Thursday, February 6, 2014

The Fed and its minions

They perform a high utility service and we set aside about 1.5% of our liquidity to pay for it.  The dollar and its curve have high utility to us. The Fed is good, except in times of rapid change it gets behind the eight ball.

What does that Fed company do?  They make the the dollar curve match the economic yield curve. Their main tool is make M1 match short term liquidity demand, using the M1 velocity inverted. The cost of that match is about 3% times the internal Fed error curve. But as the share of GDP, any error induced by internal Fed inefficiency is not that large.

The Fed has an additional charge from skew between the optimum monetary zone and the real economy. I do not think that optimum monetary skew is out  of bounds, but it is large. I haven't thought it thru to get a good measuring unit.

Otherwise, as we have seen, most of the internal economic roundaboutness is the large state, small state problem. That is not a Fed problem.

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