Lemmings like George Selgin (who just testified before Congress) say:

“None of this would matter if the Fed acted as an efficient savings-investment intermediary, as commercial banks are able to do, at least in principle.” And: “This is nonsense, Spencer. It amounts to saying that there is no such things
as ‘financial intermediation,’ for what you claim never happens is precisely what that expression refers to.”

Or take Martin Wolf, chief economics commentator at the Financial Times writing in his book:

“Charles Goodhart of the London School of Economics, doyen of British analysts of finance, responds to such suggestions as follows:

A problem with proposals of this kind is that they run counter to the revealed preferences of savers for financial products that are both liquid and safe, and of borrowers for loans that do not have to be repaid until some known future distant date. It is one of the main functions of financial institutions to intermediate between the desires of savers and borrowers, i.e., to create financial mismatch, to make such a function illegal seems draconian.”

But there are important distinctions for credit. Both banks and non-banks create credit. One expands both the volume and turnover of new money (which is inflationary). The other matches savings with investment (which is non-inflationary, completing the circuit income velocity of funds). However, only investment in real things produces a contribution to both labor and materials, e.g. housing.

Savings never equals investment. 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).

Thus, all DFI held savings are lost to both consumption and investment, indeed to any type of payment or expenditure. An increase in the proportion of time/savings accounts within the payment’s system destroys money velocity. This is the sole source of both stagflation and secular strangulation. The remuneration of IBDDs exacerbates this disequilibria.

Outside money properties (Central Bank liabilities) aren’t synonymous with inside money properties (DFI, deposit taking, money creating, financial institutions’ liabilities).

IBDDs, interbank demand deposits (a DFI earning asset after Oct. 6, 2018), are not just an asset swap. IBDD’s are assets defined by economists to be outside-of-the properties typically assigned to the money aggregates. IBDD’s are not a medium of exchange. They do not circulate outside of the inter-bank market. They do not require Basel regulatory capital. They are not subject to reserve requirements. In their present state, IOeR’s are a *Romulan cloaking* device, a quasi-tiering of DFI vs. NBFI available credit, a pseudo-credit control device.

Paradoxically, IBDDs are not a member bank’s tax (as the McCarthyites and American Bankers Association speciously hype). They are “Manna from Heaven”, digitally manufactured ex-nihilo, cost-less to, and rained on, the
payment’s system — by Simon Potter’s Market Group “trading desk” (money laundered helicopter drops, ergo: sterilized debt monetization).

The FRB-NY trading desk’s open market operations, its “smoke and mirrors” (where the 12 District Reserve Bank “smoothing” procedures were consolidated forming our effective Centralized bank in 1933), has flip-flopped – inverting from a tight money policy to a semi-percolating one (just prior to the 3rd seasonal inflection point).

Digressing note1: Dis-intermediation for the commercial banks ended with the numerous reforms in the Glass–Steagall Act; also ending: “pushing on a string” as only applied prior to the nominal legal adherence to the
fallacious “Real Bills Doctrine” when terminated in 1932 – due to a paucity of eligible (hopelessly impaired), commercial and agricultural paper for the 12 District Reserve bank’s discounting purposes.

The prior deceleration in money flows, in its proxy for 1st qr. R-gDp, has abruptly bottomed with the 2nd qtr. R-gDp currently appears to have flat lined (but money growth and velocity have at the same time accelerated), coinciding with the trough in “real-time gross settlements”, oscillating paycheck to paycheck systematic rotation (which reflects the Treasury’s TT&L receipts, prior to its re-depositing payments at one of its master accounts, its General Fund
Account, just before making Congressional outlays) as postponed to bank squaring day, April 11th (a surreptitious: on-again, off-again, accounting trick, the injection and draining of IBDDs).

Stephen Goldfeld labeled this type of: “instability in the demand for money function” (Keynes’ liquidity preference curve) as a “case of the missing money”, whereas it was simply related to, e.g., the “monetization” of commercial bank time deposits (ending gate-keeping restrictions), the daily compounding of interest, etc., all of which occurred within the payment’s system. It supposedly “presented a serious challenge to the usefulness of the money demand function as a tool for understanding how monetary policy affects aggregate economic activity.”

This misdirection charged that “advances in computer technology caused the payments mechanism and cash management techniques to undergo rapid changes after 1974. In addition, many new financial instruments (e.g.,
proliferation in the use of repurchase agreements) emerged and have grown in importance. This has led some researchers to suspect that the rapid pace of financial innovation since 1974 has meant that the conventional definitions of the money supply no longer apply. They searched for a stable money demand function by actually looking directly for the missing money; that is, they looked for financial instruments that have been incorrectly left out of the definition of money used in the money demand function.”

“Conventional” money demand functions over-predicted money demand in the middle and late 1970s; and under-predicted velocity since 1981, and not just (PY/M), or income velocity, Vi, but Irving Fisher’s transactions velocity of
circulation, Vt. Thereby M2 was substituted for M1. However, “broad money” substitute measures (vs. “narrow money” or “near money”), or highly liquid assets, “additional variables which do not accurately measure the opportunity cost of holding money”, conflate STOCK with FLOW.

The rapid pace of financial innovation was “validated” by monetary policy, and déjà vu, predictably precipitated
the GFC. Economists haven’t found their “missing money”, viz., “the search for a stable money demand function goes on”.

“The recent instability of the money demand function calls into question whether our theories and empirical analyses are adequate. It also has important implications for the way monetary policy should be conducted because it casts doubt on the usefulness of the money demand function as a tool to provide guidance to policymakers. In particular, because the money demand function has become unstable, velocity is now harder to predict, setting rigid money supply targets in order to control aggregate spending in the economy may not be an effective way to conduct
monetary policy.” SEE: “Empirical Evidence on the Demand for Money”, Chapter 19

Note2 aside: The Treasury’s General Fund account has increasingly become a policy lever. Whereas FED-wire transactions were once uncorrelated nettings / settlements prior to the GFC, they have become increasingly an economic modeling variable, a plug in “missing money”.

Note3 aside: It is inaccurate (for the cataloguer of economic statistics) to exclude the Treasury’s General Fund Account from the assets included in M1 (with the exception of WWII). No one has established any unique price effect
of federal outlays, as compared to state and local government outlays, or expenditures by the private sector. Of course, the shifting of funds to and out of the Federal Reserve banks has a dollar for dollar effect on member bank reserves, but that is another problem that can be, and is dealt with through open market operations.

M3 combines money with liquid assets. Liquid assets don’t meet the all the functions of money, such as (1) a medium of exchange, (2) store of value, (3) unit of account, (4) standard of value.

A liquid asset generally means that money has already been spent/invested. It represents a transfer of ownership of existing money within the payment’s system, conflating stock with flow.

Thus, all DFI held savings are lost to both consumption and investment, indeed to any type of payment or expenditure. An increase in the proportion of time/savings accounts within the payment’s system destroys money velocity. This is the sole source of both stagflation and secular strangulation. The remuneration of IBDDs exacerbates this disequilibria.