Barron’s notes that the M1 money multiplier biweekly indicator is worth watching closely.

Why? Because the multiplier is declining “corresponds so exactly to the expansion of the Fed’s balance sheet It hits at the core of the problem in a credit crisis. Until [the multiplier] expands, we can’t get sustainable growth of credit, jobs, consumption, housing. When the multiplier starts to go back up toward 1.8, then we know the psychological logjam has begun to break.” (Constance Hunter, economist at hedge-fund firm Galtere).


The M1 Money Multiplier (biweekly)

Source: St. Louis Federal Reserve


Reserved Banking
Leslie P. Norton
Barrons MARCH 15, 2010

Category: Credit, Currency

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

23 Responses to “Is the Fed Normalizing Money Supply?”

  1. Marcus Aurelius says:

    The Fed could balance the money supply with the existing debt to the penny, but if that money is concentrated at the top and can only be distributed by means of more debt to the hoi polloi, it won’t make a difference. Velocity is just as important as quantity. Don’t forget — the increase in the money supply is GIVEN to the banks (in fact, they are essentially paid to take it), but we have to borrow it at interest (built in inflationary/deficit imbalances).

    Why are we even talking about this shit? End the Fed monopoly on wealth, NOW.

  2. bsneath says:

    No green shoots here!

    The Fed would be wise to extend QE for a while longer given the continued contraction in velocity, IMO.

  3. dead hobo says:

    This chart supports my thesis from the last thread. No real economic growth is in sight because the velocity of money is is slower than an 80 year old with a bad back. No borrowing and no spending = no real economic growth. This, however, has no relationship to the stock market, thanks to financial engineering.

    The bear market / bull market story isn’t relevant any longer. The financial environment and the interconnected world financial markets make this concept an anachronism. Central Bank liquidity channeled to engineered financial markets, combined with lax regulation, will keep stock markets all over the world at proper levels. I think we might be at the start of the mother of all range trading markets.

  4. An Inquiring Mind says:

    Marcus Aurelius (and all others):
    Best way to end The Fed monopoly is to end The Fed. Best way to achieve this is to go to Campaign for Liberty’s website and sign the petition to Audit the Fed. Also sign the petition on Mish Shedlock’s site. And then fax, email and call your congress reps and insist that they don’t let the Audit the Fed clause be stripped from the bill that is about to be passed. Insist that they vote to audit The Fed or that you (your family, friends and business associates) will vote them out of office in November.

  5. IvoZ says:


    I agree that if the multiplier moves up this will be a sign of a credit expansion and thus some growth. But how much of it will be real economic growth and how much will be unsustainable credit-expansion based fake growth like 2003-2006?

  6. The buying power of the non-credit economy is increasing. This is not a bad thing though it may look so on paper. When dollars are disappearing the value of the remaining dollars are increasing. So even if you are getting a 1% rate from the fed you are keeping ahead of the money supply

    People may only be able to sell their goods for less but the dollars they get for those goods are gaining in value. It is only the debt slaves that lose in this equation. Though if they built enough margin into their deals they should not be bothered by this. Cash-is-kingers and being treated like royalty. China should be happy about this and maybe that is why it is happening. Maybe that was part of the deal to keep them buying debt

  7. Correction:

    Cash-is-kingers aRE being treated like royalty.

  8. perra says:

    @ Common Man

    “Cash-is-kingers aRE being treated like royalty.”

    Not if they are managing other people’s money.

  9. Joe Retail says:

    OT: Expanding ads that cover the top of the article and force me to click “x” to get rid of them … I already dislike Microsoft; this isn’t helping.

  10. Not if they are managing other people’s money. :twisted:

    Maybe they need me in there ‘splainin’ it to their clients

  11. VennData says:

    …but..but this doesn’t fit the gold bug “conspiracy of the Fed” so the numbers must be wrong.

  12. Marcus Aurelius says:


    Gold is the enemy of fiat currency. All fiat currency. Everywhere. Always.

  13. beaufou says:

    Have no plan and eventually blame the Chinese…
    I’m laughing my balls off when I hear members of Congress find China’s monetary policy scandalous.
    Their money, our problem…sounds familiar? well, here’s the result.

  14. scharfy says:

    Well hell no banks aren’t lending. And hell no people aren’t borrowing.

    The FED is mistaking correlation with causation. Money and credit flows TO good, productive ideas. Money does not CREATE good productive ideas.

    Its not the lack of credit. Its the lack of creditworthiness.

    ( And no, simply wanting to buying a house you cannot afford does not constitute a good, productive idea, nor does it constitute creditworthiness.)

  15. constantnormal says:

    @bsneath 11:45 am

    “The Fed would be wise to extend QE for a while longer given the continued contraction in velocity, IMO”

    But what if the QE is CAUSING the continued contraction in velocity? Seems logical that if you add more money without increasing demand for it, the velocity will only decrease.

    This gives me no hint that the Fed is “preparing to normalize”. The discount rate increase means nothing. If they wanted to send a signal, a quarter-point increase in the Fed Funds rate would do the trick.

    Until they stop juicing the economy (or the banksters’, at least) via ZIRP (and changing the discount rate, the Fed’s “emergency” funds, does not alter mainstream policy), the velocity is going to be stagnant and a recovery will be impossible.

    But if the do increase the fed funds rate, and start mopping up excess cash, the streets (at least Wall Street) will run with blood.

    The Fed is caught between Charybdis and Scylla. They ain’t makin’ ANY moves, anytime soon.

  16. …but..but this doesn’t fit the gold bug “conspiracy of the Fed” so the numbers must be wrong.

    Actually, it does. It still proves that a select group of people control the economy. When they do it during political events they also control the vote.

    The only difference is that Bernanke is a relative benevolent dictator in comparison to that wealth diluting tyrant Greenspan.

  17. constantnormal says:

    Also, if demand for money falls in a persistent manner, and the supply is not decreased, the velocity drops there as well.

    One way for the Fed to mop up all this excess money, in a manner with limited impact (not insignificant, or even small, but limited) would be to withdraw all the many lines of support that the repositories of much of the toxic debt enjoy, and then nationalize them as they fail instead of keeping them on the IV infusion of credit. With much of the excess cash and toxic debt all in the coffers of the Fed, things could proceed in a quasi-normal manner into recovery.

    But just as you can’t make an omelet without breaking eggs, you can’t fix an economy without breaking the TBTF.

  18. Money does not CREATE good productive ideas.

    Let’s leave Hollywood out of this discussion please!

  19. The Curmudgeon says:

    What this really tells you is that we have been in a deflationary environment since the late 80′s. Prices should have been going down, and would have been, to reflect mature economies and efficient production, but didn’t because the Fed was terrified that falling real prices would destroy the economy.

    No matter. They did anyway. The economy, i.e., demand and supply metrics in the aggregate, will relentlessly move in the direction that forces far beyond any Fed governor’s control compel it. All the Fed does with its monetary mischief is queer up the accounting.

  20. An Inquiring Mind says:

    Yup. The Fed has no control or causality over the deflationary spiral, debt destruction and de-leveraging. Bernanke continues his pretense that he is in control and has a plan. He and Obama and his administration will be looked back upon by historians as some of components that were responsible for the crash and burn of the American economy.

  21. alfred e says:

    @Curmudgeon: Correct.

    I guess we can thank trickle down economics for our current well being and excellent money velocity.


    The BUCK stops in the ELITEs’ pockets. DUH.

  22. Winston Munn says:

    Money multiplication depends on two factors: 1) a willing solvent borrower and 2) a willing solvent lender. Until these two factors meet, a debt-based economy can do no better than tread water.

  23. hr says:

    Money Multiplier? HaHaHaHa.

    Looks more like DIVISION !

    “When the multiplier starts to go back up toward 1.8,”

    I think we should be happier when it goes above ONE.