exemption, 3% for the low reserve tranche, and a 10% reserve ratio on all other transaction accounts).

The validity of the multiplier as a predictive device is also predicated on the assumption that the commercial banks will immediately expand credit and the money supply (if they are supplied with additional excess legal reserves). Prior to August 2008, the inconsequential volume of excess legal reserves held by the member banks (ever since 1942), provided documentary proof that the banks exploited virtually all of their lending, and investment, opportunities.

Actually, during this period, the bankers realized that if the aggregate of their bids for federal funds pushed the rate above the bracket (or target level), set by the “trading desk”, this would automatically trigger buy orders; thus expanding Reserve Bank credit, and bank legal, and excess reserves. What the Central bank “plugged in” (the Federal Funds “Bracket Racket”), amounted to an open ended device through which the commercial banks could decide whether or not there should be an expansion in the legal lending capacity of the banking system – the capacity to create credit (money) and to acquire additional earning assets.

In the current environment, the enormous volume of excess reserves held by the member banks function as the bank’s secondary liquidity reserves (regardless of their volume or volatility). I.e., an increase in excess reserves under the FED’s new “interest on reserves regime” functions just like raising reserve ratios would. I.e., the volume of excess reserves increases, when the interest on reserves increases, & vice versa. Likewise, the volume of excess reserves increases, when reserve ratio requirements increase & vice versa.

The volume of idle excess reserves depends primarily upon how yields are set (by the FOMC), on the banking system’s excess, required, and supplemental (daylight credit), reserves. Thus, the volume of excess reserves held by the member banks depends upon how these yields compare to, the returns on all other money market interest rates. Interest on reserves is a mechanism, which was chosen by the FOMC, to both (1) lower an individual bank’s operating expenses vis a vis the global money & lending markets, and (2) to carry out monetary policy objectives (i.e., the buildup of excess reserves (due to the current remuneration rate -- which is .25% & above the .15% FFR), has been used to offset the expansion of reserve bank credit (assets on the FED’s balance sheet).

In the current environment, a bank’s secondary liquidity reserves consist of earning assets which can be converted into cash quickly and without loss (e.g., U.S. Treasury obligations having about one year or less to go to maturity, commercial paper, repurchase agreements, contractual clearing balances, supplemental, required, excess reserve balances, etc.). Excess, required, & supplemental reserves are now earning assets (via interest on reserves), and thus should be included in a bank’s secondary reserves (excess reserves now total $794.5b -- H.3).

Also in this environment, a bank’s primary liquidity reserves or “working reserves” are those cash assets that consist of vault cash, cash items in process of collection, and balances due from depository institutions. The H.8 release shows that commercial banks currently hold $970.3b cash assets. (During the Great Depression excess reserves were roughly 50% of the volume of required reserves (at their height in 1935). This compares to c. 90% at present. (excess reserves represented a bank’s unused lending capacity). Because (during the Great Depression), the volume of excess reserves remained idle for a long period, this led economists to coin the phase “pushing on a string” (because the banks were reluctant to assume new risks, when making new business or consumer loans, & purchasing private-sector investments).

Back to the equation: A commensurate increase in the velocity of money may well offset a corresponding decline in the volume, or rate-of-change, in legal reserves (e.g., the proxy for real growth). Any increase in the rate of turnover (in our primary money supply) - will also increase aggregate demand (or nominal GDP). I.e., a dollar bill which turns over 5 times can do the same “work” as one five dollar bill that turns over only once. It is the real means-of-payment money actually changing hands that affect price levels, price trends, interest rates, employment, production, etc.

Once prices start increasing, especially housing prices, it will be necessary for businessmen to secure larger commercial loans (just to carry on the same volume of business). And other commercial loans will need to be obtained in order to hold larger inventories, finance new trade, engage in more forward buying, support higher production, additional purchasing, new carrying, or extra marketing, of goods and services.

However, all such activity promotes higher prices, with no necessary concomitant expansion in the production of “real” things. Bernanke’s price supports increase the probability of stagflation (business stagnation accompanied by inflation), because of the FOMC’s current extraordinarily “easy” monetary policy (i.e., will cause an increase in the unit prices of unsold inventory, as opposed to increase the production of quantities of goods and services exchanged), (e.g., Costco).

Since 1996, only the trend rate of the money stock is available to use as a variable in the equation of exchange. I.e., the current figure for the transactions velocity of money is unknown and unknowable. But if the rate of turnover of the money stock is relatively constant (in the equation of exchange), then the volume, and rate-of-change in M1 (as a predictor of future economic activity) is superior to even the monetary “source base”. But be watchful, because historically, the transactions velocity of money has accelerated given any rapid expansion of the money stock. In any event, accurate economic forecasts (for stocks, bonds, or the exchange value of the dollar, etc) are that much harder to project.

Note that "Cash assets" on the H.8 :Assets & Liabilities of 60 Commercial Banks in the United States include excess reserves.

This is its explanation on the H.8: 14. Includes vault cash, cash items in process of collection, balances due from depository institutions, and "balances due from Federal Reserve Banks".

The "Regulators"

2009-06-27T11:56:00.001-07:00

I am inclined to the opinion that regulatory and supervisory decision-making processes should lie entirely with the Board of Governors, and that the Board should be reconstituted to include the Secretary of the Treasury, the Comptroller of the Currency, the Chairman of the Federal Home Loan Bank Board, the Director of the Federal Deposit Insurance Corporation, the Director of the Office of Thrift Supervision, the National Credit Union Administration, the Securities Futures Commission, and the Chairman of the Securities and Exchange Commission

The Monetary Base [sic]

2009-06-27T11:53:00.000-07:00

Flawed as the AMBLR figure is (Adjusted Member Bank Legal Reserves), it is still far superior to the Domestic Adjusted Monetary Base (DAMB) figure, which is generally cited. The DAMB figure includes AMBLR plus the volume of currency held by the nonblank public (Milton Friedman’s “high powered money”).

All currency gets into circulation, directly or indirectly, through the liquidation of time deposits, by the cashing of demand deposits. There is one exception in demand deposit creation; those rare instances when the U.S. Treasury borrows from the Federal Reserve Banks. However it cannot be said, as of time deposits, that increases in the public’s holdings of currency reflect prior commercial bank credit creation. It is more appropriate to say that expansions of currency are accompanied by concurrent expansions of Reserve Bank Credit.

Any expansion or contraction of DAMB is neither proof that the Fed intends to follow an expansive, nor a contractive monetary policy. Furthermore any expansion of the non-bank public’s holdings of currency merely changes the composition (but not the total volume) of the money supply. There is a shift out of demand deposits, NOW or ATS accounts, into currency. But this shift does reduce member bank legal reserves by an equal, or approximately equal, amount.

An expansion of the public’s holdings of currency will cause a multiple contraction of bank credit and checking accounts (relative to the increase in currency outflows from the banks) ceteris paribus. To avoid such a contraction the Fed offsets currency withdrawals by open market operations of the buying type (e.g., purchases of governments for the portfolios of the Reserve Banks). The reverse is true if there is a return flow of currency to the banks. Since the trend of the non-bank public’s holdings of currency is up (ever since 1930), return flows are purely seasonal and cannot therefore provide a permanent basis for bank credit and money expansion.

Although the DIDMCA of March 1980 prescribed that all depository institutions maintain reserve requirements (thereby expanding the “source base”), the unconventional “reserves-based-operating-procedure” was unsuccessful. This was because Chairman Paul Volcker attempted to target only non-borrowed reserves (when at times, 10% of all legal reserves were borrowed). I.e., $1b of reserves in 1980 (borrowed or otherwise), supported $16b of M1. I say Volcker “attempted” because legal reserves grew at a 12% annual rate, from April 1980, until the end of that year. This presaged a 19.1% surge in nominal GNP in the 1st qtr 1981. Contrariwise, this so-called “operating procedure” (monetarism), was never “abandoned”, it was never tried.

The member commercial banks operated with no excess legal reserves of consequence between 1942, and September 2008. Subsequently, in conjunction with the Emergency Economic Stabilization Act of 2008, Regulation D, was amended and the Board gave the District Reserve Banks the authority to pay the member banks quarterly interest on their (1) required and (2) excess reserves. As a result, unused excess reserves exploded (reserves contingent upon the FOMC’s remuneration rate, vis a’ vis competing returns).

The DIDMCA permitted the Federal Reserve Banks to offer the money creating depository institutions, monthly earning credits on their contractual clearing balances (prudential reserves). Clearing balances are included in the “source base” (the base for the expansion of money and transmission of credit). The growth in these balances accelerated after the December 1990-92 cuts in, and removal of, specified reserve requirements. Since then, clearing balances have moved inversely (as a replacement), with the diminishing volume of required reserves.

Intra and inter-bank clearings, (debits and credits) are safeguarded from imbalances (overdrafts), using supplementary reserves (known as day-light-credit). Thus the actual “source base” includes 4 inter-bank balances held at their District bank, (owned by the member banks): (1) excess, (2) required, (3) contractual clearing, & (4) supplementary. (1) Excess reserves are equal to total reserves (which since 1959 includes liquidity reserves, i.e., surplus and applied vault cash), minus the member bank’s (2) required reserves, minus (3) required contractual clearing balances. The volume of excess reserves represents the banking system’s, unused, or its potential, incremental lending capacity. With this incremental lending capacity the banks have the legal capacity to “create credit”.

In our Federal Reserve System, 90 percent of “MO” (domestic adjusted monetary base) is currency. There is no “expansion coefficient” assigned to the currency component. And the currency component of MO is so prominent, and the proportion of legal reserves so negligible (and declining); that to measure the rate-of-change in currency held by the non-bank public, to the rate-of-change in M1 (where 54% is currency), is, yes, to measure currency vs. currency (cum hoc ergo propter hoc); in probability theory and statistics, not a cause and effect relationship.

Complicating the measurement of the monetary base is the fluctuation in the percentage of foreign currency circulation, to domestic currency circulation. The FED’s research staff estimates that foreigners hold one half to two thirds of all U.S. currency (this spread can result in a wide margin of error). Inflows and outflows of foreign-held U.S. currency (seldom repatriated) are attributed to political, and price, instability (as well as to seasonal flows), and all are immeasurable in the short run. I.e., the domestic monetary source base equals the monetary source base minus the estimated amount of foreign-held U.S. currency.

The “shipments proxy” estimate of foreign-held U.S. currency uses data on the receipts and shipments of currency, by denomination, at the Federal Reserve’s 37 cash offices nationwide (note: > 80 percent of foreign-held U.S. currency are $100.00 bills). Because of its influence on the DAMB, quarterly estimates of foreign-held U.S. currency are reported in the Feds “Flow of Funds Accounts of the United States” & in the BEAs estimates of the net international investment position of the United States.

The volatility of the (1) K-ratio, the public’s desired ratio of currency to transactions deposits (or currency-deposit-ratio), and the volatility in (2) the ratio of foreign-held, to domestic U.S. currency, both influence the trend rate for the cash drain factor (the movement of the domestic currency component of the DAMB). And all of the evidence points to sizable, and unpredictable, shifts in the money multiplier (MULT – St. Louis), for any of the “M’s”.

The Federal Reserve Bank of Chicago uses legal reserves (“t”-accounts), exclusively, to explain the creation of new money and credit in the booklet “Modern Money Mechanics”. The booklet is a workbook on bank reserves and deposit expansion (changes in a bank’s deposits-loans resulting from open market operations). The stated purpose of the booklet is to “describe the basic process of money creation in a "fractional reserve" banking system” - the monetary base plays no role at all in this analysis.

It is therefore both incorrect in theory, and thus inaccurate in practice, to refer the DAMB figure as a monetary base [sic]. The only base for an expansion of total bank credit and the money supply is the volume of legal reserves supplied to the member banks, by the Fed, in excess of the volume necessary to offset currency outflows from the banking system. The adjusted member bank legal reserve figure is that base

The “Holy Grail” & it is Inviolate & Sacrosanct

2009-06-27T11:51:00.000-07:00

(1) Ben S. Bernanke
Chairman and a member of the Board of Governors of the Federal Reserve System. Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body.

At the same time, because economic forecasting is far from a precise science, we have no choice but to regard all our forecasts as provisional and subject to revision as the facts demand. Thus, policy must be flexible and ready to adjust to changes in economic projections.

2) European Central Bank (ECB) Central Bank for the EURO

The transmission mechanism is characterised by long, variable and uncertain time lags. Thus it is difficult to predict the precise effect of monetary policy actions on the economy and price level…

3) Janet L. Yellen, President and CEO of the Federal Reserve Bank of San
Francisco

You will note that I am casting my statements about the stance of policy and the outlook in very conditional terms. I do this because of the great uncertainty that surrounds these issues. Frankly, all approaches to assessing the stance of policy are inherently imprecise. Just as imprecise is our understanding of how long the lags will be between our policy actions and their impacts on the economy and inflation. This uncertainty argues, then, for policy to be responsive to the data as it emerges, especially as we get within range of the especially as we get within range of the desired policy setting.

(4) Thomas M. Hoenig
President of Federal Reserve Bank of Kansas City

Monetary policy must be forward-looking because policy influences inflation with long lags. Generally speaking a change in the Federal funds rate may take an estimated 12-18 months to affect inflation measures….But the course of monetary policy is not entirely certain. & will depend on how the economy evolves in the coming months.

(5) William Poole*
President, Federal Reserve Bank of St. Louis

However inflation is measured, economists agree that monetary policy has at most a minimal influence on the rate of change in the price level over relatively short time periods—months, quarters or perhaps even a year. Central banks are responsible for medium- and long-term inflation—such inflation, as Milton Friedman wrote, is a monetary phenomenon that depends on past, current and expected future monetary policy. As a practical matter, the medium- to long-term likely is a period of two to five years.

(6) Robert W. Fischer – President Dallas Federal Reserve Bank
November 2, 2006:
"In retrospect [because of faulty data] the real funds rate turned out to be lower than what was deemed appropriate at the time and was held lower longer than it should have been. In this case, poor data led to policy action that amplified speculative activity in housing and other markets. The point is that we need to continue to develop and work with better data."

(7) Governor Donald L. Kohn
I think a third lesson is humility--we should always keep in mind how little we know about the economy. Monetary policy operates in an environment of pervasive uncertainty--about the nature of the shocks hitting the economy, about the economy’s structure, and about agents’ reactions. The 1970s provide a sobering lesson in the difficulty of estimating the level and rate of change of potential output; these are quantities we can never observe directly but can only infer from the behavior of other variables.

(8) James Grant (Grant’s Interest Rate Observer)
“Both use quantitative methods to build predictive models, but physics deals with matter; economics confronts human beings. And because matter doesn’t talk back or change its mind in the middle of a controlled experiment or buy high with the hope of selling even higher, economists can never match the predictive success of the scientists who wear lab coats.”
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First, there is no ambiguity in forecasts: In contradistinction to Bernanke (and using his terminology), forecasts are mathematically "precise” :

(1) “Money” is the measure of liquidity; the yardstick by which the liquidity of all other assets is measured.

(2) Income velocity is a contrived figure (fabricated); it’s the transactions velocity (bank debits - Vt) that’s important (i.e., financial transactions are not random);

(3) Nominal GDP is the product of monetary flows (M*Vt) (or aggregate monetary demand), i.e., our means-of-payment money (M), times its transactions rate of turnover (Vt).

(4) The rates-of-change (roc’s) used by economists are specious (always at an annualized rate; which never coincides with an economic lag). The Fed’s technical staff, et al., has learned their catechisms;

(5) Friedman became famous using only half the equation (the means-of-payment money supply), leaving his believers with the labor of Sisyphus.

(6) Contrary to economic theory, & Nobel laureate, Dr. Milton Friedman, monetary lags are not “long and variable”. The lags for monetary flows (MVt), i.e. the proxies for (1) real-growth, and for (2) inflation indices, are historically, always, fixed in length. However, the FED's target, nominal gdp?, varies widely.

(7) Roc’s in (MVt) are always measured with the same length of time as the specific economic lag (as its influence approaches its maximum impact (not date range); as demonstrated by the clustering on a scatter plot diagram).

(8) Not surprisingly, the companion series, non(their roc’s), corroborate both lags for monetary flows (MVt) –-- their lengths are identical .

(9) Consequently, since the lags for (1) monetary flows (MVt), & , are synchronous & indistinguishable, by using simple algebra, economic prognostications are infallible (for less than one year).

(10) Asset inflation, or economic bubbles, are incorporated: including housing, commodity,, dot.com, etc. This is the “Holy Grail” & it is inviolate & sacrosanct: See 1931 Committee on Bank Reserves Proposal (by the Board’s Division of Research and Statistics), published Feb, 5, 1938, declassified after 45 years on March 23, 1983.

(11) The BEA uses quarterly accounting periods for real GDP and the deflator. The accounting periods for GDP should correspond to the specific economic lag, not quarterly.

(12) Monetary policy objectives should not be in terms of any particular rate or range of growth of any monetary aggregate. Rather, policy should be formulated in terms of desired roc’s in monetary flows (MVt) relative to roc’s in real GDP.

(13) Combining real-output with inflation to obtain roc’s in nominal GDP, can then be used as a proxy figure for roc’s in all transactions. Roc’s in real GDP have to be used, of course, as a policy standard.

(14) Because of monopoly elements, and other structural defects, which raise costs, and prices, unnecessarily, and inhibit downward price flexibility in our markets, it is probably advisable to follow a monetary policy which will permit the roc in monetary flows to exceed the roc in real GDP by c. 2 – 3 percentage points.

(15) I.e., monetary policy is not a cure-all, there are structural elements in our economy that preclude a zero rate of inflation. In other words, some inflation is inevitable given our present market structure and the commitment of the federal government to hold unemployment rates at tolerable levels.

(16) Some people prefer the “devil theory” of inflation: “It’s all Peak Oil's fault", ”Peak Debt's fault", or the result of the “Stockpiling of Strategic Raw Materials/Industrial Metals” & Soaring Agriculture Produce. These approaches ignore the fact that the evidence of inflation is represented by "actual" prices in the marketplace.

(17) The "administered" prices of the world's monopolies, and or, the world’s oligarchies: would not be the "asked" prices, were they not “validated” by (MVt), i.e., “validated” by the world's Central Banks. Dr. Milton Friedman said it best: “inflation is always and everywhere a monetary phenomenon”.

Paul Volcker's "TIME BOMB"

2009-06-27T11:47:00.000-07:00

The annual rate of turnover or transactions velocity (Vt) of commercial bank demand deposits (DD) has vaulted from 35 in 1964 to an all-time annual high of 525 in Oct. 1996. For the year 1980, Vt was 135. That is to say each dollar in our checking accounts had, on the average, an annual impact in the markets of $35 in 1974 and $135 in 1980.

The sharp increase in DD velocity since 1964 is the consequence of a variety of factors which include 1) the daily compounding of interest on savings accounts in commercial banks and “thrift” institutions, 2) the increasing use of electronics to transfer funds, 3) the introduction of negotiable commercial bank certificates of deposits, and 4) the rapid growth of ATS (automatic transfers of savings to DDs) and NOW (negotiable orders of withdrawal) accounts.

But the most important single factor contributing to the increased rate of money turnover probably was those structural changes which made virtually all time deposits the equivalent of low velocity demand deposits. These changes included the virtual elimination of Regulation Q (interest ceilings on time deposits) and the introduction of interest bearing checking accounts know as money market demand accounts. Fortunately, these are one time events. High interest rates and expectations of higher prices have been both cause and effect of rising rates of Vt

The Depository Institutions Deregulation and Monetary Control Act (henceforth DIDMCA), by legalizing the use of the NOW type of checking accounts by Savings and Loans (S&Ls), Credit Unions (CUs) and Mutual Savings Banks (MSBs) immensely accelerated the rise in Vt, as did the introduction of money market funds (MMFs).

All the demand drafts drawn on these institutions clear through DDs – except those drawn on MSBs, interbank and the U.S. government:

1) MSB balances in the commercial banks (CBs) are designated as interbank demand deposits (IBDDs) presumably because MSBs are call banks. MSBs always have been, and are intermediary financial institutions – intermediary between saver and borrower.

The rapid expansion of the ATS and NOW accounts also has been responsible for the precipitous decline of the money supply M1A (currency held by the nonblank public and DDs). As well as contributing to the extraordinarily sharp increase in Vt since November, 1980. Contrary to the conventional wisdom, the expansion of the various types of checking accounts offered by the intermediaries has not been at the expense of the CBs as a group.

When the owners of (saved) DDs transfer these funds to the intermediaries, the funds are immediately invested in some type of earning asset – including CB negotiable CDs. If the saver transfers the funds to an ATS account, that too, simply results in a shift in the type of liabilities held by the CBs.

It was not by happenstance that the $27 billion decline of DDs form November, 1980 to May, 1981 is almost exactly matched by the growth of CB ATS accounts and negotiable CDs. If the member CBs were operating with an excess volume of excess legal reserves, then it could be said that the volume of bankable investments was inadequate, and that the intermediaries were acquiring investments or loans the CBs would otherwise hold.

But the Member CBs have no excess legal lending capacity, and the nonmember CBs are presumably operating at their economic limits. The legal reserves of the nonmember CBs exercise no constraint on their expansion as these reserves are defined under the so-called DIDMCA. On the other hand, the growth of any intermediary does deny investable funds to other intermediaries. Money Market Funds (MMF) growth has had , for example, a serve effect on the S&Ls and the MSBs and to a lesser extent, the CUs.

The importance of Vt in formulating – or appraising monetary policy derives from the obvious fact that it is not the volume of money which determines prices and inflation rates, but rather the volume of monetary flows (MVt) relative to the volume of goods and services offered in exchange.
===============================================

Paul Volcker, Chairman of the Board of Governors of the Federal Reserve System, appeared before the House Domestic Monetary Policy Subcommittee. In response to a question as to why the Fed had supplied an excessive volume of legal reserves to the member banks in the third quarter 1980 (annual rate of increase 13.2%), Volcker’s defense was that there are two types of legal reserves; 1) borrowed (reserves obtained by the banks through the Federal Reserve Bank discount windows -- in October they borrowed 3 billion dollars at up to 20 percent), and 2) non-borrowed (reserves supplied the banking system consequent to open market purchases).

He advised the congressmen to watch the non-borrowed reserves—“What we do on our own initiative.” The Chairman further added --- “Relatively large borrowing (by the banks form the Fed) exerts a lot of restraint.”

This is, of course, economic nonsense. One dollar of borrowed reserves provides the same legal-economic base for the expansion of money as one dollar of non-borrowed reserves. The fact that advances had to be repaid in 15 days is immaterial. A new advance could be obtained, or the borrowing bank replaced by other borrowing banks. The importance of controlling borrowed reserves is indicated by the fact that at times nearly 10% of all legal reserves were borrowed.

The money supply can never be managed by any attempt to control the cost of credit. It cannot be controlled through the manipulation of the FFR or thru interest on reserves, but only through the volume of member bank legal reserves and reserve ratios. The experience we had leading up to the Treasury-Federal Reserve Accord in March 1951 should have established the validity of that dictum.

===========================

Paul Volcker’s version of monetarism (along with credit controls), was limited to Feb, Mar, & Apr of 1980. With the intro 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).

Why did Volcker fail? This was due to Volcker's operating procedure. Volcker targeted non-borrowed reserves when at times 10 percent of all reserves were borrowed. That's before the discount rate was made a penalty rate. And the fed funds "bracket racket" was simply widened, not eliminated. Monetarism actually has never been tried.

Then came the "time bomb", the widespread introduction of ATS, NOW, & MMMF accounts --which vastly accelerated the transactions velocity of money (all the demand drafts drawn on these accounts cleared thru demand deposits (DDs) – except those drawn on Mutual Savings Banks (MSBs), interbank, and the U.S. government).This propelled nominal gNp to 19.2% in the 1st qtr 1981, the FFR to 22%, & AAA Corporates to 15.49%.

By the first qtr of 1981, the damage had already been done. But Volcker screwed up again (supplied an excess rate of legal reserves to the banking system), in late 1982-83. AAA corporates yields later hit 13.57% May 31st 1984. I forecast in FEB 84 that stocks & bonds would bottom in June.

My predcition for AAA corporate bond yields in 1981 was 15.48%. AAA corporate yields hit 15.49%. I was off by only .01% (not luck, the logical progression of bank debits).

Transactions Velocity of Money (MVt)

2009-06-27T10:46:00.000-07:00

The transactions concept of money velocity (Vt) has its roots in Irving Fischer’s equation of exchange (PT = MV), where (1) M equals the volume of means-of-payment money; (2) V, the rate of turnover of this money; (3) T, the volume of transactions units; and (4) P, the average price of all transactions units. The “econometric” people don’t like the equation because it is impossible to calculate P and T. Presumably therefore the equation lacks validity. Actually the equation is a truism – to sell 100 bushels of wheat (T) at $4 a bushel (P) requires the exchange of $400 (M) once (V), or $200 twice, etc.

The real impact of monetary demand on the prices of goods and serves requires the analysis of “monetary flows”, and the only valid velocity figure in calculating monetary flows is Vt. Income velocity (Vi) is a contrived figure (Vi = Nominal GDP/M). The product of MV(i) is obviously nominal GDP. So where does that leave us? In an economic sea without a rudder or an anchor. A rise in nominal GDP can be the result of (1) an increased rate of monetary flows (MVt) (which by definition the Keynesians have excluded from their analysis), (2) an increase in real GDP, (3) an increasing number of housewives selling their labor in the marketplace, etc. The income velocity approach obviously provides no tool by which we can dissect and explain the inflation process.

To the Keynesians, aggregate demand is nominal GDP, the demand for serves (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.

Admittedly the data for Vt are flowed. So are nearly all economic statistics, but that does not preclude us from using them. An educated estimate is better than no estimate at all. For example, we know that the international balance of payments balances – debits equal credits, payments equal receipts, etc. The Department of Commerce statistics do not prove this, so in order to make their statistics balance, they put in an “errors and omission “balance figure. The triumph of good theory over inadequate facts.

The Fed first calculated deposit turnover in 1919. It reported weekly until 1941. The figure “other banks’’ was used until 1996. Prior to this revision Vt included all banks located in 232 SMSA’s excluding N.Y. City. This was the best that could be done to eliminate the influence on prices of purely financial and speculative transactions. Obviously funds used for short selling do not contribute to a rise in prices.

The Fed calculates these velocity figures by dividing the aggregate volume of debits of these banks against their demand deposits. Like M3, the series was also discontinued, in Oct. 1996.

In calculating the flow of funds (MVt), I am assuming that the Vt figure calculated by the Fed is not only representative all commercial banks in the United States, but that the velocity of currency is the same as for demand deposits. Is this valid? Nobody knows. But we do know that to ignore the aggregate effect of money flows on prices is to ignore the inflation process.

And to dismiss the concept of Vt by saying it is meaningless (that people can only spend their income once) is to ignore the fact that Vt is a function of three factors: (1) the number of transactions; (2) the prices of goods and services; (3) the volume of M. Inflation analysis cannot be limited to the volume of wages and salaries spent.

To do so is to overlook the principal "engine" of inflation - which is of course, the volume of credit (new money) created by the Reserve and the commercial banks, plus the expenditure rate (velocity) of these funds. Also overlooked is the effect of the expenditure of the savings of the non-bank public on prices. The (MVt) figure encompasses the total effect of all these money flows.

Some people prefer the devil theory of inflation: “It’s (Peak Oil’s or Peak Debt's) fault. This approach ignores the fact that the evidence of inflation is represented by actual prices in the marketplace. The “administered” prices of the oil producing countries would not be the “actual” market prices were they not “validated” by (MVt) or the world's monetary authorities.

Financial Intermediaries vs. Commercial Banks

2009-06-27T10:43:00.001-07:00

“Banks have long contended that the costs of reserve requirements (i.e., forgone earnings) put them at a competitive disadvantage relative to non-bank competitors that are not subject to reserve requirements – Testimony of Treasury

“These measures should help the banking sector attract liquid funds in competition with non-bank institutions and direct market investments by businesses” Testimony of Treasury
=========================================================================
A member commercial bank (depository institutions) only becomes a financial intermediary when there is a 100% reserve ratio applied to all its deposit liabilities. The high point for reserve ratios, (the weighed arithmetic average of reserve ratios applicable to deposit liabilities), stood at 91.1, in at the beginning of WWII (1942).

Any institution whose liabilities can be transferred on demand, without notice, and without income penalty, via data networks, checks, or similar types of negotiable credit instruments, and whose deposits are regarded by the public as money, can create new money, provided that the institution is not encountering a negative cash flow.

From a systems viewpoint, commercial banks as contrasted to financial intermediaries: never loan out, and can’t loan out, existing deposits (saved or otherwise) including existing transaction deposits (TRs), or time deposits (TDs) or the owner’s equity or any liability item.

When CBs 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- (Transaction deposits -TRs) -- somewhere in the banking system. I.e., commercial bank deposits are the result of lending, not the other way around.
The non-bank public includes every institution, the U.S. Treasury, the U.S. Government, State, and other Governmental Jurisdictions, and every person, except the commercial and the Reserve banks.

The lending capacity of the member CBs of the Federal Reserve System is limited by the volume of costless legal (excess) reserves put at their disposal by the Federal Reserve Banks in conjunction with the reserve ratios applicable to their deposit liabilities (10% on transaction accounts in excess of the low-reserve tranche), as fixed by the Board of Governors of the Federal Reserve System.

Since 1942, Bank credit creation is a "system" process. No bank, or minority group of banks (from an asset standpoint), can expand credit (and the money stock), significantly faster than the majority group are expanding. If the member commercial banks hold 80 percent of total bank assets, an expansion of credit by the non-member banks, and no expansion by member commercial banks, will result, on the average, of a loss in clearing balances equal to, 80 percent of the amount being checked out of the non-member banks. I.e., the FED, through controlling the reserves of the member banks, can control the expansion of total bank credit, member and non-member.

From the standpoint of the individual commercial banker, his institution is an intermediary. An inflow of deposits increases his bank’s clearing balances, and probably its free/gratis legal reserves, not a tax [sic] – and thereby it’s lending capacity. But all such inflows involve a (1) decrease in the lending capacity of other commercial banks (outflow of cash and due from bank items), (2) unless the inflow results from a return flow of currency held by the non-bank public, or (3) is a consequence of an expansion of Reserve Bank credit. Hence, all CB liabilities are derivative. Note: the trend of the nonbank public's holdings of currency has been up since the 1920's, i.e., return flows are purely seasonal.

That is to say CB time/savings deposits, unlike savings-investment accounts in the “thrifts”, bear a direct, virtually one-to-one, unvarying relationship, to transactions accounts. As TDs grow, TRs shrink, pari passu, and vice versa. The fact that currency may supply an intermediary step (i.e., TRs to currency to TDs, and vice versa) does not invalidate the above statement.

Monetary savings are never transferred to the intermediaries; rather monetary savings are always transferred through the intermediaries. Indeed, as evidenced by the existence of “float”, reserve credits tend, on the average, to precede reserve debits. Therefore, it is a delusion to assume that savings can be “attracted” from the intermediaries, for the funds never leave the commercial banking system.

Consequently, the effect of allowing member CBs to “compete” with financial intermediaries (non-banks) has been, and will be, to reduce the size of the intermediaries/non-banks (as deregulation did in the 80’s) – reduce the supply of loan-funds (available savings), increase long-term interest rates, increase the proportion, and the total costs of CB TDs.

Contrary to the DIDMCA underpinnings, member commercial bank disintermediation (an outflow of the bank’s deposit liabilities), is not, and has not been, predicted on interest rate ceilings. Disintermediation for the CBs 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.

The last period of disintermediation for the CBs occurred during the Great Depression, which had its most force in March 1933. 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.

However, disintermediation for financial intermediaries- (non-banks), is predicated on their loan inventory (and thus can be induced by the rates paid by the commercial banks); earning assets (e.g., mortgages), with historically longer term structures and lower margins/spreads (between borrowing short and lending long).

In other words, competition among commercial banks for TDs has: 1) increased the costs and diminished the profits of commercial banks; 2) induced disintermediation among the "thrifts" with devastating effects on housing and other areas of the economy; and 3) forced individual bankers to pay higher and higher rates to acquire, or hold, funds.

Savers (contrary to the premise underlying the DIDMCA in which CBs are assumed to be intermediaries and in competition with thrifts) never transfer their savings out of the banking system (unless they are hoarding currency). This applies to all investments made directly or indirectly through intermediaries.

Shifts from TDs to TRs within the CBs and the transfer of the ownership of these deposits to the thrifts involves a shift in the form of bank liabilities (from TD to TR) and a shift in the ownership of (existing) TRs (from savers to thrifts, et al). The utilization of these TRs by the thrifts has no effect on the volume of TRs held by the CBs, or the volume of their earnings assets. I.e., the non-banks are customers of the member, money creating, depository banks.

In the context of their lending operations it is only possible to reduce bank assets, and TRs, by retiring bank-held loans, e.g., for the saver-holder to use his funds for the payment of a bank loan, interest on a bank loan for the payment of a bank service, or for the purchase from their banks of any type of commercial bank security obligation, e.g., banks stocks, debentures, etc.

The financial intermediaries can lend no more (and in practice they lend less) than the volume of savings placed at their disposal; whereas the commercial banks, as a system, can make loans (if monetary policy permits and the opportunity is present) which amount to server times the initial excess reserves held.

Financial intermediaries (non-banks) lend existing money which has been saved, and all of these savings originate outside the intermediaries; whereas the CBs lend no existing deposits or savings; they always, as noted, create new money in the lending process.

Saved TRs that are transferred to the S&Ls, etc., are not transferred out of the CBs; only their ownership is transferred. The reverse process, which is called “disintermediation”, has the opposite effect: the intermediaries shrink in size, but the size of the CBs remains the same.

Professional economists have no excuse for misinterpreting the savings investment process. They are paid to understand and interpret what is happening in the whole economy at any one time. For the commercial banking system, this requires constructing a balance sheet for the System, an income and expense statement for the System, and a simultaneous analysis of the flow of funds in the entire economy.

The expansion of bank credit and new money-TRs (transaction deposits) by the CBs can be demonstrated by examining the differences in the consolidated condition statements for the banks and the monetary system at two points in time.

Increases in CB loans and investments/earning assets/bank credit, are approximately the same as increases in TRs & time deposits/savings deposits (TDs)/bank liabilities/bank credit proxy (excluding IBDDs).

That the net absolute increase in these two figures is so nearly identical is no happenstance, for TRs largely come into being through the credit creating process, and TDs owe their origin almost exclusively to TRs - either directly through transfer from TRs or indirectly via the currency route.

There are many factors, which can, and do, alter the volume of bank deposits, including: (1) changes in currency held by the non-bank public, (2) in bank capital accounts, (3) in reverse repurchase agreements, (4) in the volume of Treasury currency issued and outstanding, and (5) in Reserve Bank credit. Although these principle items are largest in aggregate, they nevertheless have been peripheral in altering the aggregate total of bank deposits.

For the Monetary System:

Thus the vast expansion of deposits occurred despite:
(1) an increase in the non-bank public’s holdings of currency $801.2b
(2) an increase in other liabilities & bank capital $39b
(3) an increase in matched-sale purchase agreements $32.2b
(4) an increase in required-clearing balances $6.7b
(5) the diminution of our monetary gold & silver stocks; etc.(-)$6.6
(6) an increase in the Treasury’s general fund account $4.9b

Factors offset by:
(1) the expansion of Reserve Bank credit $847.5b
(2) the issuance of Treasury currency; $35.9b

These “outside” factors made a negligible contribution in bank deposit growth the last 67 years of $4.4b (deposits declined by $877.4b and were offset by the expansion of $883.4b).

For the incredulous reader I make this assignment: Please explain how the volume of TRs and TDs could grow since 1939 from $48 billion, to $ 8,490 (NSA) billion, even while the banks were paying out to the non-bank public a net amount of (-)$801.2 billion (NSA) in currency.

Federal Reserve Bank credit since 1939 (2.6b), has expanded by billion 847.5 (NSA), (-$801.2 of which was required to offset the currency drain from the commercial banks. The difference in the above figures outlined above was sufficient to supply the member banks with $46b of legal reserves.

And it is on the basis of these legal reserves that the banking system has been able to expand its outstanding credit (loans and investments) by over (+) $8,462 trillion (SA) since 1939. (40.7)

From a System standpoint, time deposits represent savings that have a velocity of zero. As long as savings are impounded within the commercial banking system, they are lost to investment or to any type of expenditure. The savings held in the commercial banks, in whatever deposit classification, can only be spent by their owners; they are not, and cannot, be spent by the banks.

From a system standpoint, TDs constitute an alteration of bank liabilities, their growth does not per se add to the “footings” of the consolidated balance sheet for the system. They obviously therefore are not a source of loan-funds for the banking system as a whole, and indeed their growth has no effect on the size or gross earnings of the banking system, except as their growth affects are transmitted through monetary policy.

Lending by the intermediaries is not accompanied by an increase in the volume of money, but is associated with an increase in the velocity, or turnover of existing money. Here investment equals savings (and velocity is evidence of the investment process), whereas in the case of the CB credit, investment does not equal savings, but is associated with an enlargement and turnover of new money (bank credit & the money stock).

The difference is the volume of savings held in the commercial banking system is idle, and lost to investment as long as it is held within the commercial banking system. Such a cessation of the circuit income and transactions velocity of funds, funds which constitute a prior cost of production, cannot but have recessionary effects in our highly interdependent pecuniary economy. Thus, the growth of time deposits shrinks aggregate demand and therefore produces adverse effects on GDP and the level of employment.

It began with the General Theory, John Maynard Keynes gives the impression that a commercial bank is an intermediary type of financial institution serving to join the saver with the borrower when he states that it is an “optical illusion” to assume that “a depositor and 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 financial intermediary in order to make the statement correct. Perhaps this is the source of the pervasive error that characterizes the Keynesian economics, the Gurley-Shaw thesis, Reg Q, the DIDMCA of March 31st, 1980, the Garn-St. Germain Depository Institutions Act of 1982, Financial Services Regulatory Relief Act of 2006, Emergency Economic Stabilization Act of 2008, sec. 128. Acceleration of the effective date for payment of interest on reserves, Modern Monetary Theory, etc.

The CBs can force a contraction in the size of the S&L system, and create liquidity problems in the process, by outbidding the S&Ls for the public’s savings. This process is called “disintermediation” (an economist’s word for going broke). The reverse of this operation, as implied in the analysis above, cannot exist. Transferring saved TR or TD deposits through the S&Ls cannot reduce the size of the commercial banking system. Deposits are simply transferred from the saver to the S&L to the borrower, etc.

The drive by the commercial bankers to expand their savings accounts has a totally irrational motivation, since it has meant, from a system standpoint, competing for the opportunity to pay higher & higher interest rates on deposits that already exist in the commercial banking system.

The shift from demand to time deposits has converted spendable balances into stagnant money. This transfer added nothing to the Gross National Product, and nothing will be added so long as the funds are held in the form of time deposits. Shifts from transaction deposits, to time deposits, simply increases the aggregate costs to the banking system and adds nothing to the system’s income.

But it does profit a particular bank, Citibank for example, to pioneer the introduction of a new financial instrument such as the negotiable CD until their competitors catch up; and then all are losers. The question is not whether net earnings on CD assets are greater than the cost of the CDs to the bank; the question is the effect on the total profitability of the banking system. This is not a zero sum game. One bank’s gain is less than the losses sustained by other banks.

How does the FED follow a "tight" money policy and still advance economic growth? What should be done? The money creating depository banks should get out of the savings business -- gradually (REG Q in reverse-but leave the non-banks unrestricted). What would this do? The commercial banks would be more profitable - if that is desirable. Why? Because, the source of all time/savings deposits within the commercial banking system, are demand/transaction deposits (the primary money supply)- directly or indirectly through currency or the bank’s undivided profits accounts.

That is, money flowing "to" the intermediaries (non-banks) actually never leaves the com. banking system as anybody who has applied double-entry bookkeeping on a national scale should know. The growth of the intermediaries/non-banks cannot be at the expense of the commercial. banks. And why should the commercial banks pay for something they already have? I.e., interest on time deposits.

Dr. Leland James Pritchard (MS, statistics - Syracuse, Ph.D, Economics - Chicago, 1933) described stagflation 1958 Money & Banking Houghton Mifflin,

“Profit or Loss from Time Deposit Banking” -- Banking and Monetary Studies, Comptroller of the Currency, United States Treasury Department, Irwin, 1963, pp. 369-386.

Modern Money Mechanics
http://landru.i-link-2.net/monques/mmm2.html

H.8-Assets & Liabilities of Commercial Banks
http://www.federalreserve.gov/releases/h8/Current/

H.41-Factors Affecting Reserve Balances
http://www.federalreserve.gov/releases/h41/Current/

Definitions & figures are not exactly comparable between the 2 periods. Also, some figures are only available on a SA basis or a NSA basis

Monetarism Hasn't Been Tried

2009-06-24T13:06:00.000-07:00

MONETARISM HAS NEVER BEEN TRIED

Unlike his predecessors, Bernanke is exceptionally gifted; he just matriculated at the wrong universities . As soon as Bernanke was appointed to the Chairman of the Federal Reserve, the rate-of-change in legal reserves , (the proxy for inflation), dropped for 29 consecutive months (out of a possible 39, or sufficient to wring inflation out of the economy). It’s only been in the last 10 successive months (since Aug 2008), that the FED’s “tight” monetary policy was finally reversed.

An overcautious Federal Open Market Committee acted too late to prevent the extremely high transactions velocity of money from declining (such a high velocity is required just to maintain prices at their current levels). In the longest recession since the Great Depression, it is obvious that money has no significant impact on prices unless it is actually being exchanged.

Inflation is the consequence an excessive flow of money relative to the volume of financial transactions consummated, and the volume of goods and services offered in the market place. Inflation is a chronic “across-the-board” increase in prices; or, looking at the other side of the coin, depreciation of money. The evidence of inflation cannot be conclusively deduced from the monthly changes in the price indices. The price indices are passive indicators of the average change of a group of prices. They do not reveal why prices rise or fall.

Inflation cannot occur unless fueled by a chronic increase in the volume and/or velocity of money. A chronic increase in means-of-payment money cannot occur unless the FED, through e.g., excessive open market operations of the buying type, supplies the commercial banks with an excessive volume of legal reserves, (excessive, of course, in terms of rates-of-change in real-output, and changes in the velocity of money). No money figure standing alone is adequate as a guide post to monetary policy (M*).

Since August 2008, the Manager of the Open Market Account has been regulating his operations in terms of the proper volume of legal (required) reserves which the member banks should hold (except for those periods when Treasury debt management requires “support” operations from the FED). After support operations have passed the excessive expansion of legal reserves are “washed out”.

What is the proper volume of legal reserves? This depends on the “multiplier”, the transactions velocity of money, and the rate-of-change in real-GDP. All of these variables can be estimated with a high degree of accuracy, and the rate-of-change in real-GDP serves as a close proxy to rates-of- change in total physical transactions, in both goods and services.

Since 1942, the “money multiplier” has been a comparatively constant measure using either:

(1) commercial bank credit (St. Louis FED), or

(2) the 60 largest CBs on the Board’s H.8 release,

[divided (by) legal reserves - my definition]

From 1947-1977 the multiplier doubled in 30 years; from 1977-2005 the multiplier doubled again in 35 years. At its current pace the multiplier will double in 6 years.

At the beginning of the “monetarist experiment” , Money Market Services, Inc, was surveying sixty individuals for their weekly predictions on the expected volume of M-1. It happened that for the week ending Oct 10, the Board of Governors reported that M1 had increased $2.8b. But on the subsequent week’s revision Manufacturers Hanover was found to have overstated its customer’s deposits (and the FED’s money supply figure), by $3.0b.

A simple but correct (not textbook), money multiplier is equal to commercial bank credit divided by (applied vault cash + inter-bank demand deposits) held at the District Federal Reserve Banks. I.e., commercial bank credit divided by the system’s legal reserves equals the money multiplier. Using the correct multiplier in 1979 would have given speculators in CBOT Treasury Bond futures the necessary information to make a quick trading profit on the FED’s errors.

The essence of a free (self-regulatory) capitalistic system is price flexibility, downward as well as upward. Unfortunately, it is Congress and the Administration’s job to create this “market structure”, (thru regulated capitalism):

Measures that preclude a zero rate of inflation: “It is axiomatic that the smaller the degree of price competition in a market and the greater the degree of private unregulated monopoly power over prices, and output, then the higher the amount of unit prices, the greater the tendency for restricted output, and employment, and the smaller the degree of downward price flexibility”...“Conduct antitrust actions on the basis of the most economical size of plant. I.e., limit corporations to a size that would achieve minimum unit costs at optimum rates of output. Outlaw the conglomerate and holding companies beyond the first degree, and severely restrict vertical as well as horizontal corporate aggregations. I.e., prohibit corporations from conducting unrelated activities under a single corporate roof, from expanding in order to broaden their share of the market, or from controlling their suppliers through ownership or legal devices (e.g. break up Citigroup, & AIG).”

Lacking this flexibility, downswings in the economy are no longer self-correcting. Unemployment causes more unemployment. Bank and other business failures beget more failures. Financial crises in the stock market and especially bank failures enormously accelerate and deepen the downswing. Since the economy lacks the capacity to rejuvenate itself, government intervention is inevitable. This has been the situation in the era beginning with the Great Depression.

Other measures include

(1) minimizing the size of Government,

(2) reducing unproductive use of gov’t funds (most of the military expenses/dead weight hardware),

(3) transfer payments to non-productive recipients,

(4) excessive regulatory burdens

(5) excessive rates of taxation on producers & savers,

(6) all factors that contribute to a decline in labor productivity & product quality, etc.

Until this recession/depression, monetary expansion responded immediately to an injection of reserves into the system. The FED could project with a high degree of reliability, the probable rate-of-increase in monetary flows (MVt), relative to the probable increase in real-GDP. Because of our “market structure”, the first rate (monetary flows) should exceed the latter. How much? That is a policy judgment involving trade-offs, but perhaps by no more than 2-3%

Bernanke’s strategy is perfectly obvious and his target strangely elliptical. Reserve requirements are applied to the bank’s liabilities after a 30 day lag. The sum of the bank’s

(1) required reserves, and

(2) required clearing balances, equals the correct (most accurate) “source-base” (because past reductions in required reserves have largely been accompanied by “offsetting increases” in the member bank’s clearing balances ).

Note that Milton Friedman’s “high powered money” and legal reserves are not the same thing. Friedman wrongly adds currency held by the non-bank public to his “base”. Friedman, et al, are wrong, because an increase in currency is deflationary (unless deliberately offset by the expansion of reserve bank credit ).

Required balances combined with the reserve ratios applicable to 3 subdivisions of bank deposits (only net transaction accounts), determine the limits and, since 1942, the amounts of bank credit creation. Until very recently, member commercial banks have held insignificant volumes of

(1) free reserves (excess minus borrowed), and

(2) excess reserves (total minus required ).

Reserve ratios have varied from a high of 91.1% in 1941 (percentage of reserves to note and deposit liabilities), to the present low rates.

The monetary authorities have to have complete discretion over changes in reserve ratios. This is essential since under fractional reserve banking (the essence of commercial banking) these ratios determine the minimum volume of legal reserves a bank must hold against a specific volume and type of deposit liability.

Unfortunately, the FED doesn’t gauge the volume and timing of its open market operations in terms of the amount and desire rate of increase of member commercial bank legal reserves, but rather in terms of the levels of the federal funds rates
Bank credit creation is a “system” process. No bank or minority group (from an asset standpoint) can expand credit (and the money supply) significantly faster than the majority group (or the “legally bound” banks), are expanding . Legally bound banks have required reserves. Prior to the DIDMCA of 1980 “legally bound” banks were demarcated as “membership” banks (in 1980 the member banks held only 65% of all the banking system’s assets).

Under current regulations, the “non-bound” (formally non-member) banks have no reserve requirements (pre DIDMCA, some state legislators allowed earning assets to be counted as legal reserves or allowed for the “pyramiding” of reserves ). In other words, if the “legally bound” banks hold a substantial majority (70-80%) of the assets of the entire system, the FED, through controlling the legal reserves of the “legally bound” banks can control the expansion of total bank credit, for both “bound banks” and “not bound banks”.

Legal or required reserves are determined by a “legally bound” bank’s “net transaction accounts”:

(1) Beginning at the regulation’s bottom tier there is an “exemption amount”, or a lower level deposit exclusion (with no reserve ratio requirement). Currently reserve levels start @ $0 and end @ $10.3b

(2) Above the exemption level is the bank’s “low-reserve tranche” (a 3% reserve ratio is applied to these liabilities). Reserve levels start @ $10.3b & end @ $44.4b

(3) At the “top bracket” (above the low-level tranche), all net transaction accounts require a 10% reserve ratio. Reserve levels start @ $44.4b. & have no upper level limit.

Even so, according the FED’s technical staff, reserve requirements for the system as a whole, are no longer binding. In other words, the system’s “expansion coefficient” is a progressively elastic variable

The current enormous volume of “excess” reserves ($375b on 5/1/09 in the H.3), either is restricting, or constricting, the system’s “money multiplier”. Contrary to the alarmists and cranks, increases in “excess” reserves (which represent idle & unused lending capacity), offset or absorb increases in the FED’s assets on its balance sheet (or increases in Reserve Bank Credit).

When the Federal Reserve Banks expand credit, for example, by buying U.S. obligations, the balance sheets of the District Banks reflect an increase in earning assets (in the System Open Market Account - SOMA), and an equal increase in IBDD liabilities, i.e., "free/gratis" legal reserves (contrary to the bankers, legal reserves from a system’s standpoint are not a tax).

Or, increases in these “excess” reserves function like open market operations of the selling type (but with their enormous volume, $877b on May 20, 2009, excess reserves function exactly like raising reserve ratios). I.e., higher reserve ratios accomplish the same result, a larger volume of legal reserves, and a reduction in the system’s expansion coefficient. However, the volume of legal reserves is now indirectly determined by interest rates (policy rate), and not directly by reserve ratios

Don’t be mislead by our legislators, their technical support advisors, & the bankers. From the standpoint of the entire system, the member bank’s “tax” [sic] is equal to the “money multiplier” times the volume of its “source base”. Or, instead of an accounting expense, an expansion in the volume of excess reserves (excess bank lending capacity), results in a multiple expansion of new earning assets (somewhere in the system). If the banks exploit their opportunities (and their loans & investments are subsequently profitable), the proceeds from this “tax” [sic] generates income for:

(1) the Federal Reserve District Banks (purchase securities, acquire new earning assets, and create new commercial bank legal reserves),

(2) the commercial banks (acquire free legal reserves, create a multiple volume money & credit, and add a concomitant volume of additional earning assets),

(3) and the U.S. Treasury recaptures 97% of the net income from SOMA’s (the FED’s) securities.

If ever the FED really desired to increase securities, loans, & investments (bank credit), it would always lower the comparative remuneration rate on “excess” reserves (the interest rate of return on reserves (IORs) is now .25% higher than the benchmark FFR ). Thus the banks have no incentive to invest (no opportunity cost in substituting excess reserves for loans). Until the yield curve raises or flattens, excess reserves will remain largely sterile (unused).

Since 1942 banks always remained fully “lent-up”, they held no excessive amount of excess legal lending capacity to finance business (or consumers), they have used excess reserves to acquire a piece of the national debt or other creditorship obligations that are eligible for bank investment. But with IORs equal to the Federal Funds Rate (FFR) [or higher], the exercise of FED policy is often likened either to “pushing on a string” (when it attempts to execute an expansionary monetary policy).

The reserve assets that all money creating institutions are required to hold should be of a type the monetary authorities can quickly ascertain and absolutely control. The only type of bank asset that fulfills this requirement is “inter-bank demand deposits” in the 12 Federal Reserve District Banks, owned by the member banks (IBDDs). This was the original definition of the legal reserves of member banks (made compulsory in 1917), in the Federal Reserve Act of Dec. 23, 1913 (Owen-Glass Act) and it is still the only viable definition (pre-Dec 1959 requirements pertaining to assets) .

As long as the “legally bound” banks hold a significant majority of the total assets of the banking system (all money creating institutions), and operate with no significant volume of excess legal reserves, the FED can control the money supply, that is providing they have the commitment to do so. Both of these conditions have prevailed since 1942—but not the commitment.

The only tool at the disposal of the monetary authorities in a free capitalistic system through which the volume of money can be controlled is legal reserves. The sine qua non of monetary management is total current control by a central monetary authority over the volume of legal reserves held by all money creating institutions, and over the reserve ratios applicable to their deposits.

In sharp contrast, a FED research paper (June 2003), “Declining Required Reserves, Funds Rate Volatility, and Open Market Operations” concludes that: (1) lower reserve ratios, and (2) lower reserve requirements, will “remove a distortionary tax” [sic]on depository institutions which would “improve the world-wide competitive position of U.S. Banks”.

In other words, the “gold standard” for the E-D banking system is the unregulated, undercapitalized, inadequate or prudential reserve, Euro-dollar/Yen –dollar/etc., money market (a world-wide fractional reserve banking system ), -- the discovery that the amount of actual U.S. dollar reserves required to support the E-D bank’s convertibility commitment need be only a fraction of the volume of E-D loans made – and E-D deposits (money) created.

The prudential reserves of the E-D banks consist of various U.S. dollar-denominated liquid assets (U.S. Treasury Bills, U.S. commercial bank money market assets, etc.) and interbank demand deposits held in U.S. banks. The volume of prudential reserves held by each E-D bank presumably is dictated by “prudence” – not bay any legal requirement administered by a monetary authority. In effect, the Euro-dollar market has assumed much higher risks to become the low-cost investor . But the FED followed the E-D’s head start (and between the 1990-1992 period), it drastically lowered legal reserves to: “reduce bank costs and stimulate lending”.

In theory, the policy prescription necessary for the U.S. (to achieve a world-wide competitive edge is), is to get the member banks out of the “savings business”. Thus, as a long term proposition, gradually impose, & then eliminate, commercial bank (CBs) interest rate ceilings What would all of this do the commercial banks would be more profitable – if that is desirable.

Why? because the source of time deposits is demand deposits, directly or indirectly thru currency, or the banks undivided profits accounts. Money flowing “to” the intermediaries actually never leaves the (CB) system as anybody who has applied double-entry bookkeeping on a nation scale should know. The growth of the intermediaries cannot be at the expense of the (CBs), and why should the banks pay for something they already have? I.e. interest on time deposits. The member banks would be more profitable - if that is desirable .

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The first rule of reserves and reserve ratios should be to require that all money creating depository institutions have the same legal reserve requirements, both as to types of assets eligible for reserves, as well as the level of reserve ratios. To be successful, monetary policy should limit all reserves to balances in the District Federal Reserve banks (IBDDs), and have UNIFORM reserve ratios, for ALL deposits, in ALL banks, irrespective of size (see: Member Bank Reserve Requirements -- Analysis of Committee Proposal, February 27, 1940…the study conclusions were declassified (the conclusions were once top secret!) on March 23, 1983). Two pertinent proposals or conclusions were:

(#1) "Uniform percentage requirements against the volume of deposits of both types and in all classes of cities"

(#4)"the committee recommends that all member banks and all deposits be treated alike for reserve purposes"

Monetarism involves controlling the volume of total reserves (since IOR the FED has targeted required reserves), not the volume of non-borrowed reserves as administered by Paul Volcker. I.e., one dollar of borrowed reserves provides the same legal-economic base for the expansion of money as one dollar of non-borrowed reserves. The fact that advances had to be repaid in (x) number of days is immaterial. A new advance can be obtained, or the borrowing bank replaced by other borrowing banks.

Federal Reserve Chairman Paul Volcker should be held directly responsible for the exemption and elimination of usury rates of interest on consumer debt (usury is lending money at high interest rates, rates that make repayment very difficult, or sometimes impossible - even for creditworthy borrowers). This is also called "loan sharking" or "predatory lending” (or in today’s tongue, credit card, sub-prime, & payday loans).

Higher rates of interest on consumer debt (lead to higher margins for the depository & financial institutions, and presumably higher earnings for (financiers, bankers, and stock holders), etc. But higher interest charges for consumers increasingly limit their contribution to personal consumption, disposable income, & GDP (more “grist for the mill” - Nationalization).

The importance of controlling borrowed reserves is indicated by the fact that at times during 1980, nearly 10% of all legal reserves were borrowed. Even more unmistakable, beginning in January 2008, the FOMC operated at all times with (net) borrowed reserves (to the extent that borrowed reserves eventually became negative ).
Increases in borrowed reserves allowed for the expansion of the FED’s balance sheet (the FED changed the composition of its balance sheet when it added the emergency (unforeseen), liquid funding facilities). Through asset substitution, the FOMC absorbed c. 1 trillion in Reserve Bank Credit.

As any monetarist should know, if the money supply is controlled properly, the determination of interest rates can be left to market forces.

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These are the pertinent parts regarding the MCA of 1980 published in the Federal Reserve Bulletin June 1993: “After years of debate, the Congress finally adopted legislation to reform reserve requirement rules: “the success…of adopting a reserves-based operating procedure, depended on how tight the (link was between reserves) & the (level of M1 deposits) in the entire banking system” (or how efficiently the Federal Funds Market circulates, redistributes, and links overall member bank’s excess reserves). FOMC policy wasn’t tight, borrowings were not targeted.

But with the DIDMCA the Board of Governors legally commingled, and consequently blurred, the inter-relationships between 2 distinct types of bank lending operations. In effect Congress merged these banks into a single organization, with few, or virtually unrestricted lending regulations:

(1) no interest rate ceilings,

(2) minimal or no legal reserves,

(3) as well as increasingly insignificant reserve ratios,

(4) i.e., smaller & smaller fractions were required against new & existing bank deposits.

(5) smaller reserve ratios are applied to a declining proportion, & a reduced number of deposit classifications.

Thus by edict, the principle financial intermediaries were destroyed, and a money creating System was fostered, which the Fed cannot now monitor, and has yet to bring under control . Thus it is observed that the tenants of monetarism have never been tried.

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We have discovered, too late, that money creation cannot be exposed to the forces of a free market. The money supply is not self regulatory. The operations of commercial banks and all other involved institutions cannot be fostered by deregulation. The operations of these institutions must be severely circumscribed and subject to rigorous and informed supervision. If private profit institutions are to be allowed the "sovereign right" to create money, they must be severely regulated in the management of both their ASSETS (e.g., sub-prime loans, derivatives, etc.) and their LIABILITIES (e.g., interest bearing accounts).

Current procedures and regulations add up to a legal reserve apparatus that the Fed cannot monitor, much less control, even on a month-to-month basis. And the Fed cannot know, in a meaningful administrative sense, the current volume of depository institution’s legal reserves.

For example, the carry-over allowance for excess reserves (from the current maintenance period until the next), was doubled to 4% in 1992 . These “as-of-adjustments ” (“reserve position errors”), are applied to the first Thursday immediately following the end of the prior two week maintenance period, i.e., on “settlement Wednesday”.

We have the right to know why can’t the FED manage our money. It is instructive to note that the “maintenance period” begins 17 days (after the 14 day “computation period”). The banks know that they are required to settle their daily average reserve requirements calculated 30 days earlier. But the bankers (as a consequence of lagged reserve requirements), can, and do, force the FED to supply additional reserves (increased capacity to lend – and create new money). Under these arrangements, bankers fell free to accommodate all the demands for “bankable” loans knowing that 30 days hence the FED will accommodate their reserve needs.

What the net expansion of money will be, as a consequence of a given injection of additional reserves, nobody knows until long after the fact. The consequence is a DELAYED, REMOTE, and APPROXIMATE control over the lending and money-creating capacity of the banking system.

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Prevailing hubris in the technical staff stemming from their Keynesian training which advised them that interest was the price of money, not the price of loan-funds. They therefore decided that the money supply could be controlled through the manipulation of the benchmark federal funds rate, via purchasing & selling government securities.

Traditionally, if the aggregate of bank bids for federal funds pushed the rate above the target set by the “trading desk”, this would automatically trigger buy orders, thus expanding Reserve Bank credit, and bank legal & excess reserves. I.e., a rise in the benchmark federal funds rate (above the target FFR), triggers open market purchases, a fall to the lower end of the target FFR, selling operations. Open market operations of the buying type add legal reserves to the banking system; selling operations reduce reserves.

Contrary to Keynes & Krugman, money is truly a paradox - by wanting more (demand for money), the public ends up with less, and by wanting less, it ends up with more (cash balances approach), --Alfred Marshall, the Cambridge economist. I.e., interest is the price of loan-funds; the price of money is the reciprocal of the price level. . If goods and services rise, the “price” of money falls. Interest rates in any given market at any given time are the result of the interaction of all the forces operating through the supply of and the demand for, loan funds.
Loan funds, of course, are in the form of money, but there the similarity ends. Loan funds at any given time are only a fraction of the money supply – that small part of the money supply which has been saved, and is offered in the loan credit markets.

It is true that an expansion of commercial bank credit (loan-funds) produces a concomitant increase in the volume of money & that the initial effect is to depress interest rates, other things being equal. If, however, the increase in the volume of money flows exceeds the changes in the volume of goods and services offered in the markets, prices will rise. And if the price increases broadly based & chronic, we have inflation.

Higher interest rates consequently are not evidence of “tight money”; rather they are the consequence, over time, of an excessively easy (irresponsible) money policy – money expansion so great that money flows substantially exceed the rate of expansion in real output.

Keynes & Krugman presume that a liquidity preference curve exists (which represents the supply of money). In this equation the demand for money (cash balances), “varies inversely” with the level of interest rates. But there are International cross-border flows competing for a shifting variety of highly liquid interest bearing checking accounts (and an array of asset risks & yields).

The world’s regulatory authorities may set financial instrument covenants for their individual countries. But the proliferation of financial innovations has changed faster than Central Bank regulatory controls. Hopefully however, the introduction & impact of new financial innovations has reached a saturation point.

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There are many other leakages. Savings are impounded within the commercial banking system (savings don’t equal Investment). In the Keynesian system S = I by definition, and in the national income accounts, S=I + (G - T). However, such definitions have little to contribute to dynamic monetary analysis. An expansion of commercial bank held monetary savings deposits is prima facie evidence of a leakage which collects in the form of unspent balances.

In the commercial banking system, banks buy their liquidity by out bidding other commercial banks for the same fixed volume of deposits, deposits (as a system) they already own (this reduces the supply of loan funds, & it reduces the supply of savings available to the financial markets ). It is a tenant of monetarism: the utilization of commercial bank credit to finance real investments or government deficits does not constitute a utilization of savings since financing is accomplished by the creation of new money

I.e., from a Systems viewpoint, member commercial banks as contrasted to financial intermediaries, never loan out, and can’t loan out, existing deposits (saved or otherwise) including existing transaction deposits, or time deposits, or the owner’s equity or any liability item. When MCBs grant loans to, or purchase securities from, the non-bank public (which includes every institution, the U.S. Treasury, the U.S. Government, State, & other Governmental Jurisdictions), (all except the commercial and the reserve banks), they acquire title to earning assets, by initially, the creation of an equal volume, of new money-transaction deposits (somewhere in the banking system).

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If the “store of purchasing power” attribute of money, when applied to a given asset, is to have significant meaning, it ought to be defined in terms which are applicable to the whole economy. That is, no asset really has a “monetary store of purchasing power” quality unless there can be a net conversion of that asset into money (ceteris peribus). In other words it must be possible to effect this conversion without necessitating that any present money holder reduce/liquidate his holdings/assets.

Other interpretations become mired in a futile discussion of relative degrees of confidence and liquidity. But much more than monetary liquidity for the individual holder is necessary if an asset can be said to have the “store of purchasing power” quality; it must be simultaneously monetarily liquid for society as a whole.

Current money supply definitions assume there are numerous degrees of “moneyness”, thus confusing liquidity with money (money is the “yardstick” by which the liquidity of all other assets is measured). The definitions also ignore the fact that some liquid assets (time deposits) have a direct one-to-one, unvarying, relationship to the volume of demand deposits (DDs), while others affect only the velocity of DDs.

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Take also, for example, the historical ratio of longer dated securities (by maturities, risks, & yields), to nominal GDP. Long-term rates were lower than the rate-of-change in nominal GDP for decades prior to the passage of the DIDMCA (long-term rates were above nominal GDP for years afterwards ). And “real” interest rates (the rate of interest less the rate of inflation), were as just as volatile and just as unrelated

There are three basic elements comprising long-term interest rates: a “pure” rate; a risk rate; and an inflation premium. The pure rate presumably reflects the price required to induce lenders into parting with their money in a non-inflationary & risk-free situation. In recent years, a 2-3% figure is often assigned to this element.

An easier monetary policy will temporarily reduce certain interest rates, especially short term governments securities, but in the longer term will have inflationary effects and will cause all interest rates, long & short-term, to rise. The problems of the domestic and foreign deficits, economic growth, etc., are all long, not short, term problems. The tendency of short-term rates to rise concomitantly with long-term rates is largely the consequence of the substantial substitutability of both short & long-term financing.

Bank’s manage their liabilities & corporations minimize their cash balances. This has “tightened up” legal reserve management. But the longtime competitive need to “borrow short & lend long”, in conjunction with engaging in almost any type of lending, & borrowing, was reckless and irresponsible (the U.S. inescapably has “regulated capitalism”, not laissez faire capitalism).

Long-term interest rates are determined not only by the various supply and demand factors that affect short-term rates but also by a unique factor; namely, inflation expectations. The expectation that price levels will chronically increase injects an “inflation premium” into long-term rates. Under these assumptions, the present supply of loan funds would decrease (in both a quantitative and schedule sense). That is to say, lenders as a group, reduce the volume of loan funds offered in the markets, and refuse to loan any particular volume of funds (except at higher rates that will compensate for the expected rates of inflation).

I.e., higher inflation expectations generate higher inflation premiums. The higher the expected rate of inflation, the higher long-term rates will climb (this yield-response prevents federal deficits from being “inflated away”.

Conversely, borrowers expecting to be able to pay off loans with depreciated dollars will increase their demand for loan-funds. Higher interest rates will choke off the economy long before inflationary forces reduces the burden of debt. I.e., of the two effects, the supply side is the more important, since it literally establishes the minimum for long-term rates.

Interest rates may respond to influences other than inflation rates, either current or expected (there is a demand side factor (government deficit financing) operating in the loan funds market as well as a supply side factor).

At the same time supply is decreasing, the demand for loan funds is expected to rise as a consequence of the expected massive increases in federal deficits (for savings), (the larger the deficit, the greater the demand). The deficit financing impacts on the supply side (as well as the demand side) are pushing interest rates up or retarding their fall. With supply decreasing and demand increasing (in the schedule sense), there is only one way for interest rates to go – up.

Interest rates will fall when there is an increase in the supply of, and a decrease in the demand for, loan funds. If inflation expectations diminish, supply (in the schedule sense) will increase. Lenders will be willing to lend the same amount at lower rates, etc. The demand for loan funds will be reduced by bringing under control the new voracious appetite of the federal government for (savings).

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The crux of the cause of our monetary mismanagement, especially since 1964, was the FOMC’s operating assumption that the money supply can be managed through interest rates, specifically the federal funds rate (thru the repo rate). We should have learned the falsity of that assumption in the Dec. 1941-Mar. 1951 period. That was what the Treas. - Fed. Res. Accord of Mar. 1951 was all about.

Apparently, the Fed’s technical staff either never learned, or forgot, how Roosevelt got his “2 percent war”. This was achieved by having the Fed stand ready to buy (or sell) all Treasury obligations at a price which would keep the interest rate on “T” bills below one percent, and long-term bonds around 2 -1/2 percent, and all other obligations in between. This was achieved through totalitarian means; involving the control of total bank credit and the specific rationing of that credit we had official price stability and “black market” inflation. The production of houses and automobiles was virtually stopped, and credit rationing severely reduced the demand for all types of goods and services not directly connected to the war effort. This plus controls on prices and wages kept the reported rate of inflation down.

The effect of typing open market policy to a FFR is to supply additional (and excessive free legal reserves) to the banking system when loan demand increases . This has assured the bankers that no matter what lines of credit they extend, they can always honor them since the Fed assures the banks access to more "free" legal reserves whenever the banks need them to cover their expanding loans-deposits.
Since the demand for bank credit, and subsequent increase in the money supply, is reinforcing and not self regulatory, an inflationary environment is quickly fostered. Consequently, the prevailing pressures in the credit markets are on the top side of the federal funds brackets. Demands for bank credit to finance real estate and commodity speculation soon pushed up housing prices by an average of c. 83% in 6 years (Case Schiller). It is a tenet of corporate finance that a firm should “trade on its equity” if it would be profitable to do so Borrowing to finance earning assets that yield margin in excess of the cost of borrowing is a sound business practice. As long as it is profitable for borrowers to borrow and commercial banks to lend, money creation is not self regulatory

Central Banks operate under the illusion that the money supply can be properly controlled through the manipulation of interest rates (specifically the federal funds “bracket racket”). Or with IORs, the “bid/asked” (for excess, required, contractual, & supplemental reserves) can be replaced or regulated by: floors, ceilings, symmetric channels, corridors, spreads, tiers, deposit or target rates -- ad nauseam).

It is axiomatic that wider interest rate brackets, coupled with the “trading desk’s” ability to maintain rates at the target level, for a longer period of time, (via a higher volume of IORs), will postpone the “trading desk’s” recognition and reaction to changes in the financial markets, as well as its response to changes in the output for goods & services. I.e., the “desk” won’t realign its interest rate “pegs” as frequent, or as significant. The added delay will translate into higher market volatility, higher interest rates, and higher inflation in the long run.

These manipulations amounted to a series of temporary “pegs” under Federal Reserve Bank Chairman Alan Greenspan’s oversight. The consequence was an excessive volume of open market purchases, Reserve Bank credit, and commercial bank legal reserves :
(1) from the crest the trading desk decreased the Federal Funds Rate from 6.5% on 7.3.2000, to 1.0% until 6.29.2004 (minus -5.5% over 4 years)

(2) then at the trough, the desk increased the benchmark FFR from 1.0% on 6.30.2004 until 5.5% on 6.29.2006 (plus 4.5% over 2 years)

(3) then 10 decreases from 5.5% on 9.17.2007 to 0.0-0.25% on 12.16.2008 (minus -5.5% over 1 year, 10 months). You have to agree, it’s a roller coaster management.

The Fed cannot control interest rates, even in the short end of the market, except temporarily. Interest rate The only interest rates that the Fed can directly control are those in its liquidity funding facilities: there are 5 interest rates (ceilings tied to the primary credit rate), that the FED can directly control in the short-run; the discount rate charged to bank borrowers, as well as those set in the PDCF, ABCP, MMF, MMIFF & the bank’s “tax rebate” or “interest return on reserves”.

The effect of Fed operations on all other interest rates is INDIRECT, and VARIES WIDELY over TIME, and in MAGNITUDE, e.g., the lending funding facilities auction rates: TSLF, CPFF, TAF, & SOMA, & OMO.

It is a tenet of monetarism: to ignore Federal Funds Rates, repurchase, or any interest rates, as a “trigger” to guide open market operations. The money supply can never be managed by any attempt to control the cost of credit .

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Rather than discipline the member commercial banks the reserve authorities have become increasingly lenient, resulting in many undesirable forms, including allowing member banks to count vault cash as a part of their legal reserves, thus confusing liquidity (or precautionary /prudential or /operational bank balances), and legal reserves, and making the Fed’s job of monitoring the volume of legal reserves - more difficult to predict.

Since the DIDMCA, private respondent/correspondent “pass-through accounts” include both:

(1) the respondent bank’s inter-bank clearing balances (held at its receiving correspondent) and

(2) the respondent’s required reserves (held by its correspondent as IBDDs in its Federal Reserve District Bank).

The legal reserves and operating balances that non-member banks hold in member banks provide no constraint on the non-member bank’s money creating activities, since the amount of deposits (both compensating balances & contingent reserves), these respondent banks keep in their member correspondent banks, is much greater than the amount needed to meet their legal reserve requirements.

I.e., the respondent bank’s “excess” clearing balances don’t receive contractual “earnings credits ”. These are the respondent’s “excess” reserves (because the respondent’s required reserves must be held at the Federal Reserve District Bank by its correspondent).

The volume of excess reserves balances held at correspondent banks also doesn’t receive “interest on reserves”, as IBDDs in the Federal Reserve District Bank’s do?
Thus, to be cost efficient, the respondent banks would minimize the volume of their correspondent balances (or deal with the FED directly). The banks would then be in the position to earn “interest on reserves”, or obtain additional earnings credits, instead of paying its correspondent or the FED, for real time (intraday or low-cost daylight credit ), as well as, end-of-day (discount window borrowings at the primary credit rate (penalty rate), or purchasing overnight federal funds) .

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The supply of Daylight credit (“supplemental reserves”), as the New Zealand Central Bank discovered, corresponds to an enormous volume of legal reserves (400 times daylight credit). Obviously, the NZCB was subsidizing the banking system’s inter-bank clearing & settlement process. But posting debits & credits is not functionally equivalent to applying a credit control device (such as raising reserve ratios - to control the growth in the money supply).

Subsidizing the bankers with intra-day credit means the banks are fundamentally operating with a negative reserve position (inadequate bank liquidity), and profiting immensely from doing so. Nationalizing settlement processing lowers the banking system’s operating expenses, making member banks more competitive with their international counterparts (the FED’s ultimate goal). But promoting low-cost daylight credit for payment/settlement clearing also encourages some unnecessary risk taking, by the banks & the FED.

The net settlement of payments (debit side) & receipts (credit side) is a complex balancing/rebalancing act. Matching varies in time, amount, institution, & inter-bank reserve account. It is either simultaneous (real-time), or via batch update (delayed). It is never perfect (banks incur daily payment and overnight related overdrafts):

(1) @ penalty rates, (should lawfully correspond to the policy rate)

(2) if collateralized, @ zero%

(3) if uncollateralized, @ 50 basis pts (annually),

(4) if overnight, @ FFR x (+ 4 percentage points) / 360 days

Inter-bank clearing is an impressive & awesome responsibility.
The FED’s regulation and control of bank clearings is clear evidence that our gov’t is capable of deploying sophisticated technology, e.g., (1) FEDwire, (2) FedACH), (3), Account Balance Monitoring System (ABMS) to monitor in real time the payment activity, & (4), Daylight Overdraft Reporting and Pricing System (DORPS). Besides, systems are developed by outside contractors, selling their cutting edge expertise (outsourcing), to the government (not something internally-developed by gov’t bureaucrats). Nationalization couldn’t be as bad as others project.

Low-cost intra-day borrowings are certainly used for profit. Rather than allow the member banks to determine their own liquidity management requirements:

(a self assessment which determines the bank’s own “net debit cap” (uncollateralized daily overdraft limit), & “max-cap” (collateralized overdrafts in excess of the “net debit cap”),

the FOMC should put the member banks on notice, that if they need funds for clearing payments, or the expansion of loans, they will individually have to liquidate some of their liquid assets, Treasury bills, etc. (change their portfolio composition: its distribution & concentration). And the discount window will only be open for emergency borrowings. Legal reserves should never be determined by the profit proclivities of the commercial banks.

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Excess reserves, excess clearing balances, & required clearing balances (3 different respondent balance types) are lumped together at the correspondent bank. In other words, the respondent’s “excess” reserves are not recorded separately.

Also, respondent banks may split up their required reserves and hold (1) IBDDs directly with their Federal Reserve District Bank and at the same time hold (2) IBDDs indirectly with their correspondent. How many respondent/correspondent relationships are there? No one knows. So no one knows the deposit/base either. But without separate reporting, “Pass-through accounts” should be excluded in legal reserve tabulations and calculations.

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In regulating the money supply, the monetary authorities using monetarist guidelines will be cognizant of the volume and the rate-of-change of money flows, i.e., the volume of money times its (transactions) rate of turnover (MVt). It should be quite obvious that the extent of money’s impact on prices and the economy is measured by money flows, not the stock of money. If the transactions velocity of money were a constant, it would not matter.

But money turnover has historically varied (peaks & troughs since 1919), from a rate of (-) 45% for real-GDP & (-)63% for inflation in April 1933 to over (+)34% real-GDP in February 1981 & (+)62% inflation in October 1979 (calculated using bank debits…this is not 6 sigma…the turnover numbers are contaminated by financial & speculative transactions, Obviously funds used for short selling do not contribute to a rise in prices, (sales of existing properties, etc

See: “Analysis of Committee Proposal, February 27, 1940” (top secret until 1983).

Two pertinent proposals or conclusions were:

(#3) "Requirements against debits to deposits"

(#5)"the committee proposed that reserve requirements be based upon the turnover of deposits"

Irving Fischer’s “equation of exchange” P=MV/T embodies the truistic relationship between money flows and the aggregate value of all monetary transactions. P represents the unit prices of all transactions; T, the number of “units” of all transactions; M, the volume of means-of-payment money; V, the transactions rate of turnover of money; and (MVt), the volume of money flows.

While the usefulness of the equation is somewhat diminished by the impossibility of quantifying P and T, the validity of the equation is not. Obviously if the FED allows the banking system to increase the money supply, ceteris paribus, (no change in V or T) prices will rise, etc. Transactions velocity is an “independent” exogenous force acting on prices, while Milton Friedman’s income velocity figure is contrived (See WSJ Sept 1, 1983).

The real impact of monetary demand on the prices of goods and serves requires the analysis of “monetary flows”, and the only valid velocity figure in calculating monetary flows is Vt. Income velocity (Vi) is a contrived figure (Vi = Nominal GDP/M). The product of MVI is obviously nominal GDP. So where does that leave us? -- in an economic sea without a rudder or an anchor.

A rise in nominal GDP can be the result of (1) an increased rate of monetary flows (MVt) (which by definition the Keynesians have excluded from their analysis), (2) an increase in real GDP, (3) an increasing number of housewives selling their labor in the marketplace, etc. The income velocity approach obviously provides no tool by which we can dissect and explain the inflation process. (Vi) as used in the Fed’s model, models responsible for our roller coaster economy.

To the Keynesians, aggregate demand is nominal GDP, the demand for serves (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.

But we do know that to ignore the aggregate effect of money flows on prices is to ignore the inflation process. And to dismiss the concept of Vt by saying it is meaningless (that people can only spend their income once) is to ignore the fact that Vt is a function of three factors: (1) the number of transactions; (2) the prices of goods and services; (3) the volume of M. Inflation analysis cannot be limited to the volume of wages and salaries spent. To do so is to overlook the principal "engine" of inflation - which is of course, the volume of credit (new money) created by the Reserve and the commercial banks, plus the expenditure rate (velocity) of these funds. Also overlooked is the effect of the expenditure of the savings of the non-bank public on prices. The (MVt) figure encompasses the total effect of all these money flows.

Some people prefer the devil theory of inflation: “It’s peak oil’s fault or peak debts fault.” This approach ignores the fact that the evidence of inflation is represented by “actual” prices in the marketplace. The “administered” prices of the world’s oil producing countries, would not be the “actual” market prices, were they not “validated” by (MVt), i.e., “validated” by the world’s monetary authorities.
The notion that there are “long and variable monetary lags” is wrong. Monetary Lags for real-GDP & inflation are fixed. Historically they never vary in length.

Mathematically then, it becomes impossible to miss forecasts using

1) rates-of-change in bank reserves in conjunction with

2) rates-of-change in bank debits (within a 12 month range).

Obviously, all price increases (resulting from a long-term excessive flow of money relative to the volume of real output of goods and services offered in the markets), don’t occur within a single month, but the majority of reference, or distribution points, are clustered, or skewed, within a single month. That month then becomes the immovable lag. Milton Friedman’s & Anna Schwartz’s research [Monetary History of the United States (1963)] didn’t dig deep enough: they never went further than specifying that a range of months (“initially 6-9 months, with inflation another 6-9 months”), was associated with a given growth rate of the money supply.

I.e. with bank debits, a very high proportion of the number of months used (in the lags & data for GDP), have already passed by before estimating the next quarterly GDP data (and its 2 subsequent revisions). Why wait 2 more months to plug in “final GDP” into the Taylor or policy rule?. GDP data is ex-post. GDP data is measured quarterly.

MVt is measured is measured more frequently-monthly (or up until 1941 weekly). Monetary flows are ex-ante:

Black Monday’s trigger was concealed because the decline in the proxy for real-GDP overlapped Q3 & Q4 1987 real-GDP). Black Monday Oct, 1987 coincided with the sharpest and fastest peak-to-trough decline in the rate-of-change for the proxy for real-GDP since the time series began.

Likewise Feb 27th 2007 hugely delimited the world's largest economy (c. $14t+). Because the US had a negative flow of funds (Feb 27 coincided with the sharpest decline in 1) the absolute level of reserves, & 2) & an historically large peak-to-trough reversal in the roc’s for real-GDP & the deflator)…[but there were no temporary reciprocal foreign currency swap lines to help provide liquidity, or U.S. dollars, to the overseas markets]. The policy rule is ex-post. Bank debits & legal reserves are ex-ante. Some people think Feb 27 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”.

Only price increases generated by demand, irrespective of changes in supply, provide evidence of inflation. There must be an increase in aggregate demand which can come about only as a consequence of an increase in the volume and/or transactions velocity of money. The volume of money flows must expand sufficiently to push prices up, irrespective of the volume of financial transactions and the flow of goods and services into the market economy.

Ever since the 1960’s this country has experienced, in tandem, two types of inflation. One characterized by a relentless rise in consumer and producer prices. Inflation, at varying rates, has persisted irrespective of the cycles of the business economy. This phenomenon enabled economists to coin a new term – stagflation; business stagnation accompanied by inflation. The other inflation has been largely confined to rampant speculation in (urban and rural), residential and commercial real estate. This inflation has been so excessive it has produced the “boom and bust” characteristics of all past speculative orgies.

With few exceptions, these inflations have had deleterious effects on the majority of the population. There has been a vast transfer of real wealth to a small minority; un-employment and under-employment have been at chronically high levels. All of this has exacted a toll on the lives of people that cannot be measured in terms of the average per capita income, or any other statistic. Many shattering consequences of these distortions are now showing up in bankruptcies and other economic dislocations.

These events are the cumulative result of an irresponsibly lax monetary policy pursued by the FED for most of the mid-sixties up until the present…a monetary policy totally oblivious to the sharp increase in the transactions velocity (rate of turnover) of checking accounts (both upward and downward movements).

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It is not an exaggeration to say that inflation expectations largely determine minimal long-term interest rates. Investors will not for long accept negative real returns, that is, nominal interest rates that are less than the rate of inflation. A change in the consensus among investors is inevitable (that the present low rates of inflation are temporary), and that the colossal deficits of the Federal Government, present and prospective, will continue to push up the demand for loan-funds.

An even greater impediment to achieve the monetarist goal than revisions to:

(I.) the DIDMCA (1980),

(II.) the Garn-St. Germain Depository Institutions Act (1982),

(III.) the Financial Services Regulatory Relief Act (2006),

(IV.) the Gramm-Leach-Bliley Act (1999),

(V.) the Emergency Economic Stabilization Act of 2008 ,

involves acquiring a technical staff for Congress and the FED which:

(1) does not confuse the supply of money with the supply of loan funds,

(2) can make the proper distinctions between means-of-payment money and liquid assets,

(3) knows the difference between money creating intuitions and financial intermediaries,

(4) recognizes aggregate monetary demand is measure by the flow of money not nominal GDP,

(5) recognizes that interest rates are the price of loan-funds, not the price of money,

(6) recognizes that the price of money is represented by the price (CPI) level, and

(7) realizes that inflation is the most important factor determining interest rates, operating as it does though both the demand for and the supply of loan-funds.

We need people on these technical staffs who know the Phillips curve has only short-run validity, and that in the long run high rates of inflation are associated with high rates of unemployment. And above all else, recognize that even a temporary pegging of a series of federal funds rates over time, forces the FED to abdicate its power to regulate properly the money supply.

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There is actually is a limit to the volume of debt that can be financed from taxes. And any other method used will be disastrous. Reducing the burden of the federal debt through inflation isn’t possible. This is not the Great Depression Era. Monetizing approximately 45% of World War II’s federal deficit, by the Federal Reserve Banks, and the commercial banks, laid the basis for the inflation that this country subsequently experienced in the twentieth century.

Even the belief that inflation may increase will push up long-term and short-term interest rates (inflation expectations); and thereby, sharply increase the burden of the debt.

The FED cannot dig us out of this hole, although the Federal Reserve Banks could buy up the entire Federal Debt since Fed credit creation is no longer constrained by gold or gold certificate reserve requirements or reserve ratios. Even if the reserve ratios (minimum ratios of legal reserves to bank deposits) were raised to 100%, the debt would be monetized to the extent to which the Federal Reserve Banks increased their holds of governments. That is to say, the public’s holdings of money increase pari passu with the expansion of Reserve Bank Credit. Furthermore, by raising reserve ratios to 100%, the commercial banks would become financial intermediaries no longer able to create money, serving only as conduits between savers and borrowers.

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With a debt in excess of $11 trillion any significant expansion of Reserve Bank holdings (in terms of the size of the debt) would be extremely inflationary. There is no monetary solution to the problem of the federal debt and many believe that we have passed that “point of no return” before which a fiscal solution would have been possible.

There is little that the FED can do to ameliorate the economic problems that will soon overwhelm us if we do not do something to reduce drastically our now burgeoning trade and budget deficits. The national interest burden, now in excess of $ xxx,xxx,xxx,xxx.xx billion will increase sharply (see FRED database or the Grandfather Economic Report, $406b in 06), and probably to insupportable levels. The planned budgets for fiscal years 2009-10 and beyond, unless drastically reduced, cannot be financed within the constraints imposed by a free economy. As planned by the administration, they require the controls dictated by a “command” economy if they are to be achieved.

The future holds the prospect of sharply declining levels of consumption for the vast majority of the American people, who will be facing years of stagflation. It is probable that we will never be able to dig ourselves out of the present morass of debt and still operate the economy within the framework of a free capitalistic system.

Inflation cannot destroy real property, nor the equities in these properties. But it can and does capriciously transfer the ownership of vast amounts of these equities thus unnecessarily accelerating the process by which wealth is concentrated among a smaller and smaller proportion of people. The concentration of wealth ownership among the few is inimical both to the capitalistic system and to democratic forms of government. A financial oligarchy and a government of, by and for the people simply cannot exist side by side.

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footnotes:
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(PhD - Economics, MIT, BA - Harvard).

as the weighted arithmetic average of reserve ratios remains constant

Paul Volcker Oct 6th 1979 pronouncement that the FED would henceforth de-emphasize the control of the federal funds rate and concentrate on holding the monetary aggregates in check. We were advised to “watch the money supply”

Lawrence K. Roos, past President, FRB St. Louis, was cited by the WSJ “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 stabilization of interest rates”

Leland James Pritchard, MS Statistics, Syracuse, Ph.D., Economics, Chicago 1933

From a monetary point of view, money has to be confined to assets that constitute means of payment and are controllable. Currency is not such an asset. Fortunately it is an asset the FED does not, should not, and cannot control. There is no inflationary bias in an expansion of currency, and the deflationary bias resulting from its growth, can, and is, offset though the expansion of Reserve Bank credit

(3) borrowed reserves are those obtained through the FED’s “liquidity funding facilities” (discounts & advances). The high on Wed. April 29, 1981 soared to a record $8.39 billion. Prior to that $6b was advanced to Continental Illinois for its bailout. High since then is $437b 10/15/08. Net borrowed or free reserves are still climbing - $722b as of May 2009.

Institutions “too big to fail” result in cascading contractions that are amplified on the downside

when the non-member banks purchased earning assets, the banks also increased their legal reserves

“Total transaction accounts consists of demand deposits, automatic transfer service (ATS) accounts, NOW accounts, share draft accounts, telephone or preauthorized transfer accounts, ineligible bankers acceptances, and obligations issued by affiliates maturing in seven days or less. Net transaction accounts are total transaction accounts less amounts due from other depository institutions and less cash items in the process of collection. For a more detailed description of these deposit types, see Form FR 2900”

Milton Friedman (1959) argued that the Central Banks should pay interest on all reserve balances at the prevailing market interest rate.

Account Balance Monitoring System (ABMS) to monitor in real time the payment activity

Note: all prudential reserve banking systems have heretofore “come a cropper”.
& foreign banking organizations (FBOs)

Note that the FED states that “political & price instability” are responsible for the estimated amount of foreign-held U.S. currency (1/2 or 2/3 of all U.S. currency). Instead, maybe the banks need “till” ? money

Libor varies from the FFR because of regulatory “burdens”: higher deposit insurance premiums, stiffer capital requirements, more stringent standards for inter-bank lending, required clearing balance contracts, etc.

“Profit or Loss From Time Deposit Banking” in Banking & Monetary Studies, Comptroller of the Currency, United States treasury Department, Irwin, 1963, pp. 369-386. Leland James Pritchard, PhD – Economics, Chicago 1933, MS – Statistics, Syracuse

Note the DIDMCA exempted federally chartered savings banks, installment plan sellers and chartered loan companies from state usury limits.

http://www.federalreserve.gov/releases/h3/hist/h3hist1.htm

The Act created the legal framework for the addition of 38,000 more commercial banks to the 14,000 we already had, and in the process, the abolition of 38,000 intermediary financial institutions. The intermediary financial institutions effected were the nation's savings and loan associations, mutual savings banks, and credit unions. Trust companies and stock savings banks have been commercial banks for many years.

Lending by commercial banks is inflationary; lending by intermediaries is non-inflationary

The result is that the money supply is unknown & unknowable

mistakes involve the intermittent errors in the reporting by the banks sampled, e.g., (1) as-of adjustments, (2) 4% carry-over provision on reserves, (3) (FR 2900 reporting errors on reservable liabilities), etc. there are also reporting errors in the shifting volumes of (4) applied vault cash, (5) excess clearing balances, (6) contractual clearing balances, (7) pass thru balances, or the respondent banks balances in their correspondent bank, (8) excess reserves (9) as-of-adjustments are settled for up to 45 days

"In a letter of March 15, 1981, Willis Alexander of the American Bankers Association claims that: 'Depository Institutions have lost an estimated $100b in potential consumer deposits alone to the unregulated money market mutual funds.' As any unbiased banker should know, all the money taken in by the money funds goes right back into the banks, in the form of CDs or bankers acceptances or other money market instruments; there is no net loss of deposits to the banking system. Complete deregulation of interest rates would simply allow a further escalation of rates by the banks, all of which compete against each other for the same total of deposits." -- Louis Stone whom the movie "Wall Street" was dedicated to - Vice President Shearson/American Express.

Leland James Pritchard, PhD Economics, Chicago 1933, MS Statistics, Syracuse The funds rates are the rate paid by banks to banks holding excess legal reserves in the Reserve Banks

Joe Carson, Chief Fixed Income Economist, Deutsche Morgan Grenfell made the observation “there has been a major re-alignment of market interest rates and nominal gdp growth…and its really a by product of the deregulation of the financial services industry in the 198-‘s, Barron’s 4/1/96

The correlation comparison also depends upon the correct monetary lag
See graph in appendix “The FED follows the Market”

Case Schiller

"In retrospect (because of faulty data) the real funds rate turned out to be lower than what was deemed appropriate at the time and was held lower longer than it should have been. In this case, poor data led to policy action that amplified speculative activity in housing and other markets. The point is that we need to continue to develop and work with better data." Richard Fisher, Robert W. Fischer – President Dallas Federal Reserve Bank, November 2, 2006

“What the New York Open Market Desk now sets each day is the one-day repo rate on Treasuries, that is, the one-day cost-of-carry on government bonds. This is the true policy instrument…and it affects huge amounts of money (essentially, the one-day return on all government securities), while fed funds transactions daily, in comparison, are a trivial amount.” Richard Anderson, Economist & Senior Vice President, St. Louis FED

for check clearing, collection, automated clearinghouse services, real-time gross settlement (RTGS), etc.

Earning credits are the price contracted with the FED to “net/settle/clear” inter-bank payments, (any & all debits/credits),

Clearing priced services. Adding “daylight credit” effectively increases the overall volume of excess reserves (supplemental) supplied by the “trading desk”.

Supply of uncollateralized provisional daylight reserves used to offset any & all debits & credits presented (which are erased later in the day), for a small fee. Daylight credits are insufficient funds in its Federal Reserve account

The high degree of liquidity and shiftability which the Reserve banks and numerous other federal financial institutions provide the member banks makes it possible to treat bank reserves purely as a credit-control device rather than a reserves in the traditional sense, that is, as assets that can be utilized to meet emergency cash demands on the banks. - LJP

The latest survey: “The 2007 Federal Reserve Payments Study” The distribution of debits to transaction accounts among (agencies and branches of foreign banks); type of depository institutions: (commercial banks, savings institutions, and credit unions), & (size of institutions: largest, large, medium, and small), stratified by dollar amount, negotiable instrument (debit) type, geographic region (urban & rural), & population density

“paying interest on deposits long had been advocated as a means to “level the playing field” between depository financial institutions subject to stator reserve requirements and their not-so-encumbered competitors” [sic]. Richard G. Anderson VP & Economists St. Louis FED

To assume that the FED can solve our unemployment problem is to assume the problem is so simple that its solution requires only that the manger of the Open Market Account buy a sufficient quantity of U.S. obligations for the accounts of the 12 Federal Reserve banks. This is utter naivete.

correspondence & conversations with Dr. Leland James Pritchard, MS Statistics, Syracuse, Ph.D., Economics, Chicago 1933.