Most Austrians get it wrong about money, per Hayek himself

[bart]

Most Austrians get it wrong about money, per Hayek himself

"There can be no doubt that besides the regular types of the circulating medium, such as coin, notes and bank deposits, which are generally recognized to be money or currency, and the quantity of which is regulated by some central authority or can at least be imagined to be so regulated, there exist still other forms of media of exchange which occasionally or permanently do the service of money. Now while for certain practical purposes we are accustomed to distinguish these forms of media of exchange from money proper as being mere substitutes for money, it is clear that, other things equal, any increase or decrease of these money substitutes will have exactly the same effects as an increase or decrease of the quantity of money proper, and should therefore, for the purposes of theoretical analysis, be counted as money".

-- Friedrich Hayek, Prices and Production, 1935, p. 96




http://www.nowandfutures.com/images/m3_plus_credit_and_debt_bkx.png





Same chart, but with US derivatives added in:

http://www.nowandfutures.com/images/m3_plus_credit_debt_deriv_bkx.png




And for those who might object that there's some double counting in the data - of course there is... but its not only basically consistent over time, it is also mostly eliminated when looked at on a rate of change basis.

[cjppjc]

Allow me to be the one to admit I'm trying to understand these charts in relation to the quote by Hayek, unfortunatly I'm thick.

Help.

Please.

:confused:

[bart]

Allow me to be the one to admit I'm trying to understand these charts in relation to the quote by Hayek, unfortunatly I'm thick.

Help.

Please.

:confused:


Thanks for asking, and I ain't buying that you're thick. ;)

I'm not sure, but you're probably missing the context that most Austrians believe that money is only composed roughly of cash, coin, savings accounts & checking accounts per what they call Austrian Money Supply (AMS) or True Money Supply (TMS) - which doesn't include things like Money Market Funds or jumbo CDs (CDs over $100k) or credit or derivatives or gov't debt or most of M3 etc.

My primary point is that they just are plain unaware of what Hayek actually said, and incorrectly insist on failing to use a broad definition of money.


All the charts do is three things:


Add up M3, credit, debt, etc.
Apply an estimated correction (a proxy based on banking & financial stocks) to account for debt deflation
Show the annual rate of change (in blue and read on the right hand scale) to emphasize that we did have real live deflation... and will probably return to it when we have another correction in financial stocks.



The charts could also be very roughly compared to Finster's FDI, except that they're only for the US where the FDI is world wide (frankly, I use it for confirmation of what the FDI is showing).

How's that?

[cjppjc]

My primary point is that they just are plain unaware of what Hayek actually said, and incorrectly insist on failing to use a broad definition of money.




Don't these newer charts say if all money is used things are not as bad as one might think?

[bart]

Don't these newer charts say if all money is used things are not as bad as one might think?

Very tough question, since it involves large value judgments.

Those charts are designed to show existing & historical inflation or deflation by standard total money supply data only, and with a debt deflation correction since 6/2007... and don't include two large key factors for the overall economy - time lags and velocity.

Overall economy time lags aren't terribly complex to factor in, and run in the 12-18 month range. One of the reasons for the size of the range is velocity... and velocity itself is hellishly difficult to reliably quantify, and humans and human confidence are notoriously difficult to predict... and velocity still sucks. And that's without getting into possible "currency events" or sudden stops or severe supply disruptions (or the condition of Finster's beasties ;) ).

If I only had a penny for all the electrons I've sacrificed trying to model what's ahead in the broad economy...

[cjppjc]

Very tough question, since it involves large value judgments.

That's why you get the big bucks.:)

If I only had a penny for all the electrons I've sacrificed trying to model what's ahead in the broad economy...


I thought the tin foil helped with your electrons.:)

[bart]

Very tough question, since it involves large value judgments.
That's why you get the big bucks.:)

Do you know my ex wife?! :eek: ;)



If I only had a penny for all the electrons I've sacrificed trying to model what's ahead in the broad economy...
I thought the tin foil helped with your electrons.:)

I'd have evaporated into my constituent elements long ago if it weren't for my *special defenses*. :D

[WildspitzE]

Hey bart, thanks for the graphs.

I haven't made my way through the entire panoply of charts in your website, and I'm sure that you've done the following research, so if you have direct link that would be awesome.

I'm trying to find a series of charts that compares:

AMB vs CPI, Alt-CPI (shadowstats), and Median CPI

Total Bank Credit for Commercial banks vs (CPIs above)

M1 vs (CPIs above)

M3 proxy (shadowstats) vs (CPIs above)

bart's broad Money Measure vs (CPIs above)

In the past I've only looked at what was available on FRED, thus, I could see that since the birth of FIRE, M1 increase was closest to CPI increase. However, we know the problems with plain vanilla CPI, etc.

Any other insight would be appreciated. Thanks in advance man.
Cheers.

[bart]

Hey bart, thanks for the graphs.

I haven't made my way through the entire panoply of charts in your website, and I'm sure that you've done the following research, so if you have direct link that would be awesome.

I'm trying to find a series of charts that compares:

AMB vs CPI, Alt-CPI (shadowstats), and Median CPI

Total Bank Credit for Commercial banks vs (CPIs above)

M1 vs (CPIs above)

M3 proxy (shadowstats) vs (CPIs above)

bart's broad Money Measure vs (CPIs above)

In the past I've only looked at what was available on FRED, thus, I could see that since the birth of FIRE, M1 increase was closest to CPI increase. However, we know the problems with plain vanilla CPI, etc.

Any other insight would be appreciated. Thanks in advance man.
Cheers.

I don't track Median CPI (assuming you're talking about either the one from the Cleveland or Dallas Fed).

Mostly I don't have any charts that match what you're looking for, although this (warning - very wide chart http://www.nowandfutures.com/images/images/m3_base_credit_gdp_cpi1966on.png ) does have some of the data. Note that it uses my M3, which predates shadowstats reconstruction by 2-3 months (I published in April 2006), and is weekly instead of monthly.

In general my Fed Watch page is where you'll find data like that, and is where that wide chart exists - as a link only.

As an aside, the Fed did a large data revision on the weekly H8 report from which I get most of the data to reconstruct it.



Here's a very long term chart using 10 year moving averages which does show some of the data too.

http://www.nowandfutures.com/images/m2m3_cpi_base_money_supply.png

Interesting point about the broad Money Measure and CPI though... hmmm (pause for chart creation frenzy)... here's a picture of it with both CPI & CPI w/o lies going back to 1970. And be careful about excluding velocity during interpretation.

http://www.nowandfutures.com/images/m3_plus_credit_and_debt_bkx_l.png

[WildspitzE]

Thanks for the charts bart. I like median cpi vs ordinary cpi, but obviously the adjusted cpi is the best of the three. How about vs. ppi?

Btw - the link to the graph didn't work for me. :confused:

Btw * 2 - check your inbox re: this topic.

[bart]

Thanks for the charts bart. I like median cpi vs ordinary cpi, but obviously the adjusted cpi is the best of the three. How about vs. ppi?

Btw - the link to the graph didn't work for me. :confused:

Btw * 2 - check your inbox re: this topic.

I could add PPI to that chart but it would lose its focus and also violate my rule about a maximum of 4 elements per chart... but here's CPI vs. PPI which should address your curiosity.

http://www.nowandfutures.com/images/cpi_vs_ppi.png



Sorry about the broken link - I inadvertently doubled up part of the address. This one works: http://www.nowandfutures.com/images/m3_base_credit_gdp_cpi1966on.png

[friendly_jacek]

Bart,
I have not been frequenting itulip lately and need to catch up a lot, so bear with me. I have a few questions. I saw your charts comparing long term M3 with inflation, well done and very convincing.

I also see the above charts looking at the broad measure of money. That (and weak USD) would explain the strength of the current rally.

What gets me concerned is total M3 is dropping very rapidly in the last couple of months after a rapid acceleration in the beginning of the year (green in the below image). The blue line will dip well into negative soon. Nothing like that is visible in the previous timeframe (even though M3 growth would slow down during recessions). I don't understand where it is coming from and I'm worried that it will create a short term deflationary shock. Do you see that in your total money reading? should we worry about it? Thanks!

http://www.itulip.com/forums/picture.php?albumid=8&pictureid=121

http://www.iaconoresearch.com/BlogImages/09-09-15_m3.png

BTW, this is the story that got me interested in this issue: http://www.telegraph.co.uk/finance/financetopics/recession/6190818/US-credit-shrinks-at-Great-Depression-rate-prompting-fears-of-double-dip-recession.html

Is this credible?