M1 Money Multiplier tanking

[ThePythonicCow]

Re: M1 Money Multiplier tanking

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

This same topic came up on FreeRepublic.com a few days ago, when an article by Karl Denninger was posted with this same graph of a collapsing M1 Multiplier (MULT). You can read that tread at http://www.freerepublic.com/focus/f-.../2158062/posts .

In post 57 of that thread, I posted what I still suspect is the proper explanation of that graph [P.S. - submitted this iTulip post before reading the other replies ... oops. It seems that others have already said at least as much as the following, even more actually, and likely more accurately.]

Karl D wrote:

The important part of this graph is what it denotes. Bernanke has lost control of "N" (or velocity), which is the actual knob that he is trying to diddle when borrowing rates are changed (and in fact its the market that sets that, despite his protests.)

I'm not so sure I agree with Karl D on the above. First of all, lets examine what is actually being measure here. From the St Louis Fed page Series: MULT, M1 Money Multiplier:

The M1 multiplier is the ratio of M1 to the St. Louis Adjusted Monetary Base. For further information on monetary aggregates, please refer to the Definitions, Notes, and Sources at http://research.stlouisfed.org/publications/mt/.(bold emphasis added)

Then, chasing down the afore mentioned Definitions, Notes and Sources, we see the following relevant 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.

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.

I am on uncertain ground at this point, because I am uncertain what the above means. However I won't let that stop me ;). As best as I can tell, the relevant difference between M1 and Adjusted Monetary Base is that M1 does not include money that banks have on deposit with the Fed, whereas Adjusted Monetary Base does include those deposits. From other charts I've seen, including another one from the Fed (all of which I am too lazy to track down at this time), the banks have dramatically increased their deposits at the Fed, far above their normal reserve requirements.
That's why (the immediate cause why) the M1 multiplier has fallen below 1.0. There is less money in circulation and more money in the Feds vaults, held as deposits from some (like just a few, big) banks.
Now ... here is where I am inclined to differ with Karl D's interpretation of this. I do not think that the M1 multiplier going below 1.0 means that "Bernanke has lost control." Rather I think it simply means banks (at least a few big ones) are depositing money with the Fed instead of lending it. That might actually be the intention of Ben Bernanke and Hank Paulson and their cohorts!
Such gross and excess deposits have a couple of advantages to our Big Bankers. Follow the money as they say:

• The Big Bankers can stash away some reserves to cover some losses that are not yet accounted for (still kept hidden off the books or not yet marked to market).
• This money can be invested in Treasuries, thereby helping fuel the Treasury Bubble we entered, as of a few months ago. The Fed and the Treasury are great believers in funding asset price bubbles to "reflate" after the previous such bubble collapses.
• The Fed can avoid the obvious signs of inflation (actual excess of circulating money) that they seem so keen to avoid directly associating with all this bailout money.
• The money put aside can then be used by big banks to buy failing smaller banks, thereby furthering the "Bankers Consolidation Act of 2008", as I have taken to calling some of these financial shenanigans. In short, JPMorgan is looking to get bigger, by taking down and taking over some more banks.

In short, I am more paranoid than Karl D (ouch!). I don't think this means Ben has lost control, but rather that it means Ben and friends are succeeding, like the Russian oligarchs, in seizing even more control.

[Supercilious]

Re: M1 Money Multiplier tanking

$#*, 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.

You are definitely correct in some way and here lays the genius of the fantastic duo of financial scam artists. You can say they are able to create money in a neutral way. If tomorrow a bank returns the loan to the fed by liquidating its reserve, that money disappears with a stroke of a pen (of course they are not going to do that). If say I give myself a loan which I deposit in a savings account with myself, I can do that even while I'm in the swimming pool and I have no wallet or checkbook with me. By the time I exit the pool I may decide to pay back that loan to myself and the amount of money disappears.

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.

You put it very well here. What actually they did was to create choice. It's like issuing a line of credit. Money it is actually created only when payments are charged to that line of credit.

And pure choice is not inflationary. Actually since the beginning of this crisis everything they did was basically neutral. They did nothing to try to solve the liquidity crisis.

In short, I am more paranoid than Karl D (ouch!). I don't think this means Ben has lost control, but rather that it means Ben and friends are succeeding, like the Russian oligarchs, in seizing even more control.

I completely agree. It's just a scam that is going according to the plan. They haven't lost control at all and it's all an engineered, artificial crisis.

[rchdenton]

Re: M1 Money Multiplier tanking

I don't think this means Ben has lost control, but rather that it means Ben and friends are succeeding, like the Russian oligarchs, in seizing even more control.

Scary. Presumably the idea that if something is to big to fail then it should be broken up is not a fashionable one in the corridors of power.

Hang on a minute, I thought big government, big business and big unions was called socialism. Sounds like socialist Britain in the 70s to me...

I don't remember how that worked out, wasn't there a bit of inflation as a result? Oh, I remember what followed the 70s, it was the 80s and Mrs "we are fighting inflation" Thatcher and the destruction of Sheffield Steel.

What a lot of fun they are having!

[ThePythonicCow]

Re: M1 Money Multiplier tanking

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.

Killing some banks faster, yes. Every few decades, JPMorgan goes on a feeding frenzy. They don't like competition, never have. This time around, they are kneecapping some hedge funds, and weakening smaller banks so as to prepare them to be led to the slaughter.

To be clear, I am intentionally conflating "the government", the Treasury, the Fed, and JPMorgan in the above ... I guess we call them the Banksters on this forum, or the Money Masters in some book I enjoyed reading once.

[Supercilious]

Re: M1 Money Multiplier tanking

This just drove me crazy. I went to the Fed for numbers and did my own chart. It's a little annoying. but I got a chart for MULT, a MULT without life jackets (for the friendly banks) and, in order not to be smacked by bart, I included also an estimate of the stealth printing occurring during the past few months (I've called that series MULT-adj)

It was a very interesting exercise ...;)

[bart]

Re: M1 Money Multiplier tanking

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.

Nice job of taking the bull by the horns and actually going for the real definitions, and doing some analysis too.

To continue - cash & coin is around $840 billion and checkable deposits are around $820 billion currently, so they're actually quite close size wise. Normally, checkable deposits run at about 65-80% of currency & coin.

Also, contrary to what some think and as you noted, M1 has been growing hugely in the last 3 months - from about $1.4 trillion to about $1.7 trillion last week. That's an annual change rate of over 16%.

Perhaps its semantics, but "MULT is close to being the ratio of spendable loans to bank reserves at the Fed" could be misleading.
MULT is both intended as a velocity measure per the money multiplier designation, and measures how well reserves (base) are helping to create more money. When the ratio is relatively low, its saying that people are not spending and also not borrowing as much as "normal", and are of course doing more saving.


In the overall velocity area, here's one more thing to add to the extraordinary list of things that have been happening lately - all my main ways of measuring velocity are tracking together.






Here's a close up, and also using quarterly change rates instead of annual ones in order to detect changes more quickly:





And as you can also see, my very own calculation of MULT (the pink line, and it uses nothing but raw Fed data) differs from the Fed's MULT but thankfully not by much. I suspect some of it is due to MULT being bi-weekly and my own calculations being weekly.

But the real point is that there are mild indications of velocity having bottomed, but not starting back up yet.

$#*'s comments about the stealth recap and "life jacket" money do have some validity, but its the individual bank's choice whether to keep money in "excess reserves" at the Fed and MULT is also tracking with other velocity measures pretty well. The real point though is that when the banks do start doing something else with those excess reserves in any meaningful or significant way, velocity will skyrocket.

[c1ue]

Re: M1 Money Multiplier tanking

Killing some banks faster, yes. Every few decades, JPMorgan goes on a feeding frenzy. They don't like competition, never have. This time around, they are kneecapping some hedge funds, and weakening smaller banks so as to prepare them to be led to the slaughter.

Moo-ster,

Don't confuse the JP Morgan of today with the JP Morgan of the past. JP has had its own problems; the reason I had owned some until 2007 Q3 was that they themselves had problems in 2002. Before that they had all kinds of problems (as did the overall bank sector) in 1991.

Check out JPM vs. BAC or WFC in the past 10 years.

I also note a distinct lack of comment on the BS of the Fed paying interest in reserves making any difference whatsoever.

[ThePythonicCow]

Re: M1 Money Multiplier tanking

The real point though is that when the banks do start doing something else with those excess reserves in any meaningful or significant way, velocity will skyrocket.

Hmmm ... I'm unconvinced of that. Doesn't that depend on what else banks do with that money?

If they use it to clear bad paper currently hidden on their balance sheet, then doesn't that just extinguish those excess reserves, essentially bringing to light a state of affairs already in affect, just half hidden.

Or if the big banks use that money to gobble up little banks that were forced to the verge of destruction, then doesn't that either again just extinguish those excess reserves (against the bad paper on some other losing banks balance sheet) or else demonetize those reserves into the long term balance sheet of the surviving bank?

Certainly our esteemed Banksters have been careful so far to see to it that us plebians didn't actually see any of this money they appear to be printing. Perhaps they would be motivated to continue doing so (which I naively translate to meaning that the velocity of money will continue to be depressed) at least until after they have knocked down the value of the dollar a couple of notches?

"Sure you can play with your money that we so generously printed for you ... just as soon as we first render it nearly useless funny money; that is, after we have first squeezed out any real wealth that remained in it to obtain more Control of the major institutions for ourselves."

[ThePythonicCow]

Re: M1 Money Multiplier tanking

JP has had its own problems

Yes - true. JPMorgan has serious problems. Perhaps a wounded bear is most dangerous.

[ThePythonicCow]

Re: M1 Money Multiplier tanking

I also note a distinct lack of comment on the BS of the Fed paying interest in reserves making any difference whatsoever.

Are you surprised that I in particular did not comment on that, or are you speaking more to the forum at large in this note?

[bart]

Re: M1 Money Multiplier tanking

Hmmm ... I'm unconvinced of that. Doesn't that depend on what else banks do with that money?

Of course, and that was what the qualifier of "meaningful or significant way" was all about.

Can't you think of anything that the banks could do with those excess reserves that would get them moving and return profits to the banks?

[ThePythonicCow]

Re: M1 Money Multiplier tanking

Of course, and that was what the qualifier of "meaningful or significant way" was all about.

Ah - ok - I didn't read enough into that qualifier.

Can't you think of anything that the banks could do with those excess reserves that would get them moving and return profits to the banks?

Are you asking me to think positive, non-cynical thoughts of our Esteemed Banksters?

[bart]

Re: M1 Money Multiplier tanking

Are you asking me to think positive, non-cynical thoughts of our Esteemed Banksters?

It's Satyrday and its been way too long since I could use this?
http://www.nowandfutures.com/grins/evil_laugh.wav
or this?
http://www.nowandfutures.com/grins/shadow.mp3
:eek: ;)

[cobben]

Re: M1 Money Multiplier tanking

The real point though is that when the banks do start doing something else with those excess reserves in any meaningful or significant way, velocity will skyrocket.

Here is a chart of the NAVs of some closed end funds that invest in senior bank loans, along with the SP500 index just for comparison. Note that the NAVs are down around 60%, compared to 40% for the S&P, which is why some are saying that the corporate debt of a company you believe in is currently a much better investment than their stock.

I've been watching these for signs that the corporate debt market might start to recover. It may have, or at least has leveled off and is doing a dead cat. This by the way makes me hesitant to short most equities just now.

http://finance.yahoo.com/q/bc?s=XEFR...,xpflx,%5Egspc

[bart]

Re: M1 Money Multiplier tanking

Here is a chart of the NAVs of some closed end funds that invest in senior bank loans, along with the SP500 index just for comparison. Note that the NAVs are down around 60%, compared to 40% for the S&P, which is why some are saying that the corporate debt of a company you believe in is currently a much better investment than their stock.

I've been watching these for signs that the corporate debt market might start to recover. It may have, or at least has leveled off and is doing a dead cat. This by the way makes me hesitant to short most equities just now.

http://finance.yahoo.com/q/bc?s=XEFR...,xpflx,%5Egspc

And here's something else to look at in Corporates land - LQD:
http://stockcharts.com/h-sc/ui?s=lqd...d=p89786890204