A reflation spike

 Oil up above 41, and ten year yield up a bit after dropping ten basis points. 

The up and down are zero crossings, liquidity trying to stay right at a fuzzy ratio between inventory over half full and almost half empty; the maximum elasticity slope, also the maximum entropy tendency. So deflation, inflation are spikes, more of the former these days.  The  balance sheet suffers residual congestion noise, the congestion needed to price liabilities against assets. Repricing only takes place when surplus or deficit goes above noise and act to restore noise. It appears as spikes, white noise.

In a deflation, the  sandbox model, then we should see exits, bankruptcies,  from the network of S/L pits, an inflationary counter loss in banking.  The noise residual gets expensed in the S/L accounts. The S/L pits are subject to account entry and exit, and the total market N is uncertain.  So, in aggregate, we get losses and gains from S/L pits attempting to keep market size stable.

For central banks: Account exits are headed to shadow banking, going off the Swift ledger. That is the deflation, the drop in velocity for tax dollar, but look at the derivative market grow.  Shadow banking has a limit, taxes have to clear sooner or later. Q1 one is tax battle time, and we have to test that sustainable boundary between shadow and regulated banking. Call it a distorted market, but the monster tax debate is a market, and it sets a boundary with the shadow banks.

But, this market is subject to huge technology pressure. A side issue that also comes up on a generational basis, tech changes in financial transactions.