M1 Money Multiplier Still in the Tank (Deflation Still in Control)

M1 Money Multiplier Still in the Tank (Deflation Still in Control)

Despite the Fed’s money printing (errr, quantitative easing) efforts, inflation is not in the cards yet, according to the M1 Money Multiplier.  MULT, as it’s affectionately called, still sits below the magic 1.0 level – and as long as it flounders there, we are unlikely to see inflation, no matter what the Fed does.  Because, as you know dear reader, any number multiplied by a number less than one actually DECREASES!

The gradual downtrend of the multiplier since 1980 has been a one-way street, punctuated by a sharp breakdown in 2008.  The M1 Money Multiplier has now fallen, and it can’t get up:

M1 Money Multiplier Since 1980

The 20+ year disinflationary trend in America officially turned into outright deflation in 2008.  And when I say deflation, I am defining deflation as Mish Shedlock does: a net contraction of money supply and credit, with credit marked-to-market.

As long as the M1 Money Multiplier is below 1.0, the Fed is “pushing on a string” – a la Japan since 1990.  The Fed cannot create inflation if our fractional reserve banking system is not willing to lend.  There is nothing to multiply!

This reminds me of the piece Professor Antal E. Fekete of the San Francisco School of Economics published last year about the declining marginal productivity of debt, in which he concluded:

Bernanke can create all the money he wants and more, but he cannot make it flow uphill.

He makes a compelling case that Bernanke is watching the “wrong ratio”:

The key to understanding the problem is the marginal productivity of debt, a concept curiously missing from the vocabulary of mainstream economics.

Similar to the idea that additional money in the system is worthless if it’s not moving anywhere, additional debt is also worthless – or even less than worthless – if the marginal productivity of debt is below zero.

You can read Prof. Fekete’s entire piece here.

Hat tip to Daily Wealth for including the M1 Money Multiplier in a recent article about inflation/deflation.