Monetary Watch December 2010: The Money Supply, a Triple From Here?

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Our monthly Monetary Watch, an Austrian take on where we are on
the monetary inflation front and what’s next…

Headline Monetary Aggregates in November

The U.S. money supply aggregates based on the Austrian definition
of the money supply, what Austrians call the True Money Supply or
TMS, were mixed in November, with our shorter-term one and three-month
rate of change metrics continuing their recent surge while our longer-term
twelve-month rate of change metrics showing some moderation. Focusing
’s preferred money supply measure, we find that it
increased at an annualized rate of 15.6% in November, bringing the
three-month rate of change to an annualized 15.2%. That’s up
from October’s 14.5% rate and 13.3% rate, respectively. In
contrast, the twelve-month rate of change metric on TMS2, the measure
we watch most closely, went the other way, ending November at a
rate of 9.8%, down from October’s 10.5% rate, and marking the
end, albeit barley, of 22 consecutive months of double digit increases.

As has been the case throughout 2010, M2, the mainstream’s
favorite monetary aggregate, continues to show subdued growth, in
November posting a year over year rate of increase of 3.1%, down
from October’s 3.2%. As readers of this site are aware, THE
CONTRARIAN TAKE posits M2 as a grossly misleading measure of the
money supply, meaning the gap between the true and the perceived
rate of monetary inflation is a healthy 6.7 percentage points.

A Return to Double Digit Increases in the Offing?

We must say that we were a bit surprised by that 9.8% twelve-month
rate of change print on TMS2. As we argued in last month’s
, we were expecting TMS2’s 22-month string of double
digit rate of change increases to continue well into 2011. Yes,
it fell short by only 2 bps, but double digits it was not. We do
think though that a return to double digit rate of change increases
are in the cards, for three reasons…

First, the recent surge in TMS2 – up an annualized 10% the
past six months and 15.2% the past three – should be supportive
of higher twelve-month rate of change increases over the coming

Second, the full impact of the Federal Reserve’s QE II asset
purchase program was not felt in the money supply aggregates. Coming
as it did mid-month, plus what appears to be a larger than projected
draw-down in the Federal Reserve’s Agency portfolio, QE II
yielded an annualized impact of just $600 billion in November instead
of the projected $900 billion.

Third, and most important, private banking institutions are not
only continuing to print money, but appear to be doing so at an
accelerating rate. In fact, Uncovered Money Substitutes, i.e., bank
deposit liabilities not covered by bank reserves, the issuance of
which is the result of the banking systems’ efforts to lever
up its loans and investments on top of what is currently a mountain
of excess reserves, is growing at a year over year rate of 19.9%,
a post credit crisis high.

the rest of the article

22, 2010

Pollaro [send him mail]
is a retired Investment Banking professional, most recently Chief
Operating Officer for the Bank’s Cash Equity Trading Division. He
is a passionate free market economist in the Austrian School tradition,
a great admirer of the US founding fathers Thomas Jefferson and
James Madison and a private investor. He is a columnist on the Forbes

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