Reagan, Volker and the bzonker government of the 80s

Volker wasn't chasing inflation. The real economy was kinked, likely because of the government channel becoming unsustainable. Volker was helping the economy to push CPI up to rebalance. Remember the Reagan deficits, these are sudden changes in government accuracy, down.

Today, if the Fed wanted to help the economy correct government inaccuracy, it is shackled by the advance in technology in the shadow banking system.  A huge number of the population does not have access to efficient demand deposits, and they cannot get paid the inflation rate for short term reserves, mainly because of so many more poor who carry liquidity in the form of food stamps, and govrnment transfers, hence not accessible to the fiat bankers. The Fed needs to directly pay the short term rates on all short term reserves by electronic exchange. Set the limit at 15% of the poverty line, then pay the inflation rate on that, and set the short term rate to inflation. If the CPI continues to rise and short term liquidity earns that rate, then the economy is rebalancing, let the curve kink.

Otherwise, the Fed should invest along the curve to break even, and just print itself 10 billion a year for costs. If five rate  year rates drop, the fed buy a few bonds, help the market lower yields.

Measure government inaccuracy by looking at deficit swings

They swing about 7% of GDP these days. That is not the government channel helping, that is the government channel disturbing the economy which wants a 3% accuracy.  The government channel is nominally about 35% of the economy. This economy pays a fixed, long term price, about 5% of GDP set aside to cover the cost, that is a third of the 15% reserves we keep. So velocity runs from 7 to 11, most of it caused by the government sector.

The badder the swing the more we enhance reserves and lower velocity. The swings increase and eventually the economy can no longer afford the extra reserves and we decouple the union.

Rates and inflation

As long as the Fed keeps short term rates below the inflation rate, and the retail banking system is efficient, deflation is induced by rates too low. Earning on reserves is less than the economy, that pushes prices of goods down. Rates too high cause inflation. All this assuming an efficient retail banking sector.

New Keynesians get it wrong, the fiat is still accurate because of low transactions costs across the curve. The money markets use the dollars own accuracy to corect the fed errors, still at low cost. The Treasury curve over the last thirty years, its shape, was not quite an accurate representation of the real economic curve  Inflation was mostly the economy rebalancing producer and consumer prices.

For most of the past thirty, the real flow of goods has been kinked as the real economy corrects out a severe disturbance, the Secstags. The mild deflationary trend was the fed ignoring the kink on behalf of its capital owner Congress. The fiat bankers should be borrowing cash and lending ten year notes, putting the real kink back in its curve.

Let's look:

 Volker raises rates, cpi jumps; repeat until crash. Prior to our current crash, it was the economy trying to rebalance suddenly. So the economic rebalance happened in CPI inflation and PPI deflation, the economy was too unbalanced and crashed. The Fed just tagged along offering a mild deflationary force, and still going so. But the economy is still rebalancing, and mild CPI disinflation occurs as long as the fed under prices short term liquidity.

Can't the economy ever rebalance? No, because of this large/small state imbalance.

What if the fiat bankers properly kinked the Treasury curve? Well, it would simply be known to a wider audience just how dysfuntional the government channel is. A sever imbalance the fed cannot correct.

But wait, shouldn't producer prices be falling relative to consumer prices rising?  They do, during the crashes.  But the ten year earns too much, and causes a mild inflationary effect on producer prices, this is the other half of the fiat error. If the fiat banker removed its mild deflationary effect, then consumer prices would inflate a bit and producer prices deflate a bit as the economy tries to correct itself.

The Fed errors because its capital owner tells it to, but we all know that and the cost of accounting for that is mild. It is the real disturbances caused by Congress and the government channel that is the problem.

Polar Vortex meets the Pacific

Central California is getting a good soaking, as we speak. There looks to be another potential three more rainy days. Most of agricultural is getting a soaking, so one round of seasonal irrigation is done.  This gets us another two or three weeks to worry water costs vs allocation, Good news.

But, the remaining issue, are the ocean currents going to change soon and stop the longer drought?

I don't think so, Roger

Roger Farmer: How the New Classicals drank the Austrians' milkshake is still a name that is lovingly invoked by goldbugs, Zero Hedgies, Ron Paulians, and various online rightists. But as a program of scholarship it seems mostly dead. There is a group of "Austrians" at George Mason and NYU trying to revive the school by evolving it in the direction of mainstream econ, and then there is the Mises Institute, which contents itself with bathing in the fading glow of the works of the Old Masters. But in the main, "Austrian economics" is an ex-thing. It seems to me that the Austrian School's demise came not because its ideas were rejected and marginalized, but because most of them were co-opted by mainstream macroeconomics. The "New Classical" research program of Robert Lucas and Ed Prescott shares just enough similarities with the Austrian school to basically steal all their thunder. The main points being...

No, the whole thing in its original form seems sound and calculatable, to me anyway.

The Fed and its minions

They perform a high utility service and we set aside about 1.5% of our liquidity to pay for it.  The dollar and its curve have high utility to us. The Fed is good, except in times of rapid change it gets behind the eight ball.

What does that Fed company do?  They make the the dollar curve match the economic yield curve. Their main tool is make M1 match short term liquidity demand, using the M1 velocity inverted. The cost of that match is about 3% times the internal Fed error curve. But as the share of GDP, any error induced by internal Fed inefficiency is not that large.

The Fed has an additional charge from skew between the optimum monetary zone and the real economy. I do not think that optimum monetary skew is out  of bounds, but it is large. I haven't thought it thru to get a good measuring unit.

Otherwise, as we have seen, most of the internal economic roundaboutness is the large state, small state problem. That is not a Fed problem.

Pethokoukis; first to solve the Obamacare jobs model

It’s simple: Climbing the opportunity ladder into the middle class or higher requires a job. And there’s your trouble with the Affordable Care Act. It slaps working class and low-income families with a big tax increase if they try and climb that ladder. Higher incomes are offset by lower insurance subsidies from government. As a result of steep effective marginal tax rates, some people will work fewer hours. Other will quit the job market completely.
Obamacare supporters call that a feature not a bug. People who are only working to pay for health care will now have the ability to make a different “choice.” Older workers doing physical labor will be able to retire earlier. Moms can switch to part-time work or even stay home full-time. Workers will have more flexibility to change jobs or start a business. So it’s good news … wait … fantastic news that the Congressional Budget Office now says that “more than 2.5 million people are likely to reduce the amount of labor they choose to supply to some degree because of the ACA,” three times more than its earlier forecast.

I kept my mouth basically shut on the Obamacare jobs loss issue. I had stated, many times, this is a labor market segmentation issue. The number of wage settings in the labor market reduce so the transaction cost of Obamacare are minimized. The rungs on the labor ladder are farther apart and harder to limb. From Shannon theory, the uncertainty level has increased, so the labor market dimensionality drops by one. The economy can compensate, for a cost. That cost? If the economy wants 3% accuracy and Obamacare can only deliver 8%, then no problem, to a 3% accuracy the economy will compute the skew and run a hedge channel. Total accuracy, over all, will drop; as measured over a much larger set of labor trades. The costs is 3% multiply by the size of Obamacare subsidies in share of GDP.

Total cost of Obamacre? Roundaboutness cost because of skew in the political districts, and subsidy costs; both costing 3% times share to fix.

Counting the cost of the government channel

Simple, to an approximation. Assume we like government known to a 3% level. That means 1/32 of retail transactions in daily life are with the government. The size of the transaction is 1/5. Our local council meetings are 1/1000 of the total transaction of daily life, size 1/4. Lets add a fee set of non monetized government transactions that happen 1/16 of our lives, say a genuine political discussion.

Then we have a Congress,32 regional governments, 1000 states, 32000 counties, 1 million local councils. These are piles of government goods, monetized cost about  6% of GDP. We have the other economy.  We do an analysis  and find it is only 12% accurate. We expect the share of total gdp going to government to rise toward 24% of gdp.

How to construct the optimum channel that transfers SP500 price changes into your personal account

The idea here is to assume a hypothesis,  the 500 companies on the SP500 want to make you rich. How would they do that? They would make a trading network that looked like one of these. That is the minimal network organization of these 500 companies that would fill your account. Your account is filled in units of code, the optimum code that minimize the the number of trades to fill your account. Hey, that net is fibonnaci compatible.

 Bet against the each ith quant of companies that deviate from their assigned trades. Make them obey the master net.

M1 Velocity rising

Vital Signs: Services Take the Lead in January Hiring

Economy-watchers breathed a sigh of relief on Wednesday after the Institute for Supply Management reported a pickup in January activity among non-manufacturers. Of particular interest, two days ahead of Friday’s payrolls report, was news that employment among non-manufacturers — mainly service companies — increased last month. The employment index rose to 56.4, the highest reading since November 2010.

When consumers and firms hire work for outsiders, rather then doing it in house, they turn money over one more time in the period. That is rising M1 velocity and happens when consumers and firms feel relaxed about holding less cash. Dave Beckworth will be happy.