M1 Money Multiplier tanking

[LargoWinch]

The below-noted graph has been posted by an investment letter I subscribe to.

The M1 Money Multi is apparently defined as: the ratio of M1 to the adjusted money monetary base. (I assume here it means M1 divided by M3? - but I may be wrong on this).

Having said that here is the graph:




I thus assume that when M1 is re-adjusted to correspond to the "monetary base", it will be highly inflationary?

[c1ue]

Re: M1 Money Multiplier tanking

Largo,

Swing on over to Finster's and Bart's forums; there are discussions about velocity.

A precis:

In the old days (i.e. 100 years ago) M1 could be used to gauge velocity. today it is much less useful with the advent of shadow banking and the overall role of credit.

As for M1/GDP going under 1 - this is just an example of how the Fed/Treasury is pushing on a string.

This isn't a surprise - iTulip's thesis also states this likelihood.

The question is how much money/credit supply is pushed into the system before velocity returns to 'normal' - that amount will be the base which future inflation is built on.

[Starving Steve]

Re: M1 Money Multiplier tanking

Nail the Fed down to a specific definition: What is the MULT?

What I do NOT like about environmental-frauds and econometricians, both, is that they seem to make up the definitions as they go along.

Yes, I know that MULT is the M1 multiplier, but now please have the Fed define that mathematically for me. Can they precisely measure the MULT?

[Starving Steve]

Re: M1 Money Multiplier tanking

Nearing eight hours on, and no-one has a definition of what MULT is.

Meanwhile, the Fed is selling "a bill of goods" here saying that money isn't circulating, so they have to print more money..... This sounds like so much rubbish to me, especially in the wake of exploding money supply statistics.

These are trillion dollar decisions being made here: What is the MULT? Can the Fed meaningfully measure the velocity of money, in this case M1?

[ASH]

Re: M1 Money Multiplier tanking

Nearing eight hours on, and no-one has a definition of what MULT is.

Meanwhile, the Fed is selling "a bill of goods" here saying that money isn't circulating, so they have to print more money..... This sounds like so much rubbish to me, especially in the wake of exploding money supply statistics.

These are trillion dollar decisions being made here: What is the MULT? Can the Fed meaningfully measure the velocity of money, in this case M1?

Okay -- I'll bite. Five minutes ago I didn't know how MULT was defined. So I pointed a browser at the St. Louis Fed and I got this definition:

The M1 multiplier is the ratio of M1 to the St. Louis Adjusted Monetary Base.

Just as Largo said.

Okay. So what are M1 and the St. Louis Adjusted Monetary Base? Fortunately, the St. Louis Fed provides these definitions:

M1: The sum of currency held outside the vaults of depository institutions, Federal Reserve Banks, and the U.S. Treasury; travelers checks; and demand and other checkable deposits issued by financial institutions (except demand deposits due to the Treasury and depository institutions), minus cash items in process of collection and Federal Reserve float.

Readers are cautioned that, since early 1994, the level and growth of M1 have been depressed by retail sweep programs that reclassify transactions deposits (demand deposits and other checkable deposits) as savings deposits overnight, thereby reducing banks’ required reserves; see Anderson and Rasche (2001) and research.stlouisfed.org/aggreg/swdata.html.

Adjusted Monetary Base: The sum of currency in circulation outside Federal Reserve Banks and the U.S. Treasury, deposits of depository financial institutions at Federal Reserve Banks, and an adjustment for the effects of changes in statutory reserve requirements on the quantity of base money held by depositories. This series is a spliced chain index; see Anderson and Rasche (1996a,b,2001, 2003).

On the face of things, these sound like they are both measureable quantities. M1 is money at the fingertips of consumers -- physical paper cash or coin in the hands of potential consumers, or in their checking accounts, or travelers' checks, etc.). I presume the government knows how much physical money it has printed or minted, and that the banks have records of how much physical cash and coin is in their vaults and what their customers' checking balances are. The adjusted monetary base would be the physical currency that isn't in the hands of the Treasury or Fed (but might either be in the hands of consumers or in commercial bank vaults), plus the commercial banks' reserve deposits with the Fed (book-keeping entries, I gather), but with some sort of mathematical adjustment that I haven't looked into (but sounds like it is intended to allow apples-to-apples comparisons between measurements taken at times in which different reserve fraction regulations were in force). Anyway, this all sounds like data that can be collected, and a uniform rule about its treatment.

So, I think MULT is pretty explicitly defined, and is measureable. Maybe the real question is whether it is meaningful. Potentially, it represents how much readily-spendable "cash" is out there for consumers to use, relative to how much might be created through lending against reserves. MULT includes physical cash and coin, but I gather that these are small compared to checkable deposits, so MULT is close to being the ratio of spendable loans to bank reserves at the Fed. According to the graph, the ratio had been greater than 1 since the mid-80's, which means more spendable cash than base money. That would be fractional reserve lending at work -- the commercial banks loan N times their reserves with the Fed, those loans get deposited into consumer checking accounts, and voila -- more checkable deposits than base money. If M1 falls, then we know that checking accounts and wallets are empty -- more of the physical cash is in the hands of banks rather than consumers, and there is less loaned money on deposit. If MULT falls, it could mean the M1 has fallen, but in this case it probably means that base money has risen because of the rocketing accumulation of reserves at the Fed. In any case, lower MULT means the available reserves are not being loaned and deposited into checking accounts -- lower utilization of the reserves to create spendable money.

Anyway, I'm not writing this to be contentious -- just my thoughts after a bit of Googling. I recall that you earlier remarked that the velocity of money seems like a suspect concept, as it cannot be directly measured. MULT doesn't seem to me to be quite the same idea as velocity, but I can easily imagine why some might regard it as another measurement of the pace of economic activity. A drop in MULT doesn't necessarily mean that there's less immediately spendable money (a drop in M1), but it does mean that the available reserves aren't being used fully.

[ASH]

Re: M1 Money Multiplier tanking

It looks like M1 has actually risen during the recession (from roughly $1.4T to $1.6T), but base money has doubled (from a bit over $800B to over $1.6T).

So yeah -- MULT dropping seems mainly to indicate that the base money rose.

I'm thinking there might be more money in checking accounts because of people fleeing deflating assets or non-federally-insured money market funds and going to cash. It occurs to me that M1 doesn't tell us how the readily spendable cash is distributed, so if the cats who own most of the wealth take a beating in the market and go to cash while everybody else goes broke, we might see M1 rise even as the rate of economic activity drops. (Can't be proven from the data I have -- just a speculation.) At the same time, base money has risen because reserves have risen. The change in MULT seems to support the idea that banks are not lending against their reserves at the same fraction that they did before the financial crisis. M1 says that overall, readily spendable money hasn't really declined, but conditions on the ground suggest either its distribution -- or its employment -- have changed.

That's enough Googling for me for one night. I'll leave it to sophisticated folks like Bart and Finster to tell us what this really means.

[Andreuccio]

Re: M1 Money Multiplier tanking

I'm thinking there might be more money in checking accounts because of people fleeing deflating assets or non-federally-insured money market funds and going to cash.

There might also be quite a bit going under mattresses. I had a conversation with a bank manager about a month ago and he commented on how much cash people were withdrawing. Monday a teller at a different bank told me the same thing. (Though to be fair, that was the first Monday after the holidays.)

Good time to be a burglar.

[Jam]

Re: M1 Money Multiplier tanking

Okay -- I'll bite. Five minutes ago I didn't know how MULT was defined. So I pointed a browser at the St. Louis Fed and I got this definition:

The M1 multiplier is the ratio of M1 to the St. Louis Adjusted Monetary Base.

Just as Largo said.

Okay. So what are M1 and the St. Louis Adjusted Monetary Base? Fortunately, the St. Louis Fed provides these definitions:

M1: The sum of currency held outside the vaults of depository institutions, Federal Reserve Banks, and the U.S. Treasury; travelers checks; and demand and other checkable deposits issued by financial institutions (except demand deposits due to the Treasury and depository institutions), minus cash items in process of collection and Federal Reserve float.

Readers are cautioned that, since early 1994, the level and growth of M1 have been depressed by retail sweep programs that reclassify transactions deposits (demand deposits and other checkable deposits) as savings deposits overnight, thereby reducing banks’ required reserves; see Anderson and Rasche (2001) and research.stlouisfed.org/aggreg/swdata.html.

Adjusted Monetary Base: The sum of currency in circulation outside Federal Reserve Banks and the U.S. Treasury, deposits of depository financial institutions at Federal Reserve Banks, and an adjustment for the effects of changes in statutory reserve requirements on the quantity of base money held by depositories. This series is a spliced chain index; see Anderson and Rasche (1996a,b,2001, 2003).

On the face of things, these sound like they are both measureable quantities. M1 is money at the fingertips of consumers -- physical paper cash or coin in the hands of potential consumers, or in their checking accounts, or travelers' checks, etc.). I presume the government knows how much physical money it has printed or minted, and that the banks have records of how much physical cash and coin is in their vaults and what their customers' checking balances are. The adjusted monetary base would be the physical currency that isn't in the hands of the Treasury or Fed (but might either be in the hands of consumers or in commercial bank vaults), plus the commercial banks' reserve deposits with the Fed (book-keeping entries, I gather), but with some sort of mathematical adjustment that I haven't looked into (but sounds like it is intended to allow apples-to-apples comparisons between measurements taken at times in which different reserve fraction regulations were in force). Anyway, this all sounds like data that can be collected, and a uniform rule about its treatment.

So, I think MULT is pretty explicitly defined, and is measureable. Maybe the real question is whether it is meaningful. Potentially, it represents how much readily-spendable "cash" is out there for consumers to use, relative to how much might be created through lending against reserves. MULT includes physical cash and coin, but I gather that these are small compared to checkable deposits, so MULT is close to being the ratio of spendable loans to bank reserves at the Fed. According to the graph, the ratio had been greater than 1 since the mid-80's, which means more spendable cash than base money. That would be fractional reserve lending at work -- the commercial banks loan N times their reserves with the Fed, those loans get deposited into consumer checking accounts, and voila -- more checkable deposits than base money. If M1 falls, then we know that checking accounts and wallets are empty -- more of the physical cash is in the hands of banks rather than consumers, and there is less loaned money on deposit. If MULT falls, it could mean the M1 has fallen, but in this case it probably means that base money has risen because of the rocketing accumulation of reserves at the Fed. In any case, lower MULT means the available reserves are not being loaned and deposited into checking accounts -- lower utilization of the reserves to create spendable money.

Anyway, I'm not writing this to be contentious -- just my thoughts after a bit of Googling. I recall that you earlier remarked that the velocity of money seems like a suspect concept, as it cannot be directly measured. MULT doesn't seem to me to be quite the same idea as velocity, but I can easily imagine why some might regard it as another measurement of the pace of economic activity. A drop in MULT doesn't necessarily mean that there's less immediately spendable money (a drop in M1), but it does mean that the available reserves aren't being used fully.

Ash, this is a great explanation of MULT. Your analysis also seems to support Largo's supposition that, given little or no observed deflation in consumer goods so far (M1 changed little), the stage is set for future inflation (Poom phase of Ka-Poom). Imagine rising MULT to pre-crash levels. This would lead to increased amount of M1 chasing the same goods, thus inflation. Unless, the Fed manages to gradually reduce the Adjusted Monetary Base (thereby maintaining relatively constant M1) during recovery. This, I gather, would be the Keynesian way to proceed, but is unlikely since politicians will be under pressure to keep the party going, as discussed in a different thread.

[Supercilious]

Re: M1 Money Multiplier tanking

It looks like M1 has actually risen during the recession (from roughly $1.4T to $1.6T), but base money has doubled (from a bit over $800B to over $1.6T).

I hinted at explanation for this in a post on bart's forum, but I think I used too few words to make myself clear. I'll try to expand here and hopefully it will not be too boring to read.

Ash there is a theory on stealth bank recapitalization. There is this little thingy with the Fed paying interest on bank reserves. It has a lot of uses but one of them is related to the increase in reserves.

Let's say you are a bank manager. And the ASH bank is getting $40 billion in various bailouts loans which is a loan from the Fed with X% interest (Currently X->0, but that may not last for long). You can go and extend credit in a market falling apart and probably lose everything... or you can deposit those $40 billion back with the Fed and you get an X% interest on your deposit.

Let's recap! You get a loan with X% interest and you put the money in a checking account which pays you the same X% interest . In the end the operation is neutral as long as you keep those reserves with the Fed, and actually no money is created until you don't effectively withdraw those reserves. And banks normally don't do that, except in special circumstances.

Another interesting point is that if banks increase their reserve with the Fed suddenly their leverage decreases and their perception of as safe institution improves substantially. Those banks which are eligible for interest on reserves (IOR) trick are actually receiving a government guarantee disguised as a reserve deposit operation which is done in a complete neutral way. You may say that any bank is eligible for IOR .. well that is true only if your bank is able in the current conditions to attract new capital and sink it into excess reserves ...

Those banks which are not eligible for this trick ... well.... I would say they are screwed. Remember that during the Great Depression 75% of the banks that failed were the banks which were not singing in the Fed's altar choir and did not accept candy for frisking...

Something similar is happening now. You play smart with the financial Don, you get government guarantees in disguise (a financial life jacket) and you survive. If Ben doesn't really have your picture on his piano ... well .. you are on your own in the stormy ocean without a government issued flotation device...probably you are going to go under.

Now after the banks who are expected to go under (and I'm not talking here only about american banks, because most of the drowned victims will be abroad) do go under and the field is cleared, there will be a moment of recovery when people will need credit ... a lot of credit ... and there will be only a small numbers of banks left.

Among the survivors, the Fed's chosen ones will also have a lot of excess reserves and they will be able to extend a lot of credit in very profitable transactions. The survivors, which din not accept candies for frisking, will probably be at the limit and will not be able to compete with the Fed's children for the best lending opportunities, therefore being bared from the accelerated growth at the beginning of recovery.

This thingy with Fed paying interest on bank reserves has several other very interesting features that should be examined ... one of them being presented in an old Foreign Affairs article which declared that national currency are obsolete and we should get rid of them, keeping only three world currencies: the dollar and two regional proxies for the dollar (the euro and a future currency of a future Asian Monetary Union). The relevant fragment was this:
http://www.foreignaffairs.org/200705...-currency.html

It is often argued that dollarization is only feasible for small countries. No doubt, smallness makes for a simpler transition. But even Brazil's economy is less than half the size of California's, and the U.S. Federal Reserve could accommodate the increased demand for dollars painlessly (and profitably) without in any way sacrificing its commitment to U.S. domestic price stability. An enlightened U.S. government would actually make it politically easier and less costly for more countries to adopt the dollar by rebating the seigniorage profits it earns when people hold more dollars. (To get dollars, dollarizing countries give the Federal Reserve interest-bearing assets, such as Treasury bonds, which the United States would otherwise have to pay interest on.) The International Monetary Stability Act of 2000 would have made such rebates official U.S. policy, but the legislation died in Congress, unsupported by a Clinton administration that feared it would look like a new foreign-aid program.

Anyway it's interesting to know how we got this Fed play with paying interest on reserves. It was first hinted in a diguised form in the Monetary Stability Act of 2000 which died in the Congress.

The first open drive started with a paper presented at a NY Fed conference. Those who had a good nose realized immediately that this is what the Fed wants to do and this is how things will be in the future, of course, after all the bureaucratic formalities (like passing a law through the Clowngress) are dealt with.

Eventually the Fed got the authority to start paying interest in October 2011 under the Financial Services Regulatory Relief Act of 2006. The bailout melee, gave the Fed the opportunity to fast track the IOR though Congress and to get it operational three years before the scheduled implementation.

So returning to the MULT, I believe the current numbers are misleading because the current method of calculation includes in the adjusted monetary base the life jacket money, which hasn't been yet created and it's just a pair of canceling numbers on Hank&Ben's collective balance sheet. The problem is that the monetary base is artificially inflated in the official statistics:




So you should not let yourself be distracted by the funny numbers of the MULT in this "crisis". As a former successful banker (and currently a very successful politician) says:

"You never what a serious crisis to go to waste. And what I mean by that, it is an opportunity to do things that you think you could not do before."

Or in other terms ... Problem-Reaction-Solution :rolleyes::rolleyes:

[ASH]

Re: M1 Money Multiplier tanking

Your analysis also seems to support Largo's supposition that, given little or no observed deflation in consumer goods so far (M1 changed little), the stage is set for future inflation (Poom phase of Ka-Poom). Imagine rising MULT to pre-crash levels. This would lead to increased amount of M1 chasing the same goods, thus inflation. Unless, the Fed manages to gradually reduce the Adjusted Monetary Base (thereby maintaining relatively constant M1) during recovery. This, I gather, would be the Keynesian way to proceed, but is unlikely since politicians will be under pressure to keep the party going, as discussed in a different thread.

That is my take as well. Still, we don't have any clues about timing here. I think MULT could continue to drop as the Fed buys mortgage-backed securities and other deflating paper assets with newly-created reserves, and it might stay low for a long time. As C1ue said, the drop in MULT indicates that the Fed is "pushing on a string" with its interest rate policy. Banks probably aren't going to increase their lending until the risk/reward looks better, which means they wait for rising employment and asset prices, and a less chaotic economic environment. I think this is why EJ's "poom" invokes the flight of foreign capital and repatriation of existing dollars, rather than lending against the expanded base money, as its mechanism. If a stampede out of the dollar occurs, I think it would happen mid-crisis, before we see a significant upswing in MULT. If capital flight doesn't occur, then I think we will still see higher inflation as banks lend against the expanded base of reserves, as you and Largo suggest -- but later.

[Supercilious]

Re: M1 Money Multiplier tanking

That is my take as well. Still, we don't have any clues about timing here. I think MULT could continue to drop as the Fed buys mortgage-backed securities and other deflating paper assets with newly-created reserves, and it might stay low for a long time. As C1ue said, the drop in MULT indicates that the Fed is "pushing on a string" with its interest rate policy. Banks probably aren't going to increase their lending until the risk/reward looks better, which means they wait for rising employment and asset prices, and a less chaotic economic environment. I think this is why EJ's "poom" invokes the flight of foreign capital and repatriation of existing dollars, rather than lending against the expanded base money, as its mechanism. If a stampede out of the dollar occurs, I think it would happen mid-crisis, before we see a significant upswing in MULT. If capital flight doesn't occur, then I think we will still see higher inflation as banks lend against the expanded base of reserves, as you and Largo suggest -- but later.

ASH, I don't think what you say it is going to happen... there will be a future inflation spike, but I don't think it will be a real Poom

[LargoWinch]

Re: M1 Money Multiplier tanking

but I don't think it will be a real Poom

$#*, can you please clarify this?

Do you mean the real Poom is linked to something else or that Poom is a myth?

[ASH]

Re: M1 Money Multiplier tanking

ASH, I don't think what you say it is going to happen... there will be a future inflation spike, but I don't think it will be a real Poom

Acknowledged. I believe that if there isn't a mid-crisis flight from the dollar, then we don't get a "real" poom. I was trying to distinguish between EJ's poom (sudden capital flight scenario) and the higher inflation one might expect from a resumption of lending against an expanded base of reserves (probably more gradual scenario).

I have used "poom" rather casually in the past as shorthand for an outcome with significantly higher inflation, which is how I took jam's useage. Recently I have tried to be more disciplined about distinguishing between EJ's specific poom mechanism, and all the other ways we might end up with inflation in the long-run. They're not all as explosive.

Thanks, by the way, for your more lengthy contribution to the thread above. I see how it ties in with your overall big picture. I remember when it was announced that the Fed would pay interest on bank reserves, and your observation about the impact on base money is helpful. That's the sort of "sophistication" for which I was appealing to others -- others who aren't merely Googling search terms (as I did).

[Jam]

Re: M1 Money Multiplier tanking

So returning to the MULT, I believe the current numbers are misleading because the current method of calculation includes in the adjusted monetary base the life jacket money, which hasn't been yet created and it's just a pair of canceling numbers on Hank&Ben's collective balance sheet. The problem is that the monetary base is artificially inflated in the official statistics:

$#*, I am not sure if I can agree with this statement. It seems to imply that that it makes no difference whether the two canceling numbers are there or not. Yet, obviously it does make a difference. When the numbers are present, the banks have a choice (at least in principle) to draw on the reserve if they feel they can get an X+delta% return elsewhere. If these numbers are not there, the banks have no such choice. If I understand it right, it is the presence of this choice that really defines the monetary base. In other words, money has been created, and so, it is rightfully included in the stats.
Obviously, at this time, the banks do not believe they can get a better return elsewhere, or even get their money back, so they do not draw on this reserve, and don't lend out.
The interest paid on the reserve deposits allows the banks to just sit on the money without incurring any cost. If the interest was not there, the banks could be more hesitant to borrow the bailout money, as it would cost them to do so since they do not loan it out.
I think "pushing on a string" analogy really captures what is happening here. They got part of it working--they got the banks to borrow the bailout money. But the only way they could accomplish that is by pulling on the other end--paying interest on reserve deposit.
This is not to say that I discount the interpretation you outlined in your post. In fact, I think it is quite likely that Ben&Hank's buddies got the financial life-jackets, and others will be allowed to drown.

[c1ue]

Re: M1 Money Multiplier tanking

Let's recap! You get a loan with X% interest and you put the money in a checking account which pays you the same X% interest . In the end the operation is neutral as long as you keep those reserves with the Fed, and actually no money is created until you don't effectively withdraw those reserves.

There are ways of testing to see if this might be true.

For example, we know what the Fed is paying in interest.

From the Fed site:

http://www.federalreserve.gov/newsev.../20081006a.htm

The interest rate paid on required reserve balances will be the average targeted federal funds rate established by the Federal Open Market Committee over each reserve maintenance period less 10 basis points. Paying interest on required reserve balances should essentially eliminate the opportunity cost of holding required reserves, promoting efficiency in the banking sector.

Um, but isn't this federal funds rate at 0 to 0.25 percent?

Minus 10 basis points, we're now looking at -0.10 to +0.15 percent?

Even given the full size of reserves: $1.6T let's say - the fed funds will yield the banks in question a munificent $3B a year assuming the high end.

At that rate, it will take centuries to negate the bad debt.

Even 10x the reserves: $16T would yield a whole $30B a year - a decade at least to negate the crap MBS/CDOs outstanding.

I don't see how this helps.

Or am I missing something?

Even the second part of the theory is suspect. If banks are holding on to their cash instead of loaning it out - they are equally not closing out the bad parts of their loan inventories. Well, those foreclosed on homes are losing value daily - if not from market value, then from neglect.

How much are banks losing by sitting on 10,000 or 100,000 homes losing 100K each?

After all, a home sitting empty for several years may have only one path to go: demolition.

Lastly the smell test doesn't pass either. 0.25% return on anything is crap. While there is risk in making any loan, the return will be significantly over 0.15%.

In fact it can be argued that by not allowing the real estate market to correct - the government is in fact killing the banks faster. Why? Because fewer and fewer people can afford to pay up on loans on overpriced houses.

A drop to a US national home price median of 100K with 15% interest rates mean banks can make highly profitable loans. Sure, the existing ones get killed. But they're dead anyway.

If no one is buying homes then it actual interest rate is irrelevant.

Clearly high prices and low interest rates aren't working - maybe low(er) prices and high(er) interest rates will.