The Monetary Base Is Irrelevant

The St. Louis Federal Reserve bank tweeted earlier today “Chart: Adjusted monetary base rises nearly $43 billion to $2.694 trillion.” This is interesting but basically irrelevant as the chart above shows.

What you see is the evolution of two things over the past 25 years. One is the monetary base, and the other is the monetary base once you strip “excess reserves” (money banks are keeping parked at the Fed over and above what regulations require them to keep) out of data. As you can see, for most of the period there’s absolutely no divergence between the trends. Then in 2008, Ben Bernanke decided that the Fed should start paying interest on excess reserves and also embarked on a large increase in the monetary base. The chart makes clear, however, that relative to trend all of this money creation has just gone into excess reserves.

This is wonky and boring, but it gets at my two monetary pet peeves. On the one hand you have tight money advocates who say that the Fed has printed oodles of money. What the chart shows is that they haven’t really. Or, rather, all the money that’s been created is sequestered from the actual economy and may as well not exist for most purposes. On the other hand you have monetary policy skeptics who argue that further stimulus would somehow be merely “pushing on a string.” On the contrary, as these charts show, there’s a veritable avalanche of money the Fed could unleash upon the economy were it not deliberately paying banks to keep the money out of play.