The M1 Money Multiplier: Ratio of “bank money” to “base money”

From The Federal Reserve Bank of St. Louis:

“Base money” is money created out of nothing by the Federal Reserve–currency plus the funds banks have on deposit at the Federal Reserve.

“Bank money” is currency in circulation plus total customer funds on deposit in demand accounts plus traveler’s cheques.

According to both monetarist and Keynesian theory, the M1 multiplier (bank money divided by base money) should increase as base money increases (as the Fed creates new USD out of nothing.) In view of the unprecedented expansing of base money by the Fed in recent years, the chart emphatically falsifies the theory.

All the Fed’s money creation, and all the Fed’s men, can’t turn social mood positive again:

When social mood is manic, people are willing to loan, to borrow and to assume risk. In such an environment, money pumping gives the illusion of working, because the psychology of the times synergistically multiplies the effect of an increased supply of money.

But when social mood turns negative, people become risk averse, and relatively unwilling to loan or borrow. In that environment, not only does increasing the money supply not work, the huge debts and massive waste of resources on unwise ventures that occurred during the preceding mania not only provide manifest justification to the new risk aversion, they put the whole financial system at risk of catastrophic failure,


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