Thursday, July 17, 2008

4 Different Austrian Money Supply Definitions

I have during several occassions (see for example here, here,here, here and here) discussed the issue of the definition of the money supply. This issue may seem technical and uninteresting to some, but because money supply play such a key role in Austrian economic analysis it is nevertheless important. The purpose of this post is however not to discuss that issue again (those interested are recommended to re-read the linked posts) but rather to highlight that there aren't just two different money supply definitions, there are actually at least four different money supply definitions used by Austrians.

The previous posts discussed the issue as basically being MZM versus Frank Shostak's definition, yet it should be noted that two other definitions are used. Gary North appears to still favor M1, and recently the Mises Institute has started to post a definition they call TMS ("True" Money Supply). Regarding TMS some confusion has appeared, both because of the presentation on the Mises Institute web page and Frank Shostak's use of TMS to refer to his own definition. In the presentation, Shostak's article about the money supply is referenced and because of that and because of Shostak's use of the word TMS, one can get the impression that TMS is identical to Shostak's definition. However, as was noted in this comment thread on this blog and as Shostak follower Mike Shedlock also has noted, the TMS published by the Mises Institute is not identical to Shostak's definition, as TMS includes saving deposits while Shostak argued against including them, a view that he still appears to hold judging by his numbers.


Blogger Robert Wenzel said...


What money measure do you watch, and how is it performing of late?

I watch the Fed's M2NSA, as a rough guide, up to 2 months ago it was clmbing at a 10% plus annualized rate. For the last two months, there has been zero growth. Zero!! Flatlined.

2:14 AM  
Anonymous newson said...

thank you for revisiting money supply. would you care to critique this specific comment from steve saville? he doesn't agree with your use of mzm:

"For instance, if institutions, as a group, sell $100B of asset-backed paper and re-invest the proceeds in MMFs (as per Example 4 in our "Cash on the Sidelines" discussion), no additional money will actually be created but both M3 and MZM will increase by $100B.

Currently, the supply of US dollars is growing MUCH more slowly than suggested by MZM.

3:08 AM  
Blogger stefankarlsson said...

Robert, I look at MZM. MZM growth have slowed significantly too, although it is still positive, and I wouldn't make that much from such a short term trend. (BTW, my name is spelled Stefan)

Newson, what he is saying is that it doesn't matter whether assets are immediately available as a means of payment or not. With that argument, one would be able to say that if someone withdraws money from (genuine) time deposits and puts it in demand deposits, non additional money is created even though your holdings have gone from not being immediately available to being immediately available.

In other words, he can't just assert that it doesn't create money. To make the point he is trying to make he must show that MMFs are just as unavailable as money as are asset backed paper.

8:12 AM  
Anonymous newson said...

thanks for your reply.

did you ever come to any conclusion as to why saville may include retail mmfs in his tms+ aggregate? are you aware of the retail funds being somehow more "money-like" than their institutional brethren?

5:32 PM  
Blogger stefankarlsson said...

No, I have no idea why he makes that distinction. If any legal difference had existed then that distinction would have been justified, but I have found no source that would suggest that it exist. However, I am admittedly not a legal expert on this issue and if someone were to hypothetically provide evidence of it I would be willing to change my mind on this issue. But again, that remains so far a very hypothetical if.

11:02 PM  

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