A 1-In-100 Blogger: Monetary Base VS M1 Multiplier

Monday, February 8, 2010

Monetary Base VS M1 Multiplier

Earlier I wrote a quick blurb on the M1 Money Multiplier, noting my surprise that the M1 multiplier declined to 0.811. Before the year 2009, since 1959, it had never dropped below 1.0; a key signal that indicates the money the Fed is printing is not making it into the economy. For example, a multiplier reading of 2.0 would indicate that for every dollar the Fed puts into the system two dollars are created in the economy. In this way, we can begin to see the impact of monetary policy under the Obama administration.

Economic research at the Federal Reserve Bank of St. Louis notes, "[t]he M1 multiplier is the ratio of M1 to the St. Louis Adjusted Monetary Base." Currently, the latest observations hold the value of the multiplier at 0.811, a rate that has fluctuated below 1.0 since December of 2009, valuing at somewhere between 0.810 and 0.852. The following charts show the monetary base vs the M1 multiplier (M1/monetary base), with the second chart more clearly defining the recent plunge in economic value created for every dollar the Federal Reserve prints.

What this means is that, for every dollar the Fed puts into the system, only .81 cents of economic value is created.

In the past, since 1959, for every dollar banks lent to the private sector, through various means of debt creation, interest rates and other transfer mechanisms the dollar went through, it has created up to $3.50 of economic value. That would indicate a healthy, growing economy and positive growth of value from the U.S. Dollar. One can easily begin to imagine the negative impact the M1 Multiplier resting below 1.0 will have on our economy, especially in the long run.

The most concerning issue is that this has never happened in the past, so we don't really know what to expect if the M1 Multiplier remains below 1.0 for extended periods of time. All we know is what we see: we're witnessing the Obama administration print so much money that for every dollar printed, it is only creating .81 cents worth of economic value.

Now, although I'm not a mathematician and could very well be wrong, the M1 Multiplier suggests that our economy is not just deflationary but going through a hyper-deflationary period. What's odd to me is that we've already felt and seen a rise in the price for consumer goods, which seems to suggest inflationary. What's worse than two uncertain reflections of our economy?

We also have an Obama problem. Obama is recklessly bailing out failed industries caused by the Unions sucking the life out of profits because of their entitlement pension plans, and he is printing money faster than anyone America has ever witnessed in the past. This would suggest we're going to experience inflation (or hyper-inflation?) at some point or another, and it points to Obama aggravating our economy instead of actually solving its problems. It also points to the fundamental problems that the Unions have created over the years -- seriously guys, why not just move to a 401K plan and grow the economy instead of taking from it? You're doing it wrong.

Because I'm not an expert by any means, I'm just not sure what it means or why we're seeing a deflationary chart from the M1 Multiplier. Nor do I understand enough about the long-term problems that will be created as a result of the M1 Multiplier resting below 1 for extended periods of time. At times I feel like we're in the economic eye of a hurricane, but at the same time being told by Obama that the storm has passed.


Brian Kelly. M1 Multiplier Indicates The Fed’s Gas Pedal Is Broken, iStockAnalyst, Wednesday, March 11, 2009.

Velocity of Money vs. M1 Multiplier: Mixed Signals, Seeking Alpha, May 04, 2009.


Juegos de Ben 10 said...

One can easily begin to imagine the negative impact the M1 Multiplier resting below , Thats right.

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Lee Shin

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