Reserve Ratio

When studying economics, many years ago, we were taught about the monetary multiplier. This multiplier is the inverse of the reserve ratio. It means that a decrease in the reserve ratio will lead to an increase in the money supply.

Most governments do not enforce a reserve ratio these days. However over the last few years, banks have found numerous ways to increase the leverage of their capital. This effectively reduced their reserve ratio. The consequence was an increase in the money supply.

Over the past decade, there has been a vast increase in the supply of money. Most of this was the work of Alan and Ben, the banking men. However, the private banks multiplied their efforts, by using their leverage tricks to reduce their reserve ratios.

The credit squeeze had truncated leverage, so banks are now trying to increse their reserves. This will reduce the money multiplier and shrink the supply of money further.