Grf,

I simply do not comprehend how you repeatedly think I am conflating MULT with V(x).

MULT means that money is working through the economy and doing less than its value of 'work'. It is working less than 1 time, in that the one dollar isn't doing one dollars worth of work. That isn't how many times it cycles through, it is how much each dollar is worth in 'work' on each cycle.

MULT = how much work each buck does on each cycle through the economy
V(x) = how many times that buck cycles through the economy

If MULT<1 then money isn't working as it should. Thus Ben pumps more, more money goes into the mattress, MULT stays below 1, money isn't working asa well as it should.

This is bad, as financial headlines can attest.

MULT is 0, then money stops working ENTIRELY. Inflation-->>Inf.
V(x) is 0, that's Iceland last October.

I maintain that MULT<1 will quickly put us in a position near monetary reset.

"In fact, I wonder if the $700B number was picked because it was *exactly enough* to put MULT at 1.000000."

That worked for 2 WEEKS. It then dropped again.

Lera- I assumed it was me... I understand the concepts but probably should sleep mixed up on meds.

Lera, my disagreement with you is that you keep talking about "what happens when Ben pumps more money". This assumes that there is some sort of reaction in the money supply when a dollar is added to the monetary base.

There is not.

What happens is that the monetary base goes up by a dollar.

There is no cause-and-effect explosion out there that somehow destroys M1 money, nor do the the rest of the dollars in existence "slow down".

Lera, could you please post a definition for MULT as the Fed uses it that states it is "how much work each buck does on each cycle through the economy"?

Lera,

Here's why I think you're confusing V(x) and MULT. Of course, V(x) is GDP/MZM.

First you say:
"That's what the MULT<1 is revealing. That new money isn't doing what it should which is to work through the economy multiple times. It isn't. It is working through the economy < 1 time. "

Thus, summarized:
(1) "MULT<1 (reveals) that (money) is working through the economy < 1 time."

Then you say:
(2) "MULT = how much work each buck does on each cycle through the economy
(3) "V(x) = how many times that buck cycles through the economy"

And that also ignores the fact that your definitions for MULT and V(x) are equivalent. :)

Here's something that maybe delusional: given that previous to the crisis, req'd reserves were nearly 0% (through Fed changes in the 90s) and then during the downturn (just like the depression of the 30s) reserves skyrocketed... M1 MULT is roughly equal to 1/req'd reserve ratio, and 1/0 = infinity, than a number's inverse becomes increasingly tiny in proportion as the reserves rocket into the stratosphere, or the inverse of infinity is what M1 MULT is approaching, which is zero.

Baldy, which Fed dataset are you referring to? REQRESNS? That's gone up too, but not to the extent that EXCRESNS has. This means that banks are making lots of loans, but still have lots of reserves left.

Grf, the M1 MULT is roughy equal to the inverse of the reserve ratio in the depression, for example, bank reserves were mandated at 25%, hence M1 MULT was about 4 in the Thirties (there is approximation here). I was just thinking out loud.

Most of the lending going on though is between the banks and the Fed. Banks are still lending to the private sector, but without the shadow banking system, which supplied many loans, it seems like a pittance.

Baldy, but as you say, The Poseidon has capsized. MULT being about 1/reserve ratio makes sense if banks are lending - if banks lend, they're going to lend right up to the reserve ratio line where they have no excess reserves. What were the excess reserves numbers in the Depression?

GRf- For God's sake look at the numbers...Reserves are in the hundreds of billions now, when before 2008 they were at tops maybe 40 some billion. Depression figures went up to, but nowhere near this level, even adjusting for inflation.

Baldy, where are the excess reserves numbers for the Depression? I agree that the current excess reserves numbers are unprecedented.

I cant remember where I saw them maybe one of the Fed sites- St Louis has archived stuff. Or it could have been a google book image of the Milton Friedman Monetary History of the US

Found this from Mish last night
I find that chart extremely interesting

Quote:

... Money Multiplier Lag Theory Is False

Please consider commentary from Steve Keen’s Debtwatch, Roving Cavaliers of Credit.
Two hypotheses about the nature of money can be derived from the money multiplier model:

1. The creation of credit money should happen after the creation of government money.
2. The amount of money in the economy should exceed the amount of debt, with the difference representing the government’s initial creation of money.

Both these hypotheses are strongly contradicted by the data.

Testing the first hypothesis takes some sophisticated data analysis, which was done by two leading neoclassical economists in 1990.

If the hypothesis were true, changes in M0 should precede changes in M2.

Their empirical conclusion was just the opposite: rather than fiat money being created first and credit money following with a lag, the sequence was reversed: credit money was created first, and fiat money was then created about a year later:

“There is no evidence that either the monetary base or M1 leads the cycle, although some economists still believe this monetary myth. Both the monetary base and M1 series are generally procyclical and, if anything, the monetary base lags the cycle slightly."

Thus rather than credit money being created with a lag after government money, the data shows that credit money is created first, up to a year before there are changes in base money. This contradicts the money multiplier model of how credit and debt are created: rather than fiat money being needed to “seed” the credit creation process, credit is created first and then after that, base money changes.

Solid Evidence Credit Is Created First

Solid evidence that credit is created first and reserves later can be found by reviewing Fannie Mae’s and Freddie Mac’s Financial Problems, an article written July 15, 2008.
To make certain that the GSEs have adequate funds to cover potential losses, OFHEO (like all financial regulators) imposes capital requirements. At the end of 2007, the two GSEs had a $24.8 billion surplus over the regulatory capital requirement of $58.4 billion; they had a surplus of $50.8 billion over the risk-based capital requirement of $38.8 billion.

These amounts can be compared with the combined retained mortgages portfolios of $1.434 trillion and the $3.501 trillion in MBS that the GSEs guaranteed for a total of $4.934 trillion.

The regulatory capital surplus amounted to 0.50% of the $4.934 trillion and 1.03% of the risk-based capital surplus. If the GSEs were to face losses in excess of their income by these percentages, they would be forced to either reduce their capital requirements by selling mortgages and MBS from their portfolios or to raise new capital from investors.

The Secretary of the Treasury is authorized to lend the GSEs $2.25 billion each, but this is more a symbolic amount than a total solution. Based on Fannie Mae’s issuance of $1.588 trillion in short term debt in 2007, the $2.25 billion would have lasted less than 12.5 hours. Based on the $598.6 billion issued of short term debt that Freddie Mac issued in 2007, the $2.25 billion would have lasted just under 33 hours.
Fannie Mae's capital surplus was 0.50% on close to $5 trillion in assets. In other words, Fannie extended credit at will with virtually no reserves behind it. The Treasury provided reserves later, after Fannie and Freddie imploded.

Base Money Yet Again

Steve Saville points out that recent increase in base money has been many times greater than anything during the 1930s. Steve is correct as the following chart shows.



click on chart for sharper image

Note that the pattern leading up to the great depression and the pattern before the latest spike are nearly identical. There is no other similar pattern on the chart. And most certainly the recent spike as Saville points out is unprecedented.

Base money is indeed soaring. However, so is debt....

http://globaleconomicanalysis.blogspot.c....

Yeah, I've been talking about that for quite some time - the neoclassical economic theory is clearly wrong, as demonstrated by the actual data.

furthermore he says

Quote:

Bernanke would need to not merely double M0, but to increase it by a factor of, say, 25 from pre-intervention levels. That US$20 trillion truckload of greenbacks might enable Americans to repay, say, one quarter of outstanding debt with one half—thus reducing the debt to GDP ratio about 200% [/b] (roughly what it was during the DotCom bubble and, coincidentally, 1931)—and get back to some serious inflationary spending with the other (of course, in the context of a seriously depreciating currency). But with anything less than that, his attempts to reflate the American economy will sink in the ocean of debt created by America’s modern-day “Roving Cavaliers of Credit”.

Unfortunately attempting to do that would collapse the bond market instantaneously which is rather counter-productive, no?

Lera, could you please post a definition for MULT as the Fed uses it that states it is "how much work each buck does on each cycle through the economy"?

You are asking me for a definition that is transparent, from the Federal Reserve Board? You must be joking. Ben has been lying for years, and you are asking ME to find a definition where they are honest?

How about if we just ask him what the inevitable results of the V(x) chart are, in monetary terms. He will answer honestly, for sure...

"definitions for MULT and V(x) are equivalent."

Nope.

Consider MULT as what a dollar does on each cycle. It generates XXX worth of work.

Consider that V(x) is how many times that dollar cycles through the economy, on its journey to do that work.

So, for instance, right now V(x) is about 1.700 or so, and dropping.

MULT is .985

So the FED pumps a buck out, and this buck generates only .985 dollars of new money supply as it cycles through the economy. That's how much work it does.

During its time, this bucks cycles 1.700 times through the economy before it stops working.

"That's what the MULT<1 is revealing. That new money isn't doing what it should which is to work through the economy multiple times. It isn't. It is working through the economy < 1 time. "

You are assuming that I am referring to MULT in sentences 2 & 3. Wrong. When the MULT is <1, the money isn't working. It is supposed to cycle through the economy multiple times (V(x)) to perform work. If MULT is <1, then as it cycles thru it doesn't generate M0, it shrinks it. MULT reveals that money isn't working, as however many times it cycles thru, the work done (.985) is less than the value of the original buck pushed out by Ben.

BTW, the above 3 posts are further proof that FOMC FOLLOWS.
1st credit money is created.
THEN the FED creates M0 to catch up.

I am surprised no one is catching on to this. The FED Follows.

This is just so many words to explain:

(MULT) ^ (V(x))

Lera,

Since you haven't posted the definition used by the Fed for MULT, I'll do it for you. In fact, it's been posted in this thread.

http://research.stlouisfed.org/publicati....
"Adjusted Monetary Base: The sum of currency in circulation outside Federal Reserve Banks and the U.S. Treasury, deposits of depository financial institutions at Federal Reserve Banks, and an adjustment for the effects of changes in statutory reserve requirements on the quantity of base money held by depositories."

"M1: The sum of currency held outside the vaults of depository institutions,
Federal Reserve Banks, and the U.S. Treasury; travelers checks; and demand
and other checkable deposits issued by financial institutions (except demand
deposits due to the Treasury and depository institutions), minus cash items in
process of collection and Federal Reserve float."

http://research.stlouisfed.org/fred2/ser....
"The M1 multiplier is the ratio of M1 to the St. Louis Adjusted Monetary Base."

In short, MULT = M1/M0. No more, no less.

Not "how much work each buck does on each cycle through the economy". The massive drop in MULT is caused by a jump in M0 due to banks parking all the stimulus money at the Fed in the form of excess reserves.

New (?) data for St Lousi Adj Mon Base is:
2008-10-08 1014.661
2008-10-22 1174.110
2008-11-05 1264.992
2008-11-19 1506.540
2008-12-03 1502.879
2008-12-17 1689.632
2008-12-31 1728.115
2009-01-14 1773.862
2009-01-28 1728.868
2009-02-11 1546.686
2009-02-25 1611.397
2009-03-11 1561.210

It's supposedly above 1.0 again:

2008-12-03 1.025
2008-12-17 0.951
2008-12-31 0.944
2009-01-14 0.915
2009-01-28 0.885
2009-02-11 1.011
2009-02-25 0.957
2009-03-11 1.002
http://research.stlouisfed.org/fred2/ser....

Oh good - you already posted. What do you make of that? I'm not sure I'm buying this.

I haven't a clue except it is BARELY above 1.0, so it seems things are still off. So 1 trillion is injected, and one trillion two billion comes out. KInd of bad... Almost seems it might as well be below 1.0

Quote:

Oh good - you already posted. What do you make of that? I'm not sure I'm buying this.

lower high?

keep an eye out for lower lows?

Grf,

I will explain this to you. Simply put, they wouldn't measure the two and track MULT if it was not important. It is.

"M0 Adjusted Monetary Base: The sum of currency in circulation outside Federal Reserve Banks and the U.S. Treasury, deposits of depository financial institutions at Federal Reserve Banks, and an adjustment for the effects of changes in statutory reserve requirements on the quantity of base money held by depositories."

Note that M0 includes deposits by banks at the Federal Reserve and adjustments based upon the cash those banks hold.

"M1: The sum of currency held outside the vaults of depository institutions,
Federal Reserve Banks, and the U.S. Treasury; travelers checks; and demand
and other checkable deposits issued by financial institutions (except demand
deposits due to the Treasury and depository institutions), minus cash items in
process of collection and Federal Reserve float."

Note that M1 does NOT include deposits banks make at the FR, nor does it include money they have in their vaults. M1 excludes money the banks are sitting on - either in their vault, or the Fed's vault.

The Fed's job is to issue money out into the economy. Sometimes as actual FRN's, sometimes figures on a spreadsheet. It begins its journey as M0:

"The sum of currency in circulation outside Federal Reserve Banks and the U.S. Treasury, deposits of depository financial institutions at Federal Reserve Banks..."

The job of this money is to then move out into the economy, and increase the size of the money supply. This increase in size causes the inflation of the money supply (this is not the CPI/Price increase 'inflation'), a good thing when the machinery is humming along smoothly. The money grows in size and number - the figure actually gets larger. This is by design, intended, and necessary. Fractional reserve banking based on money as debt and expanding credit require it. Money moves from M0 to M1, and M1>M0. Good times.

This is the "Work" I refer to. The "Job" of money in M0 is to do "work" in the economy, get larger, return more than itself as it moves from M0 to M1. The MULT is the "Work" that each M0 dollar is doing on its trip, its journey, its cycle from M0 to M1. If it does < 1 amount of "Work", then we have a problem. Ben issues money, it flows into M0, but then it doesn't grow as it moves on to M1. That is bad.

You can see where it goes by reading the definitions of M0 and M1. The banks are either keeping it in their vaults, or they are depositing it with the Federal Reserve. So Ben issues out money to the banks as M0, they get the money and immediately put it on deposit at the Fed. It doesn't make it out to M1 as it should, because it isn't in:

"...travelers checks; and demand and other checkable deposits issued by financial institutions...".

It is on deposit, earning interest for the banks, sitting at the Federal Reserve.

It is NOT in a demand or checking account or a traveler's check.

IOW, the designed intention, purpose, The Job or Work that money is intended to do, is not getting done. Ben Bernanke issues money and it returns right back to him or sits in the banks' vaults. Thus the money isn't working as it should, it is not doing its job.

So your statement self-contradicts:

"Not "how much work each buck does on each cycle through the economy". The massive drop in MULT is caused by a jump in M0 due to banks parking all the stimulus money at the Fed in the form of excess reserves."

It is indeed how much work it does. Your statement (...due to banks parking all the stimulus money...) above accurately describes money at rest, doing no "Work". If the banks park all money BB issues as M0 and stuff it into the Fed Reserve, it isn't flowing out into the economy, it isn't doing the work that each buck is intended to do. It is just sitting there.

Take it to the extreme. Ben issues $100T in new M0 credit/money/FRN's. He gives it to the banks. The banks then deposit all of it back with Ben, earning interest.

What happens to the economy if EVERY single dollar of that $100T never makes it into circulation but is hoarded by banks, placed on deposit at the Fed?

The money does no work. It sits there, idle.

M0 goes to $100T, M1 stays at $400B

MULT M1/M0 --> 0.00

"The M1 multiplier is the ratio of M1 to the St. Louis Adjusted Monetary Base."

Yep, and it's a harbinger of doom if it sticks around 1.000 or less. In fact less that 1.600 is bad news. It shows potential deflation, it strongly implies that V(x) --> 0.00 (and GDP/MZM is indeed dropping fast), and heralds and Icelandic style collapse, albeit over a longer timeframe.

"In short, MULT = M1/M0. No more, no less."

Incorrect. It reveals if money the Fed Reserve issues into the economy (first it goes to banks) is being circulated or not. Currently, the money is being circulated, barely. Just a bit of it is making its way out - 0.2% of it is being circulated (1.002). Most of it is not being circulated, it is being hoarded by the banks.

It reveals if money, a given dollar, is doing any work on its journey from M0 to M1. Currently MULT reveals that dollars are not working as intended.

This is "how much work each buck does on each cycle through the economy".

The cycle from M0 to M1 is one such cycle, and the money is not moving from one level (M0) to the next (M1).

Thus MULT reveals how much work a given buck/dollar does on each cycle (its cycle from M0 to M1) through the economy.

One thing you are correct about is my equation that:

MULT ^ V(x) is incorrect.

It is more like:

MULT.1 ^ Z = V(x)

Where 'Z' is the number of times a buck moves through the economy, resulting in it moving from M0 to M1, M2 and finally MZM. V(x) being Velocity, or more accurately the resulting multiplier for the entire monetary system. MULT is just the MULT for the transition from M0 to M1. MULT.1 is the multiplier for the entire system, not MULT for MO as it moves to M1. In fact there may be different MULT.x's for each cycle of the dollar, and Z may NOT even be the obvious number of cycles obtained by just counting the level transitions between M0, M1, M2 and MZM.

Just thinking out loud:

1.002 ^ Z = 1.600 (current GDP/MZM or V(x) estimate from http://research.stlouisfed.org/publicati....

Ln(1.002 ^ Z) = Ln(1.600)
Z(Ln(1.002) = Ln(1.600)
Z = Ln(1.600) / Ln(1.002)
Z = 235.234

Check
1.002 ^ 235 = 1.599

Resultant could also be the Returns of New US Debt on GDP, which is now 1.06. Then Z = 29.16. Is Z the number of times a dollar circulates before it 'dies' or produces a dollar of new GDP? Is MULT in this scenario valid? I don't know.

This needs fine tuning, and I am not certain of its accuracy or applicability. But it seems reasonable at this point.