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.
Stranger: It shows we are back to 100% reserves and that there is no relationship between bank credit and bank reserves.
It shows we are back to 100% reserves and that there is no relationship between bank credit and bank reserves.
Yes, because the Fed just printed the money to backup all of their previous worthless assets. To say that this is the biggest bailout in the history of mankind would be a gross understatement.
In a technical sense, this is now the chance of a lifetime to decartelize and deregulate the system, adopt a 100% gold system, and return money back to the free market.
caravelle,
Way too many questions to answer.
The inflationary boom artificially bid up prices of paper and real physical assets, all while massively increasing the amount of debt in the system. A deflationary bust follows the inflationary boom. People's assets become valued less than their liabilities. People become insolvent - unable to pay their bills. They go bankrupt. The Fed shows up, prints money, and buys much of the assets (loans and debt held by banks are assets) and exchanges the new dollars for the assets. The Fed now holds these paper assets on its balance sheet. It doesn't mark-to-market the real value of these assets. It claims they are still worth the face value that they bought them at. They claim there are no losses. They don't care. All the money they created to buy all these assets end up in banks. Banks can do one of two things with the money. 1) make loans with it or 2) Store it with the Fed (keep it on reserve). Banks do not see any economic recovery and they do anticipate many future losses, especially in the commercial real estate market. Rather than make risky loans with the money they instead choose to keep it as excess reserves with the Fed to cover any future losses. As people pay pay back debt, if they don't loan it out again, the money supply shrinks which is deflationary. Banks have to pay bills and want to make money. How can they afford to not make loans? Because the Fed since 2008 has been paying interest to banks on their excess reserves they warehouse at the Fed. They didn't do that before. It is keeping the bankers from making loans. If the Fed wanted banks to make loans, to make that M1 number go up, they would either stop paying interest to banks on their reserves, or they would charge banks interest on their reserves. That would cause banking profits to fall or create losses. That would force banks to make loans with their excess reserves. When that happens, M1 will shoot up and price inflation will rapidly increase. Then the Fed will be forced to raise interest rates, which will kill this phony economy and create a depression.
100% reserves is a bit of an exaggeration.
A low money multiplier means a liquidity trap, that is, government needs to increase deficit spending to b(r)ing(e) the economy back on track as banks dont want to lend out the money.
nandnor: A low money multiplier means a liquidity trap, that is, government needs to increase deficit spending to b(r)ing(e) the economy back on track as banks dont want to lend out the money.
We could start a debate about the subject of liquidity traps, but I don't know if it's worthwhile. Why do you think the banks don't want to lend money? Where does the government get the money when it deficit spends?
A "liquidity trap" does not exist. It is a fiction created by economists to explain why money printing fails to "stimulate" the economy. ABCT explains what is actually going on. The cure for the economic disaster is to restore free market price signals, and allow capital to follow those signals into the areas being demanded.
Deficit spending is a disaster. It will prolong and deepen the crisis because scarce capital is being squandered into areas that are not demanded. Deficit spending moves a pile of money from one place to another, with no change in the economic situation as a whole except for the squandered resources. The broken window fallacy is on display. But, that is the policy being implemented, and this supposed recovery is not a recovery; it is a bounce that will top out, and we'll see the next painful leg down.
"The market is a process." - Ludwig von Mises, as related by Israel Kirzner. "Capital formation is a beautiful thing" - Chloe732.
nandnor:A low money multiplier means a liquidity trap, that is, government needs to increase deficit spending to b(r)ing(e) the economy back on track as banks dont want to lend out the money.
It means that Ben Bernanke is paying the banks not to lend.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
The Late Andrew Ryan: I'm sorry but what exactly is "the money multiplier"?
I'm sorry but what exactly is "the money multiplier"?
That's a very good question that I see nobody has really answered. As far as I can make out, there is no such thing as "THE money multiplier". Instead there are a class of different, but related "money multipliers". They are all ratios between some measure of real money or base money, and some higher up measure of the money supply (M1,M2,M3,M4). Sometimes you see it described as being the ratio of the total amounts, and sometimes you see it defined as ratios of *changes* in the total amounts.
If we take the money multiplier defined as the money supply vs base money then this is way more than 1.0 even today.
If we take the money multiplier defined as *changes in* the money supply vs *changes in* base money then this could well be less than one today because the total money supply can easily shrink in an environment where people are keener to pay back loans (making money disappear under FRB) rather than take out new ones (creating money under FRB).
What Went Wrong with Economics