M1 Money Multiplier tanking

[Supercilious]

Re: M1 Money Multiplier tanking

I haven't made my way through the entire thread, and so I apologize if what I say comes across as a repost.

No problem WildspitzE. When get have time to make it through the entire thread check the IOR- MULT discussion. I was trying to point to another act of financial illusionism by the Fed

[WildspitzE]

Re: M1 Money Multiplier tanking

I was trying to point to another act of financial illusionism by the Fed

Symbols - Ok. I misunderstood your post then. I will take a look, perhaps I can add to the conversation. Cheers.

[bart]

Re: M1 Money Multiplier tanking

I'm not sure what you're asking with "So, what exactly the alphabet soup did and when exactly the crunch has started?" though. Would you please clarify?

I believe the shadow banking system hasn't grown only in parallel structures with the classic banking system. It has infected regular banks too, and money markets were responsible with the financing of SIV-ed banks, and rolled over short term debt has replaced CD's and deposits in many contaminated structures. This financing flow was also very difficult to control through Fed's existing tools.

Maybe I'm seeing things, but Lehman's collapse and the Fed's movements in financial CP that preceded that collapse, look now more like an operation of financial plumbing bypass, in which the Fed has interposed itself as a control valve on the financing stream of the shadow(ed) banking system. It would be interesting to see some charts comparing the total evolution of the volume of the alphabet soup with treasury sales + printing.

Cool - makes sense now. Probably the best charts to address your questions are ones you've already seen, since they pretty much cover the alphabet. The only difference between the two charts is that the bottom one includes US public debt growth.

I can't see the Fed remaining in this role for ever (they have at least to keep some appearances) and the control-valve role will be passed slowly to the minions (Citi, JPM , GS etc) and the minions will become the new flow through valves for financing the shadow(ed) banking system. Of course some form of TALF will be kept in the future insure nobody steps out of the line and the minons will be able to insure that the flows they control will never 'break the buck'.

True but the primary dealers (minions as you call them) are still in very rough shape and are insolvent, so it'll be a while - many months minimum, barring a large dollar devaluation or some other gigantic political move (and in that area, the recent swap announcement with the ECB, etc. has my spidey sense all a-tingle ;) ).

That's why we may see a miraculous shrinking of the Fed's balance sheet and a decrease in excess reserves once the minions begin to run their role as flow-through valves. We can also expect the minons to start doing really well by gouging the profits of the end sectors of the shadow banking system (hedgefunds). Maybe it was all just a struggle to subdue the shadow baking system under the Fed's authority, some kind of financial civil-war, since the independence and decentralization of the new kids on the block was becoming a threat for the old control monopoly. Well, the horde of wild kids has been ambushed and pushed into a pen under the strict control of the old enforcers. I don't know....

Both the primary dealers and the Fed itself have quite the task in dealing with many of the hedge funds - there are some mighty sharp folk with much political savvy & connections amongst them.... but yes, characterizing it as a financial civil war is quite accurate in my opinion.
I could even stretch it a bit and call it and/or government spending & control the current and next bubble - and I'm not limiting it to just the U.S. and the Fed.

[bart]

Re: M1 Money Multiplier tanking

New data is out:2009-03-25 , 0.903

This is what happens when the Fed treats the economy with a dollar enema :eek:

*chart*


Looking at the life jacket issue and assuming the excess reserves remained relatively constant:

Now
Mult 0.903
M1 1565.6
BASE=1725

Feb
MULT= 0.885
EXCRESNS 643.5
M1=1568.3
BASE=1749

It would result that now the real MULT is about 1.44 while in February (for which we have good data) was 1.41. from the Base M1 charts my guess is that excess reserves were higher at the beginning of March and considering the M1 was 1.6 before the Circle Jerk Finance(TM) circus started, one may think the timid recovery has started.

I urge lots of caution when looking at excess reserves numbers - they're *extremely* volatile and subject to very large revisions.

As far as velocity, here are the latest stats... and it's down no matter how one measures it (whether via mult or GDP or M3 or whatever). It just plain isn't responding to anything that has been done so far, although the drop has been stopped and its going generally sideways.

[bart]

Re: M1 Money Multiplier tanking

I'm not sure where else to put this but since it has to do with effective required reserves, this seems like a good place. It appears that the Fed implicitly did raise the required reserves a few months ago... and its slowly drifting back to the range of the last 15 years of 6-8%.

The chart is simply an attempt to derive the "real" required reserve ratio by dividing the required reserve amount from the Fed's H3 report by total checkable deposits (the Fed's WTCDNS series).

[Supercilious]

Re: M1 Money Multiplier tanking

Cool - makes sense now. Probably the best charts to address your questions are ones you've already seen, since they pretty much cover the alphabet. The only difference between the two charts is that the bottom one includes US public debt growth.

Thanks for the charts bart, Very interesting to see what is happening.

True but the primary dealers (minions as you call them) are still in very rough shape and are insolvent, so it'll be a while - many months minimum, barring a large dollar devaluation or some other gigantic political move (and in that area, the recent swap announcement with the ECB, etc. has my spidey sense all a-tingle ;) ).

. I think that in the current environments primary dealers should be viewed in connection to the private equity funds with the money from the people controling them. Look what is happening on the Wall Street. The PD are just the gloves, the hands are in PE funds of funds. Today smart money has a cake and eats it too.
And yeah, that new swap announcement also made me smile.

Both the primary dealers and the Fed itself have quite the task in dealing with many of the hedge funds - there are some mighty sharp folk with much political savvy & connections amongst them.... but yes, characterizing it as a financial civil war is quite accurate in my opinion.

Yup, and the friendly funds are allowed to feast from the taxpayer money (as told in the Book of Greenscam). Those trying to maintain independence in the shadow banking system ... well ... are fed to the friendlies.

I could even stretch it a bit and call it and/or government spending & control the current and next bubble - and I'm not limiting it to just the U.S. and the Fed.

I agree. That is the right definition.

I urge lots of caution when looking at excess reserves numbers - they're *extremely* volatile and subject to very large revisions.

Correct, but since the excess reserves are included in BASE, and since IMHO these excess reserves are monetary illusionism , I just made an adjustment to BASE in order to get rid of Fed's smoke and mirrors.

As far as velocity, here are the latest stats... and it's down no matter how one measures it (whether via mult or GDP or M3 or whatever). It just plain isn't responding to anything that has been done so far, although the drop has been stopped and its going generally sideways.

That is true. Even with the "adjusted" BASE things are pretty bleak, although one may ask if everything done so far was intended to increase the velocity ...;)

Thanks for the real reserve chart. Things are getting more and more interesting.

[c1ue]

Re: M1 Money Multiplier tanking

Gentlemen,

I haven't seen any mention of the FDIC backdooring in this discussion.

Irrelevant?

[bart]

Re: M1 Money Multiplier tanking

. I think that in the current environments primary dealers should be viewed in connection to the private equity funds with the money from the people controlling them. Look what is happening on the Wall Street. The PD are just the gloves, the hands are in PE funds of funds. Today smart money has a cake and eats it too.

Fair enough - ignoring any major component or entity during wild times like these is unwise, to say the least.

Correct, but since the excess reserves are included in BASE, and since IMHO these excess reserves are monetary illusionism , I just made an adjustment to BASE in order to get rid of Fed's smoke and mirrors.

I urge caution in drawing conclusions about current or future velocity, without confirmation from other measures.

Even with the "adjusted" BASE things are pretty bleak, although one may ask if everything done so far was intended to increase the velocity ...;)

http://www.nowandfutures.com/grins/oz_curtain.wav ? ;)

Even the Fed has some limits on what they can do on the short term, especially since their own models failed in predicting the current situations and problems.

And this applies too:

"A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him. It is necessarily part of the business of a banker to maintain appearances, and to confess a conventional respectability, which is more than human. Life-long practices of this kind make them the most romantic and the least realistic of men."
-- John Maynard Keynes, "The Consequences to the Banks of the Collapse in Money Values", 1931

[bart]

Re: M1 Money Multiplier tanking

Gentlemen,

I haven't seen any mention of the FDIC backdooring in this discussion.

Irrelevant?

In the velocity area, in my opinion they aren't very relevant. They're a second tier player at best since their funding is dependent on others - at root, they're just a backup insurance company.

[WildspitzE]

Re: M1 Money Multiplier tanking

In the velocity area, in my opinion they aren't very relevant. They're a second tier player at best since their funding is dependent on others - at root, they're just a backup insurance company.

Or perhaps, a second shingle for the same guarantor.

[Supercilious]

Re: M1 Money Multiplier tanking

Even the Fed has some limits on what they can do on the short term, especially since their own models failed in predicting the current situations and problems.

And this applies too:

"A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him. It is necessarily part of the business of a banker to maintain appearances, and to confess a conventional respectability, which is more than human. Life-long practices of this kind make them the most romantic and the least realistic of men."
-- John Maynard Keynes, "The Consequences to the Banks of the Collapse in Money Values", 1931

Good point bart and that quote from Keynes is great. It's true the Fed has serious limitations with regard to what can they do in the short term. The few tools they have at their disposal give them a lot of power and control though over long to medium term, and if we couple that with the gullibility of the markets participants .... There is a nice quote from a Mais lecture by Mervy King :

http://www.bankofengland.co.uk/publi.../speech245.pdf

This is what I call the Maradona theory of interest rates. The great Argentine footballer,
Diego Maradona, is not usually associated with the theory of monetary policy. But his
performance against England in the World Cup in Mexico City in June 1986 when he
scored twice is a perfect illustration of my point. Maradona’s first “hand of God” goal
was an exercise of the old “mystery and mystique” approach to central banking. His
action was unexpected, time-inconsistent and against the rules. He was lucky to get away
with it. His second goal, however, was an example of the power of expectations in the
modern theory of interest rates. Maradona ran 60 yards from inside his own half beating
five players before placing the ball in the English goal. The truly remarkable thing,
however, is that, Maradona ran virtually in a straight line. How can you beat five players
by running in a straight line? The answer is that the English defenders reacted to what
they expected Maradona to do. Because they expected Maradona to move either left or
right, he was able to go straight on.

Monetary policy works in a similar way. Market interest rates react to what the central
bank is expected to do. In recent years the Bank of England and other central banks have
experienced periods in which they have been able to influence the path of the economy
without making large moves in official interest rates. They headed in a straight line for
their goals. How was that possible? Because financial markets did not expect interest
rates to remain constant.

Right now the Fed is playing both the "Maradona straight line" and "the hand of God" with Mr Market.

BTW they did some minor downwards revision of the MULT. Here is the lastest data since the ball started:

2008-09-10 1.605
2008-09-24 1.528
2008-10-08 1.451
2008-10-22 1.239
2008-11-05 1.190
2008-11-19 1.010
2008-12-03 1.025
2008-12-17 0.951
2008-12-31 0.944
2009-01-14 0.914
2009-01-28 0.884
2009-02-11 1.011
2009-02-25 0.956
2009-03-11 1.000
2009-03-25 0.902

[bart]

Re: M1 Money Multiplier tanking

Good point bart and that quote from Keynes is great. It's true the Fed has serious limitations with regard to what can they do in the short term. The few tools they have at their disposal give them a lot of power and control though over long to medium term, and if we couple that with the gullibility of the markets participants .... There is a nice quote from a Mais lecture by Mervy King :

http://www.bankofengland.co.uk/publi.../speech245.pdf

Right now the Fed is playing both the "Maradona straight line" and "the hand of God" with Mr Market.

Cool quote - I like it.

I think the Fed is also shooting some craps at a Las Vegas table too... :eek: :rolleyes: ;)

BTW they did some minor downwards revision of the MULT. Here is the latest data since the ball started:

Thanks, just checked and updated my entire Excel tab and M1 too.

As an aside, the frequency with which I have to update my Fed data in Excel due to small or large changes has been much higher since last August or so... and who knows how much is due to real changes and how much is "massaging", although most of the items generally pass my own "smell test".