Summary

AAS Economics employs their own, Austrian school definition of money supply, AMS. Money is defined as a medium of exchange, necessitating that standard definitions of money supply do not fit their framework. In this system production amounts to payment and the production of wealth is driven by excess production (savings) via re-investment in infrastructure, the building blocks of economic growth. When money is created out of thin air, there is no production to justify it as a medium of exchange and it generates only consumption - draining the pool of real wealth.

The predominant driving factor of the business cycle is the expansion and contraction of the money supply. When central banks intervene in securities markets to alter interest rates they, in fact, alter money supply. This happens through 2 channels: Firstly, the central banks buy or sell securities from the banking system and then, secondly, the banking system changes the rate of which it expands or contracts credit to the broader economy. It can be expanded by purchases of securities from the banking system, and it can be contracted by sales of securities to the banking system.

Recently, central bank balance sheet growth has not been as aggressive as in previous episodes of attempted money supply inflation. Whereas in the US, for example, the annual growth rate of money supply exceeds anything since the formation of the Federal Reserve Board in 1913-14. The divergence between the US money supply curve and Federal Reserve balance sheet growth is telling. Despite dramatic increases in money supply in most economies globally, inflation has remained evident only in asset prices, rather than in consumer prices, but this may change later in 2021 and into 2022. There is the risk that rising CPI inflation may hit first and then be followed by declining economic growth.

AAS Economics’ lagged leading indicator ascertains each country’s next business cycle stage and its optimal asset mix for that stage is applied: Currently the US is in Stage 1 with recommended asset allocation of 30% defensive equities and 70% Treasury Bonds; Eurozone – Stage 2: 100% Equities including 30% in Industrials, Tech & Consumer Disc; Japan – Stage 2: 100% Equities including 22.5% Telecom, Tech, Cons Disc & Industrials; China -Stage 2: 100 Equities including 45% Tech & Cons Disc. Over 3 year period 93% of AASE Notional Equity Portfolios have outperformed benchmark.

Due to the extent of money printing we have seen from central banks, there has been considerable weakening of the economic structures and erosion of the pool of real wealth. The extent of the misallocation is very large and thus AAS expect a considerable downside shock when the economies and markets turn. Moreover, despite this drastic rise in money supply, the government balances with the fed are declining. The government is selling securities to the Fed and transferring the proceeds of those sales directly into the private bank accounts of economic actors. This is “Helicopter money”; the central bank is directly funding the expenditures of the US Treasury.

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