Wednesday, July 8, 2009

Money Multiplier

In a guest post this morning on CFR's Follow the Money, Mark Dow provides a chart of the money multiplier and the Federal Reserve balance sheet. The data comes from a Bloomberg chart of the day, and he notes some issues with confirming it. While I don't have the Bloomberg data, public data sets from the St. Louis Federal Reserve's FRED database confirm the step drop in the M2 money multiplier.

Source: Author's caclulations, St. Louis Fed FRED data base, M2 (M2SL series) and Total Reserves

The money multiplier begins a step decent in September of last year, just as Lehman Brothers failed,AIG had to be bailed out, and TARP passed. The FRED data shows a 95 percent decline in the money multiplier since August of last year.
This decline creates major problems for the stimulus bill as each dollar spend produces less benefit. I wrote about Dr. Larry Summers' belief in the money multiplier and it's ability to increase the size of the stimulus back in January.

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