The Monkey Multiplier
This is Mark Dow. Brad is still away.
There has been a lot of response to the assertion I made the other day that base money has not been growing since December, and that the money multiplier is not passing much of anything on to the broader economy or markets. The story that the Fed is printing money is just too strong to kill with a few facts. But, let me try again with a picture.
Here’s a chart I stumbled onto. It was Bloomberg’s chart of the day a couple of weeks ago. I do not know the research analyst from Westpac, an Austrialian bank, who put it together, and though I can verify his base money numbers, I cannot verify his M2 numbers. Nonetheless, the data fit what I know. Here’s the chart:
Quick, go short on bananas.
You’re not alone (as you know): See also http://theincidentaleconomist.com/eye-on-inflation/ and my related inflation posts.
Mark,
The shape of the money multiplier, albeit with a different index, can be verified by dividing the M2 and Total Reserves series from the St. Louis Fed’s FRED database.
I’ve posted a copy of a figure from the public data here
Thanks Adam. Didn’t have time to hunt it down on my own….got to follow the markets
Ya, veeery interesting.
One way to think of this is that the old “money multiplier” was off the scale, and the system broke as a consequence.
The theoretical definition of money multiplier is that its maximum value can go to 1/reserve requirements. Those are all quaint concepts nowadays, because my old econ 101 book says banks have a 8% reserve requirement on deposits, then they make loans with the remainder and that results in broad money growth.
But that was when we had banks that only made loans. Nowadays we had to invent concepts like the Basel Accord and things like Tier One, Two and Three capital as an attempt to augment the old simple notion that banks need to keep some savings and checking deposit money on hand to cover possible withdrawals by the public. And banks of course are doing all these other things. Then a bunch of money evaporated.
So I guess we can conclude that the Fed cannot successfully print M2 money, but the Treasury sure can print a lot of bonds.
Then again it seems to depend on what data series we look at. I went digging around Fred for some money aggreagate charts. Most of these are updated to July.
In order of decreasing liquidity(the more liquid being the more deflation fighting kind)here are some. Shows lots of money growth.
The blog software here only allows one link per post, so that’s the reason for all the posts.
Currency in circulation
http://research.stlouisfed.org/fred2/series/CURRCIR
MZM
http://research.stlouisfed.org/fred2/series/MZM?cid=30
M1
http://research.stlouisfed.org/fred2/series/M1?cid=25
M2
http://research.stlouisfed.org/fred2/series/M2?cid=29
Then here is the St. Louis Adjusted Monetary Base. It shot way upwards, indicating they do this series much differently that saying total reserves=base money.
http://research.stlouisfed.org/fred2/series/AMBNS
Also, the historically interesting thing about the St. Louis Adjusted Monetary Base chart is that ever since the Fed was established in 1913, they grew base money to $800B. Then in one year they added 1 trillion to that. So in one year we grew it more than in the previous 100 years.
This is a rather mind boggling factoid.
It leads to one wondering what it does?
Some choices are:
1)It kept our over abundant supply of banks alive.
2) It fixes the economy.
3)It causes inflation eventually.
4) Or my favorite Greenspan quote (or tied for favorite…I have so many..) “We can’t have deflation because we have a printing press.” Or something to that effect, I don’t remember the exact words.
5) It does nothing, but everyone gives their reasons why it was necessary.
Lately some econ/finance people have been saying you can’t fix a popped credit bubble with printing money…the scale doesn’t work.
So I have seen estimates on credit losses range anywhere from 4 Trillion to 14 Trillion globally. So from that standpoint 1 trillion doesn’t seem like much.
And we still like to attach credit strings to money, since it is the only way to maintain some accounting discipline in its distribution. (I haven’t seen any Bernanke Helicopters flying over my neighborhood yet.)
So the only approach we have is for banks to sell more good credit to make up for all the bad credit they lost, and the USG to borrow and spend and put it on the taxpayers future bill.
The math doesn’t seem to work this way either. Or at least not for a very long time, ala Japan.
Not to say the USG won’t come up with a creative solution. My bet is we nationalize Master Card, give everyone with a Social Security number a government credit card, announce 0% credit card rates, and Ben prints up $20K or $30K for everyone’s account balance. We then spend our way back to prosperity. And we will keep doing it until it works. Cool!
Cedric,
You’re such a card! You don’t get the credit you deserve, on account of your regula statements. We’re all in your debit. You’re the limit! I mean, maxed-out. Ok, ok – that’s enough credit card puns.
Seriously, though, the debate about whether or not the Fed is printing money somewhat misses the issue of psychology – inflation expectations. Regardless of the technical details, the average observer, as well as the sophisticated investor and many economists, are going to stick to their ever-stronger suspicions that what the USG is doing (huge borrowing, spending, QE) IS GOING TO UNDERMINE DOLLAR STRENGTH and lead to horrific inflation down the road. That psychology alone will potentially affect demand for Treasuries, driving up yields and weakening the dollar. So the Fed’s got its hands full trying to keep this thing from spinning out of control. The fact it hasn’t yet spun out of control is very cold comfort. Many serious hidden or half-hidden risks litter the road ahead. To come out of this even somewhat intact, the U.S. economy needs an extremely unlikely, almost dream-world correlation of forces and factors.
Prudence dictates preparation for the much more likely outcomes, ones not very happy for the developed economies.
The “Money Multiplier” has gone into long-term hibernation. The baby boomer generation just lost their nest egg/ATM (home equity)and now must save the old fashion way for retirement, which means less spending, less velocity. Further, the average age of the boomer generation is over 5o, at which time consumption begins to decline significantly in all categories except for health care.
Sooner or later the dollar must be devalued in order to substitute domestic production for imports and to produce goods and services for export. The longer we wait, the more our “core economy” will shrink and the more painful (and inflationary) the adjustment will be.
We simply must accept lower living standards and years of stagflation while we unwind the credit excesses of the past 30 years.
If anyone can envision another scenario, please educate me.
Some reduction in living standards is in order but it need not be brutal or absent international trade.
All countries in the world that have a significant trade deficit should proclaim that they no longer accept free trade as a legitimate guide to trade. Instead, equal trade should be the new objective.
Yes, Virginia, equal trade can be achieved by trade deficit countries if they are clever.
Mark,
“This is Mark Dow. Brad is still away”
Are you writing from Honduras. Will He ever return?
Re money: your chart reflects the data. Trouble is what do the data tell us? It appears that “money” (however defined) surprises us always when it is unwelcome. One could read a fair bit of monetary stimulus in the quantity thing, but we all know that the transmission channel (especially the non-bank credit system) is broken and that the banks are more interested (justly, their shareholders never intended to own charities) in repairing their balance sheets, and that again starts with trying to avoid loans that are likely to go bad. And yesterdays good borrower is no longer so, hence that borrower (who needs the money) does not borrow and his neighbour, who does not need money, and hence is creditworthy, does not borrow either.
The key thing in conducting monetary policy in high stress environments (like recessions or speculative booms) is to have the tools and the political mandate to maintain an autonomous supply of money, and that in the actual sense. The money we are talking about here is a mere statistic, as long as the marginal equity that financial firms leverage to make marginal loans is lacking, and the prospects of willing marginal borrowers as perceived by lenders are unsatisfactory given their return requirements.
But once those bank balance sheets have been repaired and the borrower prospects have improved, the monetary authorities must very quickly mop up that statistical money.
It proves again that our financial system has serious structural problems.
If a state would start from scratch, it would probably have a giro (a non-credit payments system) as a state monopoly (like bank notes and the Fedwire are state monopolies). Savers could form associations, use money market funds, etc. Borrowers could borrow direct from the market, or from finance companies, or credit card companies. None of these would be insured by the state (the state might reguire registration and mandatory disclosure, but could credibly state that it would
, under no circumstance bail out anyone except depositors in the state giro system.
Unfortunately, that looks a bit like New Zealand, where there are no domestically owned banks…
Anyway, money as used in economic theory is not quite the same thing as the real world fed statistic, at least it does not behave as it should.
“Geithner Lies Again as PPIP Prepares for Launch”
http://www.safehaven.com/article-13867.htm
Geithner with his master Bernanke and Obama all lied to American people. Wake up American people, time to lock up these criminals and throw away the key.
“We simply must accept low-life standard and years of stagflation while we unwind the credit excesses of the past 30 years.” + Obama, Geithner, and Bernanke’s trying to dupe American taxpayer into Trillion+ dollars of LOSS in PPIP. Mark my word, these crooks will not stop there, they will throw more Ponzi Scheme to dupe American taxpayer into more Trillion+ dollars of LOSS. Obama, what a dissapointment.
Geithner Plan II
http://www.youtube.com/watch?v=n-arbfLTCtI
iamapopulistnow:
We simply must accept lower living standards and years of stagflation while we unwind the credit excesses of the past 30 years.
Container throughput at the port of Long Beach is now at 2003 levels, does that make you happy?
I guess that an economy can have higher living standerds (open economy) if the same output is generated using fewesr resources and those resources are either used for SOL improvements or exports (to buy SOL improvements abroad.
But given the reality that (1) the bulk of the population are employees (2) the proportion of “tradeables” of GDP will continue to rise (3) technology that can make an uneducated $15 /hour productive is equally available to an uneducated $.50/hour somewhere in Asia, with transport costs and transit times becoming irrelevant, you cannot expect to maintain that standard of living unless someone funds your habit, and that will not last forever. And then draconian measures will be required. Just think of horror instruments like having an individual lifetime endowment for medical cate that caps medical care (but exclude productivity-improving care, like vaccinations, obesity treatment (why not cap food as well?), etc) that would be required once the population has become unfit and indebted enough to lose its ability to convince foreigners that it is OK to supply on credit, because that is what supports their own political system…You borrow from the successors of Mao ZD and sooner or later you end up with circumstances that invite Mao-style remedies.
Democrats lie, Obama lies, Geithner lies, Bernanke lies, they all lied, lying, and will continue to lie. And we, American people voted these crooks into power.
Geithner Plan II
http://www.youtube.com/watch?v=n-arbfLTCtI
nothing changed, it is justified to commit more severe and extreme moral hazard against the good people, privatize profit and socialize loss. and current administration Obama, Geithner, and Bernanke continue to encourage/justify extreme moral hazard, to dupe taxpayer into more TRILLIONS dollars of LOSS.
Mark,
As many have noted above, the Fed balance sheet data is simply taken from the H4 tables, the M2 numbers are from the H6 tables and the base money data is from H3.
Another way of looking at liquidity in the US economy is to measure commercial bank assets against ultimate liquidity (holdings of US treasury and agency securities and cash at the Fed – see the excellent IMF working paper 09/120 on this topic). This measure of ‘liquidity leverage’ sits steadily at 5.8 times which is pretty much the lowest level seen since mid 1995 and peaked in May of last year at over 10. In other words US commercial banks – who are in effect charged with circulating the Fed’s balance sheet into the economy – are hoarding cash in safe assets because they do not want (or are not being asked) to lend it out. This speaks to my point that there is simply not enough liquidity in the economy to generate the green shoots that so many are talking about.
Please reply to my email and I will happily pass on some of the work I have done on liquidity leverage.
Regards, Robert Rennie, Westpac Bank. Sydney
Robert Rennie:
“This speaks to my point that there is simply not enough liquidity in the economy to generate the green shoots that so many are talking about.”
And how would you fix that, Robbo?
You be a monkey yourself
Thanks for this, very interesting
Claus
Robert Rennie – Very nice work on liquidity. The chart of yours that I posted here tells a great story. It also makes a lot of sense to me that the broader measure of liquidity leverage you mention above would tell the same story even more forcefully.
Not only does it have implications for the green shoots ’story’, as you point out, but it also has implications for the dollar ’story’ many are propagating: there can’t be as many dollars sloshing around the world when broader dollar liquidity is contracting the way it is.
Down the road, the deleveraging story will wind down and the transmission mechanism will normalize, and then we will revert to the dollar overhang story that I wrote about a couple of days ago, which is much less a function a recent monetary policy than it is one of the legacy historical role the dollar plays in the world economy, as we move from a unipolar world in terms of reserve currencies to one where the dollar–while still central–will be far less dominant.
Mark,
When you succeeded Brad I thought we would learn how to get rich (and for the China freaks on this blog, that is glorious) but it looks like you are just a level headed guy. But what kind of opportunities for investors does this create?
An opportunity to invest in US dollar (index game) and in gov. paper (freq flier game) on its way to my next (ill multiplied) wall of QE. See, I foretell Pimco where und when to front-run me, not like those BOE amateurs…
I’m an attorney not an economist, but I don’t buy the story that says that eventual inflation is inevitable. The corollary of the Greenspan quote above that “we can’t have deflation because we have a printing press.” is that we can’t have inflation because, well, we have a fireplace.
If inflationary pressures become intense, the FRB can just pull out the extra M1 its been pumping into the financial system.
Obviously, fiscal issues are a concern, since open market operations are ordinarily conducted in U.S. Treasuries. But saying inflation is inevitable is stuff and nonsense. Inflation is exactly what Ben Bernanke says it will be, plus or minus a random error.
See: http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm
OCattorney wrote: “…The corollary of the Greenspan quote above that “we can’t have deflation because we have a printing press.” is that we can’t have inflation because, well, we have a fireplace…”
Notable and quotable but is it true? Banks traded their toxics for reserves, and there the reserves sit, unlent to the masses. And while those “reserves” remain reserves, there is no increase in the money supply. But when those banks say, “gimme the green please Mr. Fed,” ah how the general money supply doth increase.
There is a reason that the Fed has asked congress for permission to issue its own bonds, and that is for the fireplace you speak to (methinks).
There is a reason that some economists (e.g. Hamilton) think the Fed should have been buying TIPS and not general bonds for its grand QE experiment (in a panic, the Fed is going to mop up liquidity selling the very thing people are going to flee???, not so with TIPS)
Some of the Feds programs wind down automatically, and so its BS may shrink…but as with Hotel California, so may go this experiment