Friday, 20 March 2015

"Austrian" True Money Supply Weekly (9 Mar 2015)

The short version of the "Austrian" True Money Supply for the U.S. increased 0.32% on last week for the week ending 9 March 2015. At $10.7919 trillion, a new high, the money supply is now up $189.7 billion, or 1.79%, year to date.

The 1-year growth rate for the week came in at 7.60%, down from 7.82% last week and 31 basis points lower than for the same week last year. 

The 5-year annualised growth rate was 10.00% for the week, the lowest reported for 13 weeks and 80 basis points lower than one year ago. This was the 67th week in a row with a declining growth rate compared to a year ago.

The dramatic monetary expansion in the US since the 2008/9 banking crisis becomes more readily apparent when looking at the longer term growth rates. Since bottoming at 5.57% in January 2007, the 20-year annualised growth rate has since climbed to the current 8.17% and is closing in on the 8.20% record from September 2002. 


Price inflation expectations in the US has dropped significantly since August last year. Back then, the 10-year break even inflation rate (the difference between the 10-year treasury yield and 10-year TIPS) stood at 2.28% compared to 1.73% as of week ending 13 March. 

The "money relation", which measures the relationship between the demand for and the supply of money, also confirms there has been significantly less inflationary pressures during the last year compared to 2013. The current reading signals no immediate "financial crisis", but the fact that the relation has been in negative territory for 13 consecutive months serves as a warning that economic troubles could be looming. Remember that banks and the stock market both thrive when the money supply expands and people demand less money to hold, i.e. an increase in the spending/savings ratio. Conversely, a decline in the money supply growth rate and an increase in the demand for money to hold, i.e. a decrease in the spending/savings ratio, will have the opposite effect on banks, the stock market and prices in general, including stock prices.

Meanwhile, the aggregate money supply growth for the US, eurozone and the UK, measured in US$, has tanked during the last 12 months. Though this to a significant extent has been driven by a strengthening of the US$ compared to the euro, the drop in the growth rate does signal less inflationary pressure. In fact, there has been deflationary pressures for the three economies since October last year as the growth rate has plunged below zero. 

As US bank credit growth continues to expand at a rampant speed and as the ECB has once again started to expand its balance sheet (QE), the growth rate might very well soon climb above zero once again. Investors oblivious to the long term better hope it does.

Visit the "Austrian" True Money Supply archive here.