Why Interest Rates Will Go Down| M2-M1 ; M2/MonetaryBase
I hear the saying "Money printer go brrrrrr" often but, I think people have the wrong idea. When the Bank "prints" money it can only buy assets/securities or in other words "provides liquidity for existing debt". They are not creating new debt. Do you see the difference? One leads to deflation the latter leads to inflation. THE ONLY WAY THAT MONEY CAN BE USED IS IF IT IS LOANED OUT BY BANKS. This money pretty much just adds to the reserves which is included in the calculation for MonetaryBase. We see from M2-M1, Banks are not Lending. We see from M2/MonetaryBase that the so called money that was "printed" is not moving through the economy (ex. Keisha takes out a loan to start a lemonade business, she pays a carpenter to build a stand, a farmer for lemons and sugar, etc..; the carpenter and farmer bought see money in their account from Keisha's loan).
Background:
I will link previous ideas that explain M1 and M2. I want to focus on the very interesting relationship with M2/MonetaryBase. The Monetary Base can be defined as currency held by the public and in vaults of depository institutions plus their reserves. In other words pretty much all the money in every ledger.
M2-M1 estimates Bank Lending and M2/MonetaryBase estimates the money multiplier.
Analysis
We see steep declines in both these metrics indicating that financial conditions are tight. Banks still cannot afford the risk-premium to lend money out. The Banks realize that the money they are lending out does not have a high probability of generating income for them when, their balance sheets are already operating on low margins. The Banks are forcing the Fed's hand to lower rates even lower.
Background:
I will link previous ideas that explain M1 and M2. I want to focus on the very interesting relationship with M2/MonetaryBase. The Monetary Base can be defined as currency held by the public and in vaults of depository institutions plus their reserves. In other words pretty much all the money in every ledger.
M2-M1 estimates Bank Lending and M2/MonetaryBase estimates the money multiplier.
Analysis
We see steep declines in both these metrics indicating that financial conditions are tight. Banks still cannot afford the risk-premium to lend money out. The Banks realize that the money they are lending out does not have a high probability of generating income for them when, their balance sheets are already operating on low margins. The Banks are forcing the Fed's hand to lower rates even lower.
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