Money Multiplier Still Sending Deflation Signal

Although many are protecting their portfolios from inflation the M1 money multiplier is still giving off the same deflationary signals from 2008. As we continue to see banks hoarding cash, loan growth well below historical levels and consumer deleveraging it’s clear that the risk to this economy lies not on the inflationary side, but the deflationary side.

Comments

[Joe Shareho...:]

This is really interesting. Never before have inflationary and deflationary forces been battling like they are now. In my opinion, any inflationary success because of QE and printing press from Benny will just delay the inevitable deflation.

Oct 30 09:15 AM

[John Galt:]

- There was just a fantastically large housing bubble.
- Housing is the largest purchase people make in their lives
- There was just a fantastically large credit bubble

Bidding up asset prices with borrowed money is inflationary. That's why the old CPI numbers from a couple of years ago were a joke. Housing prices doubled over the span of 5 or so years, education costs sky rocketed, Health care costs went up, food prices went up... reporting that "prices" only went up 3 to 5% is a joke. Housing prices alone were going up by more than that... but then again the government has a funny way of counting this, and not counting that to suit their agenda.

Debt is deflationary
- People were borrowing against FUTURE consuption, for CURRENT consumption.

NOW is the future, and the future is less consumption, because we OVER CONSUMED in the past.

If there is a more simple way to explain this, please tell me.

Oct 30 09:37 AM

[MichaelJ007:]

We've been in a deflationary cycle ever since oil peaked in 08'. Nearly EVERYTHING is cheaper- houses, cars, food, consumer products and tons of other things that don't make its way into the basket of goods used to determine CPI. Big Brother can only define the economy as Steady Growth and Slight Decline.

Oct 30 09:53 AM

[bob adamson:]

John Galt –

The bubbles you describe are real and their impact was inflationary. The missing points, however, are that those bubbles largely grew prior to the second half of 2008 and that the asset values of those bubbles deflated significantly with the banking, credit and general economic meltdown in the winter of 2008/9. Thus there were sharp deflationary pressures growing by the winter of 2008/9 and the reflation that became evident by March of 2009 only partially off-sets that pressure.

The trends noted in the M1 Money Multiplier chart set out in the article parallel the inflation/deflation trends noted in my previous paragraph.

Arguably the economy is stepping back from the deflationary precipice it faced at this time last year but that recovery is not secure or stable. Mixed signals on the inflationary-deflationary front should be expected as that recovery stumbles forward. Public policy should now for a while yet therefore continue to error on the side of stimulation, even at the cost of huge short term government deficits and some inflation beginning in 2010, rather than risk re-emergence of a deflationary spiral.


On Oct 30 09:37 AM John Galt wrote:

> - There was just a fantastically large housing bubble.
> - Housing is the largest purchase people make in their lives
> - There was just a fantastically large credit bubble
>
> Bidding up asset prices with borrowed money is inflationary. That's
> why the old CPI numbers from a couple of years ago were a joke. Housing
> prices doubled over the span of 5 or so years, education costs sky
> rocketed, Health care costs went up, food prices went up... reporting
> that "prices" only went up 3 to 5% is a joke. Housing prices alone
> were going up by more than that... but then again the government
> has a funny way of counting this, and not counting that to suit their
> agenda.
>
> Debt is deflationary
> - People were borrowing against FUTURE consuption, for CURRENT consumption.
>
>
> NOW is the future, and the future is less consumption, because we
> OVER CONSUMED in the past.
>
> If there is a more simple way to explain this, please tell me.

Oct 30 12:59 PM

[RK:]

Is the M1 multiplier the same as money velocity? I read somewhere (can't recall the quote) that money velocity cannot be measured directly. Can money velocity be less than 1 as the graph shows? I thought if there were no credit in the economy, the money velocity would be at 1. Appreciate any clarification.

Oct 30 05:17 PM

[InvertirmePSH:]

Once the gov´t-based becomes unnacceptable we will get deflation. Wall Street will ultimately equal Main Street and everybody will hate the stock market as they lost all of their money. Cash is in a bull market.

Oct 30 06:05 PM

[derryl:]

If M1 is "payments money"--cash, checking account balances, and other highly liquid forms of money; and if the multiplier is below 1, then the presence of liquidity in the system is not contributing to an increase in the money supply. This may be because the money is not being spent (low V). A high V indicates a willingness to spend which is usually accompanied by a willingness to borrow which would increase M1 and broader measures of money supply.

The "money multiplier" idea is controversial and may be largely irrelevant as there seems to be no stable historical correlation between M1 and other measures of money supply. Sometimes money supply grows while M1 remains flat; sometimes money supply and M1 grow together; sometimes M1 grows and money supply remains flat or shrinks.

Oct 30 07:44 PM

[macro -N- i...:]

RK : " Velocity of money" is a ratio of gnp to total money supply, it measures how quickly money is reused(investopedia credit) the "multiplier" shows how often the money is re-loaned after keeping out the reserve requirement "multiplier is the ratio of m1 to the St. Louis Adjusted Monetary Base" (St. Louis fed credit) Taking out the reserve and not lending it probably produces less tan 1. If the reserve amounts go up as expected, it could go lower.

Oct 30 09:24 PM

[Tack:]

There has never been a sustained period of deflation in modern world economic history, as far as I can discover. In fact, history is a continuous story of fiat-currency inflation. Now, is no exception.

The '30's-like scenario that the perpetually apprehensive fear is utterly impossible, given the world awash with new fiat-currency printing. The fact that much of that is temporarily tied up in deposits changes nothing in regard to what its effects will be as soon as the economy and lending perk up. The only way this could be ameliorated at all would be in the Fed aggressively withdraws the excess largesse. Again, if history is any guide, they will be too timid, too slow acting and will err on the side of stimulation.

In the end, it's a simple supply-demand equation. If the various goods and services remain in relatively the same supply, but available currency mushrooms, one gets inflation. Simple as that.

Aside from this historical and general economic perspective, has anybody promoting a deflation scenario left their computer for a few minutes to actually go buy something? The price of food stuffs has skyrocketed in the last two years. Gasoline is currently priced higher now than at the same time last year. Gas and electric bills hardly get smaller. The price of chemicals, fertilizer, and most hard goods have risen or, at worst, remained flat. It's only if one buys a house, or perhaps a car, that one can see some decline in prices. Unfortunately, people live routinely on buying food and energy, not houses and cars.

And, all this price inflation is occurring while the economy is in the dumps. Just imagine what it will be like when things again catch fire.

Deflation? In somebody's fantasies.

Oct 31 08:38 AM

[Jimbo:]

Taxes and "fees" levied by local and state governments are increasing. Most food items I buy are going up. Our electric utilities are going up big time. The lower and middle classes are in a terrible squeeze just as Congress is poised to raise costs associated with "health care" but the actual "health care" will not become effective until money is collected by the federales for several years and the current President is presumably safely re-elected. Sure looks like stagflation to me. Jimmy Carter gets his revenge for us not re-electing him.

Oct 31 08:09 PM