Oct 17, 2022·edited Oct 17, 2022Liked by Marcus Nunes
But isn't the relationship between DivM4 and velocity a self-fulfilled prophecy,since DivM4 is used in the calculation of velocity itself? (I assume it's NGDP/DivM4?)
Actually no. It´s an identity (just as Y=C+I+G+ (X-M)). Usually, to turn it into the QTM, the assumption is that V is stable. That gives rise to the meme that inflation results from too much money chasing too few goods. However, as Friedman observed more than 50 yrs ago, V can be whatever people want (just like the "outside temperature can vary quite a lot depending on atmospheric conditions). A good thermostat (Money supply in our case) must "adjust" to offset changes in V to keep the "inside temperature" (NGDP) on a stable trend.
Vi is a “residual calculation, or mathematically fabricated - not a real physical observable and measurable statistic.” Income velocity may be a "fudge factor," but the transactions velocity of circulation is a tangible figure.
I.e., income velocity, Vi, is endogenously derived and therefore contrived (N-gDp divided by M) whereas Vt, the transactions’ velocity of circulation, is an “independent” exogenous force acting on prices.
Money demand is viewed as a function of its opportunity cost - the foregone interest income of holding lower-yielding returns on money balances (Keynes’ liquidity preference curve). As this cost of holding money falls (or "K" -- the length of the period over whose transactions purchasing power in the form of money is held), in Alfred Marshalls' cash balances approach, the demand for money rises (and velocity decreases).
As Dr. Philip George says: “The velocity of money is a function of interest rates”
As Dr. Philip George puts it: “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”.
It’s the transactions velocity (bank debits to deposit accounts - Vt) that’s statistically significant (i.e., financial transactions and non-GDP transactions are not random, and can be filtered).
#1 Chairman Jerome Powell: "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”.
So, Powell delayed the reporting of the money stock on the Federal Reserve Board's Statistical Release H.6, "Money Stock Measures"
And Greenspan discontinued the only valid measure of money velocity in Sept. 1996.
re: "if velocity keeps rising, money supply growth will have to fall by more."
Right. M2 hasn't changed for c. 1 year. But DDs have risen. I.e., the composition of M2 has changed. So, the "demand for money" has fallen, and thus velocity has risen (dis-savings). So, short-term money flows are rising at the same time long-term money flows are falling. Until short-term money flows reverse, a recession will not happen. But it's harder to predict now that Powell has delayed the reporting of the money stock by a month.
If you take spendable deposits divided by saved deposits, you get a velocity figure based on "money demand". Why? Because banks don't lend deposits, deposits are the result of lending.
#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”.
" When deposits are removed from the banks, the banks have less money to lend and liquidity dries up."
Completely wrong. The lending capacity of the banks is determined by monetary policy, not the savings practices of the nonbank public. The last period of disintermediation for the banks was during the GFC, and before that, the GD.
The shift (mislabeled disintermediation) by the public from indirect investment through the banks, to direct investment or investment via the nonbanks, does not apply to the commercial banks ever since Franklin D. Roosevelt’s 1933 Bank Holiday.
Savings flowing through the nonbanks never leaves the payment’s system as anyone who has applied double-entry bookkeeping on a national scale should already know. There is just a change in the ownership of pre-existing DFI deposits within the payment’s system.
Ever since 1933 (Roosevelt's "Bank Holiday"), the Federal Reserve has had the capacity to take unified action, through its "open market power", to prevent any outflow of currency and deposits from the banking system.
In 2010, the PBOC’s RRR went to 18.5% – “to sterilize over-liquidity and get the money supply under control in order to prevent inflation or over-heating”
The money stock can never be properly managed by any attempt to control the cost of credit. And the only tool, credit control device, at the disposal of the monetary authority in a free capitalistic system through which the volume of money can be properly controlled is legal reserves. Powell eliminated legal reserves in March 2020.
As I said: The FED will obviously, sometime in the future, lose control of the money stock.
Not only does the FED not know money from mud pie, the don't know a debit from a credit. Banks are not intermediaries. They pay for the deposits that the collectively already own. TDs are just DDs that have been shifted reflecting a demand for money.
"The closest the Federal Reserve came to a "monetarist experiment" began in October 1979, when the FOMC under Chairman Paul Volcker adopted an operating procedure based on the management of non-borrowed reserves.11 The intent was to focus policy on controlling the growth of M1 and M2 and thereby to reduce inflation, which had been running at double-digit rates."
However, during Volcker´s early years (79-82), whileM2 was growing at 8.5% on average, DM4 was growing only at 2.5%. In effect, monetary policy was a lot more contractionary than the Fed realized. No wonder the recession was so deep!
Testimony of Governor Laurence H. Meyer. In the early 1980s, for example, the Federal Reserve used a reserve quantity procedure to control the growth of the monetary aggregate M1 [sic]
On October 6, 1979 Paul Volcker, Chairman, Board of Governors of the Federal Reserve e System promised that the Fed was going to mend its ways. Hereafter the Fed would deemphasize the control of the federal funds rate and concentrate on holding the monetary aggregates in check. We were advised to “watch the money supply”.
For approximately the first four months following this pronouncement the money supply increased at an annualized rate of 20 percent... Up from the 8 percent increase in the prior five months... Obviously there had been no significant change in monetary policy. Why? Apparently the Manager of the Open Market Account who operated from an office in the Federal Reserve Bank of New York and who is in charge of all open market purchases and sales for all 12 Federal Reserve banks decided there should be no change in monetary policy.
Note: the actual monetary policy of the Fed during the 1980 was only nebulously related to the official policies of the Federal Open market committee (FOMC) as published in the Federal Reserve Bulletin. Open market purchases were of such a magnitude in this period member bank legal reserves expanded at an annualized rate of 20 percent. The excessive increase in the money supply made possible by this growth in reserves was accompanied by a continuing rise in the transactions velocity (rate of turnover) of money at an annualized rate of 24.9 percent.
Consequently monetary flows (aggregate monetary purchasing power) shot up to annual rate of 33.3 percent –an excessively easy money policy in view of the virtual stagnation of real GDP growth during this period.
During the next 3 months or to the end of April 1980 the fed slammed on the brakes. Member bank legal reserves decreased at an annualized rate of 20 percent, and money flows declined at an annual rate of 16.8 percent as a consequence of a small drop in transactions velocity.
Unfortunately the Fed reversed its tight money policy toward the end of April, and went on a monetary binge. For the six month period ending in December, member bank legal reserves were inflated at a 15 percent annualized rate, and the money supply expanded at an annualized rate of 20 percent and monetary flows (MVt) surged at an estimated annual rate of 29 percent.
Government and Federal Reserve economists contend it is impossible to control both interest rates and money, and that the shift to a monetarist policy from October 1979 – 1980 was the root cause of the excessively high and volatile interest rates that have prevailed over the past year. The fact is the Fed has never tried a monetarist policy except for the three months ending in April 1980.
Monetarism is more than watching the aggregates – it also involves controlling them properly. The Fed cannot control interest rates even in the short end of the market except temporarily.
And by attempting to slow the rise in the federal funds rate the Fed will pump an excessive volume of legal reserves into the member banks. This, as noted, will fuel a multiple expansion in the money supply, increase monetary flows and generate higher rates of inflation – and higher interest rates including federal funds rates.
Yes, I saw that. DM4 was contracting. But so were monetary flows based on the distributed lag effect. Volcker made huge mistakes.
Monetarism has never been tried. Monetarism involves controlling total reserves, not non-borrowed reserves as Paul Volcker found out. Volcker targeted non-borrowed reserves (@$18.174b 4/1/1980) when total reserves were (@$44.88b).
Volcker's operating procedure (which hasn’t changed since Paul Meek’s (FRB-NY assistant V.P. of OMOs and Treasury issues), described in his 3rd edition of “Open Market Operations” published in 1974. One dollar of borrowed reserves provides the same legal-economic base for the expansion of money as one dollar of non-borrowed reserves. Legal or required reserves represents the monetary base. Legal reserves were the monetary transmission mechanism, not interest rates. The fact that advances had to be repaid in 15 days was immaterial. A new advance could be obtained, or the borrowing bank replaced by other borrowing banks. That's before the discount rate was made a penalty rate (Bagehot's dictum). And the fed funds "bracket racket" was simply widened, not eliminated.
You're "on point". I haven't run across any other economist that has as good an understanding.
DM4 imparts good insight. But I can't understand the "weights". It looks almost like the distributed lag effect of money flows, which drops by about 40% between now and Jan. 1st.
But isn't the relationship between DivM4 and velocity a self-fulfilled prophecy,since DivM4 is used in the calculation of velocity itself? (I assume it's NGDP/DivM4?)
Actually no. It´s an identity (just as Y=C+I+G+ (X-M)). Usually, to turn it into the QTM, the assumption is that V is stable. That gives rise to the meme that inflation results from too much money chasing too few goods. However, as Friedman observed more than 50 yrs ago, V can be whatever people want (just like the "outside temperature can vary quite a lot depending on atmospheric conditions). A good thermostat (Money supply in our case) must "adjust" to offset changes in V to keep the "inside temperature" (NGDP) on a stable trend.
M*Vi ≠ P*Y, M*Vt = P*T
Vi is a “residual calculation, or mathematically fabricated - not a real physical observable and measurable statistic.” Income velocity may be a "fudge factor," but the transactions velocity of circulation is a tangible figure.
I.e., income velocity, Vi, is endogenously derived and therefore contrived (N-gDp divided by M) whereas Vt, the transactions’ velocity of circulation, is an “independent” exogenous force acting on prices.
Money demand is viewed as a function of its opportunity cost - the foregone interest income of holding lower-yielding returns on money balances (Keynes’ liquidity preference curve). As this cost of holding money falls (or "K" -- the length of the period over whose transactions purchasing power in the form of money is held), in Alfred Marshalls' cash balances approach, the demand for money rises (and velocity decreases).
As Dr. Philip George says: “The velocity of money is a function of interest rates”
As Dr. Philip George puts it: “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”.
It’s the transactions velocity (bank debits to deposit accounts - Vt) that’s statistically significant (i.e., financial transactions and non-GDP transactions are not random, and can be filtered).
#1 Chairman Jerome Powell: "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”.
So, Powell delayed the reporting of the money stock on the Federal Reserve Board's Statistical Release H.6, "Money Stock Measures"
And Greenspan discontinued the only valid measure of money velocity in Sept. 1996.
re: "if velocity keeps rising, money supply growth will have to fall by more."
Right. M2 hasn't changed for c. 1 year. But DDs have risen. I.e., the composition of M2 has changed. So, the "demand for money" has fallen, and thus velocity has risen (dis-savings). So, short-term money flows are rising at the same time long-term money flows are falling. Until short-term money flows reverse, a recession will not happen. But it's harder to predict now that Powell has delayed the reporting of the money stock by a month.
If you take spendable deposits divided by saved deposits, you get a velocity figure based on "money demand". Why? Because banks don't lend deposits, deposits are the result of lending.
Short-term money flows are up, so is Atlanta's gDp now forecast of 4.3% for the 4th qtr.
Long-term money flows are down, so is Cleveland's CPI inflation forecast for the 4th qtr. of 2022 @ 5.0% annualized.
http://www.shadowstats.com/article/c
Shadow Stats redefined measures of the money stock.
Sumner: 19. November 2022 at 09:28
“I don’t view the monetary aggregate data as having much predictive value.”
We're about to see. Atlanta's gDpnow is @ 4.2%. Cleveland's CPI inflation nowcast is @ 5.23% for the 4th qtr.
Long-term money flows bottom in June 2023.
LOL. 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”.
Monetarism:
Parse date; R-gDp; Inflation
07/1/2022 ,,,,, 0.088 ,,,,, 1.195
08/1/2022 ,,,,, 0.124 ,,,,, 1.280
09/1/2022 ,,,,, 0.072 ,,,,, 1.143
10/1/2022 ,,,,, 0.093 ,,,,, 1.141
11/1/2022 ,,,,, 0.119 ,,,,, 0.906 deceleration
12/1/2022 ,,,,, 0.112 ,,,,, 0.594
01/1/2023 ,,,,, 0.107 ,,,,, 0.603
02/1/2023 ,,,,, 0.104 ,,,,, 0.543
03/1/2023 ,,,,, 0.111 ,,,,, 0.459
https://www.clevelandfed.org/indicators-and-data/inflation-nowcasting
Inflation Nowcasting - website
October 2022 8.09% y-o-y CPI
2022:Q4 7.20% CPI
Stagflation, business stagnation accompanied by inflation.
See: https://research.stlouisfed.org/publications/economic-synopses/2022/08/23/liquidity-dries-up
" When deposits are removed from the banks, the banks have less money to lend and liquidity dries up."
Completely wrong. The lending capacity of the banks is determined by monetary policy, not the savings practices of the nonbank public. The last period of disintermediation for the banks was during the GFC, and before that, the GD.
The shift (mislabeled disintermediation) by the public from indirect investment through the banks, to direct investment or investment via the nonbanks, does not apply to the commercial banks ever since Franklin D. Roosevelt’s 1933 Bank Holiday.
Savings flowing through the nonbanks never leaves the payment’s system as anyone who has applied double-entry bookkeeping on a national scale should already know. There is just a change in the ownership of pre-existing DFI deposits within the payment’s system.
Ever since 1933 (Roosevelt's "Bank Holiday"), the Federal Reserve has had the capacity to take unified action, through its "open market power", to prevent any outflow of currency and deposits from the banking system.
You can't run a regression test against required reserves, the FOMC's "ELEPHANT TRACKS". The FED covers up its tracks. Just look at Black Monday.
In 2010, the PBOC’s RRR went to 18.5% – “to sterilize over-liquidity and get the money supply under control in order to prevent inflation or over-heating”
The money stock can never be properly managed by any attempt to control the cost of credit. And the only tool, credit control device, at the disposal of the monetary authority in a free capitalistic system through which the volume of money can be properly controlled is legal reserves. Powell eliminated legal reserves in March 2020.
As I said: The FED will obviously, sometime in the future, lose control of the money stock.
May 8, 2020. 10:38 AMLink
Jerome Powell is the worst FED chairman ever.
Have you seen Bernanke's "monetary aggregates"
https://www.federalreserve.gov/newsevents/speech/bernanke20061110a.htm
Not only does the FED not know money from mud pie, the don't know a debit from a credit. Banks are not intermediaries. They pay for the deposits that the collectively already own. TDs are just DDs that have been shifted reflecting a demand for money.
"The closest the Federal Reserve came to a "monetarist experiment" began in October 1979, when the FOMC under Chairman Paul Volcker adopted an operating procedure based on the management of non-borrowed reserves.11 The intent was to focus policy on controlling the growth of M1 and M2 and thereby to reduce inflation, which had been running at double-digit rates."
However, during Volcker´s early years (79-82), whileM2 was growing at 8.5% on average, DM4 was growing only at 2.5%. In effect, monetary policy was a lot more contractionary than the Fed realized. No wonder the recession was so deep!
Testimony of Governor Laurence H. Meyer. In the early 1980s, for example, the Federal Reserve used a reserve quantity procedure to control the growth of the monetary aggregate M1 [sic]
On October 6, 1979 Paul Volcker, Chairman, Board of Governors of the Federal Reserve e System promised that the Fed was going to mend its ways. Hereafter the Fed would deemphasize the control of the federal funds rate and concentrate on holding the monetary aggregates in check. We were advised to “watch the money supply”.
For approximately the first four months following this pronouncement the money supply increased at an annualized rate of 20 percent... Up from the 8 percent increase in the prior five months... Obviously there had been no significant change in monetary policy. Why? Apparently the Manager of the Open Market Account who operated from an office in the Federal Reserve Bank of New York and who is in charge of all open market purchases and sales for all 12 Federal Reserve banks decided there should be no change in monetary policy.
Note: the actual monetary policy of the Fed during the 1980 was only nebulously related to the official policies of the Federal Open market committee (FOMC) as published in the Federal Reserve Bulletin. Open market purchases were of such a magnitude in this period member bank legal reserves expanded at an annualized rate of 20 percent. The excessive increase in the money supply made possible by this growth in reserves was accompanied by a continuing rise in the transactions velocity (rate of turnover) of money at an annualized rate of 24.9 percent.
Consequently monetary flows (aggregate monetary purchasing power) shot up to annual rate of 33.3 percent –an excessively easy money policy in view of the virtual stagnation of real GDP growth during this period.
During the next 3 months or to the end of April 1980 the fed slammed on the brakes. Member bank legal reserves decreased at an annualized rate of 20 percent, and money flows declined at an annual rate of 16.8 percent as a consequence of a small drop in transactions velocity.
Unfortunately the Fed reversed its tight money policy toward the end of April, and went on a monetary binge. For the six month period ending in December, member bank legal reserves were inflated at a 15 percent annualized rate, and the money supply expanded at an annualized rate of 20 percent and monetary flows (MVt) surged at an estimated annual rate of 29 percent.
Government and Federal Reserve economists contend it is impossible to control both interest rates and money, and that the shift to a monetarist policy from October 1979 – 1980 was the root cause of the excessively high and volatile interest rates that have prevailed over the past year. The fact is the Fed has never tried a monetarist policy except for the three months ending in April 1980.
Monetarism is more than watching the aggregates – it also involves controlling them properly. The Fed cannot control interest rates even in the short end of the market except temporarily.
And by attempting to slow the rise in the federal funds rate the Fed will pump an excessive volume of legal reserves into the member banks. This, as noted, will fuel a multiple expansion in the money supply, increase monetary flows and generate higher rates of inflation – and higher interest rates including federal funds rates.
Yes, I saw that. DM4 was contracting. But so were monetary flows based on the distributed lag effect. Volcker made huge mistakes.
Monetarism has never been tried. Monetarism involves controlling total reserves, not non-borrowed reserves as Paul Volcker found out. Volcker targeted non-borrowed reserves (@$18.174b 4/1/1980) when total reserves were (@$44.88b).
Volcker's operating procedure (which hasn’t changed since Paul Meek’s (FRB-NY assistant V.P. of OMOs and Treasury issues), described in his 3rd edition of “Open Market Operations” published in 1974. One dollar of borrowed reserves provides the same legal-economic base for the expansion of money as one dollar of non-borrowed reserves. Legal or required reserves represents the monetary base. Legal reserves were the monetary transmission mechanism, not interest rates. The fact that advances had to be repaid in 15 days was immaterial. A new advance could be obtained, or the borrowing bank replaced by other borrowing banks. That's before the discount rate was made a penalty rate (Bagehot's dictum). And the fed funds "bracket racket" was simply widened, not eliminated.
Alt-M has a good article on reserves:
https://www.alt-m.org/2015/11/07/monetary-base-total-reserves-fed-confusions-misreporting/
But Selgin misses the reconstruction error that Anderson made.
You're "on point". I haven't run across any other economist that has as good an understanding.
DM4 imparts good insight. But I can't understand the "weights". It looks almost like the distributed lag effect of money flows, which drops by about 40% between now and Jan. 1st.
Barnett doesn't use lags.
Hanke doesn't know money from mud pie. And Hanke's latest rank is wrong. N-gDp is accelerating.