Thursday, February 20, 2014

Uncle Milt's Error

When the consumer is in balance, reserves cover the arrival variation of goods, the error in pricing and the return on reserves.  So the bank lowers rates below that level. The consumer will save more, borrow less and suppress prices until the return on reserves again balances.

The effect on the bank is that they have to be much more efficient, more efficient then they think.  Inflation is not generally a bank error.

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