I go after Harless in defense of Kocherlakota

Harless raises the supply and demand for bonds to find illogic in one of the Fed's own bankers. Here is my take on Andy's take:

Me: First, agents do both real goods and money goods when they adjust on a yield curve. The bankers argument was about the time misallocation of real goods, induced by below equilibrium short term rates.

Andy:

Suppose that the Fed were to keep the funds rate near zero but people began to be dissatisfied with that rate and began anticipating the 1% to 2% long-run real rate.

Me: They became dissatisfied after saving short term and buying real inventory short term. Remember the basic idea? Induce demand.

Andy:

What would happen? People would stop lending short-term money to the government at the near zero rate and instead start lending money elsewhere – for longer terms and to riskier borrowers.

Me: People start both buying long term goods and investing money for the long term. The yield curve makes an adjustment.

Andy:

The more this continued, the easier it would get to borrow money. The easier it got to borrow, the more people would buy with the borrowed money, and the higher the prices of those purchases would go. And prices would continue going higher until...when?

Me: Yes, growth above potential.

But in screwing with the yield curve, much of that demand was for goods substituted from the future. We get more demand than we planned for at the start, and less then we planned at the end.