Friday, June 12, 2009

Fear on Display

Hat tip to Gary North for the following graphic from our friends at the Federal Reserve, which shows the "money multiplier" in recent decades. One interpretation is that it shows the level of fear at the banks. When they are more optimistic, they are more inclined to lending their reserves. When they are not, well, you see the result:

Mr. North strongly believes that inflation is inevitable and definitely rejects the idea that deflation can take hold for any sustained period of time (my interpretation of reading his Reality Check newsletter over the past four or five years). This chart above screams out one key item missing in that analysis (shared by many other bright minds, and Gary is very sharp) - that social mood drives all before it. Mood makes markets. News tells stories we make up to explain mood and its effects. What you are seeing is nothing less than fractional reserve banking choking itself to death as optimism has shifted to fear.

Fractional reserve banking thrived in a multi-century era of unprecedented optimism. We are in the early stages of an era that will correct that optimism and fractional reserve banking could well be an early casualty of that shift.

2 comments:

Greg B said...

Thanks Mike. Although the recent vertical drop in the money multiplier is very dramatic, I think I may be missing something in reading the graph through a socionomics lens...

I would have expected to see some echo (direct or inversely) of the rise in mood from 1990 to 2000, then a fall from 2000 to 2004, a rise from 2004 to late 2008, and another fall from then to now. Like this: /\/\

But the graph sort of flat from 1990 to 1995, then falls from 1995 to 2000, then is flat again from 2000 to 2008, then falls off a cliff.

Or does perhaps the graph have more to do ith the fading away of inflation and the onset of deflation?

Flagg707 said...

Hmmm. Greg, you are on to something there. I was fixated on the recent plunge.

My personal assumption is that the decline over the past decade or so is reflective of the debt bubble getting larger and larger - and illustrating how the "bang for your buck" for debt declined as the years went on and the debt load grew larger. Like a cocaine fix, it took more and more junk to get that high - until the inevitable crash.

Worth looking into more, I'll admit.