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flow5
389 Comments
Real Interest Rates Are Actually High
Price increases that are "administered&quo... i.e., result from markups by sellers who exercise a greater or lessor degree of monopoly power, are not inflationary. This may seem like academic quibbling. After all, an extra dollar spent because a price is higher is a dollar spent. The cause of the price increase may not be of any concern to the buyer, but it should be of concern to economists, businessmen and others who need to analyze properly the probable trend of prices.
Higher prices generated by the exercise of monopolistic market powers harm the economy in many ways. Price distortions are created which diminish the prices and demands for competitively priced products, and the resilience of the economy is diminished. This is just anouther way of saying the economy ceases to the extent monopolistic practices penetrate the system, to be self-regulatory.
The essence of a free (i.e., self-regulatory) capitalistic system is price flexibility, downward as well as upward. Without downward price flexiblity, economic downswings are not self-correcting. Unemployment creates more unemployment. Banks and other business failures, enormously accelerate and deepen the downswing. Since the economy lacks the capacity to rejuvenate itself, government intervention is inevitable. This has been the situtaion in the era beginning with the Great Depression.
First, there is no ambiguity in forecasts. In contradistinction to Bernanke (and using his terminology), forecasts are mathematically "precise” (1) nominal GDP is measured by monetary flows (MVt); (2) Income velocity is a contrived figure (fabricated); it’s the transactions velocity (bank debits, demand deposit turnover) that matters; (3) “money” is the measure of liquidity; & (4) the rates-of-change (roc’s) used by the Fed 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;
Friedman became famous using only half the equation (the means-of-payment money supply), leaving his believers with the labor of Sisyphus.
The lags for monetary flows (MVt), i.e. proxies for real GDP and the deflator are exact, unvarying, respectively. Roc’s in (MVt) are always measured with the same length of time as the economic lag (as its influence approaches its maximum impact; as demonstrated by a scatter plot diagram).
Not surprisingly, adjusted member commercial bank "free/gratis"... legal reserves (their roc’s) corroborate/mirror, both lags for monetary flows (MVt) –-- their lengths are identical -- (like Max Planck's constant in physics (a scale of energy X time) .
The lags for both monetary flows (MVt) & "free/gratis"... legal reserves are indistinguishable. Consequently it has been mathematically impossible to miss an economic forecast (i.e., bubbles). There are no inaccuracies, just some non-conforming & unavailable data (e.g., revisions have been overlaid & lost, flawed deposit classification, data discontinued, etc.). This is the “Holy Grail” & it is inviolate & sacrosanct.
The BEA uses quarterly accounting periods for real GDP and deflator. The accounting periods for GDP should correspond to the economic lag, not quarterly.
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. Note: roc’s in nominal GDP can serve 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.
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 percentage points. 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.
Some people prefer the devil theory of inflation: “It’s all Peak Oil's fault.” This approach ignores the fact that the evidence of inflation is represented by "actual" prices in the marketplace. The "administered&quo... prices of the world's oil producing countries would not be the "asked" prices were they not “validated” by (MVt), i.e., validated by the world's Central Banks., i.e., as Friedman maintained "inflation is always and everywhere a monetary phenomenon".
Commercial Banking and Bank Failures
Another Week of No Money Supply Growth
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 central banks.
The Reign of Uncertainty in Financial Markets
I.e., the only tool at the disposal of the monetary authority in a free capitalistic system through which the volume of money can be controlled is legal reserves. Furthermore, the reserve assets that all money creating institutions are required to hold should be of a type the monetary authority can constantly monitor and control. In our commercial banking sytem, only the Federal Reserve Bank inter-bank demand deposits qualify.
This is obviously all too much to hope for and we can reasonably expect continued mismanagement of our money, and more and higher rates of inflation.
Statutory vs. Effective Tax Rates
Hedonic Adjustments Downplay Inflation
Obama says some really stupid stuff but he's charismatic, energetic, has a "can do" attitude and "sense of urgency". Change is his slogan. He would have it investigated. But COLA's will preclude a radical change (& that's in our country's interest).
It's hard to develop any price indice that is "representative&q... And these ramifications hit home harder in the international market place. I.e., PPP is a false doctrine.
Banking on Continued Risk
Banking on Continued Risk
Banking on Continued Risk
Transferring time deposits into an auxiliary money supply, besides having severe 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.
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 excess reserves and clearing balances plus his legal and economic capacity to expand loans and investments. From the standpoint of the banker, he has simply loan out the funds acquired; from the SYSTEM standpoint the added earning assets have been acquired through the creation of new money.
I.e., the individual banker is entitled to entertain the illusion that his bank is an intermediary between saver and borrower. He cannot expand loans or buy securities without adequate clearing balances, and adequate clearing balances result from a net flow of funds into his bank.
But economists are supposed to understand the economies of the system, including the financial system. This includes the concept that any expansion of commercial bank credit in the form of loans to, or purchase of securities from, the non-bank public (includes all institutions except commercial banks) adds initially an equal volume of demand deposits to the money supply
In the early sixties, the bankers at Citicorp invented the negotiable CD. It proved highly successful - at least from the standpoint of Citicorp. The cost of acquiring funds was less than the net returns on the additional earning assets Citicorp was able to acquire. But Citicorp's profits were at the expense of other banks since all the funds that Citicorp acquired by this method came from other commercial banks. The source of time deposits is demand deposits, not the savings held in S&Ls, Mutual Savings Banks, Credit Unions, or intermediary (Non-banking) financial institutions.
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.
Contrary to the DIDMCA underpinnings, member commercial bank disintermediation 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 currency 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), etc., is predicated on their loan inventory (and thus can be induced by the rates paid by the commercial banks); earning assets with historically lower fixed rate and longer term structures. In other words, competition among commercial banks for TDs has (1) increased the costs and diminished the profits of banks; (2) induced disintermediation among the "non-banks"; and (3) forced individual bankers to pay higher and higher rates to acquire, or hold funds. This also puts pressure on loan officers to seek higher and higher rates. Not only are marginal loans acquired by this process, but also many otherwise good loans become marginal at these lofty rates. Default is the inevitable consequence.
Banking on Continued Risk
The monetary base [sic] has not budged at all. The currency component is the only figure that has changed & it's expansion is deflationary.
M1, M2, Real GDP and CPI Growth: 1970s vs Now
There is a one-to-one relationship between time and demand deposits. An increase in time deposits depletes demand deposits by the same amount, either directly or via the currency route, and vice versa.
Clarifying the M3 Contraction
Why has the FED so grossly mismanaged our money??? There are three principal reasons:
(1) the FED has never used the transactions velocity concept in the formulation of monetary policy. The Open Market Committee defines goals in terms of the quantity of money, not in terms of the volume of monetary flows (MVt) through the economy.
It is obvious that money has no significant impact on prices unless it is actually being EXCHANGED.
(2) Beginning in the sixties and continuing until the present the FEDs technical staff in charge of open market operations assumed that the proper volume of money could be achieved through the manipulation of the federal funds rate.
(3) Political pressures have almost invariably been toward an excessively easy money policy.
Clarifying the M3 Contraction
Nominal GDP is determined by the volume of goods and serveices coming on the market relative to the actual (transactions ) flow of money. Rates of change in money flows for all transactions can serve as a reasonably good proxy for the rates of change of those money flows which finance real GDP.
Any increase in transactions velocity, since it will tend to cause nominal GDP to rise, will give the income velocity economists false signals. This is true even though both the volume of money and transactions velocity tend to move in the same direction. The effect on money flows and nominal GDP of an increase in both money and transactions velocity is obviously greater than an increase in either money or transactions velocity. Consequently income velocity declines. Given these circumstances it is a tighter money policy that is probably needed, not the easier policy the income velocity economists would probably recommend.
The exercise in futility derives from the Keynesian emphasis on the importance of GDP and the accompanying national income accounts. Obvioulsy income velocity will falll if, ceteris paribus, (1) nominal and/or real GDP increase, (2) the volume of money decreases, and (3) the GDP deflator rises.
This tells us nothing about the dynamics of money flows because it measures neither the volume or rate of change of actual money flows - it is real means-of-payment money actually changin hands that affect price levels, price trends, interest rates, employment, production, etc.
Clarifying the M3 Contraction
The money supply is unknown & unknowable, as any monetarist can ascertain.
First, there is no ambiguity in forecasts. In contradistinction to Bernanke (and using his terminology), forecasts are mathematically "precise” (1) nominal GDP is measured by monetary flows (MVt); (2) Income velocity is a contrived figure (fabricated); it’s the transactions velocity (bank debits, demand deposit turnover) that matters; (3) “money” is the measure of liquidity; & (4) the rates-of-change (roc’s) used by the Fed 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;
Friedman became famous using only half the equation (the means-of-payment money supply), leaving his believers with the labor of Sisyphus.
The lags for monetary flows (MVt), i.e. proxies for real GDP and the deflator are exact, unvarying, respectively. Roc’s in (MVt) are always measured with the same length of time as the economic lag (as its influence approaches its maximum impact; as demonstrated by a scatter plot diagram).
Not surprisingly, adjusted member commercial bank "free/gratis"... legal reserves (their roc’s) corroborate/mirror both lags for monetary flows (MVt) –-- their lengths are identical.
The lags for both monetary flows (MVt) & "free/gratis"... legal reserves are indistinguishable. Consequently it has been mathematically impossible to miss an economic forecast. There are no inaccuracies, just some non-conforming & unavailable data This is the “Holy Grail” & it is inviolate & sacrosanct.
The BEA uses quarterly accounting periods for real GDP and deflator. The accounting periods for GDP should correspond to the economic lag, not quarterly.
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. Note: roc’s in nominal GDP can serve 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.
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 percentage points. 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.
Some people prefer the devil theory of inflation: “It’s all Peak Oil's fault.” This approach ignores the fact that the evidence of inflation is represented by "actual" prices in the marketplace. The "administered&quo... prices of the world's oil producing countries would not be the "asked" prices were they not “validated” by (MVt), i.e., validated by the world's Central Banks.
Bill Gross: Talk of Rate Hikes is 'Comical'
The savings-investment process is an abstract reality that conceptually is unfathomable to the unthinking (Just as Einstein’s early papers were).
People are just arrogant and thus ignorant. Just remember what Louis Stone said in the Wall Street Journal (whom the movie Wall Street was dedicated).