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Why Does the Fed Feel Powerless to Identify Bubbles in Real Time?

gabe borenstein: Volcker did not pursue a "tight" monetary policy by any metric. Total reserves increased at a 18% annual rate of change coincident with the DIDMCA of March 31st 1980. Inflation killed itself (just as in hyperinflation). (the data was also killed by Anderson & Rasche's reconstruction).

MACRO MAN: Of course you can identify bubbles. It's mathematically impossible to miss economic projections (MVt=PT). MVt = bank debits, PT = nominal GDP.

I.e, the lag for nominal GDP varies widely, but the lags for both real growth & inflation are always exactly the same length.

Erosion in the M2:M1 Relationship and the Burgeoning Eurodollar Bubble

All E-Ds are created abroad.

Interest Rates Don't Equalize Savings and Investment

Keynes didn't make a distinction between financial intermediaries and commercial banks. I.e., there is a fundamental LEAKAGE in the national income accounting procedures S=I+(G-T):

In The General Theory of Interest, Employment & Money, John Maynard Keynes gives the impression that a commercial bank is an intermediary type of financial institution serving to join the saver with the borrower when he states that it is an “optical illusion” to assume that “a depositor and his bank can somehow contrive between them to perform an operation by which savings can disappear into the banking system so that they are lost to investment, or, contrariwise, that the banking system can make it possible for investment to occur, to which no savings corresponds.”

I.e., In almost every instance in which Keynes wrote the term bank in the General Theory, it is necessary to substitute the term financial intermediary in order to make the statement correct. This is the source of the pervasive error that characterizes the Keynesian economics, the Gurley-Shaw thesis, Reg Q, the DIDMCA of March 31st, 1980, the Garn-St. Germain Depository Institutions Act of 1982, etc.

I.e., "the utilization of bank credit to finance real investment or government deficits does not constitute a utilization of savings, since bank financing is accomplished through the creation of new money" see: LELAND J. PRITCHARD, Ph.D, Economics, Chicago, 1933, MS Statistics, Syracuse.

I.e., the collapse of the non-banks (financial intermediaries) is primarily responsible for the collapse in real-gdp & the high rates of unemployment and underemployment.

Q3 GDP: Obviously Fictional

Fraud indeed. It's much worse than you've documented. History has been repeatedly, re-written. Pay attention to the numbers, and make certain you keep your own files. Revisions & reconstructions overwrite virtually all historical observations (and thus your data's meanings).

Q3 GDP: Obviously Fictional

Most of this debt (49%) is short-term. Combine this with the factor with the constant roll-over of some of the long-term debt and it becomes obvious that the burden of higher interest rates will be compounded.

The burden becomes a function of the major portion of the debt, not just the current deficits. The burden, in fact, becomes exponential. In other words, if the trend is not stopped, the debt inevitably has to be repudiated.

Upside GDP Surprise: Misleading

yeah. time to buy

Economic Data Showing Signs of Negative Trends

The old saying that some people would lose money having tomorrows WSJ is right. But in forecasting, why do you vacillate between the seasonally-adjusted data, and the non-seasonally-adjusted data? Use only the "real" stuff.

The evidence of our economic health is not so elusive. It is incontrovertible. We've learned our catechisms.

Chicago Fed Index Increase Suggests the Recession Is Over

Monetary flows (MVt), the proxy for real-growth bottoms in Nov. 2009. However monetary flows (the proxy for inflation) continues to be relentless, e.g., housing, gasoline, groceries, going up, while unemployment is also going up. I.e., this is stagflation, get used to it. Regardless. Buy & hold for the next 2 years.

Chicago Fed Index Increase Suggests the Recession Is Over

No straight line! It's curving down now. We're still -.5 trillion real-gdp below 2qtr 2008.

How to Boost U.S. Exports

Correcting the current account balance, and trade deficit, is an absolutely daunting task:

The U.S. is a $7.4 trillion dollar debtor country (since 1985) and compounding.

The volume of foreign financing required to float new government debt issues each fiscal year now averages about 49%.

The U.S. imports approximately $335,992,800,000 of oil per year (@78/barrel) & 12.1 MMbd.

There were 700 foreign military bases, in 130 countries, employing more than 500,000 military personnel (2003 figures). But these numbers didn't include bases in Afghanistan, Iraq, Israel, Kuwait, Kyrgyzstan, Qatar, and Uzbekistan (this constitutes a correctable drain on the dollar - multilateral claims to foreigners).

Based on M2 Growth, the Dollar Should Be Stabilizing

WASHINGTON (MarketWatch) -- THE DOLLAR IS NOT A TOOL THAT U.S. POLICYMAKERS USE Dallas Federal Reserve President Richard Fisher said Friday.

Based on M2 Growth, the Dollar Should Be Stabilizing

Currency crises have primarily been the direct result of an overly restrictive U.S. monetary policy (“when the U.S. sneezes, the rest of the world gets a cold”), e.g., 1987 - at that time, the most restrictive period since 1918 (i.e., if you understand money & central banking).

This same logic also applies to the July/08 until March/09 period (the collapse of the non-banks). That contraction (and illiquidity), required the FED to negotiate "temporary reciprocal currency arrangements (central bank liquidity swap lines) with a number of foreign central banks: (1) dollar liquidity swap lines and (2) foreign-currency liquidity swap lines."

While the dollar's climb beginning Jul/08, and reversal Mar/09 (trade-weighted exchange index: broad), is coincident with the rapid expansion of the money stock, there are opposing forces at work. Bank liquidity, transactions velocity, nominal gdp, and the never ending trade deficit, were all contracting during the dollar's rebound.

Normally, the exchange value of the dollar, and an expansionary rate-of-change in the money stock, both move together (not with a lag). I.e., the FED initiated an "easy" monetary policy beginning Oct/02, by increasing the rate-of-change in legal reserves.

There are other factors, including interest rate differentials (long-term interest rates resulting from monetary flows (MVt) in excess of 2-3 percent of real-growth, as well as inflation expectations). These factors, plus the protracted trade deficit that began in 1985, now exceeds 7.4 trillion dollars (current account balance), deficits initially held as foreign short-term claims. This incomprehensible figure ascertains a continuation of the dollar's decline.

Measure the trade deficit 7.4 trillion dollars against the colossal Federal Budget Deficit which is 12 trillion dollars (again another incomprehensible figure), and we have the ingredients for an economic disaster.

But the major problems don’t end there: As the number of banks participating in Euro-Dollar (or other currencies), transactions increase, the E-D bankers know that the E-D deposits they created for borrowers often don’t result in a diminution of their U.S. dollar balances – the System merely shifts balances within itself. That is, drafts drawn on E-D banks are deposited in other E-D banks. This is the basis of an international system of “prudential” reserve banking – the discovery that the amount of actual U.S. dollar reserves required to support the E-D loans made – and E-D deposits (money) created (another incomprehensible figure).

But money is truly a paradox - by wanting more, the public ends up with less, and by wanting less, it ends up with more. Therefore, if there is a flight from the dollar, there will be hyperinflation in terms of dollar denominated assets.

Faces of Death: The U.S. Dollar in Crisis

This country is experiencing stagflation, business stagnation accompanied by inflation. Disintermediation is responsible for the collapse of the non-banks (debt). Your money supply measures don't represent our means-of-payment money. The "monetary base" is not a base for the expansion of money & credit because it includes currency which has no expansion coefficient. Your velocity figures are contrived calculations. Your velocity figures have nothing to do with the real world. Debt cannot be measured to GDP. Debt has to be measured by the volume of savings offered in the market place. If you've studied exchange value of the dollar you would know that it is dependent upon several factors but the most important is our unstoppable trade deficit (not printing money). The FED cannot influence the dollar except for brief periods. YOur analysis is left begging.

The Fed: Rushing for the Exits?

Your emphasis on oil as an economic indicator is perhaps the most important piece of information available. The economy is once again in a downswing. The FED doesn't understand money & central banking but focuses on how to put America's banks in a position to undercut international competition (they aren't proceeding along the right path).
Take notice when you get in your car. Check the price of gasoline along your route. You should see declines. That is telling.

The Fed: Rushing for the Exits?

What exit. Try no exit.