The relationship between the price of money and real-world behavior is non-linear
Fed governors are ALL part of the same inbred, arrogant, frequently wrong but never in doubt, Soviet nomenklatura-esque priesthood of central economic planning and control.
More than FOUR HUNDRED PhD economists with a budget of literally hundreds of millions of dollars—got the 2021 transition to an embedded inflationary environment completely and utterly wrong, it’s also that Mester et al. got the prior embedded deflationary environment completely and utterly wrong.
Since early 2009, the Fed has provided the most accommodative monetary policy in human history with the express purpose of stimulating inflationary expectations and behaviors to something close to their 2% target.
This effort was based on an essentially linear model of the macroeconomic relationship between the price of money and the velocity of money.
Does lowering the price of money from 8% to 7.5% create more risk-taking?
Does it increase the velocity of money through the real economy as corporate and household risk-takers are willing to borrow and spend and invest more at 7.5% than they were at 8%?
The relationship between the price of money and real-world behavior is non-linear.
Just like water.
It’s a miracle of life that liquid water—the foundation of life on our planet—gets lighter instead of heavier right before it changes state into solid ice.
John Mauldin 29 April 2022
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