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Why is the Economy stuck? Check the Money Multiplier.

One of my favorite source of macro data is the St. Louis Fed website. One of my favorite chart is the M1 Money Multiplier. In August 2008, it was hovering at a pretty stable 1.6. It reached a low of 0.8 in March 2009, and is barely making it to the 1.0 level as of 8/20/2009.

What this means is fairly simple. Despite the increase in the Monetary Base, a doubling from some $800bn to $1.7 trillion since September 2008, Money is not created by the banking system. In layman's terms, banks are not lending, despite their assertions to the contrary. A picture is worth a thousand words.

Until the Multiplier goes back to life, we're stuck. The next test will be non collateralized Consumer Credit, i.e. credit cards deliquencies. Until recently, I was leaning toward the squared root recovery pattern. In previous crisis times, we had WW1 and WW2. I am afraid we may have to go through W3.