Fake rates and the cost of doing business in dollars

If the quoted rate for fiat money near 0%, and inflation is 1.8%, then holding money costs 1.8% over year. Each year the economy is growing in real terms at 3%. Money velocity per year is around 7, meaning businesses turn over their cash reserves 7 times per year. Then the firm has to profit 8% on transactions. A negative return on money of 1.8% represents the cost of doing business in dollars. The inflation costs hit the firms which do business in dollars and have to hold dollar cash reserves.

When one year money cost the inflation rate, then cash reserves can be held in demand deposits and earn the inflation rate and do not cause a drain on operation. If households and firms earn the inflation rate on deposits, then they need only gain 5% on operations. The real cost of using dollars is the difference, about 3%. Cash is a necessary value in the economy, companies cannot operate unless they keep about 15% of their cash flow in reserves to cover variations and inputs and outputs. The Fed thinks business are holding too much cash, and they want them to pay a penalty.

 Here is cash and demand deposits. It has grown considerably, dramatically. It sure seems excessive. How did it get there? Via the government, which has taken out some 4 trillion from the Fed in exchange for interest free long term bonds.  Where this money is, I do not know, at the moment. But is it too much?

No, the cash reserves are about 15% of GDP. Everything seems normal to me.  Why not raise the short term rate? Because the government in DC cannot afford the interest payments if we do. If you look at the Bush era what do we see?  Very low cash reserves, not enough to cover the variations in operations so we crashed. Why do necessary cash reserves vary from 15%? Too much risk.

Just a side note, 15% reserves is what is predicted by a queuing theory macro model.

Let's look at velocity. Wow, it is just the inversion of velocity, no surprise, they are the same formula. It seems that when cash turnover is high, then reserves are low.  Our uncertainty about the future can deviate, incorrectly, it seems. A puzzle.

How did I get 15% as the approximate reserve ratio? Well, a firm has one standard deviation input stock in house,  another standard deviation is en route on the truck, and 15 percent cash is held in reserve while 15% of output product is held in output. I may be wrong, but I hand waved it. This result comes from the minimal transactions norm in queuing theory. It seems like a fundamental constant of nature which is governed by the maximum entropy law. The result is closely related to the optimum Nyquist sampling rate and also related to Jim Hamilton's double peak theory and the Pauli exclusion principle. What is the relationship between Hayek roundaboutness and maximum entropy queuing theory? They are one and the same, and the accurate macro model.  Paul Samuelson is to Keynes what Claude Shannon is to Hayek.

Beyond that, the optimum reserve ratio is likely violated when bankers run amok. Bankers attempt to impose a Samuelson model on a Shannon economy.