Ben got that one blip in 2003 when he lowered rates a quarter and got 1.5 points of inflation. But otherwise, through out the series, as you see, it is the central bank breaking the pricing mechanism with the sign reversed from current theory.
Ben drops the rate and the inflation drops a point, in 2003. He starts to exit the market and rates rise, as does inflation, from late 2004 to mid 2006. Then he gets back into the lending market, and rates drop again. By late 2007, he knows something is wrong, and he re-enters the market heavily. Inflation levels off a quarter later. Then after a quick peak in the oil, its all down hill for both, with inflation dropping after a lag now. So Ben has everyone about six months confused, but he is still driving down inflation has he actively drives down rates.
So what is cause and effect? The oil peak in 2009 is definitely the economy trying to get oil rationed, rates or not, so the pricing mechanism is dealing with severe shortage by then. Then the economy drives prices down as Ben drives down rates, the pricing mechanism a little late. Look at the level spot at zero inflation in late 2009. Notice that follows the exact path Ben took, some six month earlier. These are people thinking, does Ben know what's going on?
So the suppression of the pricing mechanism is taking longer and longer, Ben cannot get inflation down without heavy intervention to suppress rates. Then, as Ben hits bottom, he is the only player in the market, and cannot go lower.
Once growth picks up a bit, the pricing mechanism is back working. So Ben mostly screwed with the pricing mechanism, and it failed to set the proper allocation for oil, instead constantly being reset three times by Ben's monopoly market intervention. Pricing and allocation in the economy was fairly screwed up during the process because Ben either got the sign wrong or deliberately made it fail. It really wasn't until 2010 that Ben finally exited the market and pricing and allocation began to work. But basically, the sign I have is correct, and whoever has the price puzzle thing has the sign reversed. No puzzle, monopoly banks really foul up the resource allocation, driving down inflation as they drive down rates. They generally do it in service of a fraudulent central government, so the price puzzle term may just be political cover.
Pricing of oil.
At any point in the process, whoever is transacting with oil simply wants to match the entropy of oil loans with oil purchases and oil sales. They want to stay current, and avoid getting queued up in the deliveries in and out of their business. Especially with oil, we generally run a tight network because oil gets slammed all the time by central bankers, so the industry is pretty good at keeping the money queues matched to the oil queues.
But in all these network, once there is an empty queue, or an over full queue, there is an integer quant shift in the pLog(p) for the good. That happened with the peak in 2009. After the shift, the oil network had space to adjust to the central banker. These pricing metrics are within an integer, and they shift by an integer, moving up or down in the sequence when the business or firm thinks a new pLog(p) is needed. Its a queuing deal, all on integer boundaries.
How do these network re-queue?
Depends on the logarithm base, which is the line of symmetry for the industry. Do they have a fanout in multiples of two or three, and that is set by the Lagrange number. Critical networks that have high value added and get the base three log, and they are watched carefully, and shift as the cube root of three. I think that is how it works, but you all better check me on that, as usual. They do a rotation in phase and size, each rotation a power of the previous.
Jim Hamilton calls it the peak effect, queuing changes when the peak is higher than the previous. I call it 'carry the 1/3' in the rotation of the digits that count through the network, like a Shannon decoder with a cubic variance, and a three way fan out. I know its a cubic variance, its very high value and the oil people watch the economic square variance and key of that as their signal, making their noise cubic.
Is this price puzzle then a cubic thing?
A very good question. The correlation between the fed and inflation is likely hard to observe during normal times. It is simply that economists watch the fed when things are cyclic and volatile, and that is right when critical networks will watch the fed. It is hard to tell. The Fed likely has only two degrees of freedom, and during uncertain times its square variance is the real thing to watch, the central bank will be all over the map. So I think that makes the observer's noise spectrum cubic and asymmetrical. In the pricing of oil look, does oil require three swings at the anvil before is acquires Ben's noise? That is the key, how long before the cubics get a solid integration of the Fed variance. Narrative studies? They are cubic in noise. Romer and Romer are separating out the second moment in noise when they extract narration, as was Uncle Milt, god bless his soul. And the bankers at the GD moment had do do the same, it is when they get a good look at the central bankers square noise when they find stabilization. Asymmetric cubic noise explains the sign reversal.
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