On Austrian Economics

Economics Economics Questions
1

I was looking at TMS the other day, when I got the following thought. Fairly simplistic though, I’ll be using the typical Austrian definitions of inflation and deflation (not price inflation/deflation)

So, the government keeps inflating the money supply by creating new currency, or the money supply inflates because of the fractional reserve system. The TMS should keep track of inflation due to both government printing and fractional money supply. Now, when an economic downturn finally occurs, there are defaults on loans, and other market corrective activities from previous malinvestments, that cause deflation. Thus, if I were to take TMS and subtract the actual physical amount of currency out and about, whenever there is a recession, I should be able to find a contraction. So far, I think it’s fairly accurate

I’ve attached a text file, resave it as a .csv extension. The last column is a list of TMS adjusted with currency. Tell me what you think.

2

What do you mean by physical amount of currency?

If you mean actual coins and bills then that fluctuates by the season, there is a higher demand around Christmas for presents and such so you would find a contraction in the money supply around every January when it gets deposited back into banks–or the other way around, not really sure how you are calculating the contraction since I didn’t look at the spreadsheet.

3

I prefer graphs to spreadsheets

I see what you mean…money that didn’t exist in the first place disappears ao governments print more money and force banks to lend to get the system ‘going again’.

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4

What I mean by physical amount of currency is all the physical bills out there in existance. Just the actual amount of money that has been minted/printed.

5

There’s an article on St. Louis Fed’s site that talks about how the amount of money in circulation fluctuates as I was saying earlier…or at least I believe that’s where I read it.

6

I’m looking at amount of money in circulation

Edit: There is a statistic that just says, “Amount of Currency”, if you check out the Federal Reserves statistics, that is where I’m getting it from. Perhaps I’m still mistaken?

Here: http://www.federalreserve.gov/releases/h6/hist/h6hist2.txt

Look at “Currency”

Edit Edit: MathewWilliam: I believe that is a correct assesment. However, more importantly, the fact that it seems to accurately pinpoint recessions seems to be some good evidence for Austrian Economics.

7

The amount of real, hold in your hands, currency only gets counted when it is in circulation. When the banks hold it it is counted as a bank deposit or something.

So what you’re saying is that the amount of currency being held by the public is somehow an indication of a recession?

Seems feasible as people’s on hand monetary holdings would probably increase during a time of uncertainty but the vast majority of physical dollars are held by foreign institutions if I’m not mistaken.

8

Here’s what I’m trying to do:

TMS should show inflation/deflation due to fractional reserves and due to government printing. I want to isolate the fractional reserve element, thus a decrease in this element implies defaults on loans/etc. and should also correspond with economic downturn. I thought the number I was looking at was the amount of printed money. That if you grabbed all the physical dollars, and counted them up, that would be the number; and if you look at this number from one year to the next, you could just subtract them to see how much money the government has minted/printed. If it is not the ‘currency’ data, where could I find it?

9

I assume you have played around with this data: http://mises.org/content/nofed/chart.aspx?series=TMS

10

Yup, that’s on one of the columns in the spreadsheet.

11

My brain started to hurt when I thought about this last night. I realise I don’t know as much as I should about money.

I thought it over, and the TMS does not double count money (money that doesn’t really exist). It only measures money that is available for use right now. So wouldn’t it be impossible to calculate what you’re looking for using the TMS measure in the first place?

12

Alright, so here’s how I understand it/this is how I’m thinking of this/allow me to explain myself better.

Say Joe is a banker, George is a farmer, and Molly is a potter.

Joe has 100 gold coins, and he decides to save them under an account with George. In turn, Molly wishes to buy a pottery wheel and takes out a loan from George for 50 coins. Here the money supply has inflated, since Joe has 100 coins that are to be accessible to him, and Molly has 50 coins accesible to her. The money supply has inflated from 100 coins to 150. (I’m getting most of my thinking from here: http://mises.org/daily/3040)

Now, if Joe suddenly wishes to redeem his money, and takes out all 100 coins from George, the bank defaults and Joe has lost 50 coins.

However, taking out the gold coin scenario we have, and placing in the government, the government can prop George up, either offering a loan to him, or if this is a closed system, the government would mint up 50 more coins and inflate the money supply that way.

Either way, the money supply can be inflated one of two ways: either by fractional reserve banking or by government printing. Either way, inflation leads to misinvestment because, in the scenario above, if Molly was buying a pottery wheel from a supplier with money that essentially doesn’t exist, we are creating a market signal that should not exist. The wheel-supplier might forecast that the demand for wheels have gone up until somewhere down the line, a default is made, and the series of forecasts come crashing down. This is the gist of the Austrian Business Cycle (does someone else want to come in here? I think I’ve got this right.).

Thus, bad inflation corresponds to misinvestment, and deflation corresponds to a correction to this.

Now, since inflation and deflation can occur only by adjustments in the FRB-system or by direct printing, my idea was to look at and isolate the inflation/deflation due to direct printing. Thus, with such an adjustmed-flation and by the reasoning so far, under recessions we should see adjusted-deflation.

13

Sorry to bump this, but it’s been a year, so I was wondering if anyone could answer this?