The chart below shows what the Fed is up against in trying to resuscitate a U.S. economy already dangerously glutted with debt. The dip at the right edge reflects a decline in money velocity to multiyear lows. What it implies is that the “multiplier effect” of fresh credit is not working with nearly as much vigor as it did in recent years. When money velocity is high, and customers are – so to speak – queuing at the banks’ doors to borrow, it is possible for a single dollar of new deposits to engender dozens of new credit dollars throughout the banking system. Because banks are required to hold only a small fraction of each newly deposited dollar in reserve, the rest of it is available to be reloaned and further multiplied by bankers and their clients.
But this magical ability to create money from thin air only works to the extent there are borrowers eager to take advantage of it.Let borrowers become the slightest bit skittish, though, and money velocity plunges in the way the chart shows. The result is that lenders find themselves pushing on a string, unable to get customers to borrow.
We read that the Fed has gone all out to stimulate the economy, but the effect will be muted at best if consumers are reluctant to binge on credit once again. Far from binging, though, and with home prices falling across the U.S., we think consumers at this point are frightened at the very idea of going deeper into hock. As a result, they can be expected to ramp up savings in the coming months at an extraordinary rate, causing money velocity to fall to levels not seen in many years. What the Fed will do then is anybody’s guess, but in theory at least, if they can’t get consumers to step up their borrowing, they may simply have to give the money away.
The content on this site is protected
by U.S. and international copyright laws and is the property of GoldSeek.com
and/or the providers of the content under license. By "content" we mean any
information, mode of expression, or other materials and services found on GoldSeek.com.
This includes editorials, news, our writings, graphics, and any and all other
features found on the site. Please contact
us for any further information.
Live GoldSeek Visitor Map | Disclaimer
The views contained here may not represent the views of GoldSeek.com, Gold Seek LLC, its affiliates or advertisers. GoldSeek.com, Gold Seek LLC makes no representation, warranty or guarantee as to the accuracy
or completeness of the information (including news, editorials, prices, statistics,
analyses and the like) provided through its service. Any copying, reproduction
and/or redistribution of any of the documents, data, content or materials contained
on or within this website, without the express written consent of GoldSeek.com, Gold Seek LLC,
is strictly prohibited. In no event shall GoldSeek.com, Gold Seek LLC or its affiliates be
liable to any person for any decision made or action taken in reliance upon
the information provided herein.