Chart of the Day: M1 Money Multiplier

M1 is the narrowest definition of money. It includes currency and coins, traveller’s checks, and checking accounts (so-called demand deposits).  The chart below from the St. Louis Fed shows the relationship between base money that the Fed controls and M1 (hat tip Dan).

Since the bull market in equities and fixed income began in the early 1980s, the M1 money multiplier has steadily declined for a number of reasons. But when the Lehman panic came, the multiplier plummeted as the Fed expanded its balance sheet. Traditionally, economics students are taught that injecting base money into the system and allowing reserves to build up as the Fed has done is inflationary because it increases money and credit. However, what is clear from this chart is that there is not a very good correlation between base money and M1. To date, post QE-inflation has been acute not in credit and consumer prices, but in prices of assets like junk bonds, pre-IPO social media companies and commodities.

Economicsfinance chartsfinancial historyinflationmonetary policymoneymoney multipliermoney velocityquantitative easing