Money Multiplier

Dave Cantey 2013 10-30-13

Today was Fed Day, which corresponds to the Federal Reserves official quarterly meeting after which they announce Fed Policy decisions. Today they announced, No change in QE, which means that they will continue printing $85 billion per month (at the rate of $1 trillion per year). This morning, employment data was weak despite all this money printing. Many people are asking why the Feds QE (Quantitative Easing) programs are not working in the way intended. Or are they? The Feds stated purpose for QE is to stimulate the economy, and thereby, increase growth and employment, to the benefit of Main Street. By this criterion, the Feds QE programs have had truly marginal success. On the other hand, if the real object is to prop up financial assets (principally stock prices stocks are up 24% so far this year) and the big banks (who still have really rotten balance sheets), then the QE programs have been wildly successful, to the benefit of Wall Street, and the top 10% who owns Wall Street. Lets explore this. In the financial world, there is something called the Money Multiplier (aka, the velocity of money), which measures how many times a dollar turns over as it moves throughout the economy. To understand this, consider the school teacher, who receives a salary, then buys groceries from the grocer, who buys canned peas from the canner, who bought the peas from a farmer, who bought seed... These dollars multiplied numerous times as they moved from the teacher to the farmer as they turned over and over through the economy. For the Feds QE programs to be effective, the dollars the Fed prints must likewise turnover numerous times throughout the economy in order to stimulate growth and employment. But this has not happened, as is apparent from the chart below which presents the money multiplier over the time since the Federal Reserve was created back in 1913. What is going on here?

As we can see, the Money Multiplier has actually decelerated to a record low, which means that all the money the Fed is printing is actually just sitting at the big banks who receive this money. What do the banks do with this money? They buy stocks though their proprietary trading departments, which accounts for the stock market increase this year. Today, there are fewer people holding stocks than at any time during the past twenty years, therefore, who benefits? Answer: First, the big banks, whose profits are way up, and second, the top 1%, who own the big banks and stocks, and their cousins in the top 10%. So, who is the Fed actually serving? Main Street or Wall Street? Clearly, the Feds actions are actually only benefiting Wall Street, and the top 10%, while Main Street, and the middle class, continues to stagnate.