Money Multiplier – A Red Flag

Here in this post I give an update to the money multiplier proxy, which helps us get an understanding where prices may go into the future. 

The more money moves, the more money is being multiplied – which means more of it is created. This ultimately puts pressure in inflation, which impacts all markets. The reverse is also true: a slowing down of the multiplier means money creation is slowing. In a debt-ridden market that we are currently witnessing – particularly in equity markets, a slowing down of the money multiplier is not particularly sanguine. 

You must remember that higher prices as measured by the popular CPI will put pressure on the FRB to hike interest rates. This would lead to higher interest costs, which would not be great for the housing market or government finances.

As we see below, the money multiplier continues to slow down, the trend is obvious. This means that if this trend continues we should expect some meaningful correction (minimum 10-15% drop) in equity prices. When? I have no idea, but probably sometime before year-end 2021.   

Source: https://www.federalreserve.gov/releases/h6/current/default.htm