Money Printing Continues Apace

The global race to debase, in an ominous parallel to the 'beggar-thy-neighbor'  policies of the 1930's depression, continues at full blast. This was underscored again on December 28, when Japan's new finance minster Taro Aso told reporters that Japan refuses to be 'lectured' by others on the merits of its latest plan to debase the yen.

“Japanese purchases of foreign bonds to weaken the yen may become more likely as the nation rejects trading partners’ rights to criticize its currency policies.

“Foreign countries have no right to lecture us,” Finance Minister Taro Aso told reporters at a briefing in Tokyo on Dec. 28. He said that the U.S. should have a stronger dollar and questioned whether major Group of 20 nations had stuck to pledges from 2009 to avoid competitive currency devaluations.

Japan’s new Prime Minister Shinzo Abe may accept trade friction as a cost of spurring growth and countering deflation through a looser monetary policy and weaker yen. The currency is set to complete its biggest annual decline in seven years after Abe’s Liberal Democratic Party secured a landslide victory in this month’s lower-house election. During his campaign, Abe said foreign-bond purchases were a possible monetary tool.

“The LDP wants to boost stock prices before the upper- house election in July next year, and the easiest option for them is to weaken the currency,” said Satoshi Okagawa, a senior global-markets analyst in Singapore at Sumitomo Mitsui Banking Corp., a unit of Japan’s second-biggest bank by market value. “The explicit policy to weaken the yen is likely to upset the U.S. And China.”


(emphasis added)

As you will see further below, the Bank of Japan so far continues to fail to actually increase the supply of yen by a percentage large enough to make a difference (which is of course a good thing). However, the above highlights several important fundamental points: Aso is correct when he states that others have not stuck with their pledges to avoid competitive devaluations. They really do have 'no right to lecture Japan' based on that. Furthermore, Shinzo Abe appears to have correctly divined that there is a connection between the social mood, stock prices and the chances of incumbents to get reelected. Since there is at the moment an inverse correlation between the yen and the Nikkei, mostly driven by clueless foreign investors, it is understandable that he is targeting the yen's exchange value in his endeavor to improve his party's chances at the polls.

Whatever the specific reasons may be, everybody is at it; all protestations to the contrary, the major central banks of the largest developed market currency areas are all trying to devalue the money they issue. This is being done in ever greater gobs, in spite of the fact that the policy has predictably failed to deliver the hoped for results for many years running, which is bound to continue. Unfortunately, in spite of both the theoretical and empirical evidence documenting this failure, the faith that central planning of money and interest rates will somehow 'work' has rarely been more deeply ingrained than today. It is a bit like living in a nightmare in which logic and rational thought have been suspended.



Ben Bernanke, Mario Draghi, Masaaki Shirakawa, Mervyn King, Jean Claude Trichet.

Attempting to print the world back to prosperity: Ben Bernanke, Mario Draghi, Maasaki Shirakawa and Mervyn King.

(Photo credit: Gerald Herbert)



On the Road to Nowhere

Below is a chart that compares the pace of monetary inflation in the industrialized nations. As can be seen, the Bernanke Fed so far continues to beat everyone else in the inflation department. For a thorough discussion of the money measure TMS ('true money supply') and how it is defined, we want to point readers to this excellent overview by Michael Pollaro (who is also the creator of many of the charts presented below).




Year-on-year growth of the true money supply in the US (10.6%), the euro area (6.1%), Japan (3.2%) and the UK (3.2%) – click for better resolution.



As can be seen, since the 2008 financial crisis, the Fed's direct monetization of government debt and mortgage backed bonds has been most effective in actually creating consistently high money supply growth. We suspect that this is in large part due to the fact that the Fed buys a lot of securities not only from banks, but also from non-banks. When the central bank purchases securities with newly created money from non-banks, it increases the amount of deposit money in the system concurrently with increasing bank reserves. If it were solely buying from banks, bank reserves would increase, but the money supply would only increase if banks were then pyramiding additional credit atop their increased reserves. We suspect that the ECB and the Bank of England had trouble keeping the pace of monetary inflation high because they bought securities mainly from banks that in turn were eager to deleverage.

Let us first take a look at US money supply growth. So far, 'QE3' and 'QE4' have not yet ignited a strong acceleration in bank reserve and money supply growth. However, one must be aware that this is mainly due to technicalities. For one thing, the Fed's purchases of mortgage-backed securities are subject to a large settlement lag. The first purchases undertaken in the course of 'QE3' (the MBS purchase program) only settled in mid November. Concurrently the treasury drew down $100 billion in deposits it held with the Fed. Since these are part of the money supply, growth in narrow money TMS-1 was negative for the month of November, and growth in TMS-2 was slower than it would have been otherwise. We expect this effect to be temporary; likewise, the most recent data captured in the US money supply growth charts include what is probably a seasonal decline in demand deposits, offset by a much larger increase in savings deposits (the latter are part of TMS-2, but not TMS-1). Currency in circulation continues to grow at a strong pace as well, up 8.9% year-on-year. Moreover, the recent sharp increase in 'securities held outright' by the Fed shows that the new inflationary program is now well on its way.




Currency in circulation is at a new record high – click for better resolution.



Fed-securities held outright

Fed credit –  securities held outright have also reached a new record high – click for better resolution.



Monetary Base, NSA

The monetary base is approaching the upper end of its recent sideways channel. It will likely soon break out to new highs, similar to what was seen on the occasion of the first two 'QE' iterations – click for better resolution.



It is instructive to look at a long term chart of the US money supply. We keep hearing that there 'is no inflation', but money supply growth in the inflationary 1970's didn't look much different from today's – in fact, if anything, it was a bit less pronounced. This highlights the problem that attends attempts to measure inflation by calculating the mythical 'general level of prices'. We know for an incontrovertible fact that if the money supply increases, prices are going to be higher than they would have been absent such an increase. However, the purchasing power of money does not only depend on its supply. Both an increase in economic productivity and an increase in the demand for holding cash balances can mask the effects of inflationary policy on prices. This is usually when the most dangerous economic imbalances tend to build up, as policymakers and mainstream economists are lulled into a false sense of security by the fact that CPI appears to be tame.




A long term chart of the broad US money supply TMS-2 with quarterly and annual growth rates. Money supply growth since the year 2000 appears to be stronger on average than during the 'stagflation' decade of the 1970s – click for better resolution.



The fact that money is not neutral and that there is therefore no linear relationship between the money supply and prices doesn't receive the attention it deserves. This is not really a big surprise, since if any attention were focused on this matter, one could not possibly skirt the inescapable conclusion that increases in the money supply enrich some groups in society at the expense of others. The strata of society that are hurt the most by inflationary policy are precisely the ones the policy is allegedly designed to 'help'. Exposing this lie can potentially prove dangerous to a mainstream economist's career.

Is there some way of measuring the 'success' of all this money printing? Since the year 2000, the US true money supply TMS-2 has more than tripled. If the performance of the economy and the action in the stock market since then are any indication, the policy has evidently been leading us down the garden path.

Of course we would not even need empirical evidence of this sort to come to this conclusion. We are mainly mentioning it because the perpetrators of the policy are positivists who do pretend that they rely on empirical evidence. The models they use for guiding their decisions are based on statistical data after all. Apparently any evidence that contradicts their preconceived notions of what should 'work' is destined to be ignored.




In the time period between the two red arrows, the US money supply TMS-2 has grown by 214%. Stocks have gone nowhere in this time amid extreme volatility, while the economy has suffered two recessions and is obviously in worse shape today than prior to the acceleration in money printing – click for better resolution.



2013 Outlook for US Monetary Conditions

2013 is going to be an interesting year. We have already commented on the seeming inability of 'QE inf' (3 and 4 combined) to move the stock market higher thus far. While by no means conclusive yet, this may constitute a warning sign: if the economy's pool of real funding is damaged beyond a certain threshold, then additional free liquidity may no longer flow into stocks.

What is also going to be interesting is how the Fed's new economic 'targets' are going to play into the conduct of policy in 2013, especially considering that this year's FOMC board is going to be even more dovish in terms of its voting members than the outgoing one. While the lone hawk and serial dissenter Jeffrey Lacker will be gone, the ultra-dovish Eric Rosengren from the Boston Fed and Charles Evans from the Chicago Fed will both have a vote this year. We wonder what will actually happen if the newly announced unemployment  and 'inflation' rate targets are actually reached. We wouldn't be surprised if some new rationalization were to emerge then so as to keep the extremely loose monetary policy stance in place. However, this is a bridge we will cross if and when we get there. As it were, there are numerous indications that the economy may 'unexpectedly' weaken in spite of the current round of heavy monetary pumping. For one thing, three of four major coincident economic indicators the ECRI institute employs in attempting to forecast recessions have already peaked in mid 2012.



ECRI-coinicident indicators

With the exception of employment, the major coincident economic indicators ECRI watches have peaked in mid 2012 – click for better resolution.



Indicators we are inter alia keeping an eye on are the various ratios of spending on capital goods production versus consumer goods production. The chart below depicts the ratio of spending on business equipment versus non-durable consumer goods production. This is an attempt to roughly gauge the effects of monetary policy on the economy's production structure. As might be expected, the Fed's loose monetary policy has drawn factors of production away from lower order to higher order goods production. The problem with this is that all economic activity must ultimately be funded by real resources. Money as such cannot fund production: it merely serves as a medium of exchange. However, when the money supply grows and interest rates are artificially suppressed by central bank intervention, it certainly appears as though there were more savings available than there actually are. If the long-range investment projects in higher order stages of production that have been initiated as a result cannot be funded, they will eventually falter and will have to be abandoned, regardless of how much money the Fed prints.

A large shift in production away from lower order to higher order goods due to credit expansion will eventually bring about a production structure that ties up more consumer goods than it releases – and this is ipso facto not a sustainable condition. A recession eventually becomes unavoidable, even though the precise timing cannot be forecast.




The ratio of spending on business equipment production against spending on non-durable consumer goods production has recently reached a new record high. Note that this ratio tends to peak shortly before recessions begin – click for better resolution.



As an interesting aside to this, we have also constructed an overlay chart that shows the above ratio and the S&P 500 index. A divergence between the two data series is currently in evidence. Usually both the ratio and the SPX tend to reach peaks almost concurrently, with the SPX tending to lead slightly. Recently though a new high in the ratio was not 'confirmed' by a preceding new high in the SPX. We are of course not certain if this is meaningful, but it may well be that it will turn out to be a valuable timing indicator, so we wanted to draw attention to it.



Cap-cons-goods ratio vs-SPX-ann

The above ratio compared to the SPX – their recent peaks are diverging relative to the previous two occasions – click for better resolution.



If ECRI is correct  – the institute continues to predict a recession and actually thinks its beginning will eventually be backdated by NBER to sometime in 2012 – then we should expect that the Fed will not only fail to begin with the much talked about 'exit' from its non-traditional monetary policy initiatives, but may  actually add even further measures to the existing money printing programs. Given the recent new high in the ratio of capital versus consumer goods production, it is definitely conceivable to us that ECRI will turn out to be correct with its forecast.


Monetary Conditions Outlook for the Euro Area

Money supply growth in the euro area as a whole has accelerated all year long and most recently stood at 6.1% year-on-year. The ECB provided the impetus with its LTROs and the promise to engage in the new 'OMT' program ('outright monetary transactions') of government bond purchases in the event Spain or Italy are hitting the wall and apply for a bailout. However, the actual agent of the recently recorded money supply growth is surprisingly the banking system. Outstanding ECB credit and with it covered money substitutes have actually been declining for some time – the growth in the money supply is thus largely owed to growth in uncovered money substitutes, this is to say credit expansion on the part of commercial banks. This is of course quite uneven across the euro area: there is e.g. monetary deflation in Spain and the other peripheral countries that have been hit the worst by the crisis. Currently this appears to be outweighed by credit expansion in the 'core' countries.

Evidently this will only continue as long as confidence improves, i.e., as long as everybody remains convinced that the sovereign debt crisis has been overcome. This faith rests on a very weak foundation, as the peripherals seem highly likely to once again miss their deficit targets in the course of 2013. There will of course not be any reduction in their cumulative debt at all. The criteria set forth by the 'fiscal pact' are going to be increasingly out of reach. Eventually we expect to see that the ECB will go beyond mere words and actually implement the 'OMT' program.



Euro Area money supply

Euro area money supply aggregates – back on a growth path for now – click for better resolution.



ECB Credit

Outstanding ECB credit has begun to decline again following the LTROs – click for better resolution.



Below is a chart illustrating the wild volatility in the growth rates of the major euro area money supply components. Evidently, central banking and 'flexible currencies' have not exactly contributed to low volatility in these measures.



Euro-Area TMS-mo-betta

Volatility in the growth rates of euro area money supply components. Somehow this is  held to be 'better' than the steady small money supply growth we would likely see under a gold standard – click for better resolution.



Monetary Conditions Outlook for Japan – Exercises in Futility

The BoJ has by now grown its outstanding credit considerably, although the total still remains below the 2006 peak. As Japan has been at this for far longer than other central banks (it is already engaged in 'QE5' or 'QE6', depending on how one counts it), the ratio of covered to uncovered money substitutes has long ago inverted in Japan, i.e., there are far more covered than uncovered ones.

In spite of the BoJ's interventions though, money supply growth in Japan remains very low. The banking system has no interest in expanding credit, and  we may assume that there are also only very few borrowers willing to add to their debt. Although a sufficiently motivated central bank can always create inflation in a fiat money system, it remains to our mind quite doubtful whether Shinzo Abe's inflationary plans will actually be implemented. For now the recent moves in the yen and the Nikkei rest solely on perceptions, not reality. At the end of September, the year-on-year growth rate of Japan's money TMS stood at 4.2% – by the end of October it had slowed down by a full percentage point to only 3.2%. The culprit is a nearly 60% year-on-year decline in uncovered money substitutes, offset by a 48% increase in covered money substitutes. In other words, Japan's commercial banks are contracting credit and with it the money supply while the BoJ attempts to increase it.




Japan's money supply aggregates TMS and M3 – growth in both is recently slowing down again – click for better resolution.



Japan-BoJ Credit

BoJ credit outstanding is increasing, but has yet to even reach the levels of 2006 – click for better resolution.



It should also be noted here that the recent rally in the Nikkei that coincided with a bout of considerable yen weakness may not be much more than a seasonal phenomenon which we have observed for three years running. The chart below shows that in recent years rallies have tended to begin around October and have subsequently peaked out sometime in March (incidentally the fiscal year end for most corporations in Japan).



Nikkei, seasonals

The Nikkei, weekly. In the past three years, rallies have begun in October and peaked in March. The beginning of this year's rally was right on time again – click for better resolution.



In short, one must suspect that this year won't turn out to be different. Conversely, if the recent rally were to remain alive beyond the usual March cut-off date, we would be provided with a clue that something more profound is going on. As can be seen below, on a very long term basis the recent rally in the Nikkei doesn't really amount to much yet. Perhaps the forth time will be the charm. Much will of course depend on how stock markets elsewhere in the developed world perform this year. We can imagine a rising Nikkei while the SPX and the core euro area markets either go sideways or move higher, but Japan's stock market is highly unlikely to be able to decouple in the event that these markets should head lower.

As our readers know, we are partial to Japanese stocks long term, based on the idea that they are cheap – in fact, they are cheaper than they appear on the surface, due to Japanese companies understating their profits by means of accelerated depreciation. However, whether the market has turned up for good here remains to be seen.



Nikkei, monthly

The Nikkei's long bear market since late 1989 – the recent rally is but a blip on this long term chart. Will it eventually turn out to be something more? – click for better resolution.



One interesting and quite surprising factoid is that while speculators have amassed an extremely large net short position in yen futures, they have so far failed to go net long Nikkei futures. Only very recently have small speculators  begun to scramble to  cover their shorts on the index, which has likely added fuel to the recent rally. Given the difference in views on the yen and the Nikkei, there may be a chance that the index will at some point cease to be driven by moves in the yen.



CoT Nikkei

Commitments of traders in Nikkei futures – surprisingly, speculators have up until recently held a very large net short position on the index. Over the past few weeks they have begun to cover their positions, adding fuel to the rally (chart via sentimentrader) – click for better resolution.



Will the BoJ follow Shinzo Abe's prescriptions? Probably not as long as the very cautious Maasaki Shirakawa remains its governor. However, in April this year Abe will likely replace Shirakawa with a more dovish governor, so we will have to wait and see what happens thereafter. As we have pointed out a few times already, the JGB market remains doubtful. Should it however become convinced that a more determined inflationary policy is indeed on the way, it will likely very quickly disabuse Mr. Abe of his misconceptions and help him change his mind again. Japan's aging consumers should hope so – they have certainly no use for inflation.




Cautious BoJ governor Shirakawa – his reign at the helm of the central bank will end in April.

(Photo via The Web, source unknown)




Charts by: BigCharts, Michael Pollaro, ECRI, St. Louis Federal Reserve Research



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31 Responses to “2013 Outlook, Part One: Global Monetary Conditions”

  • georgew:

    A typically great post! I read most of your posts and enjoy them a lot! Thanks!

  • georgew:

    >>The fact that money is not neutral and that there is therefore no linear relationship between the money supply and prices doesn’t receive the attention it deserves.

    This is not an Austrian view though? Is it?

    Yes, it is. Well, Austrian Economists are not a homogeneous group, but it is common knowledge among them (us, if a lay AE may be so entitled) that Fisher’s Equation of Exchange is utter nonsense because “the price level” is a fictitious, fallacious concept. More clearly, there can be no linear relationship between an array if independently determined prices and single input to those prices (supply of money).

    • Andrew Judd:


      I was not focusing on ‘money is not neutral’ but rather the relationship between money and prices. And at the time I was under the impression that Austrians were considering reserve balance expansion has highly inflationary. Peter had said:

      >>We know for an incontrovertible fact that if the money supply increases, prices are going to be higher than they would have been absent such an increase. However, the purchasing power of money does not only depend on its supply. Both an increase in economic productivity and an increase in the demand for holding cash balances can mask the effects of inflationary policy on prices. This is usually when the most dangerous economic imbalances tend to build up, as policymakers and mainstream economists are lulled into a false sense of security by the fact that CPI appears to be tame.

      So Peter agrees there is no direct relationship between money and prices but feels it is only mainstream economists who are not alarmed by the inflationary impact of increases in money because it is an incontrovertible fact that if money supply increases prices will be higher.

      The emphasis in Austrian economics often/always appears to be that if money supply increases then we should be worried about prices. However i am happy to admit that much of my education about Austrian economics has come from forums where people who say they are Austrians were talking about hyperinflation by june 2008, Gold at 10,000 or infinity and QE for the rest of time. Ie I know next to nothing about Austrian economics.

      If I have a point worth noting it seems that Austrians overly worry about inflation at a time of extreme deflationary pressures and therefore the worthy observations they make about our time and this crisis seem to get lost amongst those of us who are struggling to see how self sustaining economic activity to drive prices rapidly higher is going to come from anywhere visible on the horizon in the current dire circumstances.

  • therooster:

    Gold still had fixed value back then. The mechanism did not have to be killed for gold to be uprooted as a currency. Without the dynamics of an elastic trade value, it’s difficult to see how gold as a currency could have survived in the face of war. It’s only after Bretton Woods that the stage was set for gold to be re monetized in real-time, where the potential for all currencies to float around gold might become a reality in the age of information … a new wineskin.

    • georgew:

      Gold didn’t have a fixed value then, the dollar had a fixed value and was defined in terms of gold, malfeasance aside, which is why Gold fled the US by the ton…good old GL. Rothbard spells out quite well the transition from an almost free monetary market (FRB existed) to a pure fiat currency in his books.

  • therooster:

    Jason … Perhaps my comment should have been expressed in more rudimentary language. Regardless of what the elite do a) it cannot solve our debt problem while supporting economic liquidity. b) people are free to use debt-free precious metals as currency.

    If bullion skyrockets to awesome heights, it will become very liquid as Gresham’s Law will not pertain to it any longer. GL was predicated on FIXED values for bullion, not values that can rise. Liquidity is the product of (weight x trade value). |Either can rise for increased liquidity and the pruging of debt. If bullion skyrockets and is, therefore, used as currency, thanks to the invisible hand of the market, circulating real assets (debt-free) will free up debt based currency to be returned to those that created it from nothing. The irony here is that bullion-as-money can help to stabilize debt based currency because of a new paradigm of competitive forces that the USD has not experienced in the past. Express it in any complex and established terms that you like, Jason, but bullion-as-money will support the greasing of the wheels of trade without any associated new debt…. but don’t take that to the bank … :-)

    • georgew:

      I agree (and believe Jason and therooster do as well other than semantecs), and would add to clarify that it isn’t gold (PMs) going to infinity, but the paper tickets returning to their intrinsic market value as the fiat-ness loses its lustre.
      That said, never underestimate the parasite’s (or parasites’ in this case) will to live. The welfare of humanity is of secondary concern (“crew expendable” if i may borrow a line from the movie “Alien”) to the political class. Instead of more freedom I have a much more pessimistic outlook unless we (this group and many more like us) can educate the ignorant and/or disinterested masses ahead of the popularist statist rhetoric that will be marched out when the stuff hits the fan.

  • therooster:

    Common sense should prevail in this “race to the bottom” for debt based national currencies. The only way to support economic liquidity in a debt-free fashion is to circulate real debt-free assets such as gold and silver (or their fully backed & weighted ownership title). The challenge is not systemic in view of the fact that bullion now trades in real-time (floating). The challenge is in waking up the market in such a way that we each come to realize (or at least 5% of us) that a bottom-up real-time gold standard must be market driven and cannot be introduced from the apex of government or banking power. Rate of change is critical and anything coming from the apex in this regard would surely lead to a quick dollar crash. The market must be the instrument of transition for this very reason. The elite are now handcuffed and relegated to a simple prescribed role of “carrying the stick”, which is exactly what perpetual QE is all about. Follow “the script”. You’ll see some “necessary evils” within it.

    • JasonEmery:

      rooster said, “………real-time gold standard must be market driven and cannot be introduced from the apex of government or banking power.”

      Sorry, sir, but you and I must not be looking at the same set of facts. On a GAAP basis, the USA Federal Govt. is running an ANNUAL deficit of $7 trillion, per J. Williams of Shadowstats. Others have slightly smaller (i.e. $5 trillion) estimates. This is clearly a Ponzi scheme. It will eventually crash, with the POG (price of gold) going to infinity, in dollars, or there will be a reasonably well thought out, organized bankruptcy proceeding. I propose the latter take the form of a 2nd constitutional convention. Clearly this would be a top down restructuring, against your wishes.

      BTW, the POG is not floating, but heavily manipulated. This is why gold miner stocks are doing so poorly. Gold is going up SLOWER than the costs to mine it, so miners are squeezed.

      • jimmyjames:

        Rate of change is critical and anything coming from the apex in this regard would surely lead to a quick dollar crash. The market must be the instrument of transition for this very reason.


        I have to agree with that sort of concept-except I don’t believe it has to be the dollar that leads us there-I would say any major currency that collapses first will drag every country kicking and screaming towards gold-this is of course after massive interventions by all countries trying to prevent any fiat collapse by any and every means of manipulation-which will all fail in the end-

  • georgew:

    Thanks for posting. Since I haven’t read Fekete yet, I am simply asking here. I do not see what is novel about what you described above. Gold or gold substitutes (backed by real metal somewhere) and financing agreements are all you need, no? I see no complications at all and the confusion arises only when one introduces unbacked substitutes.

    • JasonEmery:

      george-Correct. Fekete says that Germany, G.B. and France, in order to arm themselves for the approaching WW1, killed the ‘real bills’ clearing mechanism, knowing it would kill gold as money. This allowed them to issue fiat without limit and allowed for unlimited military spending.

      • georgew:

        Yes, but didn’t Hartley Withers call this out at the time? I guess we are agreeing in principle on facts, but I am curious about what is allegedly novel here. ??

    • therooster:

      If I can contribute, I agree in theory, GeorgeW. If derivatives of bullion are used, such as weighted paper or digital units of weight ( &, the models should have decentralized functions for as much as what is possible. We see this now with some bullion based payment processors that use weighted digital currency where you can think of the currency as ownership title to reserved bullion. In this manner, you can transfer bullion backed currency (debt-free) in exact settlement amounts and do so in the twinkling of an eye …. globally. The spirit of the model’s concept is gold weight trades for real economic widgets …. some would say barter.

  • Andrew Judd:

    >>The fact that money is not neutral and that there is therefore no linear relationship between the money supply and prices doesn’t receive the attention it deserves.

    This is not an Austrian view though? Is it?

    QE, without government deficit spending, has a very very limited ability to push up prices other than indirectly via lowering interest rates. QE alone would not be expected to raise prices. If the US government were not also running a huge deficit then QE, at a time of massive deflationary pressures, then QE would have resulted in falling prices, unless lower interest rates resulted in greater credit creation, or encouraged savers to spend more.

    The point that seems overlooked by the Austrian view is that bank reserve balances are not necessarily part of the banks own wealth and are not necessarily the banks money to spend and speculate. The bank is regulated so that it can only speculate using the banks equity – something like that applies.

    In the current crisis the banks ability to speculate and raise prices, with or without QE, has almost nothing to do with the huge increases in the banks reserve balances, but rather is do with perceptions of the market value of the banks assets, where officially sanctioned mark to fantasy has played a very important part in the regulation allowed assessment of the banks equity or true wealth.

    So if we are going to talk about ‘True money supply’ and get meaning from it, we need to be clear about what we mean by money that can be spent so that it can drive prices higher.

    It seems to me that the Austrian view has quite a bit of merit to it, but emphasis on TMS is not part of that merit and the Austrians need to recognise this and fine tune what they are describing by TMS

    • 1. that money is not neutral is definitely an Austrian standpoint. It is the main reason why boom-bust cycles occur, as new money enters the economy at discrete points, and not everywhere at once.
      2. bank reserves are not counted as part of the money supply, they are neither contained in the TMS measures nor in the government’s ‘M’s. However, it is important to realize that bank reserves are demand deposits the banks hold at the Fed and the banks are legally entitled to exchange excess reserves into standard money at any time they wish. Moreover, bank reserves can be used as the basis for the expansion of credit.
      3. it is precisely BECAUSE we wanted to get a meaningful definition of the money supply that Austrians constructed the measures AMS (= TMS1) and TMS-2. To quote Rothbard (who in turn sets forth Mises’ definition): “Money is the general medium of exchange, the thing that all other goods and services are traded for, the final payment for such goods on the market.”
      This and only this is what is contained in the money measure TMS. By contrast, the government’s measures contain components that are most definitely not money, but credit instruments.
      The reason why it is important to watch money TMS in addition to the ‘M’s is that there are times when the signals given by these measures diverge. In these instances, the signals given by money TMS are more reliable.
      4. as to how an inflation progresses, the salient point I frequently make is that measures of the ‘price level’ are not informative in terms of whether there is or isn’t inflation. Prices can seemingly remain tame for many years while an inflationary policy progresses (whereby it should be noted that they will a) be higher than they would have been otherwise and b) that relative prices will be distorted, arguable the greater evil). Unless the authorities cease to pursue the policy in a timely fashion, there eventually comes a breakdown in the faith of money holders that the policy will be reversed. That is when the effects on prices become more noticeable, often very very fast (as though a dam were breaking).

      • Andrew Judd:


        After I posted that comment i went over to an Austrian site and it seemed clear that reserve balances were not part of austrian TMS. But when i came back here you were clearly pointing to Japanese bond purchases by the new government under the banner of money printing.

        And my beginning confusion came from other sites where people who said they were Austrians were equating reserve balance increases to what they called inflation, where they said inflation was not rising prices.

        Logically speaking there is almost no direct case to be made to make a relationship between the BOJ increasing reserve balances and the BOY increasing inflation other than the interest rate function it creates. Most of your text is however apparently equating the two.

        • Andrew Judd:

          Another issue that is creating confusion is the nature of the moneyness of different instruments. For example a government bond is as good as a large bank deposit for many purposes so replacing one with the other is not really creating much of a purchasing power difference as I see it. Hence i view that BOJ ‘printing’ even if it creates ordinary deposits is not going to lead to inflation because it is likely the investor is just going to keep on investing rather than spending.

          Also if credit card purchases are not being done with money then what are Heloc purchases made with? An unused HELOC and an unused credit card are essentially the same thing. Would a one year bank loan involve money and yet a credit card that is unrepaid for years not involve money? Is TMS a true measure of money supply? Obviously if credit cards are freely issued to consumers it will drive up prices and will lead to a bust. As will freely issued Helocs and bank loans.

  • ab initio:

    One of the few things that you can be certain about in this uncertain world is that central banks will continue with easy money policies. They will keep doubling down because retreat now will be to acknowledge failure of ideas that the ivory tower Ph.Ds cannot ever countenance.

    The key as an investor is to be alert for a change in psychology. Greenspan, Bernanke, et al have convinced practically everyone that we must fear the evil deflation – the every day low and lower prices! When the cognitive dissonance between the reality of rising prices for things that the average Joe needs like health care, college tuition, food and gasoline and the theory of the Ph.Ds gets to the point that reality starts gaining more credence, then we will enter more interesting times. The best outcome would be central banking being completely discredited. I am not holding my breath on that outcome though.

  • Solon:

    I posted the following on Keith Weiner’s recent year-end update article. I am re-posting it here solely on the fears that no one goes back to old articles to read new comments. Apologies for this double post, if it was not required…


    Why have you no longer given credit to Professor Fekete in your recent articles?

    The thank you that you give above is not an acceptable scholarly reference. In fact, since your concepts are so close to Professor Fekete’s teaching, you should be demonstrating what exactly is YOUR thinking and how it is different from Fekete’s. You should be providing references on Each Individual Article.

    By not crediting and referencing Fekete in your recent work, it appears as if the ideas presented within them were entirely your own, whereas we both know that is not true.

    Here is a further critique from Hugo Salinas Price:

    • JasonEmery:

      Solon-I wasn’t going to say anything, but since you brought it up, I will post a thought I had during the lively ‘gold’ debate in the ‘comments’ section of a Weiner penned article about a month ago. The very astute posters here dissed and dismissed a good portion of Weiner’s work. I kept waiting for Weiner to load his bazooka with Fekete’s ‘Real Bills’ argument, in order to defend his stance on gold, but not a peep out of him on this gold-as-money instrument.

      If one knows anything at all about Fekete, you know that he eats, sleeps, and breaths ‘real bills as gold substitutes’. You cannot be in the same universe with Fekete on gold if you don’t mention ‘real bills’ at least once per sentence, in any discussion of gold as money. BTW, I’m with Fekete most of the way.

      If you want to read up on ‘Real Bills as a gold-as-money clearing mechanism’, just google ‘Antal Fekete Articles’ and look for any article title that specifically mentions ‘real bills’. However, most articles about gold have a ‘real bills’ mention as well.

      Basically, Fekete says that gold can be used as money, with a bill clearing system, as long as the paper instrument is retired with a gold coin. For goods in seasonal demand, the wheat grower, for example, wants to be paid, of course, but the miller has no cash, so he pays with a ‘bill’, promising gold when the wheat is ground into flour and sold. The baker makes the same arrangement with the miller. Finally, the bread is sold to the paying customer for a small piece of metal, or (in my opinion, with today’s technology) a debit (not credit) card linked to an account containing actual metal. The farmer, miller, and baker all eventually get paid in gold, without the creation of any out-of-thin-air, unbacked fiat.

      • therooster:

        Except for the promise of gold delivery, is this not the same principle as using a gold based digital payment system where all bullion based payments are denominated in fully backed weight, 1:1 ? The idea is sound but from a marketing point of view, I think the market needs to put its pants on one leg at a time. The precursor for successful “gold credit” would then be real-time gold payments and the market has not stepped up the support for such services to the point of critical mass, as yet. The movement is growing , however …. a very good thing, IMO. Fekete has a sound concept, moving forward, but I suspect that he may be a tad weak in the area of marketing and understanding people’s habits. One thing at a time.

        Jason, have you even considered that the ultimate purpose of the development of the free floating USD was not to act solely as a currency , but may have ultimately been developed for the sake of acting as a real-time measure ? The real monetary challenge for mankind does not reside in the smaller picture of moving from debt based currency to asset based currency, but is somewhat larger, IMO. It’s really about evolving from fixed bullion values to market driven, free floating bullion values for the sake of the marriage between debt-free store properties and real-time, instant global liquidity. The development of free floating fiat currency (along with the associated debt, unfortunately) has been a “necessary evil”, it appears, and a stop-gap measure on route to shifting monetary paradigm from fixed to real-time and applying real-time to commodities. The evidence is glaring because had it not been for the severing of the $35 FIXED peg on gold, gold could not float in terms of debt values and real-time gold-as-money could not a be a current subject of conversation. The elite actually set the stage. Follow “the script”. You cannot pour new wine into old wineskins.

        • JasonEmery:

          Rooster said,
          “It’s really about evolving from fixed bullion values to market driven, free floating bullion values for the sake of the marriage between debt-free store properties and real-time, instant global liquidity.”

          As you must know, the Bretton Woods fixed rate system was abandoned because the USA’s gold was being called away, at fixed rates. Another disadvantage of the fixed rate currency system is that devaluations tend to be catastrophic, rather than gradual.

          So they moved to the present, floating rate system. This system encourages massive trade imbalances, since central banks can sell or buy virtually unlimited quantities of unbacked paper promises.

          What good does a real time price discovery mechanism do, on a national level, since buying in size will inevitable push the price against the buyer? Even if this problem could be overcome, any system with unmanipulated gold anchors would require low levels of trade deficits/surpluses. If that was the situation, I could see the world’s nations giving such a system a shot.

          How do we get to a situation where trade deficits/surpluses are small? Think of the adjustments that need to be made!!! You can’t institute a system where gold is callable first, and worry about trade deficits later. Your system would implode almost immediately. The stop gap solution that the can kickers have opted for, ZIRP, could be setting the stage for a transition, as coupons that give the holder negligible interest will be relatively easy to inflate to worthlessness. But what about the trade deficits that continue? Countries tend to prefer war to living within their means. Given that we are in the nuclear age, this might not be the answer. Probably more likely is a 100 year ‘Dark Ages’ type situation.

          • therooster:

            Brettom Woods provided two critical features that we still have as “leftovers” today.
            1) Centralization of the dollar and the important price peg
            2) It’s demise brought us to real-time applications and possibilities for commodities, which include the PM’s. This idea can be condenced to the real-time variable of “USD/oz”, a bridge from the debt paradigm to the asset based paradigm.

            The floating dollar is but a stop gap measure in the transition over to real-time gold as money … but the market must show that it wants it via price support.

            Once bullion based payments become popular at some point, the market can then choose to price in weight so that we can trade with weighted payment for weighted pricing. The currency challenge of moving people to make weighted payment for fiat pricing is the big leap.
            This process will actually allow debt currency to die a peaceful death.

            • JasonEmery:

              rooster–I think the issue is time. Wages have been flat in the USA for over a decade, and still our wage structure is not competitive in a global economy. Not even close. How many more decades must American wages go sideways, waiting for the ROW (rest of the world) to catch up?

              We’re running federal govt. ANNUAL budget deficits of $7 trillion. There isn’t time for the present can kicking operation to work. We’ve got millions of Americans retiring in the next few years, and this will will force the issue of entitlement program bankruptcy.

              There isn’t time for a smooth transition to the next global financial system. It will either be chaotic (lots of barter) or there will be a top down forced reorganization. The latter will almost certainly be part of some 1-world socialist regime. This is not my desired outcome, just how it seems to be shaking out. Notice how no one has left the Euro Zone?

            • georgew:

              therooster, Freidman and others who advocated the free floating exchange system (to my knowledge) never thought, spoke of, or considered it as a transitional step to a more advanced commodity money system. Further, since this would not support the parasitic nature of Govt, there is no chance that Govt’s will move this direction if there is an alternative that better supports maintaining control over the serfs and their continued fleecing.

          • georgew:

            I like this thread, but the nefarious nature of Govt (concentrated power) is being glossed over.
            1. “Countries tend to prefer war..” You mean “Politicians/Governments” as “Countries” are nothing more than the boundaries the define under who’s rule one lives and the citizenry almost never “prefer” war, at least without some good Hobgoblin-ing (per Mencken)
            2. Since politicians are driven by only two things, the demagogic necessity (vote selling) and maintaining the parasitic activity that supports the political class, we know we are headed for more freedom while the parasite has not been supplanted, i.e., more tyranny and impoverishment.
            3. 100 year dark ages? Impossible. There can be a catastrophic mass loss of life without entering a dark ages, and this may take a century to recover from, but a dark ages means an incredible loss of knowledge from the epistemic base, which would take many centuries to recover from.

            • JasonEmery:

              george said–“100 year dark ages? Impossible.”

              My bad, lol. Poor choice of words. Whatever you want to call what Japan has gone through the last 23 years, and likely another 40 or 50, that’s what I meant.

              Obviously, we’re just like Japan, except with less education, and more sugar and fat, per capita.

              If the present population of the Earth is to be supported, at the present AVERAGE std. of living, then war must be gradually phased out, or technological advancements must be spectacular, to make up for the loss of cheap oil.

              I just don’t see how the present, ‘King Dollar’ system, as Doug Noland calls it, can be phased out in an orderly fashion, in part for the reasons you mentioned: demagogic necessity, parasitic activity, etc. If you have read Mises, you know there is a price to be paid for living beyond your means. These things take a long time to work themselves out.

              There are no quick fixes, just protective measures one can take on the individual level. Not at the national level, though. If you, others, and I protect ourselves through hoarding, retail sales drop and others lose their jobs. Sorry about that chief, as Maxwell Smart would say.

    • Keith has mailed me a brief article where he answers to these points. It will be posted tomorrow.

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