The M1 Money Multiplier

Your Captain is a monetarist and (admittedly) has in his mental mind a simple model or "concept" of what role money plays in an economy. Ultimately money does not matter in that it is the amount of "stuff" we produce in a nation that determines its wealth. Sure, tinkering with the money supply can have an effect on the economy, largely a negative one, by distorting prices, triggering a misallocation of resources, and sending us into a recession. But if the government were to just keep the money supply in line with RGDP growth, inflation should be 0% (which brings up a question the Captain has had for a while "Why doesn't the Fed just aim for 0% inflation?").

But if you want to believe in Keynesianism and Santa Claus and the Boogeyman, you can study "multiplier effects."



I find the chart interesting on two accounts. One, the general decline in the M1 money multiplier (suggesting electronic payments are taking over physical cash transactions) and two the cliff during this last recession. It is here I believe is one of the reasons why the stimulus package has failed and is a vital flaw in Keynesian economics. When you mortgage the future of the country to the point of insolvency, people tend to close up their wallets. Therefore the more you "prime the pump" at the expense of mortgaging the future, the more people tighten their wallets in fear of worse economic times ahead, negating any effects of the stimulus.

Ultimately though what this teaches us is that Keynesian intervention (or any government intervention) into an economy is simply social engineering. As the US has aged, it's gone from a people telling the government what they want it to do (for better or worse) to a government telling the people what they are going to do (for worse). It won't be until the people who head up the government realize they do not control the $14 trillion beast that is the US economy.