I have often wondered why central banks think raising interest rates reduces inflation, I never saw the connection. When the central bank lends to the economy, it drains money from the economy, disinflation. When the central bank borrows from the market it adds money to the economy, inflation.
I notice this in the data. The bank loans less money, rates rise along with inflation. Volker had that problem, as did Bernanke. I often think bankers are using the bizarre expectation function and have no real clue what they are doing.
When was the last time raising rates worked to reduce inflation? When Volker let the rates rise? No, inflation rose right along. How did Volker raise rates? He simply loaned less money. It was the market that pushed rates up, not Volker. Volker simply quit doing the disequilibrium. The market threw itself into the recession, Volker had nothing to do with it. This is a recent subject in economics.
Why do economists think that running the central bank up against the bounds of the market is equilibriating? Why do they think that central bankers should always be causing volatility and cycles by avoiding the neutral position? Economists simply have never studied stability theory, if they did they would figure out that they are simply causing economic disruption with the ridiculous.
As near as I can tell, economists who are clueless about the flow of water start using this thing called the expectation operator, taken from linear least squares statistics. They used that incorrectly, misplacing the time function, not accumulating the variance and a bunch of other crap. It took 50 years to teach the bozos about spectral theory. Taking less money from the economy, raises rates and inflation. If the Fed were neutral, its effect on the economy would be a Gaussian minimum phase effect, it would have very little effect, and the economy would stabilize. The more I think about it the stupider economists seem to be, and they always confuse me. I have to go think for hours about how economists got up and down mixed up. It is more a study into the psychology of the stupid.
So why do we have no inflation if the Fed is simply letting Congress draw on its signiorage? We likely do, in Congressional expenditures where they spend the money, that is why they are going broke, Congress keeps raising prices on themselves. Anyway, I no longer listen to economists until they learn some basic spectral and stability theory. I keep assuming they know the obvious, and then I am constantly confused for a moment, thinking they discovered some secret, and then I get it, they are simply uneducated in the art of aggregate statistics.
I had to get up off the couch and think this again.
Just a week on Mark Thoma's site listening the the upside down has totally confused me. Ok, bozo economists, taking money from the economy is less money in the economy, the central banker is causing disinflation with lending. Try to get this right you idiots. What you guys see is a 180 degree phase shift, mainly from yapping all the time that the banker should cause cycles. Try having the banker cause nothing in the market once in a while.
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