The “true money supply” measure is a measure of the money supply pioneered by Murray Rothbard and Joseph Salerno and is designed to provide a better measure than M2. The Mises Institute now offers regular updates on the TMS metric and its growth.1
Money supply can be a helpful metric in observing economic conditions. Historically, money supply has fallen prior to recessions and economic crises, and has risen during economic expansions.
Since 2014, money supply growth has ranged from about 7 percent to 8.5 percent. In October of last year, money supply growth hit a seven-year low of 6.8 percent, although this proved not to be an indication of any new trend. Overall, money supply growth has been quite stable over the past two years.
In July, however, money supply growth hit a 36-month high, reaching a year-over-year growth rate of 8.6 percent. Growth has not been as high since August of 2013, when growth reached a rate of 8.9 percent.
This data suggests that, in spite of a lackluster economy, the central bank’s reluctance to raise the target interest rate has helped in increasing the money supply, and may even help bring about the Fed’s target price-inflation rate of two percent.
In general, the economy has been too week to drive substantial gains in money supply — contrary to what the Fed wants — although the Fed’s continued commitment to a target rate at 0.5 percent or lower may be paying off (from the Fed’s perspective).
Although money supply growth since 2014 has been considerably lower than it was from 2009 to 2013, the drop in growth from 2013 to 2014 did not fall to the levels seen prior to the 2008 financial crisis. In other words, the Fed’s massive stimulus efforts appear to have partially worked in preventing contractions in the money supply.
Unfortunately, the economy has never managed to finds its footing on its own, and it’s likely central banks around the world will continue to pursue ultra-low interest rate policies unless the economic data changes significantly for the better.
For reference, the second graph shows total M2 and TMS levels: