Fractional Money Multipliers
Money multipliers – the stock of money divided by a measure of base money (generally reserves plus currency in circulation) – are dwindling to fractions of what they used to be. FT Alphaville draws our attention to this fact on the Euro area (EA) using SocGen’s analysis. The money multiplier is a representation of how much credit is leaving the banking system via lending and growth (or inflation) enhancing monetary activities.
As FT Alphaville points out, the EA M3 multiplier is just over 3/4 its average 2007-2008 level, 7.67 vs 10.
But this is global! The US M2 money multiplier is a little over 2/5 the size of its average 2007-2008 level, 4.1 vs. 9.3. By this simple measure, I’d say that the US is in worse shape than is the EA.
Of note, my visual is a bit different from that in FT Alphaville. Specifically, I don’t agree with SocGen’s estimates that the EA money multiplier drops in December to roughly 6. Given that December 2011 EA base money has been published, a 6.2 M3 multiplier implies that M3 dropped by 15% in 1 month. That’s unlikely.
To my readers: There’s a 92% probability that I’ll be serving on a grand jury for the next three months. Since I’ll need to keep up with all matters EA, I’ll probably be blogging at a higher frequency and in less depth (like this one).
Rebecca Wilder
Source data: The Federal Reserve publishes money supply and monetary base data, which can be easily downloaded at the St. Louis Fred database. ECB data can be found here and here.
2 Responses to “Fractional Money Multipliers”
rjsigmund • January 4th, 2012 at 12:23 pm
how did you come up with the exact "92%" probabilty?
rwilder3 • January 4th, 2012 at 3:23 pm
If it were random. I have a 2/25 chance of getting out of it. I got out of it – had a very good excuse. I guess that it was not random after all. Rebecca
