'Money Multiplier Theory Is Wrong'

'In fiat based credit systems, lending comes first, reserves come second, and extra reserves do nothing much except pay banks to sit in cash in cases where interest is paid on excess reserves.'

<blockquote>Money Multiplier Theory Is Wrong


The above hypotheses regarding "Excess Reserves" are wrong for five reasons.

1) Lending comes first and what little reserves there are (if any) come later.
2) There really are no excess reserves.
3) Not only are there no excess reserves, there are essentially no reserves to speak of at all. Indeed, bank reserves are completely "fictional".
4) Banks are capital constrained not reserve constrained.
5) Banks aren't lending because there are few credit worthy borrowers worth the risk.

Let's explore each of those points in depth.

1: Lending Comes First, Reserves Second

Australian economist Steve Keen has made a strong case that lending comes first and reserves later in Roving Cavaliers of Credit. I discussed that at length in Fiat World Mathematical Model.

...

There is much additional discussion in the article but it is clear that MMT theory as espoused by Murphy, Saville, North and others did not happen in Japan nor is there any evidence of it happening in the US, nor is there a sound theoretical basis for it.

In fiat based credit systems, lending comes first, reserves come second, and extra reserves do nothing much except pay banks to sit in cash in cases where interest is paid on excess reserves.
- Mish, Fictional Reserve Lending And The Myth Of Excess Reserves, December 21, 2009</blockquote>