The need for Quantitative Easing shows the inadequacy of the macroeconomic model that underpins all Fed policy. They need to go back to the drawing board.
This is a great whine, Dr. John. Liquidity's relationship with financial stability is dubious at best. Like so many problems in finance (and medicine) the theorists and policymakers confuse cause and effect. Instantaneous equilibrium signifies an alignment of the three definitions of money: exchange value, storage value and unit measure. When the economy is not in alignment (which is a lot of the time) the knock-on effect on money will be experienced in the future, which is to say, the money markets and possibly longer-term credit markets.
Logically, dynamic equilibrium has forward reach or meaning. It involves the credit markets too. Here the alignment of exchange value, storage value and unit measure is not instantaneous so we have to map these concepts to their dynamic equivalents: price (exchange value), intrinsic (storage) value and ratings (unit measure).
The above argument highlights some fundamental flaws in our thinking:
(1) when we conflate price and intrinsic value, we reduce the dimensionality of the equilbrium to something that may not be capable of equilibrium; and
(2) when the designated ratings agencies that govern capital allocation do not follow a rigorous system of measure, the market is unlikely to converge in real time to equilibria of price and value.
The good-humored title of your blog gets right at the heart of our financial governance problem.
This is a great whine, Dr. John. Liquidity's relationship with financial stability is dubious at best. Like so many problems in finance (and medicine) the theorists and policymakers confuse cause and effect. Instantaneous equilibrium signifies an alignment of the three definitions of money: exchange value, storage value and unit measure. When the economy is not in alignment (which is a lot of the time) the knock-on effect on money will be experienced in the future, which is to say, the money markets and possibly longer-term credit markets.
Logically, dynamic equilibrium has forward reach or meaning. It involves the credit markets too. Here the alignment of exchange value, storage value and unit measure is not instantaneous so we have to map these concepts to their dynamic equivalents: price (exchange value), intrinsic (storage) value and ratings (unit measure).
The above argument highlights some fundamental flaws in our thinking:
(1) when we conflate price and intrinsic value, we reduce the dimensionality of the equilbrium to something that may not be capable of equilibrium; and
(2) when the designated ratings agencies that govern capital allocation do not follow a rigorous system of measure, the market is unlikely to converge in real time to equilibria of price and value.
The good-humored title of your blog gets right at the heart of our financial governance problem.