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Is a Shift in the Austrian “True Money Supply” Pointing to a Contraction?

September 25, 2014 in Economics

By Ryan McMaken


Michael Pollaro writes at Forbes that “deceleration” in the money supply is increasing the risk of an economic bust. Pollaro, of course is using not the standard Fed-approved measures of the money supply, but the Austrian “True Money Supply” (explained in detail here.)*

Pollaro writes:

The True “Austrian” Money Supply (TMS) as represented by TMS2, our broadest and preferred U.S. money supply aggregate, posted a year-over-year rate of growth of 7.9% in August, the last monthly reporting period, down from an 8.2% rate in July. Although still sitting near the twenty year average of 8%, the U.S. monetary inflation rate is now down 780 basis points (50%) from its most recent August 2011 high and 860 basis points (52%) from its November 2009 cyclical high.

He goes on:

We take the decline in TMS2 very seriously. To Austrian economists, its simple – monetary inflations always end in economic and financial busts. In short, once the economy is subjected to a bout of monetary inflation, whether that be via direct central bank money creation or through money (and credit) creation by the fractional reserve banking system, an unsustainable, artificial economic boom is born, whereby malinvestments are created that sooner or later must be liquidated. And whether that bust takes the form of a hyperinflationary bust or a deflationary, bust we will get. The form the bust takes will depend on the course of the inflation. If the central bank/banking system at large pursues an inflationary course, by throwing continual and importantly ever larger doses of money (and credit) into the economy, the bust will take the form of a hyperinflationary collapse. If instead the central bank voluntarily pulls back (and in increasing fashion) on its monetary largesse and/or free market forces force the central bank/banking system to pull back, the bust will take the form of a deflationary bust. [emphasis mine.

So what is this deceleration in TMS2 telling us? The risks of a deflationary bust are rising.

To lend credence to the theory, let’s have a look at the Austrian boom-bust model in action using our TMS2 metric vs. the forward looking S&P 500, the embodiment of the health of the economy and financial markets…

The data supports what the Austrians teach – monetary inflations create booms which result in deflationary busts once the rate of monetary turns down in a significant and sustained manner. The 1995 to 1999 monetary surge, then subsequent monetary deceleration …read more


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