The recent implosion of the global equity markets – from Hong Kong to New York – engendered yet another round of the semipternal debate: should central banks contemplate abrupt adjustments in the prices of assets – such as stocks or real estate – as they do changes in the consumer price indices? Are asset bubbles indeed inflationary and their bursting deflationary?
Central bankers counter that it is hard to tell a bubble until it bursts and that market intervention bring about that which it is intended to prevent. There is insufficient historical data, they reprimand errant scholars who insist otherwise. This is disingenuous. Ponzi and pyramid schemes have been a fixture of Western civilization at least since the middle Renaissance.
Assets tend to accumulate in “asset stocks”. Residences built in the 19th century still serve their purpose today. The quantity of new assets created at any given period is, inevitably, negligible compared to the stock of the same class of assets accumulated over decades and, sometimes, centuries. This is why the prices of assets are not anchored – they are only loosely connected to their...