Twitter: @rpgoyal_
The Fed has its tools backwards. The Fed sets policy by altering the price of safe assets (like cash, Treasuries) in an attempt to change the incentives for the private sector to create risky assets, but the Fed does this in a way that treats safe and risky assets as the same, when they’re opposites. As opposites, raising the value of safe assets via rate cuts and QE results in less risky asset production by lowering the value of risky assets. The way to stimulate risky asset production is to make safe assets abundant, which the Fed can accomplish via rate hikes and QT, not rate cuts and QE, giving the system the free lunch of diversification (between safe and risky assets) and the necessary collateral to add risky assets on top of.
With its tools backwards, the Fed has to conduct policy through narrative, jawboning, and psychology, rather than mechanics, and hope that the private sector carries out the Fed’s vision despite the mechanics working in the opposite direction. Today, that’s showing up as the Fed trying to convince the economy to slow down by raising rates, when raising rates is in fact stimulating the economy, getting us further away from a recession, not closer. Any analysis that makes the Fed central and imbues it with the mechanical tools of a real central bank is subject to unexplainable and unanticipated outcomes in economic conditions, because the Fed ceased to be a real central bank around 2013.
Companion Presentation:
A pictographic walk through the Fed Does Not Exist:
A quotational walk through the Fed Does Not Exist:
Links to chapters:
Reading through your articles and thus far it's excellent stuff. Nowhere seen a treatment of inflation with such clarity. Will Ch 9 be written out in the future, and Ch 7 still has to be written?