Here is the smoking gun. Note the sharp contraction in the US monetary base before the last two recessions and again in 2010. Monetary base (M0) is plotted net of excess bank reserves on deposit with the Fed, which are not in circulation. The Fed responded after the contraction had taken place, instead of anticipating it.
The long-term problem is that the monetary base should not be expanding at 10 percent a year. More like 3% to 5% — in line with real GDP growth.
So with massive liquidity creation now, the stock market is rising but in ’07/08 the market was overpriced while liquidity was restricted. Hmmmm – so Economics101 is bunk?
2006/2007 were heady days. The market ignored a negative yield curve in late 2006 which warned of a coming credit contraction. So Econ 101 may not be all bunk — just that the market ignores the warning signs when it has its head in the punch bowl.