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The True Money Supply and the Future of the U.S. Economy

  • True Money Supply
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EcPoFi recaps last year's development of the True Money Supply (TMS), a monetary aggregate developed by Murray Rothbard and myself in the 1980s. The author of the post points out that in 2014, "the money supply increased by a total of $731 billion, the fourth biggest expansion ever recorded," although its rate of growth was 7.4%, substantially below its average growth rate of 8.1% since 1981.  He also notes that TMS increased by $9.832 trillion, or 1,257% since 1981 and by a whopping $5.354 trillion, or 102%, since 2007.

Thus, in the author's view :

At this stage of the money cycle, as we come from an extraordinary elevated level, it is arguably as important as any time before to continue to monitor the money supply closely.  The economic distortions these highly inflationary policies have led to will become only too apparent if the growth rate in the money supply is not kept high in 2015.

Furthermore, the post contains an eye-opening chart based on a theoretical insight of Hayek's, which shows that, at least since 1980 in the U.S., the ratio of the money supply to gross private saving peaks just before a financial crisis and downturn in real economic activity.  Based on this chart, the author forewarns,

the U.S. economy could experience great instability sooner rather than later. Banks will be at the epicenter once again this year and that is never a good thing with their weak balance sheets (equity/total asset ratio of around 10.8%) demonstrating only too well the extraordinary economic risks posed by a fractional reserve banking system. 

Joseph Salerno is academic vice president of the Mises Institute, professor emeritus of economics at Pace University, and editor of the Quarterly Journal of Austrian Economics.

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