Money Supply Blues

As I hear more and more about this economic crisis, the pundits and politicians' voice begin to merge and it becomes a sort of white noise. There isn't much sense to be made out of most the reports, so as a statistician I prefer to look at data and see what the real story is. Data sometimes lies, but to be frank it lies a lot less than politicians and businessmen scrambling to keep their jobs. I went to the Bureau of Labor Statistics (BLS) website for some graphic interpretations of various economic data. As I had said back in March, the United States is in a recession, perhaps the worst in a very long time. But what does the data say about this? Inflation is currently at 3.7%, not much different from last year. The unemployment rate (6.7%) increases every month, but we're still nowhere near where we were in 1982 when the rate was around 10 percent. What really worries me is not the labor indicators, it's the monetary indicators. Check out the latest data and you will see what worries me.

In a little over a month the total money supply for Treasury and the Federal Reserve have sky-rocketed. This is the medicine that is supposed to soothe the credit markets. But at what cost? As Milton Friedman pointed out, inflation is always a monetary problem, how prescient. Some may say, so what? These are hard times that call for drastic measures. The cost of these drastic measures has been the potential implosion of the American government's credit-worthiness. To increase this money supply, debt must be sold, and interest paid to debt-holders. As this debt grows, it is nearly certain that the dollar will begin to lose its value. We saw this last year when the dollar plummeted against the Euro. This would change after Europe entered its own downturn, but the lesson remains. The danger of applying Keynesian economic theory is that in trying to breathe life into an economy one may end up destroying it instead.

One must ask during times such as these, how much government intervention is necessary to stave off disaster? Many people, including the insulated folks in DC, ponder this question as if it is abstract, and there are no real consequences to such tinkering. Much of this downturn can be attributed to overzealous tinkering in the housing market. If the government cannot take responsibility for their complicity in this matter, what makes you believe they have the wherewithal to fix it? We are witnessing the government solution, which is to print money. We are walking down a dangerous road, not unlike the 1930's. Government interference in economic markets exacerbated what could have been a severe recession and helped it become a depression. We have historical precedent, I can only hope that decision-makers will pay attention, but you'll pardon me if I doubt it.