I am an amateur! I have to get to speed on this.
Not marginal interference, interference at the margin through self destroying RPs which is a
form of potential money creation
I had proposed a thesis that the persistent divergence between these rates of compensation
is permitted by FED's interference at the margin in the cost of money. [post 3248]
cost of money = interest rate
at the margin = where marginal cost equals marginal revenue
Marginal worker = next worker hired that reduces maximum profit. (When I ran a small business I had to ask how long would that worker have the profit reducing status since I had minimal pricing power - I had to buy machinery for him to run., also).
Marginal change = a unit change of anything (grain on the front 120 pays well, but not back 40 - grow hay there; could have planted 20 more of grain on back 40 but would have gone down to break even with the 20th).
1. RPs. Fixed term, fixed rate. Lend the money as in buy the security , hold it to term, sell it back, get the rate. Conditions of money creation are there: promises, loans, repayment, investment, human effort
2. RPs could be leveraged: using the bought security as collateral, buy more securities, do it again. The amount of collateral being value of the securities discounted by something like prevailing interest rate. The number of times you could do this is theoretically determined by the interest rate - the lower the rate, the more times you could theoretically leverage. Drive for profit tempts lender to leverage more often as rates diminish. Anyone with large cash or security positions (banks, businesses, governments) can participate. RP markets are gigantic…. Are1 and/or 2 the potential and actual money creation you have in mind?
The existence of this new money raises prices. But not uniformly in a given period - wages, for instance, could shoot ahead of other prices due particular business conditions of the period..
Fed interference at the margin in cost of money by setting rates (big, sudden change or no change), stops RP market from getting, by small increments (by discovery), to where interest = marginal cost = marginal revenue. Similarly with other interest sensitive markets.
This may be generalized: It's the interference with the discovery process of economic participants, (the market), which is the dangerous practice. Absent discovery, which is empirical and has feedback, participants have to fall back on superstitious/magical thinking - taking cues from "wealth effect, envy," or gnomic statements from AG or talking heads at Morgan Stanley, etc.
Are my changes in [….?], below, correct?
Not marginal interference, interference at the margin through self destroying RPs which is a
form of potential money creation far greater than the potential money creation of permanent
reserves even while [though?] permanent reserves are far more potent, but while [right now?] FED is stingy and provides little permanent reserves(currently),.
The strike interest rate of the RPs is set at a fixed constant over time of life rate and so while they [RPs?] exist the instantaneous desire of higher compensation seekers must remain also constant to keep prices of labor from rising, but it doesn't. [Because?] The wealth effect, envy, keeps expectations for more compensation rising. |
