This is the "infinite multiplier" that Doug Noland talks about:
prudentbear.com
Let’s now look at a bank’s role as intermediary. When you place your money
into a bank deposit, the bank will take your funds and make loans. The
borrower, now with "money" in his account, will have access to your funds,
hence acquiring purchasing power. At the same time, you, as holder of a
bank deposit, maintain your purchasing power. In this example it should be
clear that bank lending creates credit and additional money supply. This, of
course, is the traditional mechanism for money creation, or the "money
multiplier." The key difference between the intermediation performed by an
insurance company and that of a bank is that a bank deposit is "money,"
functioning both as a medium of exchange and a perceived store of value.
As opposed to insurance premiums, bank deposits afford its holder the
means to buy goods, jump on a hot stock or use as a down payment on a
new home. Banks, having the ability to create money out of thin air, have at
times throughout history lent excessively and recklessly, creating too much
additional purchasing power only to fuel manic booms that end with the
inevitable devastating busts. To guard against such occurrences,
governments have for some time closely regulated bank lending, using such
measures such as reserve and capital requirements. Or at least they used to.
Let’s now look at the nature of intermediation performed by money market
funds. Let’s say someone places money into a money market fund account.
The money market fund then performs its function as an intermediary,
lending these funds into the financial markets. Does this lending create
additional money - additional purchasing power? To help answer this
question, let’s ponder the following: Is the intermediation function of a
money market fund similar to that of our insurance company example, or is it
more like a bank? Importantly, it is the nature of the financial liability
created by the initial deposit into the intermediary that is a critical factor to
be considered. So, with this in mind, does a deposit into a money market
fund create a liability to the depositor similar to an insurance policy - an
instrument that does not function as a medium of exchange? If this were the
case, additional money and purchasing power would not be created through
the intermediation process.
On the other hand, does the deposit into the money market fund instead
create a financial asset with "money" characteristics similar to a bank
deposit? Or, said another way, does the depositor maintain a financial asset
that functions as money, securing purchasing power? Well, it should be
obvious that money market fund deposits have the economic functionality of
bank deposits and, thus, should today be considered "money." Clearly, when
a person makes a deposit into a money market fund, purchasing power is
maintained in the form of fund deposit, while additional purchasing power is
created for the borrower when these funds are subsequently lent by the
money fund, just like bank lending. The Federal Reserve agrees that money
market fund assets are money, as it includes retail money market fund assets
in M2 money supply and institutional money funds in M3. And in an effort to
develop the most meaningful measure of money supply after momentous
changes within the financial system, William Poole, president of the St. Louis
Federal Reserve Bank, developed MZM, "Money at Zero Maturity" that
specifically includes money market fund assets.
Undeniably, money market funds provide "intermediation" similar to banks,
creating additional purchasing power and "money" through the act of taking
deposits and lending these funds into the marketplace. At the same time,
money market funds have some striking and powerful advantages in this
process not traditionally available to banks. For one, they are not burdened
by either reserve or capital requirements. This is precisely why we make the
argument that the mechanism of money market funds taking deposits and
lending into the capital markets provides an "infinite multiplier" for money
and credit creation. Unlimited additional money market liabilities can be
created as long as deposits are made into money market funds and these
deposits are lent and re-circulated back into additional money market
deposits. |
