M1 Money Multiplier Rolls Over – Again – Well South of 1.0

M1 Money Multiplier Rolls Over – Again – Well South of 1.0

DailyWealth’s Dr. David Efrig likes to keep an eye on the M1 multiplier (as do I) as an indicator of whether or not inflation is in control:

The M1 money multiplier monitors the amount of money individuals and businesses have to spend on consumption or investment… relative to the money available for banks to lend.

When the ratio is less than “1,” it implies banks aren’t lending as much as they could and/or folks have less to spend on things that would increase economic activity. A reading greater than 1 suggests individuals and businesses have money in reserve that is primed to flow into the economy… like water building behind a dam.

As you can see from the chart below, the reservoir is low. Money is still not moving through the economy swiftly or broadly among sectors. You can take all the dire warnings of inflation and chuck them in the garbage right now.

Until this indicator ticks above 1, inflation is NOT a problem… or even a worry in the near term.

M1 Money Multiplier 2011

Source: DailyWealth

In the broader economy, the only significant rising prices I see on Main Street are gas prices, and to a lesser degree, coffee.  While input costs have been rising at a fast clip, it appears, at least to me, that producers have no pricing power with the end consumer.  So, they are being forced to “eat” these higher input costs, and sacrifice profit margin.

(Cue Jim Rogers: “I don’t know where Brett shops, but…”)

Gold and silver did prove me wrong, however, to the extent that deflation would stay in total control.  With gold at an all-time high, and silver at a 30-year high, it appears that the “hot money” from QE1 and QE2 have at least made their presence felt in most asset classes, with the notable exception of housing.

  • “..inflation is NOT a problem”.

    That IS incorrect. Inflation is already here. Running a business, everything I purchase has gone up in price, sometimes as much as 40%. Add to that fuel surcharges of about 25% that FedEx and and other shippers are charging.

    Have you seen the price of food lately or do you eat? Note that smaller packages of food for the same price IS inflation.

    Many business owners I am talking to state that they are paying much more for the materials they buy but are trying to keep their prices down waiting for the competition to raise theirs. Eventually the dam bursts and prices all around go up.

    There is no doubt, inflation is high now.

  • Brett

    Ron, thanks very much for weighing in.

    I run a software company, so am likely biased by input costs that are in a deflationary megatrend.

    Food has been alright for us (other than my morning coffee) – we buy a lot of local California produce though. Not as affected by the higher grain prices.

About Author


Hi, I’m Brett Owens – and I’m a financial junkie. My “problem” started incollege, when I got a little dose of the stock market – man, was I hooked…in no time, I was reading the Wall Street Journal religously.

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