Additions to yesterday’s review

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Forgot to include the influence of the 8,000 lb gorilla I’ve been advancing for the last few years!

Supporting GDP

  1. Pension funds adding to allocations for passive commodity strategies

Sources of inflation

  1. Pension funds adding to allocations for passive commodity strategies
  2. Pension funds contributing to the $ decline by allocating funds away from domestic equities to foreign equities
  3. Sovereign wealth funds allocating to passive commodity strategies

Errors made by the Fed

  1. Failure to recognize the influence of pension funds on inflation and aggregate demand
  2. Failed to understand reserve accounting and liquidity issues
    1. Thought open market operations altered functional quantitative measures, not just interest rates
    2. Delayed implementing the TAF for several months to accept additional bank assets as collateral
    3. Failed to recognize that the liability side of Fed member banks is not an appropriate source of market discipline
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