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. 


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, European and U.S. bureaucrats, politicians and demagogues at large are busy diverting attention away from dismal domestic economic performance and an ever increasing mountain of government debt. This time around the diversion was a trade war with Russia, inevitably reducing even further any prospects at all for economic growth and prosperity. 

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