Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
This Dividend Aristocrat Is Leading the 5G Revolution - 22nd July 19
What the World Doesn’t Need Now is Lower Interest Rates - 22nd July 19
My Biggest 'Fear' For Silver - 22nd July 19
Reasons to Buy Pre-Owned Luxury Car from a Certified Dealer - 22nd July 19
Stock Market Increasing Technical Weakness - 22nd July 19
What Could The Next Gold Rally Look Like? - 22nd July 19
Stock Markets Setting Up For A Volatility Explosion – Are You Ready? - 22nd July 19
Anatomy of an Impulse Move in Gold and Silver Precious Metals - 22nd July 19
What you Really need to Know about the Stock Market - 22nd July 19
Has Next UK Financial Crisis Just Started? Bank Accounts Being Frozen - 21st July 19
Silver to Continue Lagging Gold, Will Struggle to Overcome $17 - 21st July 19
What’s With all the Weird Weather?  - 21st July 19
Halifax Stopping Customers Withdrawing Funds Online - UK Brexit Banking Crisis Starting? - 21st July 19
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

An More Accurate Measure of the Money Supply TMS or M3 ?

Economics / Money Supply Jul 14, 2008 - 06:16 PM GMT

By: Mike_Shedlock

Economics Diamond Rated - Best Financial Markets Analysis ArticleThere has been an interesting discussion between Steve Saville and Paul van Eeden over the monetary aggregates M3 and TMS.

For those not familiar with TMS it stands for True Money Supply and it is a monetary measure based on Austrian economic principles. I will come back to the description of TMS in a moment but let's listen to a couple of discussion points from Steve Saville and Paul van Eeden first.


From Steve Saville in TMS or M3?

A few weeks ago Paul van Eeden (PVE) posted an extremely bearish outlook on bonds that he justified, in large part, by the rapid expansion of M3 money supply. We responded that while we are long-term bearish on bonds (we expect bond yields to move much higher over the coming 5 years), we thought that PVE's premise was wrong. Our reasoning: M3 is a poor indicator of monetary inflation, whereas a vastly superior monetary aggregate, namely the True Money Supply (TMS) developed by Murray Rothbard and Joseph Salerno, reveals a relatively slow rate of monetary inflation.

Paul van Eeden responded with a reply to Steve Saville - TMS or M3?

Paul posted several chart of M3 vs. TMS in relation to the CPI (defined as John Williams' estimate of the CPI) as his rebuttal.

Interestingly, the first chart would appear to show the superiority of TMS. By picking a different starting time period, M3 tracks the CPI better than TMS as the second chart indicates.

M3, TMS, and the CPI 1959 to Present



M3, TMS, and the CPI 1980 to Present




OK but I have to ask: Of what practical use is tracking an estimated M3 vs. a nonstandard definition of the CPI?

I certainly see no reason to be shorting Treasuries based on that premise, as the following chart suggests.

10-Year Treasury Yields



If M3 is such a good measure of inflation why did 10-year treasury yields collapse from 15% to 4%? And if one had shorted treasures in size in August of 2007 based on M3, that person would now be broke as short term rates collapsed from 5.25% to 2%.

Assuming (and to me it is a leap of faith) that M3 and the Williams CPI track, how does one take advantage of it? While M3 was sharply rising, gold was falling for decades along with treasury yields. Finally, I see absolutely nothing in those charts that makes M3 any kind of economic indicator.

M3 is soaring, we are clearly in a recession, and treasury yields have plunged over the last year. Which of those did M3 predict?

Why Is M3 Soaring?

People are failing to take into consideration why M3 is soaring. And right now the why is extremely important. The answer is businesses are tapping credit lines for fear they cannot tap them later. They are parking that money in institutional money market accounts and in response M3 and MZM have been soaring. These certainly are not inflationary conditions.

Indeed, Bank Credit Is Contracting .

Economist Paul Kasriel agrees. Kasriel is asking If the Fed Is So Easy, Why Is the Growth in Money and Credit Aggregates So Weak?

I am on record stating Peak Credit has arrived and Deflationary Hurricanes will Hit U.S. and U.K.

True Money Supply
The True Money Supply (TMS) was formulated by Murray Rothbard and represents the amount of money in the economy that is available for immediate use in exchange. It has been referred to in the past as the Austrian Money Supply, the Rothbard Money Supply and the True Money Supply.

For a detailed description and explanation of the TMS aggregate, see Salerno (1987) and Shostak The Mystery Of The Money Supply Definition (2000) .

The TMS consists of the following: Currency Component of M1, Total Checkable Deposits, Savings Deposits, U.S. Government Demand Deposits and Note Balances, Demand Deposits Due to Foreign Commercial Banks, and Demand Deposits Due to Foreign Official Institutions.
Note the above definition of what TMS consists of carefully.

Chart of TMS as of 2008-07-12



I have two problems with the above chart, both of them are serious. The first problem is the chart does not display TMS as Shostak defines it in The Mystery Of The Money Supply Definition :

Incorporating all the above arguments, the money supply is defined as follows: Cash+demand deposits with commercial banks and thrift institutions+government deposits with banks and the central bank.

Shostak rightfully excluded savings deposits because they are credit transactions (savings deposits are immediately lent out and are not really available on demand).

There is one other thing missing from the definition and that is sweeps. Inquiring minds will want to read Mystery of the Money Supply Definition for a complete discussion.

The second problem I have with the chart is the nature of the presentation. The best way to see what is happening is on a percentage change basis year over year. The Mises site does not offer that view.

M Prime

Using Shostak's definition and with much charting help from Bart at Now and Futures , I came up with M Prime (M'), arguably what TMS is supposed to be. For more details on the origin of M', please see Money Supply and Recessions .

Should Mises incorporate Shostak's definition and offer percentage changes, there will be no further need to publish M' updates.

M Prime 1968 To Present



M' dips below 2.5% or so are a strong signal of recession.

M3 1968 To Present



M3 is essentially useless in predicting recessions. Nor is it useful in predicting treasury rates or the price of gold. I can't find a single practical use for it. The amount of focus on an indicator so useless is staggering.

M Prime vs. TMS



TMS did a better job on a few earlier recessions but a worse in 1995 (non-recession), 2001, and now. I am sticking with M' for theoretical reasons. Shostak has this correct.

Synopsis


TMS and M' are clearly superior to M3 by any practical measure that I can come up with.

As for measuring inflation or deflation, I do not think any of them will suffice for the simple reason that credit marked to market is plunging and that is the way things need to be looked at. Unfortunately, there is no accurate measure of the plunge in credit because financial institutions are not marking credit to market. Instead much credit is still in SIVs and/or hidden in Level 3 (marked to fantasy) assets.

We can say that bank credit is shrinking, but we also know the numbers are distorted by off SIVs slowly coming back on bank balance sheets. That is on top of the distortion I mentioned earlier in that M3 and MZM are expanding because credit lines are being tapped and parked in money market funds.

Judging from collapsing real estate, people walking away from homes, risk aversion sinking in, and banks unwillingness to lend, together with the idea that credit that should be marked to market isn't, I believe we are in deflation, right here right now. Those focused on M3 or energy and food prices are truly missing the boat. Trillions of dollars of destruction in housing wealth (with much more coming) and another trillion markdown in bank credit coming (on top of what we have already seen) are far more important and far more representative of the state of affairs than is M3, or any other monetary aggregate for that matter.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2008 Mike Shedlock, All Rights Reserved

Mike Shedlock Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules