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Changes in the money supply are notoriously difficult to connect to anything, which is why the Fed targets short-term interest rates as a policy instrument and not the money supply.

As the quantity theory indicates, the money supply will track changes in nominal GDP pretty closely: M = (1/v)*PQ. If you graphed nominal GDP you would probably mostly see the trend growth rate too, but that doesn't mean recessions don't happen (do a plot of the yearly growth rates of the series instead of the series itself).

As for the so-called "Greenspan bubble" I think it is mostly just a myth if you mean bubbles are caused by excessively low interest rates and too-rapid money creation. For example, US house prices started diverging from previous trends in 1995, at a time when Greenspan was actually raising interest rates. Greenspan can be blamed instead for trying to get a little more mileage out of a weak recovery by stupidly telling people to take out ARMs a couple of years ago.

The real culprits are IMHO financial deregulation and exploding income inequality, the combination of which channels ever more funds to increasingly exotic investments in search of higher returns. Real interest rates were on average lower before 1970 than they have been since, and we didn't have these kind of asset bubbles developing.

by TGeraghty on Sun Oct 7th, 2007 at 03:35:40 AM EST

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