In this article we will show that the Macro-Economy and its growth can be modelled and explained exactly in principle by commonly known Field Theory from theoretical physics. We will show the main concepts and calculations needed and show that calculation and prediction of economic growth then gets indeed possible in Dollars and Cents. As every field theory it is based on an equation of continuity, which in economic terms means the full balance of all sources and sinks of Capital (Assets) and real Goods (GDP) in the bulk. Uniqueness of field theory of macroeconomics then can be derived from adapting Noether's Theorems, which is based on the notion of invariants to derive unique field equations. We will show that the only assumption which is needed for a self-consistent non-linear macro-economic theory is that the well known Quantity Equation, used in corrected formulation, holds at least locally in time.

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Last week, I wrote a fairly comprehensive piece laying out some of the macro issues around the Fed and other central banksâ ultra-easy monetary policy. The gist of that piece was that, due to the political economy, monetary policy is now seen by policy makers as a good way to âsteerâ the cyclical economy through peaks and troughs. Fiscal policy, while used effectively during the depths of crisis in 2008 and 2009, is largely off the table.

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The Supreme Court in the US has just made a ruling that corporate misstatements is perhaps not so important if market prices are already imperfect. According to the NYTimes,

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On a seasonally adjusted monthly basis, the Case-Shiller Composite 20 index was up 0.2% in April - and the Composite 10 was close to unchanged - the smallest monthly increase since prices bottomed in early 2012.

On a real basis (inflation adjusted), prices actually declined slightly for the first time since 2012. The price-rent ratio also declined slightly in April for the Case-Shiller Composite 20 index.

It is important to look at prices in real terms (inflation adjusted). Case-Shiller, CoreLogic and others report nominal house prices. As an example, if a house price was $200,000 in January 2000, the price would be close to $278,000 today adjusted for inflation (39%). That is why the second graph below is important - this shows "real" prices (adjusted for inflation).

The first graph shows the quarterly Case-Shiller National Index SA (through Q1 2014), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through April) in nominal terms as reported.

In nominal terms, the Case-Shiller National index (SA) is back to mid-2004 levels (and also back up to Q2 2008), and the Case-Shiller Composite 20 Index (SA) is back to November 2004 levels, and the CoreLogic index (NSA) is back to December 2004.

The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to Q4 2001 levels, the Composite 20 index is back to August 2002, and the CoreLogic index back to December 2002.

In real terms, house prices are back to early '00s levels.

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Here is a similar graph using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.

This graph shows the price to rent ratio (January 1998 = 1.0).

On a price-to-rent basis, the Case-Shiller National index is back to Q1 2002 levels, the Composite 20 index is back to December 2002 levels, and the CoreLogic index is back to April 2003.

In real terms, and as a price-to-rent ratio, prices are mostly back to early 2000 levels. ]]>