Money Supply Firing on All Cylinders?
by Michael Pollaro
by Michael Pollaro: The
Monetary Watch, an Austrian take on where we are on the monetary
inflation front and whats next
Monetary Aggregates, Where We Are
The U.S. money
supply aggregates based on the Austrian definition of the money
supply, what Austrians call the True Money Supply or TMS, continued
their recent surge, in December posting an annualized rate of growth
of 38.9% on narrow TMS1 and 24.6% on broad TMS2. That brought the
annualized three-month rate of growth on TMS1 and TMS2 to 22.3%
and 18.1%, respectively, 8.6 bps and 2.7 bps higher than those posted
in the prior month. No doubt some of this surge is seasonal, but
as discussed below, clearly underpinned by the money-printing efforts
of not only the Federal Reserve but of private banking institutions
our longer-term twelve-month rate-of-change metrics more
indicative of the underlying trends and focusing on our preferred
TMS2 measure, we find that TMS2 saw another healthy increase, in
December growing at an annualized rate of 9.9%. Not only was this
a tick up from Novembers 9.8%, but we think close enough to
10% to mark December as the 23rd time in the last 24 months that
TMS2 posted a twelve-month rate of growth in the double digits.
For new readers of the Monetary Watch, the last time TMS2 saw this
kind of string was during the run-up to the now infamous housing
boom turned credit implosion, a time during which TMS2 saw 36 consecutive
months of double-digit growth.
In what could
be a developing trend, M2, the mainstreams favorite monetary
aggregate, is finally starting to show some growth. In the three
months ending December, M2 has grown at an annualized rate of 9.5%,
bringing its twelve-month rate of increase to 3.6%. Yes, 3.6% is
still a relatively low rate of growth, but it is up substantially
from its March low of 1.3%.
of this site are aware, THE
CONTRARIAN TAKE posits M2 as a grossly misleading measure of
the money supply. So the question is, why do we even care? The reason,
because the mainstream cares. They think M2 is a perfectly fine
measure of the money supply, including the worlds most powerful
money printer, Chairman Bernanke. And as we argued in The
Bernanke Arbitrage, when the worlds most powerful central
banker, armed with the worlds largest printing press, the
same central banker who seems to think that economic prosperity
can be achieved by printing money, thinks that the rate of monetary
inflation is low, even when its not, hes apt to
print even more. So, with M2 quite possibly on an upward trajectory,
the question to ask is this will an upward trajectory in
M2 give Bernanke some pause, perhaps give him a reason to slow his
QE efforts and in turn slow the growth in the money supply? We doubt
it, not at 3.6%. In fact, given that core consumer price inflation
is still low, the unemployment rate still high, the real estate
market still on the ropes and, as Bernanke testified to the Senate
Budget Committee on January 7th, municipal debt problems becoming
a concern of the Federal Reserve, we could almost guarantee it.
Clearly though its something to watch.
Firing on all Cylinders?
At THE CONTRARIAN
TAKE, we put a lot of effort into dissecting the components of TMS2.
We think its an important tool in deciphering the underlying
trend in the money supply. Our favorite component views are what
we call TMS2 by Source and Economic Category, views which
zero in on the who and the how behind the ebb and flow of the money
supply. Under this view, monetary inflation can be reduced to two
basic institutions and three primary venues:
Federal Reserve, via the issuance of what Austrians call covered
money substitutes: the simultaneous issuance of on-demand
bank deposit liabilities and bank reserves by the Federal Reserve,
created through its purchase of assets, by writing checks on itself,
and later, when those checks are deposited by the sellers of those
assets in their respective banks, completing the issuance by crediting
those banks reserve balances at the Federal Reserve for
the full amount of the checks.
banks, via the issuance of what Austrians call uncovered
money substitutes: the creation of on-demand bank deposit
liabilities by private banks unbacked by any reserve cover, created
through their issuance of loans and purchase of securities when
they pyramid up those loans, securities purchases and deposit
liabilities on top of their reserves.
- The Federal
Reserve, via the largely passive issuance of currency:
the issuance of Federal Reserve notes, created when the public
chooses to redeem their on-demand bank-issued deposit liabilities
for currency. In contrast to covered and uncovered money substitutes,
the issuance of Federal Reserve notes is by and large neutral
with respect to the total money supply, as it simply substitutes
one form of money, namely covered and/or uncovered money substitutes
for another, namely currency.
total of covered money substitutes plus currency is what economists
call the monetary base. And the issuance of covered money
substitutes is more popularly known as quantitative easing or
the Federal Reserve can create money via the issuance of covered
money substitutes at will and without limit, it can only do so on
a one-to-one basis; i.e., one dollar of asset purchases or QE can
only bring forth one dollar of money supply. So, even though the
Federal Reserves money printing powers are unlimited, there
is not much bang for the buck. In the case of private banks it works
the other way around. Under the law of the land, the private banking
system can create money uncovered money substitutes
at a multiple of their reserves at current reserve requirements,
at a multiple of at least ten to one. Bang for the buck. Problem
is, the buck stops when those private banks max out their reserves.
The trick then, to get the money supply firing on all cylinders,
is to get everyone involved, everyone working together as a team
the Federal Reserve supplying the QE fuel, and the private
banking system taking that fuel and pyramiding up the money supply.
Where are we
today? Well, for the first time in quite a while, the Federal Reserve
and the private banking system are finally teaming up.
the rest of the article
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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