True “Austrian” Money Supply (TMS)

Since the calculation of the money supply according to the concept of the True Money Supply at http://blogs.forbes.com/michaelpollaro/austrian-money-supply/ is unfortunately no longer updated, we have recalculated the TMS, based on the data of the European Central Bank. The series will be updated at regular intervals. Questions regarding the concept of the True Money Supply are answered in this article: http://blogs.forbes.com/michaelpollaro/money-supply-metrics-the-austrian-take/

From the perspective of the Austrian School of Economics, inflation is an increase in the money supply. The increase of prices is only one of many symptoms of this inflation. Historically prices have fallen quickly when there was no inflation – technical progress and the ever-present competition on the market are responsible for this. Even in an inflationary environment, these mechanisms continue to work (despite inflation leading to misallocations and distortions), which is the reason why inflation is higher than price increases most of the time.

Inflation (defined as an increase in the money supply) shows how much redistribution is occurring thanks to the monetary policy. Inflation stood at an average of eight percent in the last two decades – while interest rates where continually declining. As a comparison: During the era of the gold standard – a period in which the foundation for today’s prosperity was laid – inflation was at only two percent (the quantity of gold increases by an average of two percent annually in the long run), while the interest rate was four percent. Governments, who are the main profiteers of these extrem measures which lead to a worsening of market institutions, still don’t get it done to reduce debt – actually the opposite. This fact is an alarm signal for the future monetary policy as well as the financial feasibility of promises made by the government.