Normalizing against the M1 is an not very meaningful because ignores the fact that the price of a dollar is subject to demand as well. In times of high demand for dollars (like right now), the supply of money (the M1) needs to increase to for the price of a dollar to not rise.
In other words, stock prices normalized to the M1 has the same amount of meaning as stock prices normalized to the number of loaves of bread the country produces, or the number of cars. It's nonsense — you're comparing a price to a metric that only takes into account half of the equation (only supply)!
Sidenote: When the price of a dollar rises, that's deflation; when it falls, that's inflation. That's also why "asset price inflation" isn't precise — inflation measures the change in price of a currency, not an asset. Maybe individual assets go up or down in price, but that happens in response to consumer demand shift. The Fed's mandate is to manage inflation, which is affected by changes in aggregate consumer demand. Therefore, Congress delegated it tools to influence consumer demand as a whole, but not tools to shift demand from one asset to another.
The phenomenon you're observing is: the Fed's monetary policy helps the US grow, which benefits corporations and increases stock prices. The only way the Fed can prevent that is to... stop the economy from growing by letting our currency deflate? Which sounds bad? I.e. the Fed can't do anything to shift consumer demand, short of causing a recession.
TD;DR: If you think stonks are overvalued, then blame Congress, not the Fed. They're the ones who have the power to change that without causing a recession.
[0] https://www.brookings.edu/blog/up-front/2017/12/07/the-hutch...
I was thinking exactly this. Is there any reasonable measure economists use for the demand for dollars? Other than I suppose inferring it from CPI and M1...
Edit: According to this link, it would appear the foreign demand for dollars has declined? https://www.marketwatch.com/investing/index/dxy
When that cash flow stops — people stop eating out at restaurants, or consumers lose their jobs — they need cash (dollars) to pay their obligations. The supply of money is the same — the same number of dollars exist — but the demand is higher now.
Essentially, everyone is getting margin called all at once. If there is no intervention, businesses and people that are in sustainable & healthy in the long-term go bankrupt and fire workers, and our society loses a lot of organizational capital.
We don't want a short term shock (a pandemic) to hurt our long term growth. To avoid that, the Fed injects some money so that the supply can meet the demand. Then businesses can borrow money to pay their employees (and their rent), plus we don't fall into a deflationary spiral.
You need data that includes so called demand shifters or demand multipliers, to estimate the supply and vice versa.
That is, if you observe a supply independent shift of demand, you can use that measure of to identify supply parameters. Even if you di this non parametrically, you implicitly impose a model.
Supply and demand is one of the origin problems of the theory of statistical identification and causal analysis.
The argument is that the textbook definition of the way inflation is described has become detached from reality. people are undoubtly affected and suffering by the price increases in the asset markets.
look at the currency markets where the dollar has dropped 10% against a basket of the largest foreign currencies. Using your definition, would you call this inflation then? Because 10% is much higher than the 2.1 or whatever the fed had just declared.
Also, the Fed can't change asset prices without slowing growth. Is that desirable?
> dollar has dropped 10% against a basket of the largest foreign currencies.
No reasoning from a price change. Another explanation for the drop in the dollars value is decreased demand. And since CPI is still stable, more likely IMO that it's a decrease in demand.
It's not nonsense for policies that are directly concerned with consumer prices, which most that the CPI (or, more precisely, any of the CPIs, of which there are several) is used for do. We have lots of other inflation measures (, industry specific PPIs, for instance) for other purposes.
> Measuring inflation (or whatever you want to call the difference between an asset's nominal value and it's intrinsic value) is still useful
That's not what inflation is supposed to measure, because that's a nonsense thing to try to measure, because there is no such thing as intrinsic value.
> but the current method of pegging everything against the bag-of-goods in the CPI seems like an overly simplistic model.
How? Consumer prices are final prices. Everything else is instrumental to producing final goods and services.
> The intrinsic dollar value of an asset is its value relative to how many dollars there are
No it's not, and even if it was, that wouldn't make M1 a sensible measure. Why not the actual number of actual dollars there are: monetary base. Or something that better captures the number of effective dollars, M2.
If and when that money injection moves around to affect the price of bread will be quite important though.
True, and that's great!
> but you can always buy more stock or real estate.
There is nothing innate about this state of affairs. What is "ownernship"? How many acres of land and I keep to myself with my own shotgun? Surely that's bounded too?
> Supply is harder to increase as well.
https://en.wikipedia.org/wiki/Floor_area_ratio
Every person deserves some amount of floor space near other people's floor space. They do not so deserve private land area.
Land area is held in common in parks, whose size, beauty, and other factors vary inversely with their accessibility. We can vary the park distribution and the vacation distribution to do nice things with the expected nature rejuvenation.
This is completely separate from housing.
I'm sure if it wasn't for the fact that bread expires we would see it traded like stocks too.
Personally I find grocery shopping quite affordable, as I'm sure do most in the HN demographic. However the rate of people experiencing food insecurity in the US was around 12% prior to the pandemic, which shows that grocery costs are a serious concern for many. People in that group, which has expanded this year, do not have the option to increase their grocery budget in proportion to price inflation.
But it's also true that the % of income spent on groceries on average has been dropping over time.
Groceries may have made more sense as a metric when the CPI was invented than they do now.
"Between 1960 and 1998, the average share of disposable personal income spent on total food by Americans, on average, fell from 17.0 to 10.1 percent"
https://www.ers.usda.gov/data-products/chart-gallery/gallery...
But I'm not really sure how they calculate this number in the first place, the USDA page's only citation is "for more information contact", which is kind of lame. It seems likely that it's based on a survey sample though.
It makes sense to me though; we have whole categories of expense that our grandparents just didn't have, they had a lot less stuff than we have. But they needed about the same number of calories. (On the other hand, I bet average % of income spent on rent has gone up...)
Apparently Americans also spend less % of income on food than most other countries, which is kind of odd.
https://www.npr.org/sections/thesalt/2015/03/02/389578089/yo...
For this discussion, the reason it matters that less % of income is spent on groceries -- is that it makes a CPI based on groceries not as good a metric of relative buying power overall.
There's also the cost of healthcare, or the financial repercussion of not having coverage.
People are food insecure. It's freightening. But the root issue is more than food.
In this way, I expect the prices of consumer goods like foodstuffs to continue to decrease over time.
We are living with economic theory that was posited when the most advanced computer was a slide rule.
https://www.bls.gov/cpi/quality-adjustment/questions-and-ans...
> I still don't see how the CPI is factoring this in, do you?
Because value = acceptable opportunity cost = foregone utility
And CPI measures (in closest approximation of any measure) changes in the prices of goods that provide direct rather than instrumental utility. Presuming monetary expansion affects prices but not, in first order effects, production possibilities and relative worth of non-money goods, a consumer price deflator is the most sensible kind of value deflator (one might still contest details of the construction of the CPI, of course.)
It is tempting to say that you can have asset inflation while other assets deflate, but it's not consistent with the general topic of inflation that implies the currency gets devalued.
If the government said that it would collect a special tax to all goods but stocks of 1$, it will increase prices of many goods but it will not be inflation. It's a change in the relative price of goods.
High inflation economies have also seen a surge in pricing in housing, relative to other parts of the economy.
I'm saying assets have had relative changes of value in high inflation economies, where everything is going up.
Say a bag of rice is 100, housing is 1000. In a 100% inflation scenario, it goes to 200 and 2000, but when you look at prices it is 200 and 3000. This points to two effects: inflation + relative price changes.
It's an informal argument against the notion that there is "asset inflation" because of dollar printing. Economies with high inflation have seen "asset inflation" even with all prices increasing. It points to a typical change in demand.
It’s similar to how certain industries can crash while others can boom at the same time. A non-uniform economy is such a basic and intuitive concept, it’s hard to believe it needs to be argued to the average layman.
I think most people agree there is a lot of asset inflation. Your link doesn't match your quote either.
Yeah, “there is no asset inflation” doesn't seem to actually be a common belief.
“Asset inflation is different in kind than consumer price inflation and not what normal people discussing inflation care about” is more common.
I'm not sure why monetarily-driven asset inflation would be an issue at all, unless one expected the driving monetary force to not merely be removed (returning to a more typical long-term pattern of asset price changes), but undone (such that the current overall lift above the prior long-term trend would be unwound before returning to the prior long-term slope.) Producing a monetarily-driven transient bubble.
It's not implausible that that could occur under some circumstances, but I'm not aware of any evidence that there would be anyway of distinguishing circumstances that might indicate it. Certainly, there's no obvious reason to assume such a monetary bubble is the normal case with monetarily-driven asset inflation.
Its been one of the main causes in inequality and unaffordable house prices so is very important. It also makes the economy vulnerable to big drops in prices which could/will happen.
I think our current method of measuring inflation against the CPI is nonsense, the basic premise that you can assume the price of e.g. milk is stable doesn’t even make sense. There’s changes in manufacturing, quality, brands, and market demand that aren't accounted for in the CPI.
Measuring inflation (or whatever you want to call the difference between an asset's nominal value and it's intrinsic value) is still useful, but the current method of pegging everything against the bag-of-goods in the CPI seems like an overly simplistic model. This approach of normalizing asset prices against the M1 supply seems more reasonable to me. The intrinsic dollar value of an asset is its value relative to how many dollars there are, not relative to whatever the price of milk is.
1. http://noahpinionblog.blogspot.com/2013/07/asset-price-infla...
Edit: I am clearly not an economist, please see some of the informative comments below. In particular, it sounds like the CPI does account for some complexities, asset inflation is more commonly supported than I thought, but normalizing by M1 might not make any more sense than CPI.