Irreversible damage to the economy from central bank interventions (example no. 92175)

The internet is a wonderful source of data. For instance, we can find estimates for M2 (a form of money supply) here.

I present for your edification or amusement charts of non-M1 M2 data since November 1980.

There are two charts--the upper chart simply shows the growth of non M1 M2 money in the US economy going back to November 1980.

Historical data exists prior to this date, but there was a change in the way the number was calculated--apparently new forms of money were included after November 1980 which were not counted before, making comparison before and after this date problematic.

The lower graph is a chart of the data, but with the exponential trend removed. The exact method I used after tabulating the data was to take the natural logarithm of the reported number, use a linear detrend on the logarithms, and then calculated e^(detrended ln) to obtain the logarithmic detrended data. The resultant graph shows the periods where monetary growth was faster than average over the past 30 years (upward sloping sections) and periods where monetary growth was slower than average over that period (downward sloping sections).

This is not to suggest that the average rate of monetary growth over the past 30 years is the correct one. To my knowledge, there is no "correct" rate of monetary growth (perhaps we could try 0?).

In the larger scheme we see faster than average monetary growth from '81 to '85, average monetary growth from '85 to '91, and slower growth (and even actual shrinkage) from '91 to '95 (the era of the "strong dollar policy"?), more rapid growth to about '03, followed by roughly average growth into the spike of '09, followed by slower than average growth (the data I have used ends in mid-January 2011).

Working from memory, there was a bit of a housing bubble collapse in the early '90s. There was something of a recession after '01 perhaps into '03. It's possible that there are connections between asset values and monetary growth. This will be investigated at a later date.

Now we will consider the impact of monetary growth on unemployment. One common argument of the Keynesians is that increasing the amounts of money in circulation is a requirement of maintaining acceptably low unemployment. Let us test this notion. We use the monthly unemployment figures from the BLS website which we have previously discussed here and here.

Below is a scatter plot showing official unemployment rate plotted against the detrended non-M1 M2 data discussed above. I have only unemployment data going back to January 2000, so here is unemployment vs money from Jan-00 to Feb-08 (before the amazing change in state).

I always supposed that more money was supposed to decrease unemployment. However this chart shows just the opposite. More money = more unemployment. So--who really benefits from money creation?

But the story gets better. Let's add the part where the unemployment data drop into the black hole (up to Dec 2010).

Yow! So now reversing the money growth machine doesn't reverse the rise in unemployment! Talk about a Keynesian nightmare!

This type of behaviour in a natural system would be described as "irreversible". Climate scientists frequently fret about the possiblity of irreversible changes in climate due to human or natural activities. What we observe above may be an actual observation of an irreversible change in a dynamic system brought about by human activity. How exciting! Bernanke et al. are making history! If any of the eight or so of you who read this know him, why not drop him a line to tell him how he's doing?

In the natural world, the behaviour is not completely irreversible, because if the driving force in reversed long enough, eventually the system does return to its previous state. But the system usually displays hysteresis, meaning the way back to the previous state may be long and arduous. I fear the same may be true for the unemployed in America.