The Cash Balances Paradox?

Following up on Credit Prestidigitation: A Vicious Circle?

At the end of the day, the rate at which banks create credit; coupled with the motive (purpose of the loan) and manner (disposition) in which those funds or that credit are circulated (transaction turnover); will determine velocity, the rate of inflation, beneficial or deleterious economic consequence, and resulting economic "health" or conditions. As we are witnessing, it can be a vicious circle.

and the limited scope in Velocity and Inflation?

Take aways? Increases in money supply, even from wage growth and as much as we might want them to, do not necessarily or always correlate with inflation... especially when the circumstances are less than normal, QE, ZIRP, NIRP, QT.

then a bit more expansive Friedman's Velocity?...

Take aways? Wen and Arias briefly touch upon something critical in liquidity preferences, hoarding and then transactions velocity or the turnover of money, but go no further down the path. 

We are left with questions, [a conflict between Hamilton-Chen and Wen-Arias] regarding demand for money, did it or did it not increase?  Also regarding the total volume of transactions, more means velocity increases and the economy is likely to expand?  Is this always true? 

then adding a new angle from The Irrelevance of Velocity?...

Take aways? Old views of rising wages leading to inflation do not necessarily hold under present conditions. The linkage of INCOME velocity and inflation has potentially decoupled. Small nominal GDP increases account for corresponding velocity upticks.

and astute observations in The Real Threat of Inflation? 

Take aways? Due to declining real wages, something OTHER than constrained consumer and aggregate demand is driving this economic "surge". Input materials, transport costs, lean inventory and a biblical plague of disasters all conspired to drive up prices and create a false sense of greater aggregate demand. 

Hamilton and Chin, Wen and Arias, Snider and DiMartino-Booth see the resultant pattern, have grasp of a piece of the puzzle, but for limitation in scope, do not fully address the underlying causes and potential consequence.  We shall endeavor to address the latter.

Liquidity preferences can be altered through natural and un-natural market conditions, viz. there is something in this more than natural. 

Those preferences can lead to capital, which otherwise might be working towards PCE and GDP economic endeavor, being malinvested in pursuits (non PCE and GDP) which are deleterious to economic growth.

Those funds which become ensconced in the system, increase the demand for money, and reduce the transactional velocity of money. What are the underlying causes? 

First, there is a paradox with respect to peoples monetary motives. This "psycho social" aspect to spending in layman's terms:

By wanting more money, the public ends up with less, and by wanting less, it ends up with more.  - Salmo Trutta

To bring the reader up to date, we addressed this paradox at length in Marshall's Cash Balances and The "Psycho Social" Aspects of Spending?  A brief summary follows.

+ many want to increase their cash balance

- many spend less

+ aggregate demand for money increases

+ value of money increases

- goods prices decline (not staples)

- profit expectations decline

- loan volumes decline

- money velocity declines

- bank cash balances decline

Wash, rinse, spin, repeat.  Ceteris paribus, wanting more money leads to an economic contraction with lower aggregate demand. Lower aggregate demand dictates less spending (PCE is circa 70% of GDP) which is the primary driver of the economic engine.

More to come on the second underlying cause in The Nature of Transactional Velocity? Stay tuned, no flippin.