Money Supply, True Money Supply & Gold musings

[Wonk]

Not sure how many folks follow money stock levels, but I figured I'd post an update on an Austrian-school metric: True Money Supply.  For those not familiar with money stock, there are the usual metrics in Keynesian/Monetarist circles: MB, M1, M2, M3 (discontinued) & MZM.  They can be useful to a certain extent, but I also like to check out Austrian measures.

In Austrian circles, there is TMS (True Money Supply) as well as several variants.  More info on TMS here:

http://mises.org/content/nofed/chart.aspx?series=TMS

I was looking for an updated total for TMS and it appears the tool on mises.org has been broken for a while (nearly a year).  So I went back and constructed a current (10/10) TMS aggregate from all of the components.  As of the October data, TMS stands at $7,046 billion--which is a rise of about 10.5% over the year before.  There's no question money is moving into the system at the moment--even though the monetary base has been relatively stagnant recently. 

On a side note, I do a lot of research on historical data relating to money stock measurements and gold because there are a lot of recurring patterns.  The late '70s was an interesting time in the U.S. because it was one of the only examples in history a country was on the brink of a complete loss of confidence in it's fiat currency--but survived.  Credit Paul Volker and his brass balls for that one. 

Anyway, if you look at TMS in January, 1980 and the price of gold, there's an interesting correlation.  More on that in a minute....

When the Bretton Woods agreement was adopted in 1944, there was a U.S. requirement to have a 25% gold backing of it's reserves.  Gold reserve requirements prior to this ranged typically between 25-100% of central bank reserves in most countries.

Due to overseas redemptions and the draining of U.S. gold, Nixon closed the gold redemption window in 1971 and the USD was devalued throughout the 1970s via inflation.  Right around the beginning of 1980, there was a peak in the gold price and a trough in investor confidence in the dollar. 

So what's the correlation? 

If you take the price of gold in Jan 1980 and multiply it by the ounces of gold in U.S. reserves, it met the 25% level (even exceeding for a bit) required under Bretton Woods I if you are using TMS as your monetary aggregate.  I'm not saying this has to happen again, because it doesn't.  It's just an interesting slice of history given the current state of international affairs.

[Storm]

Wonk, I'm curious what happens if you multiply the price of gold now but the amount in US reserves?  Does it still equal the 25%?  Of course, we don't really know how much, if any, gold is actually left in the US reserves.  They could have leased it all out already, and I wouldn't be surprised if they did.

[Wonk]

Wonk, I'm curious what happens if you multiply the price of gold now but the amount in US reserves?  Does it still equal the 25%?  Of course, we don't really know how much, if any, gold is actually left in the US reserves.  They could have leased it all out already, and I wouldn't be surprised if they did.

Well, the U.S. is technically in a good position (yes, I said it) with respect to foreign creditors.  The level of gold as a percentage of FOREX reserves is quite high--reported at 72%.

Bank reserves or the monetary base is less rosy: about 18%.  If you use TMS as the measuring stick for a reserve currency and its currency in circulation, it's at a paltry 5%.  No country really needs to go on a strict 1:1 gold standard so long as it's managed properly.  Unfortunately, it rarely is. 

Switzerland was seen as the last bastion of a healthy currency at 40% reserve to currency in circulation until they dropped it in '97.

RE: U.S. gold supply.  True, we haven't had an audit in some time.  It may or may not be there.  Of course, the U.S. is a custodian to about 6,000 tons of gold from overseas governments.  That's nothing a stroke of a pen couldn't solve.