FRSB misses the point

Macroeconomic models have long predicted a tight long-run relationship between the supply of money in the economy and the overall price level. Money in this context refers to the quantity of currency plus bank reserves, or what is sometimes called the monetary base. As the monetary base increases, prices also should increase on a one-to-one basis.This theory also has been confirmed empirically. According to Robert Lucas of the University of Chicago, who received the Nobel Prize in Economics in 1995 in part for his work in this area, "The prediction that prices respond proportionally to changes in money in the long run … has received ample — I would say, decisive — confirmation in data from many times and places."1But recent events have called the relationship Lucas spoke of into question. Over the past decade, the monetary base in the United States grew at an average annual rate of 16 percent as the Federal Reserve dramatically increased the amount of reserves in the banking system in response to the financial crisis of 2007–08 and the Great Recession. At the same time, prices grew at only 1.8 percent per year on average. 

The point is that we distinguish the 'long run' to include bouts of default which is 'inflation' (to get a bigger pile of).   Money lost.   Nixon Shock lost money to gold hoarders, we got inflation.

OK, we have a large balance sheet at the Fed with IOED and IOEL; interest on excess deposits and loans. Let us go on:

Eventually, as bank capital becomes scarce, the cost of holding additional reserves becomes higher than the interest paid on reserves and banks again become sensitive to the quantity of reserves outstanding. At this point, the model predicts that prices would once again move together with the quantity of monetary assets.

Cut to the chase.  Deposits become scarce, loans get hit with an interest charge. Is that so difficult? Did that take all of a friggen 250 years to figure this out?

Any problem? Our Fed does the opposite of normal, when deposits become scarce, loans get a reduced interest charge, waddya know?  Hence, we sit for a year with an inverted curve, as none of the bankers react, since the market maker is walking backwards.