Friday, 9 January 2015

Recap 2014: The Short Version of the "Austrian" True Money Supply (TMS)

This is the final report of the short version of the "Austrian" True Money Supply for 2014.

A key monetary development in 2014 was the shift from the Federal Reserve to the banks as the driver of money supply growth as the Fed tapered its asset purchases during the year until QE3 was finally ended in October. As long as the Fed maintains its current policy of only rolling over its assets and not expanding its balance sheet, it will be up to the banks to expand the money supply in 2015. The extent to which this is achieved, in addition to Fed interest rate decisions, will to a large extent determine what happens to the U.S. economy this year.


In 2014, the money supply increased by a total of $731 billion, the fourth biggest expansion ever recorded beaten only by 2009, 2011 and 2012. In percentage terms, the money supply increased by 7.4% during the year, a rather low number compared not only to the very aggressive expansion during the 2009 to 2012 period, but also compared to the long term average of 8.1% since 1981. The table below lays out the annual money supply developments since 1981. 


Here are some other useful observations based on the table for 2014 (based on data since 1981): 
  • Since 1981, the money supply has increased by $9.832 trillion, or 1,257%. This means the money supply today is almost 13.6 times higher than just 33 years ago.
  • The money supply has increased by $5.354 trillion, or 102%, since 2007. This equates to an annual growth rate of 10.5%. This is the second highest percentage increase during any seven year period, lagging only the seven year period ending in 1988 when it increased more than 121%, or 12.0% on an annualised basis (Reagan administration).
  • The average growth rate during the last two years (6.9%) is 5.9 percentage points, or 45.9%, lower than the average during the 2009 to 2012 period (12.8%). This is a substantial decline in the growth rate which could flash danger ahead. This decline is however not nearly as big as the case was in 2006 when the growth rate dropped by 11 percentage points, or 85%, on the same basis. 
  • The money supply has contracted only three times on an annual basis since 1981 (1989, 1994 and 1995) while it has increased 31 times (out of a total 34 years).

In 2015 it will be as important as ever to follow the money supply developments in the U.S. I'll continue to publish weekly updates so stay put. And do remember: an increasing money supply in no way makes society better off. At this stage of the money cycle, as we come from an extraordinary elevated level, it is arguably as important as any time before to continue to monitor the money supply closely.

The economic distortions these highly inflationary policies have led to will become only too apparent if the growth rate in the money supply is not kept high in 2015. F.A. Hayek once explained that "...saving at a continuously high rate is an important safeguard of stability" and that a high rate of saving would also "...tend to mitigate disturbances arising from fluctuations in credit" (Profits, Interest and Investment, p. 168). Well, in the U.S. saving is dismal (personal saving rate has averaged 4.8% during the last 12 months) while credit fluctuates widely. Based on this, I believe the below chart is a loud warning that the U.S. economy could experience great instability sooner rather than later.


Banks will be at the epicenter once again this year and that is never a good thing with their weak balance sheets (equity/total asset ratio of around 10.8%) demonstrating only too well the extraordinary economic risks posed by a fractional reserve banking system.

Update 13 January 2015: see Professor Joseph T. Salerno's comments on this post here.

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