Friedman became famous using only half the equation (the means-of-payment money supply), leaving his believers with the labor of Sisyphus.

The lags for monetary flows (MVt), i.e. proxies for (1) real GDP and the (2) deflator are exact, unvarying – respectively. Roc’s in (MVt) are always measured with the same length of time as the specific economic lag (as its influence approaches its maximum impact; as demonstrated by a scatter plot diagram).

Not surprisingly, adjusted member commercial bank “free/gratis” legal reserves (their roc’s) corroborate/mirror, both lags for monetary flows (MVt) –– their lengths, or frequency, are identical — (as the weighted arithmetic average of reserve ratios remains fairly constant)

The lags for both monetary flows (MVt) & “free/gratis” legal reserves are indistinguishable. Consequently it has been mathematically impossible to miss an economic forecast (bubble, etc.).

There are no inaccuracies, just some non-conforming & unavailable data (e.g., revisions have been overlaid & lost, flawed deposit classification, data discontinued, etc.). This is the “Holy Grail” & it is inviolate & sacrosanct.

The BEA uses quarterly accounting periods for real GDP and deflator. The accounting periods for GDP should correspond to the economic lag, not quarterly.

Monetary policy objectives should not be in terms of any particular rate or range of growth of any monetary aggregate. Rather, policy should be formulated in terms of desired roc’s in monetary flows (MVt) relative to roc’s in real GDP. Note: roc’s in nominal GDP can serve as a proxy figure for roc’s in all transactions. Roc’s in real GDP have to be used, of course, as a policy standard.

Because of monopoly elements and other structural defects which raise costs and prices unnecessarily and inhibit downward price flexibility in our markets, it is probably advisable to follow a monetary policy which will permit the roc in monetary flows to exceed the roc in real GDP by c. 2 percentage points.

In other words, some inflation is inevitable given our present market structure and the commitment of the federal government to hold unemployment rates at tolerable levels.

Some people prefer the devil theory of inflation: “It’s all Peak Oil’s fault.” This approach ignores the fact that the evidence of inflation is represented by “actual” prices in the marketplace. The “administered” prices of the world’s oil producing countries would not be the “asked” prices were they not “validated” by (MVt), i.e., validated by the world’s Central Banks ( i.e., as Friedman maintained “inflation is always and everywhere a monetary phenomenon”)

I have no idea what is included in the CPI, but shouldn’t asset prices (be it real estate, or stock prices) be included with an appropriate weighting.

Also, could you explain why most countries do not publish how they calculate CPI?

The Fed’s view on bubbles helped fuel what became known as “the Greenspan put” — the conviction among investors that the Fed would let them take excessive risks and step in as custodian if the bets they made went awry. By giving market participants an incentive to assume greater risk than they would have otherwise, the Fed’s laissez-faire position on bubbles may have contributed to the surge in credit that helped push housing inflation skyward in the first half of this decade.

Despite Greenspan’s defenses, there are quite a few signs the Fed should look for when attempting to identify asset bubbles, in order to reduce the risk of implosion. Consider these 10 elements to identifying bubbles in the equity markets in real time that the Fed, or anyone else for that matter, can use:

1. Standard Deviations of Valuation: Look for traditional metrics — P/E, price to sales, etc. — to rise two, then three standard deviations away from the historical mean.

2. Significantly elevated returns: The S&P500 returns in the 1990s were far beyond what one could reasonably expect. Consider the years around Greenspan’s “Irrational Exuberance” speech:

1995 37.58
1996 22.96
1997 33.36
1998 28.58
1999 21.04

And the Nasdaq numbers were even better.

3. Excess leverage: Every great financial crisis has at its root easy money and rampant speculation. Find the leverage, and speculation wont be too far behind.

4. New financial products: This is not a sufficient condition for bubble, but it seems that every major bubble has somewhere in the mix, new products. It may be Index funds, derivatives, tulips, 2/28 Arms.

5. Expansion of Credit: With lots of money floating around, we eventually get around to funding the public. From Credit cards to HELOCs, the 20th century was when the public was invited to leverage up also.

6. Trading Volumes Spike: We saw it in equities, we saw it in derivatives, and we’ve seen it in houses: The transaction volumes in every major boom and bust, by definition, rise dramatically.

7. Perverse Incentives: Where you have unaligned incentives between corporate employees and shareholders, you get perverse results — like 300 mortgage companies blowing themselves up.

8. Tortured rationalizations: Look for absurd explanations for the new paradigm: Price to Clicks ratio, aggregating eyeballs, Dow 36,000.

9. Unintended Consequences: All legislation has unexpected and unwanted side effects. What recent (or not so recent) laws may have created an unexpected and bizarre result?

10. Employment trends: A big increase in a given field — real estate brokers, day traders, etc. — may be a clue as to a developing bubble.

While we can debate whether or not the Fed should intervene by popping bubbles, we can all agree that, at the very least, they should not contribute to bubble inflation . . .

Won’t the bursting of an asset price bubble not lead to deterioration in long-term employment? So it becomes part of the Fed’s mandate.

On price stability – why don’t we include asset prices in the calculation of inflation? Stable prices are good for long-term prosperity – why should it only include consumption prices and not investment prices?

Gaurav

I believe that regulation should be minimal, and work. Greenspan said today:

“It is important to remember, however, that whatever regulatory changes are made, they will pale in comparison to the change already evident in today’s markets. Those markets for an indefinite future will be far more restrained than would any currently contemplated new regulatory regime.”

That’s what I’ve always believed. If you allow a crisis, it’s much worse than minimal regulation. Here I agree with Keynes, there’s no good reason for it.

By minimal, to the extent that I understand them, I would include CDO’s and CDS’s. Anything meant to shift risk, in other words, needs to be looked at. I’m not saying always regulated, but looked at to make sure the system is transparent and collateralized. I keep hearing about risk. If you try to shift it to others or expect the government to cover you, it makes it easier to risk.

As to the Fed, I think that Greenspan willfully ignored problems, but I’m not a fan of the spigot theory, which says that if interest rates are too low or there’s too much capital around, you’ll end up with a bubble. Politically, if people are making money and feeling secure, however foolish they are in feeling that way, raising interest rates to spoil the party on a theory will be hard.He should have slowed the economy to check the engine, but a lot of people kept telling him to drive.

The sad thing is that, I know I could be wrong, the things that we needed to do, like a clearinghouse for swaps and Greenspan slowing the economy a bit to get us to check the engine, would not have been that hard or onerous to the market.

— Posted by Don the libertarian Democrat

I’ve always wondered what someone who had been a party to these important monetary decisions thought about the viability of such a plan. My personal opinion is that price stability is of paramount importance, and a system that minimized the human aspects (i.e. political pressure, personal leanings, etc.) would be a net benefit. However, human intervention would probably still be necessary during crises that require a quick decision to provide varying levels of liquidity.