m1 mulitiplier?

[Jerk]

Does anyone understand what this is?

I sure don't.

What if it goes to 0...as in zero?

[Frozen Sooner]

I do! I do! (Waves hand in the air, jumping up and down.)

Short form:

The money multiplier effect measures the maximum impact of reserve ratios on changes in the money supply. The idea is that if a bank can lend out, say, 96% of their deposits, then a $100 deposit will increase the money supply by 100*1/(4%) or $2500 as the bank lends out each successive deposit.

Theoretically, if it were at 0 then there'd be no reason to even have banks-we wouldn't be able to lend, because our reserve requirement would be 100%. Which they're never going to do.

[Jerk]

I do! I do! (Waves hand in the air, jumping up and down.)

Short form:

The money multiplier effect measures the maximum impact of reserve ratios on changes in the money supply. The idea is that if a bank can lend out, say, 96% of their deposits, then a $100 deposit will increase the money supply by 100*1/(4%) or $2500 as the bank lends out each successive deposit.

Theoretically, if it were at 0 then there'd be no reason to even have banks-we wouldn't be able to lend, because our reserve requirement would be 100%. Which they're never going to do.

It's under 1 now (for the first time ever?). If it keeps up at this rate, it will hit zero between August 2009 and April 2010. Is that even possible?

I don't understand your fancy shmancy formulas, so tell me if this is a correct way of putting it: When m1 is at 1.0, a dollar will do one dollars worth of work when it cycles through the economy. If m1 was a .50, then every dollar Benny and Timmy put into the economy will do .50 cents of work. Am I even close, froz?

[tommieharris91]

It's under 1 now (for the first time ever?). If it keeps up at this rate, it will hit zero between August 2009 and April 2010. Is that even possible?

I don't understand your fancy shmancy formulas, so tell me if this is a correct way of putting it: When m1 is at 1.0, it will do one dollars worth of work when it cycles through the economy. If m1 was a .50, then every dollar Benny and Timmy put into the economy would do .50 cents of work. Am I even close, froz?

M1 = currency, coin, and checkable deposits. If M1 falls from 1.0 to .5 like in your framework, then basically half our most liquid money will have been destroyed.

[Jerk]

M1 = currency, coin, and checkable deposits. If M1 falls from 1.0 to .5 like in your framework, then basically half our most liquid money will have been destroyed.

Well, let's hope Benny and Timmy can do their magic...

eta- i'm reading a thread about this at the Market Ticker forum and it is scaring the **** out of me

http://research.stlouisfed.org/fred2/series/MULT

[tommieharris91]

Anyway, the money multiplier is basically m=(1/r), r = reserves held by banks. Since the multiplier (m) is now below 1, it basically means that the banks are holding onto their cash they get from buying and selling bonds from the Fed and not loaning it out. The required reserve ratio for banks is 10%, so if banks were to lend out all the money they could under law, m=(1/.1)=10. The money multiplier is now under 1, which is to be expected when banks stop lending money out as well as hold onto some profits as reserves. Money has almost come to a complete stop right now.

To clarify, M1= currency, coin, and checkable deposits. m is the multiplier which creates extra money when banks lend money to other banks and consumers.

[jkjsooner]

Theoretically, if it were at 0 then there'd be no reason to even have banks-we wouldn't be able to lend, because our reserve requirement would be 100%. Which they're never going to do.

And that's why I don't get the logic of those anti-fractional reserve types.

The consequence of 100% reserves would be that we would have to pay the banks to take our money. And if we wanted to lend it out we would have to do it ourselves and take the risk of default rather than spreading that risk out through a common pool.

[Frozen Sooner]

And that's why I don't get the logic of those anti-fractional reserve types.

The consequence of 100% reserves would be that we would have to pay the banks to take our money. And if we wanted to lend it out we would have to do it ourselves and take the risk of default rather than spreading that risk out through a common pool.

Anti-fractional reserve people tend to think of banks as bolt-holes to put money in as opposed to engines of investment. They tend to be anti-consumer debt and feel that business capital should be raised through equity or bond sales instead of commercial loans.

[jkjsooner]

Anti-fractional reserve people tend to think of banks as bolt-holes to put money in as opposed to engines of investment. They tend to be anti-consumer debt and feel that business capital should be raised through equity or bond sales instead of commercial loans.

That's giving many of them too much credit.

Some are just paranoid about the multiplier effect - like buying bond and having the company spend that money doesn't have its own multiplier effect. In fact, there is no reserve requirement on a bond purchase so the multiplier effect could be much larger although maybe for practical reasons this might not be the case.

Anyway, the simple fact is that money supply has always been able to expand and contract. Even if banks held 100% reserves, people would find other ways to loan money which increases money supply.

Some may look at it the way you say but quite a few are just crazy conspiracy types. I don't know much about economics but I know enough to know they some of them are just clueless.

[Frozen Sooner]

A bond paid for in cash has no multiplier effect if there's no fractional reserve system. Bonds are not demand deposits, so are not part of M1.

But yeah, I was mainly talking about rational anti-fractional-reserve people as opposed to conspiracy theory loons.

[Chuck Bao]

This is really weird. I asked the Thai government's top economist a couple weeks ago if anyone pays attention to money supply numbers anymore and she said: "no".

That is the case for Thailand, but we are clearly going into a strange new world in the US now.

[Okla-homey]

I hoped this thread this was gonna be about Garands or tanks. sorry. I'm leaving now.

[jkjsooner]

A bond paid for in cash has no multiplier effect if there's no fractional reserve system. Bonds are not demand deposits, so are not part of M1.

But yeah, I was mainly talking about rational anti-fractional-reserve people as opposed to conspiracy theory loons.

Let's say I buy a bond from Company A. This company uses this money to buy something from Company B. Company B uses the proceeds to buy a bond from Company C.....

This is money supply expansion.

[Crucifax Autumn]

Let's say I can't afford to be buying bonds...my money's tied up in rent and food...

This is a money contraction.

[Frozen Sooner]

Let's say I buy a bond from Company A. This company uses this money to buy something from Company B. Company B uses the proceeds to buy a bond from Company C.....

This is money supply expansion.
Again, bonds aren't demand deposits or cash, so you can't count the face value of the bond as part of the M1 supply.

[Chuck Bao]

This article is a pretty good indication of our economic troubles and the whole issue with the shrinking money supply.


DAVID WEIDNER'S WRITING ON THE WALL
Your credit is no good here

Commentary: Why U.S. banks need to pull back from lending -- now
By David Weidner, MarketWatch

Last update: 12:01 a.m. EDT April 21, 20090

(MarketWatch) -- U.S. banks need to stop the charade, ignore the political and public pressure and admit they're not lending. It's not because they don't want to, but because it's bad business.

Don't think so? Take this pop quiz. On Monday, Bank of America Corp. announced smashing profits for the first quarter. Ken Lewis, the bank's chief executive, claims B. of A. is lending as if the good times never ended. So, in the bank's conference call, which one of the following statements did Lewis make?

A. "Credit is bad and we believe credit is going to get worse before it will eventually stabilize and improve."

B. "Even our internal economists are a little at odds as to the timing with some seeing recovery earlier (than year-end)."

C. "We believe unemployment levels won't peak until next year at somewhere in the high single-digits."

D. All of the above.

E. None of the above.

For a CEO whose bank is lending as if it's 2006, you might be surprised that the same Lewis who proclaims to be bullish on loans is bearish on the economy. The answer is D.

There's only one problem. No bank CEO can reconcile more lending with a deteriorating economy -- especially one in which economic conditions are the worst than they've been in generations. But that's exactly the claim he's making.

Lewis described a deep recession that's going to be here for months. Still, B. of A. touts that it's "helping" homeowners and small businesses with new loans. It claims to have added 45,000 customers and provided them credit. The reality, however, is less impressive: Bank of America loaned $183 billion during the quarter, up just 1.6% from the last quarter of 2008, when lending took a big dive industry-wide.

This isn't to single out Bank of America. All of the major big banks, including Wells Fargo Corp. have been doing the credit double talk that goes something like this: these are terrible conditions to be lending in, but we're lending in them without risk.

TARP as stimulus
If those claims sound a little too good to be true, it's because they are. Almost all the big banks that have taken cash from the Troubled Asset Relief Program have curtailed lending, according to The Wall Street Journal.

One of the intentions behind TARP was for it to be a kind of stimulus program made through the banks. After plugging holes on each bank's balance sheet, the TARP cash was supposed to flow into new mortgages, auto loans, credit card lines and corporate lending. Six months later, it's fair to say TARP has helped prop up some banks, but it hasn't flowed into the consumer credit markets the way the framers intended.

Now, critics have argued that the banks should be loaning this money to help stimulate the economy. Companies need credit to expand and hire, they say, and consumers need credit to buy products and help feed the economy.
In almost any other economic time, this would be true, but not in a time where an overextension of credit created the recession we are fighting. Credit cycles by definition are periods where banks overextend credit and then pull back to correct the overextension. If the government forces banks to lend to at-risk borrowers, we're going to aggravate an already dire credit picture and require more government intervention.

You can easily see how lending to home buyers not worthy of credit would fuel the nation's housing woes and create more housing problems, but what about the loans most people assume are helpful to the economy: small-business loans?

It turns out that existing small-business loans are defaulting at an alarming rate. More than 4.4% of small-business loans were in 30-day default, up from 3.48% a year ago, 1.29% were delinquent 90 days, up from 1.04% a year earlier and 0.63% were 180 days delinquent, double the rate a year ago, according to PayNet, a small-business payment network.

It doesn't matter what type of loan, lending into an economic downturn is an invitation to trouble.

Government intervention
The steep rise in defaults and non-performing loans suggests that the economic conditions Bank of America's Lewis talked about will make it hard for banks to simultaneously set aside reserves and lend more money out. Small businesses will lay off workers before they start missing loan payments, and the unemployed can't pay off their credit cards and car loans.

Taxpayers fuming about the banks' unwillingness to loan government money into the system might reconsider, given that the banks are actually being prudent with taxpayer cash. Now that banks have been backstopped by the Federal Reserve and Treasury Department, they have less incentive to scrutinize credit. The risk of bad loans has been shouldered by Washington.

Banks have made a lot of missteps in the financial crisis -- from overreaching with credit to big paydays, to misuse of taxpayer cash, to punitive interest costs for consumers, to a lack of sensitivity -- but reining in credit is not one of them.
So, when Lewis and his counterparts at competing banks brag about how much lending they're doing, take it with a grain of salt. In most cases, this is posturing by CEOs looking to fend off criticism they're not doing enough to help the economy.

What critics fail to acknowledge is that we all benefit from banks adhering to lending standards. When that doesn't happen we get financial collapses that compare to the darkest times in our history.

David Weidner covers Wall Street for MarketWatch.

[Jerk]

Interesting. The 2nd wave of foreclosures is coming...this time the prime borrowers who aren't paying because they've lost their jobs, and commercial real estate is collapsing.

This is becoming like a black hole.

[jkjsooner]

Again, bonds aren't demand deposits or cash, so you can't count the face value of the bond as part of the M1 supply.

I didn't say it was part of M1 supply but it is still an expansion of wealth/debt. I was probably wrong to use the term "money" though...

[Okla-homey]

You people carry on as if this macroeconomics stuff was a science or something. It is, and has always been, a black art with virtually no practical applicability. Kinda like chiropractic and psychology.;)

[Frozen Sooner]

You people carry on as if this macroeconomics stuff was a science or something. It is, and has always been, a black art with virtually no practical applicability. Kinda like chiropractic and psychology.;)

Or Law. Tell me again why a discipline that contains no logical rules is taught by the Socratic method again?

[Okla-homey]

Or Law. Tell me again why a discipline that contains no logical rules is taught by the Socratic method again?

It is lectured via the Socratic method because that method is easiest on the profs (who never actually practiced law) and don't have to worry over developing a decent lecture as result of the adoption of that method in the late nineteenth-century at HLS. I can imagine the harrumphs as the Harvard law faculty actually realized, "gentlemen, think about how liberating this Socratric-method business will be! All you'll have to do is quiz and berate the students on key points of law, and you won't have to actually 'teach' them anything."

All they gotta do is say, "Ms. So-and-So, please enlighten us with the rule of this case." She does, and is promptly soundly bashed by the prof as an ignoramous, thereby simultaneously making her feel like a baffoon in front of all her friends, and elevating said sadistic prof to legal godhood. Lather-rinse-repeat. You'll see. The lectures are a waste of time. Totally. As is legal scholarly writing.

In practice, the law is actually extremely logical because its actually just a multi-dimensional game of chess played under very complicated rules.

[tommieharris91]

You people carry on as if this macroeconomics stuff was a science or something. It is, and has always been, a black art with virtually no practical applicability. Kinda like chiropractic and psychology.;)

For some reason, I think you would find a way to debate whether 2+2=4 because math is also a "black art" to you.

[Crucifax Autumn]

It's the debil

[Okla-homey]

For some reason, I think you would find a way to debate whether 2+2=4 because math is also a "black art" to you.

Not at all. Math is practical, predictable and provable.

[Chuck Bao]

Maths applied to historic economic data is indeed a black art because the economy is forever changing as new technology is introduced.

For instance, inflation is just a made up number because the composition of the CPI continually falls behind new technology introduced and consumer spending habits. It is highly debateable on how much price increases are due to improved products and how much due to real price increases.

More importantly, we live in a very capital intenstive world. Labor input continues to dimenish with new technology and outsourcing. Still, the investment cycle gets shorter and shorter as new technology is introduced.

Thirdly, money supply numbers are not as useful as before because cash and deposits are not the only measure of liquid assets given the development of the capital markets. Just look at the banks' balance sheets: they aren't the same as only 10 years ago. Besides, individuals can buy or sell stocks or bonds anywhere in the world over the internet.

I just want to mention this because every time some analysts on CNBC tries to compare the current economic crisis to the Great Depression, I want to throw a brick at the TV.

[Frozen Sooner]

A vastly improved brick at a TV that wasn't invented during the Great Depression, even. :D

[Chuck Bao]

A vastly improved brick at a TV that wasn't invented during the Great Depression, even. :D

Heh! Instead of brick, I should have said my pet rock or chia plant or tamagotchi pet or ipod or whatever the kids are doing these days.

You are making me feel old.

And, don't they have these new super light and super strong bricks now? I remember writing about it five years ago and recommending a certain stock and then the share price collapsed because all the competitors got the same technology and I felt stupid.

So, I'm pitching my fit and throwing a super light and super strong hitech brick that wasn't invented during the Great Depression. At least give me that satisfaction after my really bad stock market call.

[Frozen Sooner]

I don't know that your stock call was THAT bad, particularly short-term. I think WFC is a solid long-term hold, but on a short-term I think WFC and BAC might be a bit exuberant.

I know that we got hammered on our 1q results due to regulatory changes. Increased expenses for loan loss reserves and increased premiums for the new liability limits on NCUA insurance just crushed our profitability.

[Chuck Bao]

Oh, just wake up already!

The banks have a lot of uncollectible loans/assets and if they recognized all of these they would be insolvent.

For the record, yet again, I want to say that I hope I am terribly wrong.

There is already a lot of doubt that the expected stress tests will play out for the markets. There is no way and no how that the announced tests will be anything akin to the real thing.

I still think that this will play out like the Asian economic crisis and that there will be short-term periods of hope and private sector participation and then followed by a brief period of reality check and quarterly write-downs.

At the end of the day, regular stock market investors have to deal with massive share price dilution and previous share price data is not at all meaningful.

I have yet to see the quality of analysis that I did during the Asian economic crisis. During that time, there were analysts talking about full write-offs and dilution of shareholders’ shares. The problem is that nobody really understands the big banks exposure in the current US market.

I could be really wrong, but the key should still be dilution. Banks should be valued on shareholders’ equity. Their assets and liabilities are essentially valued at cash. The whole idea not to mark their assets and liabilities at market is just a trick.

Maybe I’m really wrong and I hope that I am. I would trust large scale investors rather than the so-called stress tests. If the big funds are buying banks, that would be a very good sign. Otherwise, be careful.

[Jerk]

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