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We Know How This Ends! – China Copies U.S. Housing Bubble Policies

Summary:
Steve Keen knows a credit from a debit. http://bit.ly/2GXddnC (at end of article) "Banks don’t “intermediate loans”, they “originate loans”. "The fallacy in their thinking is easily demonstrated by looking at the two types of lending – from one non-bank agent to another (Loanable Funds or LF) and by a bank to a non-bank (Bank Originated Money or BOM as an accountant might call it)." Keen: "A 'Loanable Funds' loan simply shuffles existing money from one person’s bank account to another: no new money is created (row 1 in Table 2). A “Bank Originated Money” loan creates a new asset for the Bank, and creates new money as well – which the recipient then spends." Lending by the commercial banks is inflationary (increases both the volume and turnover of new money). Lending by the non-banks is

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Steve Keen knows a credit from a debit.

http://bit.ly/2GXddnC (at end of article)

"Banks don’t “intermediate loans”, they “originate loans”.

"The fallacy in their thinking is easily demonstrated by looking at the two types of lending – from one non-bank agent to another (Loanable Funds or LF) and by a bank to a non-bank (Bank Originated Money or BOM as an accountant might call it)."

Keen: "A 'Loanable Funds' loan simply shuffles existing money from one person’s bank account to another: no new money is created (row 1 in Table 2). A “Bank Originated Money” loan creates a new asset for the Bank, and creates new money as well – which the recipient then spends."

Lending by the commercial banks is inflationary (increases both the volume and turnover of new money). Lending by the non-banks is non-inflationary, other things equal (results in the transfer of title to existing bank deposits within the payment’s system, a velocity, Vt, relationship).

From the standpoint of the payment’s system, the source of time/savings accounts is demand deposits, directly or indirectly via the currency route (never more than a short-run situation), or through the DFI’s undivided profits accounts. Consequently the expansion of savings-investment accounts, per se, adds nothing to total bank liabilities, assets, or earnings assets. Therefore the expansion of monetary savings, bank-held savings, adds nothing to N- gDp.

See Philip George: “The riddle of money, finally solved”

http://bit.ly/2u3xiBV

Commercial banks pay for their new earning assets with new money.
A theoretical explanation was advanced in 1961 to support this conclusion. It was based upon the following assumptions:

(1) That monetary policy has as an objective a certain level of spending for N-gDp (sound familiar?, viz., N-gDp targeting?), and that a growth in time/savings deposit classifications will not, per se, alter this objective. And that a shift from demand to time deposits will also not, per se, alter this objective;
(2) That a shift from demand to time deposits involves a decrease in the demand for money balances and that this shift will be reflected in an offsetting increase in the velocity of money.
(3) To prevent the increase in Vt from altering the desired level of spending for N-gDp, it is necessary for the FRB-NY trading desk to prevent the diminished money supply brought about by the shift from demand to time deposits from being replenished through an expansion of bank credit;
(4) To prevent the expansion of bank credit requires that the trading desk “mop up” al excess reserves created by the shift from demand to time deposit classifications.

As hypothesized: It seems quite probable that the growth of time deposits shrinks aggregate demand and therefore produces adverse effects on N-gDp. I.e., it seems highly improbable, and in contradiction to Professor Chandler’s theoretical analysis: that the stoppage in the flow of these funds is entirely compensated for by an increased velocity of the remaining demand deposits.

I.e., all monetary savings, commercial bank-held savings, are from a macro-accounting perspective, un-used and un-spent, lost to both consumption and investment, indeed to any type of payment or expenditure.

Take the “Marshmallow Test”: (1) banks create new money (macro-economics), and incongruously (2) banks loan out the savings that are placed with them (micro-economics).

As professor Lester V. Chandler originally theorized back in 1961, viz., that in the beginning: “a shift from demand to time/savings accounts involves a decrease in the demand for money balances, and that this shift will be reflected in an offsetting increase in the velocity of money”.

His conjecture was correct up until 1981 – up until the saturation of financial innovation for commercial bank deposit accounts I.e., the saturation of DD Vt according to Marshall D. Ketchum (Professor at the Chicago School):

"It seems to be quite obvious that over time the “demand for money” cannot continue to shift to the left as people buildup their savings deposits; if it did, the time would come when there would be no demand for money at all”

Thus, as Dr. Leland J. Pritchard, Ph.D. Chicago - Economics, M.S Statistics, Syracuse predicted after the passage of (1) the DIDMCA of March 31st 1980, i.e., coinciding with his prediction of the (2) "time bomb", the widespread introduction of ATS, NOW, & MMDA accounts, that money velocity had reached a permanently high plateau.

Professor emeritus Pritchard never minced his words, and in May 1980 pontificated that:

“The Depository Institutions Monetary Control Act will have a pronounced effect in reducing money velocity”.

This is the direct and sole cause of both secular strangulation and stagflation (business stagnation accompanied by inflation).

All savings originate within the payment’s system. Saver-holders never transfer their funds outside the payment’s system, unless they hoard currency, or convert to other national currencies, e.g., DFI, direct foreign investment. The source of commercial bank time/savings deposit accounts, is other bank accounts, originally non-interest-bearing demand deposits, directly or indirectly via the currency route (never more than a short-run situation), or through the DFI's undivided profits accounts.

The DFI’s time / savings deposits, e.g., negotiable CDs, rather than being a source of loan funds for the payment’s system, are the indirect consequence of prior bank credit creation. And the source of bank deposits (loans + investments = deposits, not the other way around), can be largely accounted for by the expansion of Reserve bank credit. That there is a close connection between aggregate bank credit and the aggregate volume of bank deposits can be verified by comparing the net changes in commercial bank credit to the net changes in total deposits for any given time period (R. Alton Gilbert was dimensionally confused).

When DFIs grant loans to, or purchase securities from, the non-bank public, they acquire title to earning assets by initially paying for them, by the creation, simultaneously and ex-nihilo, of an equal volume of new money - demand deposits -- somewhere in the payment’s system. For the payment’s system, the whole is not the sum of its parts in the money creating process.

Net changes in Reserve Bank Credit since the Treasury-Reserve Accord of March 1951 are determined by the FOMC.

Critically, the only way to activate voluntary savings (income not spent), is for the saver-holder to invest directly or indirectly, intermediated through, a non-bank conduit.

*Intermediated through* means that funds exchange counter parties, within the payment’s system, as no funds are ever extracted.

“Crunch time” is simply a macro-accounting error. The NBFIs are not in competition with the DFIs. The NBFIs are the DFI’s customers. Savings flowing through the non-banks never leaves the payment’s system (where all savings originate). There is simply an exchange, a transfer of title between counter-parties, to existing DFI liabilities, a money velocity relationship occurring within the payment’s system.

Paradoxically, this is somewhat like the physics principle of SUPERPOSITION:

“The general principle of superposition of quantum mechanics applies to the states [that are theoretically possible without mutual interference or contradiction] ... of any one dynamical system…”that every quantum state can be represented as a sum of two or more other distinct states.”

The capacity of a single bank to create credit as a consequence of a given primary deposit is identical to a financial intermediary. L = S (1-s). The superposition is that all primary deposits are actually derivative deposits from the system’s belvedere.

In other words, there is an increase in the supply of loan-funds, but no change in the money stock, a velocity relationship, where savings are matched with investments (a non-inflationary relationship). This process is the exact opposite of stagflation.

Unless savings are activated, put back to work, a dampening economic impact, a deceleration in money velocity, is engendered and metastases, resulting in secular strangulation. This is the source of the pervasive error that characterizes all developed countries slower growth rates.

The expiration of the FDIC's unlimited transaction deposit insurance in December 2012 is prima facie evidence, i.e., created the infamous "taper tantrum". Hence my “market zinger” forecast, a "predictive success”.

As Leland J. Pritchard, Ph.D., Economics, Chicago 1933, MS, Statistics Syracuse, predicted:

“Savings require prompt utilization if the circuit flow of funds is to be maintained and deflationary effects avoided”…”The growth of commercial bank-held time “savings” deposits shrinks aggregate demand and therefore produces adverse effects on gDp”…”The stoppage in the flow of funds, which is an inexorable part of time-deposit banking, would tend to have a longer-term debilitating effect on demands, particularly the demands for capital goods.” Circa 1960

Tyler Durden
Tyler Durden (a pseudonym) represents the idea that a return to truly efficient markets is a possibility and a necessity. After having experienced the inner workings of capitalism at various asset managers and advisors, Tyler believes that the current model is flawed and a deleveraging at every level of modern society is needed to reinspire the fundamental entrepreneurial spirit.

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