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Wednesday, October 2, 2019
Secular Stagnation: The Limits of Conventional Wisdom | naked capitalism
Secular Stagnation: The Limits of Conventional Wisdom | naked capitalism: The debate over secular stagnation continues, yet orthodox economists are loath to admit that the needed fix is more demand, which means more government spending.
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It is secular strangulation not stagnation. It's just the idling of savings. It was predicted in the late 1950's. You see, banks do not loan out deposits, banks create deposits when they lend/invest. So, $11 trillion in savings are frozen in the payment's System. I.e., savings flowing through the nonbank public, e.g., NBFIs, never leaves the payment's System, there is just an exchange in the ownership of pre-existing DFI liabilities, a velocity factor. That's why velocity has decelerated since 1981's "time bomb". Savings flowing through the NBFIs increases the supply of loanable funds, but leaves the existing money stock unaffected.
As Nobel Laureate Dr. Milton Friedman pontificated:
"The only relevant test of the validity of a hypothesis is comparison of prediction with experience."
The 1966 Interest Rate Adjustment Act is prima facie evidence.
The 1981 “time bomb” (widespread introduction of ATS, NOW, and MMDA accounts) is prima facie evidence.
The 2012 expiration of the FDIC’s unlimited transactions’ deposit insurance is prima facie evidence (caused the "taper tantrum").
R-gDp has decelerated relative to inflation, relative to N-gDp. In this compressing of the mix, real incomes are declining, and income inequality is accelerating.
In Secular strangulation, because of a flawed monetary policy, there becomes an excess of savings over real investment outlets. When the circular flow of income not spent is suspended, money velocity falls. It is axiomatic, unless savings are driven out of the payment’s System, R-gDp will fall. As R-gDp falls the Fed will seek to soften the downswing by inflating the money stock, i.e., by creating stagflation.
#1) The 2008 downswing is prima facie evidence: where prices peaked in July 2008 - which was reported with a lag on Aug 14, 2008 - when the government announced that the annual inflation rate surged to 5.6% in July - the highest point in 17 years.
#2) The initial Jan 1980–July 1980 recession is prima facie evidence: where gold peaked @ $843 on 1/21/1980
As I said: This results in a double-bind for the Fed (FOMC schizophrenia: Do I stop because inflation is increasing? Or do I go because R-gDp is falling?). If it pursues a rather restrictive monetary policy, e.g., QT, interest rates tend to rise.
This places a damper on the creation of new money but, paradoxically drives existing money (savings) out of circulation into frozen deposits (un-used and un-spent, lost to both consumption and investment). In a twinkling, the economy begins to suffer.
% Deposits vs. large CDs on "Assets and Liabilities of Commercial Banks in the United States - H.8"
Jul ,,,,, 12227 ,,,,, 1638.6 ,,,,, 7.46
Aug ,,,,, 12236 ,,,,, 1629.4 ,,,,, 7.51
Sep ,,,,, 12268 ,,,,, 1662.4 ,,,,, 7.38
Oct ,,,,, 12318 ,,,,, 1685.8 ,,,,, 7.31 (twinkling)
Nov ,,,,, 12313 ,,,,, 1680.1 ,,,,, 7.33
Dec ,,,,, 12425 ,,,,, 1698.6 ,,,,, 7.31
Jan ,,,,, 12465 ,,,,, 1732.9 ,,,,, 7.19
Feb ,,,,, 12494 ,,,,, 1744.6 ,,,,, 7.16
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See: Dr. Philip George - October 9, 2018: “At the moment, one can safely say that the Fed's plan for three more rate hikes in 2019 will not materialise. The US economy will go into a tailspin much before that.”
The riddle of money, finally solved
http://www.philipji.com/riddle-of-money/
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