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.
“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.”
is that a real statistic?
when you create aa additional dollar what does it do?
Sits in reserve.
I’m sorry but what exactly is “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).
“Every additional dollar created leads to less than one dollar entering circulation.”
how does that happen? why would it happen if
"allowed banks to reclassify many M1 checking accounts as M2 savings deposits. M2 and the broader measures became quasi-deregulated aggregates with no legal link to the size of the monetary base.[1]" is true???
do reserves have any meaning according to the above info?
if a dollar is created it would have to fulfill some role woulndnt it? either the govts own dollar increase schedule or to meet a claim for a paper dollar?
if what you call reserves are not being lent out…wouldnt banks be falling by the wayside every few days or so?
what are banks currently lending? funds with no legal link to the monetary base?
It shows we are back to 100% reserves and that there is no relationship between bank credit and bank reserves.
what are banks currently lending? funds with no legal link to the monetary base?
is that a real statistic?
It shows we are back to 100% reserves and that there is no relationship between bank credit and bank reserves.
was there a federal reserve memo about going back to 100 percent reserves? it seems that there woulod have been an article saying such. wihout all the pages of complaionts about inflation and credit expansion.
It shows we are back to 100% reserves and that there is no relationship between bank credit and bank reserves.
so all rothbardians are now happy?
how long of a period was there where ‘we’ werent back to 100 percent 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.
“that there is no relationship between bank credit and bank reserves.”
except that they are both reckoned in dollars? do you specifically mean there isnt a reserve ratio anymore? or is there still some type of relationship?
“Yes, because the Fed just printed the money to backup all of their previous worthless assets.”
how did they previously get the worthless assets?
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.
“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.”
i dont know if that true or not. im looking at m1 from 1998 to 2001.
from 1998 to 2001 it varied less than 100 billion dollars.
from about mar of 2001 m1 began a a stady upward climb.
was near a 100 billion dollar variation over 3 years enough to create a tech boom as you call it?? 40 percent losses common in many 401ks (so i read)???
if the inflationary boom as you say went into things that sped up data transfer and reduced storage space and costs would numerous other vital prices for goods likely be reduced??? creating a near overall lowering of prices adjusted for monetary inflation?