The Friedman rule

Wiki: The Friedman rule is a monetary policy rule proposed by Milton Friedman.^[1] Essentially, Friedman advocated setting the nominal interest rate at zero. According to the logic of the Friedman rule, the opportunity cost of holding money faced by private agents should equal the social cost of creating additional fiat money. It is assumed that the marginal cost of creating additional money is zero (or approximated by zero). Therefore, nominal rates of interest should be zero. In practice, this means that the central bank should seek a rate of deflation equal to the real interest rate on government bonds and other safe assets, to make the nominal interest rate zero.

There is a lot of ambiguity in the summary. What government bond? One year, ten year? And the cost of money creation is about 1.5%, I think, the fee charged by the money distributors.  I didn't look, but "seeking a deflation rate" means buying and selling notes, which I  convert into "set short term deposit and loan rates, independently".  

So Milt says normally the currency banker should be slightly tight with  the outflow, slightly less liability floated than necessary to cover price volatility over the central bankers update period.  What update period?  The short end, but the actual term and rate are not quite known until the next update. There is risk and uncertainty in currency banking, and the variation can be captured easily by assuming the short rate and term is not exactly known.  The amount of float needed comes in two varieties, 1) you assume the economy has a locked in Gibbs state*, or 2), you think the economy switches between multiple equilibria.  I think Milt is of the former, the Magic Walrus camp.  The difference is whether the currency banker leaves enough float for a state change, because the currency banker has no advanced knowledge.

When does the currency banker change rates? When the member banks do not have enough second derivative to cover the first and zeroeth. The relationship depends upon the model. But he central banker is boxed in by government induced market segmentation, illogical program management, Senate corruption, ownership issues on Freddy and Fanny, the debt cartel, New York concentration, and all the rest.  Our federal reserve is trying to make banking work in a Swamp.


*In probability theory and statistical mechanics, a Gibbs state is an equilibrium probability distribution which remains invariant under future evolution of the system.

I should repeat.  None of this matters when the US Senate is a member bank.  When that happens, then the central banker is one generation between monetary regime changes.  And, you can bet on the new Smart Cart technology, counterfeit proof pure cash devices with built in portfolio management.  We are seeing  these things, like the OnlyCoin virtual credit card technology.  The interaction between government and banking will change quite radically.