To: Little Joe who wrote (391576 ) 11/6/2010 10:59:52 AM From: rich evans 3 Recommendations Read Replies (3) | Respond to Perception is the reason and the possibility that the huge monetary base which the Fed has/is creating will be turned into the money supply if the banks start lending. A normal money multiplier even during the depression was about 2-3. The St. Louis Fed site shows it to be about .8 now. So it is potential for M1-M2 to expand causing inflation. But Bernanke say and thinks he can prevent this by selling bonds/notes when the time comes thus reducing the monetary base and by raising interest rates and doing reverse repos. The arguement even at the Fed is can they control if the banks start loaning , thus adding to their deposits. I think they can as the primary dealers(banks) under their agreements with the Fed have to buy the bonds the Fed wants to sell as well as the Bonds the Treasury wants to sell. However, price is another matter. Currency plus deposits = money supply. Currency plus reserves=monetary base. Money supply divided by monetary base = money multiplier. I don't think the banks will start loaning thus creating deposits because they have no one to loan to who is safe and qualifies with good collateral. They have lots of loan losses to still provide and reserve for and they are capital constrained and must shrink their balance sheet(deposits) , not expand it. The big companies have lots of cash. Everyone has lost their home equity so cannot put up their home for collateral to start a business. So the potential for the money supply to increase out of control is not there. We are in for a long winter economically. The Payroll report showed 151,000 job increase for Oct. But if you go to the BLS web site , you will see that the household survey which is small business, independent contractors, illegals, underthe table stuff-- had a decrease of -350,000 employment and the adjusted household employment was -535,000 employment. Construction is the key and there is none.
