Diagnosis of Monetary Inflation in Asset Markets

Abstract

The defining symptom of monetary inflation in asset markets is an empowerment of irrational forces, otherwise described as an inflaming of flawed mental processes. In an economic boom, below-neutral interest rates stimulate irrational exuberance, especially via positive feedback loops. In a weak economy, interest income famine induces desperation for yield, which leads investors to take on bad bets which for many are disguised in speculative narratives about which they would be sceptical if in rational mode. In all asset inflation, carry trades boom. The chapter includes an analysis of the leads and lags between monetary inflation in the asset markets and in the goods markets, taking account of disinflationary camouflages.