Saturday, January 18, 2014

Euler vs Shannon

Brad Delong says the Fed's QE is not that risky. When I assume the Fe4d acts fairly fast, and markets value is a nice rounded bell curve, then I see the Fed costing about a half point of GDP by distorting the curve. The Fed research itself posits a change in rates of less than a point, even less than a point. Big Whoopie.

Unless... we are deliberately illiquid. When that is the case phase shift in the Fed sampling bandwidth, look here, creeps suddenly out of band, and volatility blows. On that post I referenced, here, look at that volatility in interest costs. See it explode? It is exploding as the Feds become relatively late in doing its update.  That rising volatility in the US budget is a killer, Congress can never handle that, believe you me.
I call it Shannon, because this is a channel problem in government, DC is not going to make its shipments.

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