Tuesday, September 28, 2010

Fed finally admits what MMTers have been saying for a long time: There is no "money multiplier."

A second issue involves the effect of the large volume of reserves created as we buy assets. [. . .] The huge quantity of bank reserves that were created has been seen largely as a byproduct of the purchases that would be unlikely to have a significant independent effect on financial markets and the economy. This view is not consistent with the simple models in many textbooks or the monetarist tradition in monetary policy, which emphasizes a line of causation from reserves to the money supply to economic activity and inflation. . . . [W]e will need to watch and study this channel carefully.

Donald L. Kohn, Vice Chairman of the Federal Reserve Board, March 24, 2010

Fed finally admits what MMT'ers have been saying for a long time. The "money multiplier" is fiction, which is why all their easing efforts have had zero effect on the economy, bank lending and inflation.

Here is the link to the Fed's paper. Read here.


Tom Hickey said...

Duh. About time they noticed that the theory wasn't working.

It's bad enough that we have a bunch of unelected and unaccountable technocrats setting the price of money in the country (command system), but they don't even know what they are doing.

Maybe they are reading some MMT blogs lately, but I don't put a lot of hope in it. Their reason for being is to coddle the financial sector. Central bank "independence" is a sham.

Matt Franko said...


Yet the media is still reporting this week the Fed is considering more QE....thats all CNBC is focusing on this week...sad.

Perhaps another future Fed ignorant policy:

I would point out here that total loans and leases in bank credit is sitting at 6.8T, while Treasuries held by the public is heading towards 10T, I dont think this has ever been the case in history...public debt well in excess of bank credit.

when and if (and I think this is a big if at this point of course) the Fed starts to tighten by raising rates, there will be more fiscal transfer to the non-govt sector than perhaps a tightening effect on the private credit outstanding.

this may be like a case of 'unintended acceleration' where a driver thinks they are pressing the brakes but have hit the accelerator instead and just keep pressing harder. The increase in policy rates will greatly increase fiscal transfers as new Treasury securities are issued/rolled over to the new higher rate.

I guaranty they wont see it that way if it comes to increasing the policy rates eventually.


mike norman said...

And Bill Gross is talking about how Fed policymakers will ultimately "inflate us out" of the current crisis.

mike norman said...


Very good point! How ironic...RAISING interest rates now would absolutely produce more inflation via the interest/income channel. And the "know-nothings" keep talking about how they need to raise rates to stave off an incipient inflation. Beautiful observation, Matt!!! Simply beautiful. You don't get this anywhere else.

mike norman said...

We should all pray for higher rates!!

Райчо Марков said...

"...this may be like a case of 'unintended acceleration' where a driver thinks they are pressing the brakes but have hit the accelerator instead and just keep pressing harder."

Matt, but don't we really need that acceleration now with all the unemployed people? The tricky part would be to stop accelerating on time when full employment is achieved.

Matt Franko said...


Yes, I agree that more fiscal is surely needed now but of course the Fed doesnt see it that way...they could do the right thing for the wrong reason...but again I dont see them raising in the immediate future, but if this China thing escalates and perhaps more middle east conflict, then the numbers that the Fed watches for 'inflation' may give them no choice but to raise, then when they raise, it may be stimulative as interest income and COLAs for the non-discretionary items will add NFAs to the non-govt sector that may increase AD, then so on and on.. that would be a bullish scenario for the economy (and jobs)..if fiscal transfers start to rise from due to these factors...

My concern would be for seniors who have perhaps been buying bonds further out the curve (to make up for yield lost on the short end in this ZIRP we've been in) who would get crushed if the Fed went crazy on the interest rates again a la 1981.

I wish I knew more about the 1981 situation and what the Fed was seeing that they thought it necessary to raise all the way to 20%....but alas back then instead of listening to the Australian Bill Mitchell, I was listening to the Australian Angus and Malcolm Young!

I talked to a friend the other day who said he covered a T-bond short back in the 1981 time frame at 54.... yikes!