Wednesday, September 28, 2016

Imagine fed maximizing the policy rate

".,,,Suppose there was no government debt, and the Fed raised nominal interest rates to 20% and held them there forever. What would happen to real rates? Well, they wouldn't rise to 20% forever, because there's just no way that our society can physically, technologically deliver a 20% riskless rate of return to bondholders. Eventually, one of two things would have to happen: either 1) the Fed's control over the nominal interest rate would break down, or 2) inflation would rise (the Neo-Fisherite result). If the Fed can't control the nominal interest rate, then our standard models of monetary policy all break down, and we have to think about the microeconomics of money demand, which is hard to do. But the only alternative would be the Neo-Fisherite result."

That's Noah Brains 

Is there a third outcome possible

Massive defaults
If so why the policy
To prevent leading to a drying up credit system demand
the state credit systems direct lending to commanded firms
Leads to this weird loop of bail outs from
The endless re supply capability of the state thru fiat money creation

Looking glass outcome from logic box wonder lands
Pop up every where
Push any model to its extremes and they result is a tornado ride
To oz or rabbit hole fall to wonder land