Here we have a chart of the Money Multiplier. Can anyone explain exactly what is going on when it drops below 1? I guess this is related to the enormous growth in excess reserves that are not being lent out.
Every additional dollar created leads to less than one dollar entering circulation. The chart says that It's around .8; so every additional dollar created will increase circulation by eighty cents. Basically, velocity (reciprocal of money demand) has crashed.
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Sits in reserve.
I'm sorry but what exactly is "the money multiplier"?
praxe:Here we have a chart of the Money Multiplier
With excess reserves pretty much at 0% before this crisis began, the real multiplier of the base money is a lot higher then what is shown in this graph. I'm not sure I understand what they are showing here.
Depending on the type of deposit, the required reserves was anywhere from 10% for demand deposits, and as little as almost 0% for saving deposits. 10% means roughly a multiplier of 1/0.1 =10.
Greg Mankiw explained this back in January: The Disappearing Money Multiplier.
Here's an interesting fact that you may not have seen yet. The M1 money multiplier just slipped below 1. So each $1 increase in reserves (monetary base) results in the money supply increasing by $0.95 (OK, so banks have substantially increased their holding of excess reserves while the M1 money supply hasn't changed by much).
It shows we are back to 100% reserves and that there is no relationship between bank credit and bank reserves.
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