Friday, 24 October 2014

The Short Version of the "Austrian" True Money Supply (TMS), as of 13 October 2014

The short version of the Austrian True Money Supply for the U.S., the measure of the money supply applied in this weekly report, decreased 0.05% on last week for the week ending 13 October 2014. At $10.3522 trillion, the money supply is now up $468.9 billion, or 4.79%, year to date.

The growth rate in the money supply headed down sharply during the week. The 1-year growth rate fell to 6.71%, down from 7.36% last week. It was the lowest year on year growth rate reported since the final week of last year. The growth rate also remains significantly lower than the 8.30% average since 1980.

Compared to the growth rate recorded one year ago, the year on year growth rate shred 1.68 percentage points, the sharpest drop since mid April this year.

Taking a look at the longer term data, the 5-year annualised growth rate ended the week on 10.23%. The growth rate is still well above the 7.55% longer term average, but it keeps dropping compared to a year back as it has done now for 46 consecutive weeks. This week it declined 1.78 percentage points compared to last year (the dotted line in the chart below), the biggest drop since week ending 15 September 2008 which happens to be the day Lehman Brothers filed for Chapter 11 bankruptcy protection.

As I started reported some time back, the year on year percentage point drop in 5-year growth rate since August 2011 resembles the trend from December 2001 onwards. What is different this time around however is that the growth rate is dropping faster. As the chart below tries to convey, the current drop in the growth rate is significantly lower than it was as of week 168 the last time around. In fact, the current drop in the growth rate is one year and three months ahead of the 2001 to 2006 trend.

Should this trend continue, we could fast be approaching market turmoil of some sort. Or we could actually be in the storm as we speak. There are certain signs the turmoil has already started as the U.S. stock market has been very volatile in recent weeks*, the 10-year treasury yield has dropped about 37 basis points during the last four months even as the Fed has been tapering and as the VIX shot up to 26.3 just nine days ago, the highest reported since early June 2012.

As banks are increasingly being left with the "burden" of increasing the money supply as the Fed is nearing the end of QE3, the risk of further drops in the money supply growth rate appears high. But maybe QE was never meant to end at all and that QE4 is just around the corner? Or maybe the Fed is becoming scared (now that it has saved the banks) of the inevitable collapse of the monetary system with ongoing inflationary policies and instead will implement full-reserve banking? Time will show, but this is what the U.S. economy has come to as everything hinges on Fed policy. Unfortunately, a central bank can never print itself out of economic problems, only into them.

* The 21 day moving average coefficient of variation of the S&P 500 index has more than doubled during the last few weeks compared to the January 2013 to September 2014 period.



The Short Version of the Austrian True Money Supply vs Austrian True Money Supply, as of September 2014