There has been an interesting discussion between Steve Saville and Paul van Eeden over the monetary aggregates M3 and TMS.



For those not familiar with TMS it stands for True Money Supply and it is a monetary measure based on Austrian economic principles. I will come back to the description of TMS in a moment but let's listen to a couple of discussion points from Steve Saville and Paul van Eeden first.



From Steve Saville in TMS or M3?



A few weeks ago Paul van Eeden (PVE) posted an extremely bearish outlook on bonds that he justified, in large part, by the rapid expansion of M3 money supply. We responded that while we are long-term bearish on bonds (we expect bond yields to move much higher over the coming 5 years), we thought that PVE's premise was wrong. Our reasoning: M3 is a poor indicator of monetary inflation, whereas a vastly superior monetary aggregate, namely the True Money Supply (TMS) developed by Murray Rothbard and Joseph Salerno, reveals a relatively slow rate of monetary inflation.

M3, TMS, and the CPI 1959 to Present

M3, TMS, and the CPI 1980 to Present

10-Year Treasury Yields

Why Is M3 Soaring?

why

why

True Money Supply

The True Money Supply (TMS) was formulated by Murray Rothbard and represents the amount of money in the economy that is available for immediate use in exchange. It has been referred to in the past as the Austrian Money Supply, the Rothbard Money Supply and the True Money Supply.



For a detailed description and explanation of the TMS aggregate, see Salerno (1987) and Shostak The Mystery Of The Money Supply Definition (2000).



The TMS consists of the following: Currency Component of M1, Total Checkable Deposits, Savings Deposits, U.S. Government Demand Deposits and Note Balances, Demand Deposits Due to Foreign Commercial Banks, and Demand Deposits Due to Foreign Official Institutions.



Note the above definition of what TMS consists of carefully.





Chart of TMS as of 2008-07-12





Incorporating all the above arguments, the money supply is defined as follows: Cash+demand deposits with commercial banks and thrift institutions+government deposits with banks and the central bank.

Mystery of the Money Supply Definition

M Prime

M Prime 1968 To Present

M3 1968 To Present

M Prime vs. TMS

Synopsis