Thursday, 22 August 2013

Introducing The Short Version of the "Austrian" True Money Supply (TMS)

What is the "money supply"? According to Mises Wiki "money supply or money stock is the total amount of money available in an economy at a particular point in time". This seems pretty straight forward, but there are many ways to define it and measure it. The Federal Reserve publishes the M1, M2 and MZM money supply aggregates for the U.S. including all the individual components that make up these aggregates. These various aggregates differ in how liquid the monetary assets included in each are. For example, M1 includes currency, travellers' checks, demand deposits and other checkable deposits, while M2 includes, in addition to M1, savings and time deposits and retail money funds.

On a bi-weekly basis I issue the "U.S. Money, Credit & Treasuries Review" which reports on money supply developments in the U.S. in addition to bank credit and treasury yields. In this report we use the standard money supply measures as defined by the Fed plus one which resembles the M3 (which the Fed stopped publishing in 2006).

Now, there has for quite some time been a debate among economists of what the "real" or "true" money supply is. The debate boils down to whether some of the less liquid monetary assets should be included or not. For example, should Retail Money Funds, which is part of the M2, really form a part of the money supply?

As a result of this debate, some Austrian economists, namely Murray Rothbard and Joseph Salerno, further developed Ludwig von Mises' definition of "money in the broader sense". This definition of the money supply goes under the name True Money Supply (TMS). Some also refer to it as "Austrian" Money Supply, True "Austrian" Money Supply or "Austrian" True Money Supply. TMS includes the following components:
  • Currency Component of M1
  • Total Checkable Deposits
  • Savings Deposits
  • U.S. Government Demand Deposits and Note Balances
  • Demand Deposits Due to Foreign Commercial Banks
  • Demand Deposits Due to Foreign Official Institutions. 
The last three components are only published monthly. Furthermore, combined they only make up about approximately 0.6% of the TMS as of July 2013 (0.5% on average during the last seven years). These three items are therefore largely "irrelevant" these days for the TMS and a "short version" money supply measure constructed using only the first three components would track the TMS for the U.S. very closely. This is depicted in the chart below (monthly numbers).

As I am inspired and influenced by Austrian Economics, I'll therefore start publishing the short version of the TMS for the U.S. on a weekly basis which then includes only the first three components in the list above. For lack of a better name, I'll simply call it "The Short Version of the Austrian True Money Supply". The three latter components in the list above will however be tracked, and reported from time to time. If they start making up a bigger portion of TMS than has previously been the case, the usefulness of the short version would need to be reassessed.

The data used is the not seasonally adjusted numbers, week ending Monday. The data is usually made available by the Fed every Thursday 10 days later (e.g. the numbers for the week ending Monday 5th August was published on Thursday 15th August). The post, which I'll normally publish on each Friday, will usually be brief; a few comments and a chart showing the year on year percentage change in the money supply.

If you're interesting in viewing TMS (the full version), I suggest you visit Michael Pollaro who publishes it on a monthly basis. I would also highly recommend his article on this subject, titled Money-Supply Metrics, the Austrian Take.

That's the background. And here's the first chart of the short version of the "Austrian" True Money Supply depicting the year on year percentage change (as of 5th August).

Visit the "Austrian" True Money Supply archive here.

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