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.
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...