DeLong helps the bankers play the Fed accommodation game. I always like Brad's little math tricks, being such a bad mathematician myself. Kling wonders if DeLong is close to Austria. Brad would make a great Recalculationist, and his math would be accurate.
So, let me simply discuss the whole issue of Speculators, Fed accommodation, and Norms, and games. If, by some magic, the Fed can force open an accommodative banking channel, then entropy based Kelly gamblers will fill the channel with optimum sized trades such that any other effort to find a minimum variance trades will be drowned in quantization noise. In English, the transactions costs are now very high in finding available Variance trades in an Entropy dominated channel.
From an optimization point of view this is clear, if the Fed can distort the channel, then the channel should develop recoding; changing the frequency and size of trades across the yield. Look at the Shannon channel formula, the C/B in the exponent. By magic we distort B, the channel bandwidth. Then the market has lower C, the goods rate; and hence a Recoding must occur in an Entropy channel (this is the Ramsey search). In the financial system, the Recoding will simply result in a production chain that generates a way around the Fed distortion.
Boys and girls, my guess is that right now, is that entropy coding dominaters variance coding in the banking channel. Fiscal and Monetary games cost lots in terms of transaction costs, because the markets have to recode.
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