The idea is to keep the essentials going until we have a covid solution. A liquid S/L system works fine. Add to it an extension of unemployment checks. On the onset of the Black Swan, the pit boss intervenes a lot due to idiosyncratic actions, we normally do not reveal our essentials.
The fair banking system should shrink to match the new economy. The missing trades are spent on covid bets. We become specialized in anti-body engineering. But velocity returns.
Where is velocity now? Hidden from the tax dollar. Home production, shadow banking, second hand markets, off the books skilled labor and generally down from covid.
Low velocity means fewer dollar coin tosses to pass around, operating off the maximum entropy point. So the Fed has less and less information about the deposits and loans, the distribution of liquidity.
The seigniorage is a burden, and restricts credit markets, then on a negative shock, those constrained credit markets are not available. The Fed can never track the incidence of that tax, deposits to loan way under sampled. So the tax causes skew which shows up in cyclic Fed market risk,which get absorbed by Congress.
The Fed needs to be mostly partitioned from the government budget issues. Our tendency is to think the Fed is independent and can be libertarian. Not so, and it is not the Fed problem to constrain direct inflation by Congress.
The more independent Fed keeps credit channels open with lower transaction costs unburdened any inflation tax. So quit trying to constrain Treasury's ability to create inflation, make a trade, there is a happy medium. The Fed' target is bound white noise, it will execute an interest swap when market risk exceeds a quart point of assets.
The Fed needs a representative sample, congestion priced is fine.
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