Discussion of David I. Fand’s “Are we facing a stock market bubble?”

Substantial idle capacities in Europe, Japan, Southeast Asia and Latin America add significantly towards generating an elastic augmented supply for America. As a consequence of this hypothesis of a Keynesian global economy, an increase in American aggregate demand will lead to an increase in the U.S. trade deficit but not necessarily to any rise in U.S. prices as measured by the CPI, the PPI or the ECI. There is, however, strong evidence that the extremely rapid money growth has led to substantial increases in the prices of equities, real estate and nontradables. But the absence of inflation in the U.S. tends to handcuff the Fed since the chairman finds it difficult to restrict the accelerating growth of money supply in this rather extraordinary situation. Consequently, market professionals are liberated to borrow and leverage their portfolio positions, and equity prices continue to rise.