An updated version of MA

I have recently updated an “Austrian” measure of the UK money supply labelled MA. The Executive Summary is as follows:

The 2008/09 financial crisis and subsequent recession has created renewed attention to UK monetary aggregates. This discussion paper argues that although measures of the money supply are crucial to understanding the economy, existing approaches are flawed: “Notes and Coin” is too narrow, and M4 is too broad. An alternative measure that is based on the Austrian school approach to the definition of money (MA) is proposed, which indicates the following:

  • From January 2008 – January 2009 MA fell from a monthly growth rate of 27.9% to one of – 3.9%
  • In the 30 months from December 2008 – May 2011 MA grew in 6 of them but contracted in 24

This finds evidence to support the conventional wisdom that a sustained and increasing monetary expansion during the “great moderation” was followed in 2008 by a catastrophic slowdown in money creation that has become a sustained monetary contraction.

The paper can be viewed here and the data is available to view via Kaleidic Economics. Kaleidic is a business roundtable that will be launching soon.

Note that in May 2011 MA fell by -5.9% (compared to the previous year), meaning that it has been contracting since October last year. The monetary deflation that has followed the financial crisis shows no signs of abating.


  • Robert Sadler says:

    Hi Anthony,

    Do you consider this monetary deflation to be a problem in and of itself or merely a symptom of another deeper issue?

  • Anthony J. Evans aje says:

    Hi Robert
    I think the entire monetary regime is flawed, and needs drastic and radical reform. There’s no doubt that a prolonged period of monetary contraction would lead to a slowdown in economic activity, but my main concern is avoiding a 1930s style meltdown without unleashing hyperinflation.

    • Robert Sadler says:


      What would you recommend to achieve this goal? I.e. avoiding the meltdown without hyperinflation? I gather from your concern that you believe there is a delicate balancing act here between recovery and hyperinflation.

      For my own part, it’s not clear to me that this deflation is particularly serious but rather inevitable and temporary (I have Horwitz’s book and I am slowly reading it btw). Speaking as a lender, banks are lending less partly because of increases in risk aversion (on the part of banks and potential borrowers) and partly because of extremely low interest rates. Because of the low interest rates many banks in my industry cannot lend as much as they otherwise would. This is because funds are tied up in loans hedged with long term swaps (where the idea was to fix interest charges for their borrowers and protect refinancing positions) at significantly higher rates. The low interest rate environment has made it close to impossible for banks to unwind these swaps, and reduce the risk of their loan book without incurring huge losses. Subsequently, they cannot extend as many new loans.

      So because of meddling by the BoE the process of project liquidation is happening at a slower pace thus contributing to a longer slowdown in economic activity.

      • Current says:

        That’s interesting.

        So, these loans you mention earn a high interest rate for the bank, but the bank are worried that the businesses they have loaned to aren’t going to pay in the future.

        How is it though that the swaps you mention along with the low interest rate environment prevent the bank from unwinding these deals?

        • Robert Sadler says:

          Hi Current,

          Actually just the opposite. The loans earn a low interest rate. Actually for a bank, we are not concerned about the level of interest rates but rather the margin. In other words, there is the interest rate the bank borrows at (say 3 month LIBOR) and then we add a margin (say 1%). The margin is our gross profit.

          The reason the margins are so low is that they were set during the boom period when the risk of lending was perceived as being low. However, the banks got their risk assessments completely wrong and they are charging too small a margin given the riskiness of the loans. This is one major problem.

          The other is the swaps. In order to earn big fees on derivatives banks (particularly in the real estate industry) would enter into a swap transaction that matured years beyond the maturity of the underlying loan. The argument was the following: a borrower wishes to buy an office building which has a tenant with a lease expiring in 20 years. The bank lends money for 10 years but has a swap expiring at the same time as the lease. The swap fixes the rate paid by the borrower at say 5% for 20 years. When the loan matures the borrower can sell the building, pay off the loan and transfer the swap with the building giving the new buyer a neatly hedged cash outflow.

          However, say at maturity the central bank has reduced rates to near zero. Why would a new buyer want this new swap paying 5% interest when he could pay next to nothing (and get a new swap). Well, he doesn’t. So, at maturity, the Borrower has to pay the bank the amount of the loan, plus the present value of the remaining 10 years of swap payments (5% per year less near zero). In some cases, the remaining value of the swap plus loan is greater than the value of the building. This is a major problem for the Borrower and a huge problem for a bank with lots of loans set up just like this.

          Thus unwinding these deals is very difficult for the bank and creates delay and risk when it comes to making new loans.

          • Current says:


            I think I’m contributing to the first group of people you mention. I bought a flat in late 2005 with a tracker mortgage. The mortgage guaranteed interest of 0.45% above the base rate. Unfortunately for the mortgage provider it had no floor, this was very stupid of the provider more trackers have a floor, so when the base rate fells so did my mortgage. For the last couple of years I’ve been paying 0.9%. I doubt my mortgage provider have made any profit from me and I expect they’ve made a loss.

            • Robert Sadler says:

              All these things seemed like a good thing at the time. Unfortunately, bankers, like most people have short memories and I don’t expect them to learn from this.

      • Anthony J. Evans aje says:

        Simple answer – I don’t know. I’m like the farmer who – when asked for directions – says “I wouldn’t start from here”.

        It is a balancing act and the reason I oppose central banking is because it requires an epistemic burden we can never satisfy. That said, it could be worse. Best case scenario is an orderly unwinding, and that may well be what’s happening.

        I’m not an expert though!

        • Robert Sadler says:


          From the banks I have inside knowledge of, its definitely orderly but its going to take a long time…

      • Evening Robert,

        When AJE and I set about creating this measure , it was driven by an understanding of a proper definition of money being the final thing for which all goods exchange. This is all spelled out in our co authored paper where the Actual Money supply was first introduced. For me, it helps me understand the world bettter. It tells me that despite all the new money creation, we have a real contraction. This means business that did formally have credit support, now do not. As this was institutionally driven, I do not think these people who are having their business destroyed are at fault. Thus freeze the money base so no deflation can take hold. This was advocated in 1998 by Huerta de Soto and I did a 1200 word summary of why freezing and building on honest money reforms thereafter would be worth while. This is shown in the “Emperors New Clothes” Article on this web site.

        Fractional reserve free banking that you are reading about in Horwitz book, does not address the fact that people hold money on a precautionary basis. I know fund managers who have hundreds of millions in cash on deposit thinking they are waiting for the correction to happen so their capital can buy more assets as the correction unfolds. Little to they know that they are supporting these very companies and malinvestments by having their money on deposit. FRFB is an unstable system. Just as it was in all teh locations it was tried with multiple bank failures, whilst better than now, it is unstable . There is then the problem of with the new cash in the system, what loanable funds to give to whom under the FRFB system? It need more work. A full reserve system, compliant with contract law and accounting rules is all you need. The latter two points dont get addressed as in the FRFB literature , they are not viewed as an issue. Thus, a deflationary money supply and policy recomedations from FRFB would be slow to get.

        • Tim Lucas says:

          Toby –

          Why so worried about what is a correct measure of money quantity? Publishing aggregates such as these, implictly tends to support the idea that stability of any such aggregate is acheiveable and/or desirable, whether this be the intention or not. In doing this, it distracts attention from the more important non-neutral effects caused by the QE process. i.e. any “stability” is acheived only through handing out dollops of new central-bank created credit through favoured channels, disrupting pricing signals and redistributing wealth. As you know, any aggregate measure tells us nothing about the magnitude of these effects. This sort of measurement is no better or worse than attempting to measure the effect of inflation through a basket of goods/assets/whatever.


          • Tim, I do agree with alot you say here. On the mainstreams own terms we do this definition. I think it is as good as it gets . It provides us with a lens to look at things and this lens is not the all seeing glass but a one with just a little bit better vision.

          • Current says:

            I agree with Toby about this. Though a monetary aggregate can never be perfect it’s better to have something instead of nothing.

            • Tim Lucas says:

              Are you sure Toby, Current?

              I always think Sir John Cowperthwaite’s answer on what poor countries should do in order to pull themselves out of poverty illuminating:

              “They should abolish the Office of National Statistics”.

              Of course, this would leave economists with less to do.

              It is an unfortunate thing that that which can be shown apriori must be subject to the burden of proof, especially when the theory is quite unproveable no matter how many statistics are gathered.

  • Barney says:

    A 3,000 year history shows that sound money is the basis for sustainable prosperity. The solution to the escalating global crises thus reduces to how, not whether, to revert from fiat currencies to a gold money standard. Since gold (and silver) are monies that people flock to anyway, as confidence in their governments and central bankers paper currencies ebbs away, then those central financial powers need to be slowly curtailed (eg. 1. stop bailing out failing entities: 2. start reducing taxation, etc.) thus allowing the market to re-allocate those freed-up resources, into productive enterprise (aka growth). Will there be enough politicians who realise this, and realise it in time, before the market (i.e. people) prevails, and there is widespread social dis-order, in many more countries? I believe that Money Supply is not the business of governments; only the quality of the money. Let competitive banking deal with Supply; let governments deal with Soundness.

  • Current says:

    That certainly makes me less worried about inflation.

    • Current, when Anthony and I created this measure , my biggest worry was the prior inflation. It is now the money deflation. This is disguised by QE . It would be even more pronounced had QE not happened . All in business are deleveraging and banks are not lending . You know as well as I that if a bank is paid back a loan and does not lend out again, that money goes back from whence it came ie from no where. This means that business formally supported by this credit no longer have that support . The re adjust as best they can. Reality is many go bust. Fixing the money base as I have said stops these contractions and are the foundations of honest money .

      • Current says:

        By coincidence I was just writing about this. I’ll send in an article about it soon.

        It’s true that fixing the monetary base eliminates the problem of recessions caused by the quantity of money falling. That’s an issue for the recessions where the money supply has fallen dramatically, such as the Great Depression and this one. However, it can’t prevent changes in the demand for money from causing recessions. Instead changes in that demand will cause opposite changes in prices. That will itself cause booms and busts.

        • Morning Current,

          A prolonged change in the demand to hold cash balances will cause prices to fall (absent govt messing about etc) and business will need to adjust accordingly . This will only be a “bust” type adjustment if the prior cause was a credit expansion . I am not here to try and stop the former as this is part of the healthy market ebb and flow that is the price of a free society. For the record, I advocate a money base freeze only because it is not the fault of the average business man that he is overextended in this environment .

          • Current says:

            A prolonged change in the demand to hold cash balances will cause prices to fall (absent govt messing about etc)

            Yes it will in the long run, but in the short-run it will do other things. If there is a fall in demand for money then there will be a boom until prices have risen, and if there is a rise in demand for money then there will be a bust until prices have fallen.

            business will need to adjust accordingly

            Well, businesses have to adjust to what central banks do today, we all do. We can in the long run, but it still causes real losses.

            This will only be a “bust” type adjustment if the prior cause was a credit expansion .

            If demand for money grows then that means a fall in spending it. We will always be in an environment where short-run prices can’t change very rapidly, so any rise in demand for money will cause a recession. As a result there will be recession. That there may be no misallocation involved can’t change this.

            • Current , it would be nice if these misallocations could only happen if there was a massive war or some natural disaster , which is the only thing that I could see delivering up a systematic change in the demand to hold money on the scale to trigger a recession. In an ecomony of 100% reserves, you have not credit created boom and bust, so what you say would become mute and I submit only apply to types of events mentioned. In an unstable FRFB system (they all historically have been), of course , the banks could accomodate and lend to distressed business to keep the whole show on the road and trigger the next boom bust cycle. Such a substandard system, although better than what we have, I think could only be a milestone to full reserve banking and stability.

              • Current says:

                it would be nice if these misallocations could only happen if there was a massive war or some natural disaster , which is the only thing that I could see delivering up a systematic change in the demand to hold money on the scale to trigger a recession

                It would be nice, but I don’t think it’s very likely.

                Unfortunately demand for money, or velocity, does vary for other reasons. It can vary because payment systems change, or because there is uncertainty in another economy.

                It would only take a small change in velocity to make a substantial change in the price level. In a 100% reserve system roughly speaking, every % change in velocity would be reflected by a % change in the price level. That would mean that only a small amount would be needed to cause a deflationary recession or an inflationary boom.

                you have not credit created boom and bust, so what you say would become mute and I submit only apply to types of events mentioned

                Even with 100% reserve ABCT can occur because that system doesn’t have any mechanism to ensure that the demand for money and supply meet. If the demand for money were to fall then prices would be bid upwards. There would also be the same Cantillon effects that happen when extra money is created without demand. Those would set in motion the same misallocation of capital. That the change comes from the money demand side rather than the supply side wouldn’t make any difference.

                In an unstable FRFB system (they all historically have been), of course , the banks could accomodate and lend to distressed business to keep the whole show on the road and trigger the next boom bust cycle.

                Well, of course I disagree about the historical stability of FRFB systems. But, for the reasons I mention above if you think they have been unstable then you better start supporting Central Banking because 100% reserve banking isn’t a viable alternative.

                I also disagree with this “keeping the show on the road” point of view. In a recession, as at any other time banks can create loans if there are customers lending to them. That can be used for capital formation, this is a good thing.

                It can’t “trigger the next boom and bust cycle”. What could do that though is continuing monetary expansion after recovery has begun, something modern central banks seem to me to be doing at present.

  • Current says:

    Incidentally, I found that the UK payments administration have counted the number and size of the payments they made during 2009.

    It was £69.4 trillion. Your graph has MA for that year as being ~1.4 trillion. That means that if we take all of the transactions the UK payments administration administered into account then V in the equation MV=PT is at least 49.6.

    • Anthony J. Evans aje says:

      On the kaleidic website I also have V, but I use conventional aggregrates. I didn’t know about this this UK payments figure, but I’ll look into compiling V where V = MA/P*T. Thanks for this.

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