I don’t have x-ray vision, but looking at 1914 Banking and Monetary Statistics, I'd say the U.S. is on the precipice of another Greater Economic Depression.
The economy cannot be stimulated with FDIC limits of $250,000 per depositor’s account (an altogether unrecognized leakage in Keynesian National Income Accounting by the stylized economic profession), let alone a 700 billion dollar war budget -- coupled with "peak oil", the latent “degradation of the $7.5 trillion U.S. corporate debt market”, and savings being disproportionately dissipated in financial investment (the transfer of title to goods, properties, or claims thereto), e.g., buybacks, mergers & acquisitions, i.e., fake wealth (as opposed to real investment outlets), etc. The 5th Elliot Wave is past us.
It is conceptually very simple. Lending by the commercial banks is inflationary, because it increases the volume and turnover of newly created money (irrespective of the stock of available goods and services). There is no assurance that any new money thereby created will be matched in the marketplace with a corresponding and price offsetting addition to the stock of new goods…A preponderance of DFI lending is a cockeyed mix, primarily focused on existing assets, that produces stagflation, business stagnation accompanied by inflation.
The staflationists, advocates of N-gDp LPT should be happy now:
On the other hand, recycled income, or lending by the non-banks, is non-inflationary. NBFI lending activates existing and otherwise idled funds (income received and retained, but not spent). As income inequality has accelerated towards the upper quintiles, money velocity, the uninterrupted and expeditious flow of savings into real investments, has become ever more critical to economic growth.
Monetary savings, funds held beyond the income period in which received, is one of the “factors of production” (land, labor, and capital). Among the various possible uses of funds, NBFI’s tend have a more specialized, or a narrower range (highly concentrated and specifically channeled) of real-investment purpose. Whereas the DFIs’ portfolio composition reflects a broader diversification of loan types.
Unless the circuit income flow of funds is completed, AD declines – because Vt declines. Voluntary savings require prompt utilization if the circuit flow of funds is to be maintained (financial perpetual-motion), and deflationary effects avoided.
It is not as the Keynesian economist pontificate in economic texts: “Economists define Aggregate (or ''total'') Demand (which is the same as National Income or Gross Domestic Product) as: Y = C + I + G + X – M”
How absurd. Just like looking at the current account when analyzing world trade, it is a confusion of stock vs. flow. In the flow of funds charts there is no doctrinaire equality of savings and investment.
Savings held outside the payment’s system must become quickly invested to overt the cost of acquiring any funds. There is an immediate velocity of one when these funds are invested. Whereas savings-investment accounts at a bank have zero payments velocity. The fluidity of credit products is the life-blood of the economy. And people who borrow in the bond market are not the same as the folks who get a personal loan to buy a car.
The pertinent question is, if DFI savings deposits were no longer available, will a shift to holding other NBFI manufactured liquid claims (near-money substitutes) decrease the demand for money balances (increase Vt) as much as would an equal shift from DFI demand to highly liquid time deposits (deposits with minimal gate-keeping restrictions)? That’s like asking if the bond market is a better indicator of economic growth than pooled savings.
An increase in time deposits is not offset by an increase in the velocity of the remaining bank deposits, because of Alfred Marshall’s “money paradox” (by wanting more the public ends up with less, and vice versa). The shift in the demand for money cannot be realized (as the saturation in deposit innovation which peaked in 1981 with the introduction of ATS, NOW, and MMDA accounts proved).
If the public wants to hold more money, there is a stepdown in velocity, a stepdown in the tempo of business activity, and bankable opportunities will contract along with bank credit.
As stated in 1961: “the stoppage in the flow of monetary savings, which is an inexorable part of time-deposit banking would tend to have a longer-term debilitating effect on demands, particularly the demand for capital goods”.
The impoundment and ensconcing of monetary savings is the sole cause of both stagflation and drag and decay secular strangulation from polarized income distributions (not robotics, not demographics).
So, I've reconsidered. This juncture could be a Monumental Minsky selling Moment. All that is necessary for a big fall is: some P/E ratio suppression (as earnings are already set to fall going into 2019).
Disclosure: I am/we are long oex options.