Friday, 29 August 2014

The Short Version of the "Austrian" True Money Supply (TMS), as of 18 August 2014

The short version of the Austrian True Money Supply for the U.S., a measure of the money supply applied in this weekly report, increased 0.11% on last week for the week ending 18 August 2014. At $10.2390 trillion, the money supply is now up 3.65% year to date.

The 1-year growth rate in the money supply jumped to 8.06% for the week, up from 7.72% last week, but in line with the 8.04% average during the last 28 weeks. The growth rate remains lower than the 8.30% long term average since 1980. 


The 5-year annualised growth rate ended the week on 10.75%, the highest for 17 weeks. The rate of growth however continues to be lower than one year ago and has now declined for 38 weeks in a row. The last time a similar development took place was the 38 weeks spanning 15 August 2005 to 1 May 2006 (when it continued to decline for another 155 consecutive weeks).


All the growth rates, except for the 1- and 39-week and the longer term growth rates (7 to 30 year) in the table below are lower than they were a year ago. Most of the shorter term growth rates (1-week to 1-year) are also lower than the longer term averages.


The decline in the growth rates are however, for now, not as dramatic as they were in the run-up to the U.S. banking crisis in 2008. 



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As I've highlighted on numerous occasions this year (e.g. here), there is now tremendous pressure on U.S. banks to drive money supply growth as the Fed is proceeding rather quickly with ending its QE programme (on target to end it in two months time it looks like). Banks are flush with cash and excess reserves (here), but are still just as badly capitalised today, as judged by the equity to total asset ratio, as they were when the banks collapsed nearly six years ago. For those obsessed with the very fractional fiddling with capital ratios as represented by Basel I, II and III and national banking regulators, I can only advise to cut through the chase and start any analysis of the banking sector with a quick glance at the equity to total asset ratio. Today, this ratio stands at a minuscule 10.8% for U.S. banks. Six years ago the ratio was 10.6%. Would any prudent, well-established, listed, non-bank corporation operate with such a highly leveraged balance sheet? Of course not (it would struggle to obtain credit and even win long term contracts with customers to mention a few problems brought about with a weak balance sheet). 


Though U.S. banks are substantially more "too-big-to-fail" today than six years ago (here), the public at large is arguably substantially better educated today than when the government bailed out the whole banking system with taxpayer money six years ago. Though the Fed and the politicians will find a way to save the banks next time around as well, they will face headwinds from the public which they've perhaps never encountered before. This could in my opinion work as a deterrent for bank credit and money expansion as banks surely must be keen to avoid another round of bail-outs. But with an utter lack of a moral compass and the economic system rigged in their favour, this is perhaps nothing but wishful thinking. My point is this: it will prove difficult for banks not only to drive money supply growth upward, but even to maintain the growth rate seen in recent years. Over the longer term, it will prove impossible. And when the growth rate in the money supply slows significantly (a process that has already started) and deflationary pressures commence (this has also started, see chart below), something has to give. The first to fall will likely be equity prices followed by a range of other asset prices and finally the real economy. 


Meanwhile, Europe and the U.S. are busy covering up dismal domestic economic performance and an ever increasing mountain of government debt by having started a trade war with Russia, inevitably further reducing any prospects for economic growth and prosperity for all. 


Visit the short version of the Austrian True Money Supply archive here. 

Tuesday, 26 August 2014

Seven years ago the stock market peaked, just like seven years earlier. And here we are again...

... but with a debt/GDP ratio that has almost doubled during the last 14 years. 


Friday, 22 August 2014

"Management of the Money Supply is More Sensible than Linking it to Gold..."

Right, I'm doing a bit of research on fractional reserve banking. So I pulled up my old "Macro-Economics" textbook from my days at college some 21 years ago. The 12th edition of the book, written by McConnell and Brue, was published in 1993. In a section titled "money as debt" they write:
Most economists feel that management of the money supply is more sensible than linking it to gold or any other commodity whose supply might arbitrarily and capriciously change. A large increase in the nation's gold stock as the result of new gold discovery or a breakthrough in the extraction of gold from ore might increase the money supply far beyond the amount needed the transact a full-employment level of business activity, and therefore cause inflation.
First of all, any amount of money will do in an economy. There is no such thing as "too little" or "too much" money as prices will just adjust accordingly (as long as the money is easily divisible). But what I found really amusing was their statement that "...management of the money supply is more sensible than linking it to gold or any other commodity whose supply might arbitrarily and capriciously change", i.e. they're advocating money not backed by anything. Well, here's what happened to the U.S. money supply since 1993:


How is that for an "arbitrarily and capriciously change". Since 1993, the U.S. money supply has increased, on average, by more than 7.2% every single year. I did a quick search, but was not able to find anything useful on the quantity of gold. But I do believe I have read somewhere that the world gold supply typically increases some 0.5% to 1.0% annually. But I'm very confident the gold supply hasn't increased anywhere near the some 360% total increase in the money supply during the last 21 years. How wrong McConnell and Brue were. I sincerely hope they have changed their views in the most recent, and 19th, edition of the book.

The Short Version of the "Austrian" True Money Supply (TMS), as of 11 August 2014

Today is the one year anniversary of this weekly report. The first one, which also explains the components of the money supply discussed in this report, can be accessed by clicking the link below.

The short version of the Austrian True Money Supply for the U.S., a measure of the money supply applied in this weekly report, decreased 0.38% on last week for the week ending 11 August 2014. At $10.2273 trillion, the money supply is now up 3.53% year to date.


The 1-year growth rate of the money supply (year on year percentage change) came in at 7.72% for the week, down from 8.07% last week, and the lowest YoY growth rate for 19 weeks (week ending 31 March).


The 5-year annualised growth rate continues to head nowhere but down and growth has now dropped for 37 consecutive weeks compared to the same week the previous year. At 10.48%, the growth remains however significantly higher than the 7.54% average since November 1980.


Most of the growth rates, as shown in the table below, continue to decline compared to both 26 weeks and one year ago.


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A note on the short version vs the "full version" of the Austrian True Money Supply
As explained in the link above in this report, the money supply discussed in this report is an abbreviated version of the Austrian True Money Supply (TMS) for the simple reason that statistics for some of the components in the "full version" are only published on a monthly basis. The components only reported monthly are however relatively small compared to the total. The shortened version discussed in this report therefore make it possible to track developments in the full version on a weekly basis. This close correlation between the two is demonstrated in charts below.