I don't see the predictive value of Divisia M4. It looks ex-post not ex-ante. There is no "Fool in the Shower". Contrary to Powell and Greenspan et al., the distributed lag effects for M*Vt has been a mathematical constants for > 100 years.
Money flows don't show a recession in 2023, but there' a likely downdraft in the 1st qtr.
"In fact, credit cards likely provide more transactions services to the economy than some of the components of existing central bank monetary aggregates, such as nonnegotiable certificates of deposit, which are highly illiquid"
That's what the G.6 Debit and Deposit Turnover release was used for. When it was discontinued by mistake in Sept. 1996 it was the FED's longest running time series. Barnett's Divisia aggregates double counts transactions.
The transactions velocity of money was a statistical stepchild. I.e., virtually all the demand drafts that were drawn on DFIs, the CUs, S&Ls, etc., cleared through DDs – except those drawn on MSBs, interbank & the U.S. government. That is all "new payment methods" clear through transactions' deposits, i.e., thru the payment’s system.
The "user-cost aggregator function" is just another name for money demand. Barnett's explanations are convoluted. Dr. Philip George's explanations are more straightforward:
"Corrected Money Supply (CMS). An important part of this measure was that it estimated the amount of precautionary savings held in M1 deposits and subtracted that to arrive at an accurate measure of money. The logic was that such precautionary holdings are not intended to be spent and hence do not qualify as money."
There’s some circular reasoning going on here. We’re saying that money growth alone cannot predict inflation, which is true. Then we’re saying the reason is that velocity has to be taken into account. Money growth can no longer predict nominal GDP growth. But velocity is just a ratio between GDP and money growth. You can’t say that including the endogenous variable, velocity, allows you now to predict how inside temperature causes inflation. The problem is velocity ends up being endogenous, just the measure of all the unknown variables affecting nominal GDP other than money supply. So there’s no predictive value to velocity for inflation, or nGDP, because velocity is just derived from the same observations and measurements.
Professor Cochrane’s work is very important in resolving this dilemma. It’s amazing how he incorporates an FTPL exposition into monetarist economics. Growth rate of total federal liabilities, essentially a huge extension of divisia-M4, when balanced against expected repayment of federal debt, via future taxation, becomes the cause of unexpected inflation. And the Fed target interest rate via Stanley Fisher’s work determines expected inflation.
Powell destroyed deposit classifications in May 2020 (eliminated the 6 withdrawal restrictions on savings accounts, which isolated money intended for spending, or means-of-payment money, from the money held as savings, or the demand for money (reciprocal of velocity).
Powell:
#1 “there was a time when monetary policy aggregates were important determinants of inflation and that has not been the case for a long time”
#2 “Inflation is not a problem for this time as near as I can figure. Right now, M2 [money supply] does not really have important implications. It is something we have to unlearn.”
#3 “the correlation between different aggregates [like] M2 and inflation is just very, very low”.
Powell is the worst FED Chairman we’ve ever had.
“CHAIRMAN GREENSPAN. I must say that I have not changed my view that inflation is fundamentally a monetary phenomenon. But I am becoming far more skeptical that we can define a proxy that actually captures what money is, either in terms of transaction balances or those elements in the economic decision-making process which represent money. We are struggling here. I think we have to be careful not to assume by definition that M1, M2, or M3 or anything is money. They are all proxies for the underlying conceptual variable that we all employ in our generic evaluation of the impact of money on the economy. Now, what this suggests to me is that money is hiding itself very well.”
The problem is that no money supply figure standing alone is adequate as a guidepost for monetary policy. The turnover ratio for DDs as opposed to TDs is 95: 5. If Barnett can apply a "transactions services" index to money, then he's solved the AD problem.
Transaction's velocity is an "independent" exogenous force acting on prices. However, income velocity merely tells us that a given volume of m will have to turnover a certain number of times to finance a given volume of nominal gDp. Income velocity does not assist in any way in explaining inflation.
And Greenspan discontinued the only valid measure of money velocity in Sept. 1996.
Just because a deposit classification can be defined as "means-of-payment" money, doesn't mean that its "weighting" / user index is a "perfect substitute".
Shadow Stats uses the same weighting for “Basic M1” (Currency plus Demand Deposits [checking accounts]) . Obviously large financial transactions, e.g., real estate transactions, aren't consummated using currency.
Divisia aggregates is definitely superior to Steve Hanke's reasoning, which has been plastered in the WSJ.
What I have a problem with is the distributed lag effect: Dr. Richard Anderson: “Although the evidence is mixed, the MSI (monetary services index), overall suggest that monetary policy *WAS ACCOMMODATIVE* before the financial crisis when judged in terms of liquidity”.
Your weighting's sound right: "The Divisia index is directly derived from optimizing consumer behavior"
There was no “monetarist experiment”. Volcker targeted non-borrowed reserves when borrowed reserves vastly exceeded the borrowed ones.
re: "Many economic agents transferred money into those new high-yielding accounts with the source of funds often coming from outside M2"
That of course is wrong. It was easier to see with the widespread introduction of NOW accounts in 1981. There was just a shift in deposit classifications.
The FED said: "“Following the introduction of NOW accounts nationally in 1981, however, the relationship between M1 growth and measures of economic activity, such as Gross Domestic Product, broke down. "
That was false. We had a one-time event, a "time bomb" which propelled the transactions velocity of DDs to stratospheric highs. I.e., all the demand drafts drawn on CBs, CUs, S&Ls clear through DDs – except those drawn on MSBs, interbank & the U.S. government.
re: "The implicit tax on banks is the foregone interest on uninvested required reserves"
That of course is wrong. Reserves are "Manna From Heaven"
No, Friedman was not confused. He derived his optimal quantity of money rule by maximizing welfare in the Sidrauski model, which was an extension of the famous Ramsey model. The interest rate in the Sidrauski model is not the interest rate on liquid assets. It is the interest rate on capital. More modern extensions introduce rigidities into the model altering the conclusion.
Money demand is just another name for Alfred Marshall's cash balances P = M/KT
Cf. D. H. Robertson, Money (New York): Harcourt, Brace and Co., 1929, p. 125
But income velocity, Vi is a contrivance. Friedman bastardized the equation of exchange that he had printed on his car license plate. The transactions’ velocity of money has sometimes moved in the opposite direction as income velocity, as in 1974-1975 or 1978 (all economist’s forecasts for inflation were drastically wrong in 1978).
Money has no significant impact on prices unless it is being exchanged. To sell 100 bushels of wheat (T) at $4 a bushel (P) requires the exchange of $400 (M) once, or $200 (Vt) twice, etc. Or a dollar bill which turns over 5 times can do the same “work” as one five-dollar bill that turns over only once.
There's been no valid velocity figure reported since Ed Fry discontinued the G.6 Debit and Deposit Turnover Release in Sept. 1996 (by mistake)
Dr. Philip George gets this right. “Changes in velocity have nothing to do with the speed at which money moves from hand to hand but are entirely the result of movements between demand deposits and other kinds of deposits.”
Milton Friedman must be rolling in his grave. According to his famous paper on "the optimum quantity of money" to maximize welfare, the optimum money growth rate is negative to produce deflation equal to the interest rate, so that monetary services become a free good with no opportunity cost. Yet economists who most militantly quote him to support their pessimistic forecasts are actually ignoring Friedman's research.
Let's see Divisia Aggregates explain the GFC?
I don't see the predictive value of Divisia M4. It looks ex-post not ex-ante. There is no "Fool in the Shower". Contrary to Powell and Greenspan et al., the distributed lag effects for M*Vt has been a mathematical constants for > 100 years.
Money flows don't show a recession in 2023, but there' a likely downdraft in the 1st qtr.
"In fact, credit cards likely provide more transactions services to the economy than some of the components of existing central bank monetary aggregates, such as nonnegotiable certificates of deposit, which are highly illiquid"
That's what the G.6 Debit and Deposit Turnover release was used for. When it was discontinued by mistake in Sept. 1996 it was the FED's longest running time series. Barnett's Divisia aggregates double counts transactions.
The transactions velocity of money was a statistical stepchild. I.e., virtually all the demand drafts that were drawn on DFIs, the CUs, S&Ls, etc., cleared through DDs – except those drawn on MSBs, interbank & the U.S. government. That is all "new payment methods" clear through transactions' deposits, i.e., thru the payment’s system.
re: "I found published empirical research showing that when credit card use increases, the demand
for money goes down, and vice versa."
https://centerforfinancialstability.org/research/Barnett_Interview.pdf
The "user-cost aggregator function" is just another name for money demand. Barnett's explanations are convoluted. Dr. Philip George's explanations are more straightforward:
"Corrected Money Supply (CMS). An important part of this measure was that it estimated the amount of precautionary savings held in M1 deposits and subtracted that to arrive at an accurate measure of money. The logic was that such precautionary holdings are not intended to be spent and hence do not qualify as money."
http://www.philipji.com/
re: "note there´s no “long and variable” lag between the “tightening” of policy and the effect on inflation!"
Good point. What you do is tighten and then drive the banks out of the savings business.
There’s some circular reasoning going on here. We’re saying that money growth alone cannot predict inflation, which is true. Then we’re saying the reason is that velocity has to be taken into account. Money growth can no longer predict nominal GDP growth. But velocity is just a ratio between GDP and money growth. You can’t say that including the endogenous variable, velocity, allows you now to predict how inside temperature causes inflation. The problem is velocity ends up being endogenous, just the measure of all the unknown variables affecting nominal GDP other than money supply. So there’s no predictive value to velocity for inflation, or nGDP, because velocity is just derived from the same observations and measurements.
Professor Cochrane’s work is very important in resolving this dilemma. It’s amazing how he incorporates an FTPL exposition into monetarist economics. Growth rate of total federal liabilities, essentially a huge extension of divisia-M4, when balanced against expected repayment of federal debt, via future taxation, becomes the cause of unexpected inflation. And the Fed target interest rate via Stanley Fisher’s work determines expected inflation.
Powell destroyed deposit classifications in May 2020 (eliminated the 6 withdrawal restrictions on savings accounts, which isolated money intended for spending, or means-of-payment money, from the money held as savings, or the demand for money (reciprocal of velocity).
Powell:
#1 “there was a time when monetary policy aggregates were important determinants of inflation and that has not been the case for a long time”
#2 “Inflation is not a problem for this time as near as I can figure. Right now, M2 [money supply] does not really have important implications. It is something we have to unlearn.”
#3 “the correlation between different aggregates [like] M2 and inflation is just very, very low”.
Powell is the worst FED Chairman we’ve ever had.
“CHAIRMAN GREENSPAN. I must say that I have not changed my view that inflation is fundamentally a monetary phenomenon. But I am becoming far more skeptical that we can define a proxy that actually captures what money is, either in terms of transaction balances or those elements in the economic decision-making process which represent money. We are struggling here. I think we have to be careful not to assume by definition that M1, M2, or M3 or anything is money. They are all proxies for the underlying conceptual variable that we all employ in our generic evaluation of the impact of money on the economy. Now, what this suggests to me is that money is hiding itself very well.”
The problem is that no money supply figure standing alone is adequate as a guidepost for monetary policy. The turnover ratio for DDs as opposed to TDs is 95: 5. If Barnett can apply a "transactions services" index to money, then he's solved the AD problem.
Transaction's velocity is an "independent" exogenous force acting on prices. However, income velocity merely tells us that a given volume of m will have to turnover a certain number of times to finance a given volume of nominal gDp. Income velocity does not assist in any way in explaining inflation.
And Greenspan discontinued the only valid measure of money velocity in Sept. 1996.
https://monetaryflows.blogspot.com/2010/07/monetary-flows-mvt-1921-1950.html
Re: "Divisia properly weights each monetary asset in accordance with aggregation and index number theory. "
That's significantly different than say Mises' answer:
https://mises.org/library/true-money-supply-measure-supply-medium-exchange-us-economy-0
Just because a deposit classification can be defined as "means-of-payment" money, doesn't mean that its "weighting" / user index is a "perfect substitute".
Shadow Stats uses the same weighting for “Basic M1” (Currency plus Demand Deposits [checking accounts]) . Obviously large financial transactions, e.g., real estate transactions, aren't consummated using currency.
Divisia aggregates is definitely superior to Steve Hanke's reasoning, which has been plastered in the WSJ.
What I have a problem with is the distributed lag effect: Dr. Richard Anderson: “Although the evidence is mixed, the MSI (monetary services index), overall suggest that monetary policy *WAS ACCOMMODATIVE* before the financial crisis when judged in terms of liquidity”.
Was Divisia aggregates different?
William Barnett: You should read Leland Pritchards Money and Banking textbook. Part 7 Monetary Theory.
Simple sum M2 is obviously mud pie. The G.6 Debit and Deposit turnover release demonstrated that:
https://fraser.stlouisfed.org/files/docs/releases/g6comm/g6_19961023.pdf
And we knew this already:
http://bit.ly/1A9bYH1
Your weighting's sound right: "The Divisia index is directly derived from optimizing consumer behavior"
There was no “monetarist experiment”. Volcker targeted non-borrowed reserves when borrowed reserves vastly exceeded the borrowed ones.
re: "Many economic agents transferred money into those new high-yielding accounts with the source of funds often coming from outside M2"
That of course is wrong. It was easier to see with the widespread introduction of NOW accounts in 1981. There was just a shift in deposit classifications.
The FED said: "“Following the introduction of NOW accounts nationally in 1981, however, the relationship between M1 growth and measures of economic activity, such as Gross Domestic Product, broke down. "
That was false. We had a one-time event, a "time bomb" which propelled the transactions velocity of DDs to stratospheric highs. I.e., all the demand drafts drawn on CBs, CUs, S&Ls clear through DDs – except those drawn on MSBs, interbank & the U.S. government.
re: "The implicit tax on banks is the foregone interest on uninvested required reserves"
That of course is wrong. Reserves are "Manna From Heaven"
No, Friedman was not confused. He derived his optimal quantity of money rule by maximizing welfare in the Sidrauski model, which was an extension of the famous Ramsey model. The interest rate in the Sidrauski model is not the interest rate on liquid assets. It is the interest rate on capital. More modern extensions introduce rigidities into the model altering the conclusion.
Money demand is just another name for Alfred Marshall's cash balances P = M/KT
Cf. D. H. Robertson, Money (New York): Harcourt, Brace and Co., 1929, p. 125
But income velocity, Vi is a contrivance. Friedman bastardized the equation of exchange that he had printed on his car license plate. The transactions’ velocity of money has sometimes moved in the opposite direction as income velocity, as in 1974-1975 or 1978 (all economist’s forecasts for inflation were drastically wrong in 1978).
Money has no significant impact on prices unless it is being exchanged. To sell 100 bushels of wheat (T) at $4 a bushel (P) requires the exchange of $400 (M) once, or $200 (Vt) twice, etc. Or a dollar bill which turns over 5 times can do the same “work” as one five-dollar bill that turns over only once.
There's been no valid velocity figure reported since Ed Fry discontinued the G.6 Debit and Deposit Turnover Release in Sept. 1996 (by mistake)
Dr. Philip George gets this right. “Changes in velocity have nothing to do with the speed at which money moves from hand to hand but are entirely the result of movements between demand deposits and other kinds of deposits.”
Marcus, what data (source) do you use to illustrate Velocity (or Money Demand) in your charts?
Milton Friedman must be rolling in his grave. According to his famous paper on "the optimum quantity of money" to maximize welfare, the optimum money growth rate is negative to produce deflation equal to the interest rate, so that monetary services become a free good with no opportunity cost. Yet economists who most militantly quote him to support their pessimistic forecasts are actually ignoring Friedman's research.