Here's something from the usually excellent Doug Noland:
"Today, when, for example, a foreign central bank “recycles” dollar liquidity through the purchase of Treasuries, this finance is immediately available to be “multiplied” infinitum in the modern day securities finance arena. Let’s say the Bank of Japan buys $100 million of Treasuries from a hedge fund, a (“carry-trade”) speculator using this short-sale as a source of finance for the purchase of higher-yielding securities. Here, a $100 million of dollar liquidity that the Bank of Japan initially acquired by exchanging yen finance with, say, Toyota then flows to the hedge fund. For the hedge fund, this liquidity becomes buying- power for the purchase of ABS from, let’s say, Merrill Lynch. Merrill would then have liquidity for its investment banking clients to finance a jumbo mortgage or perhaps an acquisition. This entire $100 million of finance can then follow various paths as it flows back out to the world financial system whereby it can again be recycled in its entirety right back to our securities markets."
Noland’s entire paragraph about dollar recycling and the multiplier effect is a canard. His error stems from beginning his analysis in the middle of the process where BOJ acquires dollars from “Toyota”. “Toyota” did not create dollars out of nothing, it got them from customers who withdrew them from the banking system (drawing down deposits or taking out loans) exactly balancing out the multiplier effect when BOJ puts them back into the system by buying US Treasuries.
The multiplier effect only works on the creation of high powered money from the Fed and acts through reserve requirements. The real problem is that for certain time deposits reserve requirements are zero hence the multiplier effect on these deposits is infinite. In addition, todays banks securitize assets such as auto loans and sell them to investors, essentially re-charging their balance sheets for more lending (although the investors have to draw down deposits to buy these investment vehicles .... need to think about this aspect more).