Rates and inflation

As long as the Fed keeps short term rates below the inflation rate, and the retail banking system is efficient, deflation is induced by rates too low. Earning on reserves is less than the economy, that pushes prices of goods down. Rates too high cause inflation. All this assuming an efficient retail banking sector.

New Keynesians get it wrong, the fiat is still accurate because of low transactions costs across the curve. The money markets use the dollars own accuracy to corect the fed errors, still at low cost. The Treasury curve over the last thirty years, its shape, was not quite an accurate representation of the real economic curve  Inflation was mostly the economy rebalancing producer and consumer prices.

For most of the past thirty, the real flow of goods has been kinked as the real economy corrects out a severe disturbance, the Secstags. The mild deflationary trend was the fed ignoring the kink on behalf of its capital owner Congress. The fiat bankers should be borrowing cash and lending ten year notes, putting the real kink back in its curve.

Let's look:

 Volker raises rates, cpi jumps; repeat until crash. Prior to our current crash, it was the economy trying to rebalance suddenly. So the economic rebalance happened in CPI inflation and PPI deflation, the economy was too unbalanced and crashed. The Fed just tagged along offering a mild deflationary force, and still going so. But the economy is still rebalancing, and mild CPI disinflation occurs as long as the fed under prices short term liquidity.

Can't the economy ever rebalance? No, because of this large/small state imbalance.

What if the fiat bankers properly kinked the Treasury curve? Well, it would simply be known to a wider audience just how dysfuntional the government channel is. A sever imbalance the fed cannot correct.

But wait, shouldn't producer prices be falling relative to consumer prices rising?  They do, during the crashes.  But the ten year earns too much, and causes a mild inflationary effect on producer prices, this is the other half of the fiat error. If the fiat banker removed its mild deflationary effect, then consumer prices would inflate a bit and producer prices deflate a bit as the economy tries to correct itself.

The Fed errors because its capital owner tells it to, but we all know that and the cost of accounting for that is mild. It is the real disturbances caused by Congress and the government channel that is the problem.