Even the flows as represented by rates are close to balance, since the Fed turns over earning to Treasury. The banking law is screwed up, but the system is maintaining balance anyway. Savers get screwed in the trade because the deposit rate is .25% and the inflation rate 1.5%. However, the one year treasury is now .25, that is the yearly rate paid by borrowers. That is equilibrium. What happens when the Fed saving and lendign are in balance? We get very high growth and low inflation. For example:
This is the inflation rate and real growth. Look at 1998, the inflation rate, blue line, was nearly 1%, and the growth rate, red line, was at 4%. That is very good.
The inflation rate should continue to drop since the Federal reserve is now almost exactly in balance with both flows and balances equal. The equilibrium condition for inflation is zero because inflation is an expense, and extra cost. It represents mis-pricing. Hence, if the Fed is in balance, inflation is stabilized at zero.
Why am I so happy about the Federal reserve now?
One has to follow my learning process. I started with the assumption that any third grader who knew about mud puddles understood fiat banking, it is always a corridor system. We obviously had a corridor system because pricing was so accurate, it is within 1% when politicians do not screw up. Then I discovered that the Keynesians never passed third grade and Congress frigged the fiat system by stealing all the incoming ink and paper. That freaked me out since all of nature operates with equilibrium flows, its the law of conservation. But I looked and discovered that the private banks were adjusting balances to keep the fiat accurate. For example, the private bond market raised rates during QE, the correct move. Also inflation was trending down to zero in the short, medium and long term; also a sign of equilibrium. Hence my world went back to normal.
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