“Clearly, the greater the credit expansion and the longer it lasts, the longer will the boom last. The boom will end when bank credit expansion finally stops.” – Murray Rothbard
This is the truth that most economists, the media, central bankers, politicians and your money manager either do not know or are unwilling to tell you:
Money supply is everything.
Full stop. That is all that matters. The problem is that Austrian Economists are the only ones who understand this, while all other economic schools believe in the manipulation of the money supply and fail to understand what money even is.
It is true that you can time the market by following the money supply, therefore: When the Fed sells, (contracts the money supply) you sell because there will be a bust and market crash; and when the Fed buys, (expands the money supply) you buy because there will be a boom and maybe hyperinflation.
Please read on, because the context behind this conclusion is far more enriching:
In 1912 Ludwig von Mises published “the best book on money ever written,” The Theory of Money and Credit. He noted that money is nothing but a medium of exchange used to facilitate transactions of goods and services more easily than it would be with barter exchange. He traced the origins of money, discussed gold as money, inflation, inflationism, and was able to bridge micro and macroeconomics by showing what is good for the individual is good for the nation. This was over twenty years prior to Keynes who refuted Mises without any proof, truth or logic by declaring that “behaviour which might make a single individual poor can make a nation wealthy.”
What Mises further showed is that money is a good. Money is therefore no different than bread in that money is subject to demand and supply factors. The demand for money is not how much people want to have money; rather, it is how much individuals want to hold the money that they have, while the supply of money is the quantity of money in existence. However, money as a medium of exchange gives it several peculiar properties unlike all other goods. Unlike bread which can only be consumed, money can only be exchanged for other goods. Money is neither a production good nor a consumption good. And unlike water, air, unclaimed land or minerals, money is always and at all times owned by someone.
Once the demand and supply factors for money as a good are understood, combined with the unique properties that money has as a medium of exchange, several economic truths become apparent, all of which have been ignored for over 100 years.
In the case of bread, as more bread is produced by a society, the price should go down and this is considered beneficial for society. However money has the opposite effect from all other goods. In the case of money, the more money that is produced, the lower its ‘purchasing power’ becomes and the less you can buy with it. Therefore, as the supply of money increases, the ‘purchasing power’ of money decreases.  When the purchasing power of money decreases, the price of goods, services and assets increase. The increase in money supply / decrease in purchasing power is called ‘currency debasement,’ and it is the reason why Zimbabwe has ‘starving billionaires,’ why Venezuela’s currency has collapsed, and why your real-estate, stocks and bonds have had exponential price increases since 2009.
For all economic goods, no economist or central bank can calculate an ‘optimal supply’. In this regard, money follows the same rules as all other goods. Per Mises:
“It must be pointed out that the levels of the total stock of money and of the value of the money unit are matters of complete indifference as far as the utility obtained from the use of the money is concerned.”
In other words, if you double the money supply, society won’t be ‘doubly rich,’ and once you read further you realize that neither will all prices double. Once this is understood, you also realize that there is no such thing as an optimal supply of money as,
“Society is always in enjoyment of the maximum utility obtainable from the use of money.”
There has never been, nor will there ever be an economic calculation to prove what the optimal money supply of money ought to be, any more than a calculation can show what the optimal supply of bread ought to be. The Fed uses the term ‘data dependent’ to explain economic calculations which cannot be explained, shared, proven or verified.
The truth is that the Fed understands the money supply no more than it understands the interest rate, both of which can only be determined by the market, and not by central planning calculation.
If you can understand how the creation of new money debases a currency and can understand that there is no such thing as an ‘optimal money supply,’ then you may come to ask yourself who the Fed serves by increasing and decreasing the money supply from time to time. This can be answered when you recall that money always is owned by someone. Since money is owned by ‘someone,’ each newly created dollar must go somewhere.
Mises noted that money first goes to ‘economic agents,’ who are at an advantage because they are allowed to bid up the price of goods before the purchasing power of money decreases for the rest of society. Economic agents today can be thought of as banks, hedge funds, the super-rich and large corporations who can receive bail-outs and near limitless amounts of credit at cheap rates (i.e. everyone except the average person).
When it comes to the ‘Trillions’ of dollars of newly created money that can be borrowed in and around 0%, there are not many places where these economic agents can put this money. They’ve found that the best things to do is to deposit it back at the Fed to earn interest as ‘excess reserves’, share buy-backs, Mortgage Back Securities, US Treasuries, stocks, bonds and real estate. The $4.5 Trillion of ‘money out of thin air’ that the Fed created helped these economic agents at the expense of society.
So please tell any leading economist:
The expansion of the money supply is called ‘inflation’; the increase in asset prices is because of inflation. Now that the Fed is decreasing the money supply, all assets that increased because of inflation will now decrease. This is the boom and bust cycle that has been going on for over 100 years since the inception of the Fed. This is socialism, it is anti-capitalism and anti-liberalism.
You can see ‘inflation’ below. You can also see the decrease in the money supply that began in 2007 which caused the recession and market crash of 2009. The increase in the money supply being QE1, QE2, and QE3 followed. You can now see the decrease in the money supply that began at the end of 2017. The recession (depression), market crash and QE4 increase to the money supply are to follow.
- Murray Rothbard, America’s Great Depression, (Auburn, The Ludwig von Mises Institute, 2000), 13.
- “The best book on money ever written” is a famous Murray Rothbard quote
- Ludwig von Mises, The Theory of Money and Credit, (Indianapolis, Liberty Fund Inc., 1980), 31.
- John Maynard Keynes, The Collected Writings of John Maynard Keynes. Vol. XXI, (London, Royal Economic Society, 1978), 334.
- Mises, The Theory of Money and Credit, 95.
- Ibid., 170.
- Ibid., 251.
- Ibid., 165.
- Ibid., 165.
- Ibid., 161-162.