Debt and the imprecise yield curve

Says Brad:

Thus the dynamic system has two basins that converge to two attractors: a basin that converges to "normal" with employment near full, the nominal interest rate equal to inflation plus the warranted natural real rate of interest, and inflation near the central bank's target; and a basin that converges to "Japan" with nominal interest rates at their floor and deflation proceeding at its (slow) speed limit.

Another form of the Kling two state hypothesis, though Kling would have no reason to label one normal as opposed to the other.

Let's limit the inflation measure to consumer inflation, the household only, then talk about the two states from the consumer perspective. In both states we have a continuing drift in households inventory volatility. During inflation volatility is increasing, during deflation it is decreasing.

The inflation drift is handled by the consumer with debt, the deflation drift handled with savings. The debt bridge handles the Maturity Transformation needed to keep a maximum entropy curve. The size of the consumer debt/savings cycle represents the distance between the two states, measure in terms of yield curve malformation.

The distance between the deflated and inflated states.
The consumer is asked to take on an increasing load in managing the yield curve over time due to technology and demographic changes. The distance between the two consumer state increases when adjustment fails to take place higher up in the distribution network. Infrastructure in consumer distribution eventually runs to its limit and be restrictive regardless of the consumer state.

To explain this, I use the precision metaphor, and the consumer is the least significant bit. That bit, by design, always takes two steps between the two states (Nyquist). And the two states will always be separated by two consumer steps. The underlying manifold adjusts to the consumer.

The consumer can get to either state as needed. The issue today is not the consumer, but the produce farther up the line. It is the producer's turn to take a step, and the producer will also have two states. However, the spectrum is much slower the higher up the curve, and steps take longer.

The economy is a six bit computer, imprecise. But the economy always adjusts the underlying saddles and dwell points such that the six bits are used to potential. (Transaction rate * transaction size tends to a constant across the terms in the aggregate yield curve).

To take an extreme case. What happens when it is the turn of Central Government to contract. In that case the economy is in the following binary state: 000001 and wants to go to 111110. The most significant bits corresponding to higher points int the yield curves. When a bit changes a bubble is literally passed up or down the curve to an adjacent term.