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[log in to unmask] (Roger Sandilands)
Date:
Wed May 23 07:46:34 2007
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On the question of asset bubbles, I agree with Tony Brewer that money that is not used to buy stocks does not "have to be put somewhere else". When someone or some institution sells a share, they may immediately buy another one with the proceeds, and then that seller can do the same. The net sentiment in the market causes asset prices to rise or fall without there being any more money out there. 
 
The transactions velocity of money is extremely volatile, and many times greater than the relatively stable income velocity (or demand for money as a percent of national income). 
 
Central bankers need to watch both, but must avoid the mistakes of 1929 when undue preoccupation with asset prices and "unproductive credit" (a la Banking School or real bills doctrine) led the Fed to raise interest rates sharply at a time when the real economy was turning down, thus precipitating the Great Depression.
 
Roger Sandilands


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