Wednesday, April 27, 2011

Money Multiplier

For those whose eyes glaze over when topics such as money supply are discussed here it is quickie version as best I can do. The multiplier shows the increase in money supply for each $1 increase in reserves or how much bang you get for each dollar added to the system. I haven't commented on the multiplier in some time.

Below is an updated look at the long term M1 Money multiplier chart courtesy of the St. Louis Fed.

The above chart gives a good overall view. Now lets take a closer look with a 5 year chart which is below.

It has been well chronicled that the decline in the multiplier corresponds to the expansion or rise in reserves held of the Fed's balance sheet. You can click here and see the chart of this expansion via the St. Louis Fed website, suffice to say it corresponds counter to the above chart.

According to the St. Louis Fed, the multiplier number as of April 6, 2011, is 0.764. This means that for every $1 added to the monetary base money supply increases 76.4 cents. Something is different. Forget wrong or right for now.

Banks are building up reserves instead of lending.
Well now, that's a very good question. It would be awfully strange for a banker to not want to lend and make lots of money, preserve market share dump that college sweetheart who raised his kids and get that trophy wife for the charity circuit. Yes, awfully strange, that is, if the economy was truly recovering and real estate was as strong as the shills like Mark Zandi and Allan Blinder tell us it is.

Have another look at the above chart again.

Notice the shaded area on the chart represents recession. So after a short reprieve bounce which rallied to the lows of that shaded recession, it has now collapsed again and has taken out the prior lows. Nothing has changed. So are things really better as the crumb chasing dependent shills on CNBC would have you believe? Mark Zandi and Allan Blinder (what a fitting last name) put out a paper explaining the great recession was brought to an end. Hey guys, you really think we're out of it huh? You really believe that? You looked at this chart? If you're correct shouldn't the line on the chart have reversed and gone the other way? Or should I simply take your word for it and disbelieve my lying eyes?

As an aside I'll be keeping an eye on you guys just in case you want to pull a Mishkin and rename your paper at a later date. Oh and another thing... if you received compensation for your paper ala Mishkin did via the Icelandic chamber of commerce, I would suggest you disclose the details ASAP or you might just get a spot on my All-Imbecile Team.

Anyhow back to the multiplier.

One might probably want to check with a real professional ponzi operator like Greenspan, Bernanke or Madoff but in my opinion, every successful ponzi requires more money coming in than going out. So my final question is.... can the Great Ponzi the Fed has created continue with a multiplier shrinking let alone not keeping pace with equilibrium at 1?

Good speculating to you all and please remember to never forget that "an investor is a speculator who made a mistake and will not admit it".

Open Positions:
Long 1 unit Direxion Large Cap 3X Bear ticker BGZ @ $96.70
Long 2 units Direxion Small Cap 3X Bear ticker TZA @ $60.30
Long 1 unit Direxion Emerging Mkts 3X Bear ticker EDZ @ $60.50
Long 2 units Direxion Financial 3X Bear ticker FAZ @ $98.25
Long 2 units Ultrashort Xinhua China ticker FXP @ $42.45
Long 1 unit Ultrashort Real Estate ticker SRS @ $49.10
Long 2 units Direxion Tech 3X Bear ticker TYP @ $52.60
Short 1 unit Darden ticker DRI @ $49.51 stop @ $49.71

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