So the key relation you need to pay attention to is in growth of the money supply compared to growth in the real economy. If they are growing at the same rate, prices will be stable forever. If one is growing at a slower rate, you will see a bubble in that side.
And the secondary thing you need to keep in mind, when the money supply is growing at a rate faster than the real economy, and the value of that money is pushed into either consumption(CPI) or investments. But because the Fed explicitly outlaws more than 2% inflation, it must therefore be in investments. Those investments can be anything, from houses to stocks to tulips to receipts of monkey jpegs.
The third thing you need to realize is that once an asset is above their 'true' value, there is no rule that better assets will grow more. What actually happens is those which have the least supply and largest marketing raise the most. So you see houses go up, you see buyback stocks go up, you see collectables go up.
So next you need to look at, how is the money supply going up? The money supply goes up when interest rates fall. Wealthy people who have good credit take out more and more money to buy more and more assets. As the wealthy don't use this new wealth to consume, as they already consume as much as they want, inflation doesn't occur. This is the savings glut of the rich[0]. When this happens, because we don't get inflation, this pushes the Fed to allow even more money printing to occur to allow inflation to hit their 2% target. It becomes a vicious cycle of more wealth inequality begets more interest rate reductions.
But with interest rates at 0%, the Fed is no longer able to move the money supply anymore. Now they need to do it directly. When they were doing it indirectly, they had that indirect buffer, "that's just how the way the world works", but when they do it directly, suddenly they have accountability. So instead of 90% of new money going to the wealthy, maybe only 50% goes to the wealthy and 50% is spread around to the non-wealthy.
So once the Fed starts Monetary Policy 2, now we see inflation. And once inflation kicks in, the Congress and others will see the hurt that is occurring to normal people, and they will push for even more policies that trigger inflation even more. This is what happened in the 70's.
So the Fed needs to put a stop to the bubble, just as they did in the 70s, so they will raise rates. Those raised rates will push the balance to currency, and money managers will work out that fact, and more a bigger and bigger percentage of their investments into this area. This will crush all of that extra value, and boom will go the inevitable cyclical money velocity bubble. Houses will drop down to their fundamentals, stocks will correct, monkey jpegs will crash to 0.
The big thing we need to watch as this occurs is what happens to things that we thought were not correlated, but ended up correlated based on everyone buying into the bubble. What happens when people pull their broad index funds? When the index funds are net negative, how low can the market go? Can the Fed have the precision to crash the Bitcoin market, to slow down the housing market, and not allow the stock market to fall 90%? I guess we'll see.
And the secondary thing you need to keep in mind, when the money supply is growing at a rate faster than the real economy, and the value of that money is pushed into either consumption(CPI) or investments. But because the Fed explicitly outlaws more than 2% inflation, it must therefore be in investments. Those investments can be anything, from houses to stocks to tulips to receipts of monkey jpegs.
The third thing you need to realize is that once an asset is above their 'true' value, there is no rule that better assets will grow more. What actually happens is those which have the least supply and largest marketing raise the most. So you see houses go up, you see buyback stocks go up, you see collectables go up.
So next you need to look at, how is the money supply going up? The money supply goes up when interest rates fall. Wealthy people who have good credit take out more and more money to buy more and more assets. As the wealthy don't use this new wealth to consume, as they already consume as much as they want, inflation doesn't occur. This is the savings glut of the rich[0]. When this happens, because we don't get inflation, this pushes the Fed to allow even more money printing to occur to allow inflation to hit their 2% target. It becomes a vicious cycle of more wealth inequality begets more interest rate reductions.
But with interest rates at 0%, the Fed is no longer able to move the money supply anymore. Now they need to do it directly. When they were doing it indirectly, they had that indirect buffer, "that's just how the way the world works", but when they do it directly, suddenly they have accountability. So instead of 90% of new money going to the wealthy, maybe only 50% goes to the wealthy and 50% is spread around to the non-wealthy.
So once the Fed starts Monetary Policy 2, now we see inflation. And once inflation kicks in, the Congress and others will see the hurt that is occurring to normal people, and they will push for even more policies that trigger inflation even more. This is what happened in the 70's.
So the Fed needs to put a stop to the bubble, just as they did in the 70s, so they will raise rates. Those raised rates will push the balance to currency, and money managers will work out that fact, and more a bigger and bigger percentage of their investments into this area. This will crush all of that extra value, and boom will go the inevitable cyclical money velocity bubble. Houses will drop down to their fundamentals, stocks will correct, monkey jpegs will crash to 0.
The big thing we need to watch as this occurs is what happens to things that we thought were not correlated, but ended up correlated based on everyone buying into the bubble. What happens when people pull their broad index funds? When the index funds are net negative, how low can the market go? Can the Fed have the precision to crash the Bitcoin market, to slow down the housing market, and not allow the stock market to fall 90%? I guess we'll see.
[0]: https://scholar.harvard.edu/files/straub/files/mss_richsavin...