Friday, 4 April 2014

The Short Version of the "Austrian" True Money Supply (TMS), as of 24 March 2014

The short version of the Austrian True Money Supply (SVTMS) for the U.S. decreased by 0.43% (20.23% annualised) during the most recent week ending 24 March 2014 to reach $10.0346 trillion calculated from the latest data published by the Federal Reserve. 

The 1-year growth rate came in at 8.20%, the highest for four weeks. Though it has increased since hitting an intermediate trough of 6.23% at the beginning of the year, it remains lower than the 8.31% long term average and substantially lower than it was in 2012 and 2013.

It is important to point out that a 8.20% annual increase is substantial as it would lead to a doubling of the money supply in less than nine years. Back in November 1980 the money supply was USD 827.4 billion (see here for more historical data). Today, less than 24 years later, the money supply is north of USD 10 trillion, more than 12 times higher than in 1980! Such monetary expansion has a profound negative effect on the purchasing power of the dollar which surely domestic U.S. dollar spenders during this period have noticed. To put it differently, if the money supply had remained unchanged since 1980 the purchasing power of the U.S. dollar would have been tremendously higher today than what it actually is. This is the real inflation, but as it is not directly seen it is largely ignored by the many. 

In a scenario of an unchanging money supply, it would pay off to be a saver (as the purchasing power of the currency would steadily increase with time). And as savings is a prerequisite for economic growth (as a part of it is channeled into investments either directly or through banks lending it out), it would benefit all. Monetary expansion has the opposite effect, it penalises savers and encourages debt financed consumption including capital consumption. Monetary expansion also helps finance projects and spending which would not have taken place in the absence of such expansion. The explanation for why this is so is rather straight forward: 
If all funds available for investments were generated through prior savings only (and not through fiat money expansion), the funds would be channeled into projects with the highest expected returns. These projects can be found in the areas where the most urgent demand of consumers can be satisfied. 
Throw in government intervention and over-regulation (much of which would not have been possible to finance without the monetary expansion in the first place - people would not agree to finance this level of government activity through taxes other than monetary inflation) and you have to a large extent the answer as to why the American people are substantially worse off today than they otherwise would have been (and worse off than they were 24 years ago some would perhaps argue). Again, this is the unseen ignored by the many not able to imagine it


The smoothed 12 month average of the year on year growth rate of the money supply continues to decline. The current 8.50% was the lowest reported since 29 June 2009. It has continuously declined since hitting 14.45% on 2 July 2012 and is rapidly approaching the longer term 8.47% average. The last time it fell below this average was in mid 2005, a couple of years before the U.S. stock market peaked, but around the time when cracks in mortgages and MBSs were becoming noticeable (some started writing about it earlier, e.g. here).

Though this is a bit of a technical observation, it nonetheless serves to highlight that the growth in the money supply is slowing down. Students of the Austrian Business Cycle Theory (ABCT) are keenly aware that a slowing down of the growth rate in the money supply eventually will trigger a necessary adjustment and/or a financial crisis. How big this adjustment turns out to be depends on the prior excesses and the speed of the contraction. Being a follower of Milton Friedman's analysis and conclusions of the late 1920s/early 1930s depression, the Fed will ensure any monetary contraction is modest. In this scenario, the U.S. economy would avoid a steep, but necessary (think government debt, budget deficits, mortgages and TBTF banks and companies), contraction, and would just continue to produce substantially less output than otherwise. We could then soon begin talking about another lost decade in addition to the current one.