@russellwadey Inflation as the Price-Level Representation of Claim Dilution

"If equity exists on the macro balance sheet, then inflation is the logical and empirical representation of claim dilution — i.e., the price-level adjustment that reconciles expanding nominal claims with real output." @russellwadey When the total stock of nominal claims expands more rapidly than real output, the purchasing power of each existing claim declines.

@russellwadey From Ex-Post Income Identity to Ex-Ante Balance-Sheet Dynamics

The income-expenditure identity is descriptive; it records how GDP is distributed.
The balance-sheet identity is causal; it explains how GDP is created. @russellwadey The identity therefore tells us how income was spent, not why it changed.

Policy Regimes Are Balance-Sheet States, Not Discretionary Switches

“Using a Markov-switching reaction function and logit bridge, we show that the probability of an ‘active’ Fed regime rises systematically with total-debt-to-GDP (Ω). Policy regime is not independent; it’s a balance-sheet state.” Logic (what we tested)

Why the GDP–FX Triangle Shows U.S. Output Is Energy-Constrained: A New Keynesian Restatement

"Energy throughput (Ω = E·η) is the real state variable NK models have been estimating implicitly as “productivity.”
The GDP–FX triangle reveals its existence and shows that even the United States cannot be modeled outside that global energy constraint." Empirically, “productivity” AtA_tAt​ is correlated one-for-one with energy throughput and efficiency.

Energy as the Global Unit of Account and the Real Denominator

— what we can actually produce — is limited by the quantity and efficiency of energy throughput.
You cannot “print” more real output without mobilizing more usable energy or improving efficiency The two triangles — one nominal (FX) and one real (GDP) — close with less than 0.05% error, which means the world’s nominal exchange structure and real output structure are internally consistent.
This implies that currencies represent proportional claims on global output, not arbitrary relative prices.

GDP–FX Triangle: Closure Test with Cointegration Evidence

“GDP–FX cointegrates with exchange rates at rank=1, has stable error-correction terms, and remains robust under break/out-of-sample tests. The triangle closure demonstrates system consistency. UIP fails everywhere, GDP–FX fits everywhere.” 👉 All three legs reject UIP simultaneously. UIP not only fails, it inverts.

The GDP-FX Parity Triangle: Evidence That Exchange Rates Track Relative Output Capacity

........"exchange rates track relative output capacity. Far from being “free-floating” expectations around interest-rate differentials, currencies behave as shares of global production" ....currencies reflect shares of global output capacity.

Why CPI Is the Wrong Inflation Object

Accounting: CPI mixes domestic and foreign prices

Therefore, “The CPI is not the ‘true inflation’ concept relevant for domestic nominal constraints … these results demand that NK inflation theory move beyond a closed-economy CPI focus.” Interpretation: CPI inflation is a weighted average of domestic inflation πD\pi^DπD and import price inflation πM\pi^MπM. Any shift in global commodity or import prices mechanically shows up in CPI, regardless of the state of domestic slack.

Why the Two Anchors Together Are More Powerful

"Because serviceability of debt and valuation of equity must both remain internally consistent with the size of the balance sheet, the economy is double-anchored. This twin constraint locks the long rate to the leverage path. Put plainly: rrr must follow ΩΩΩ." Two independent necessities.

DSR comes from cash-flow accounting (flows must be payable).

DCF comes from market pricing (equity per dollar of debt must be priced consistently).
They arise from different mechanisms; agreement between them cross-validates the conclusion.

"Here’s the compact math that ties your slide to a balance-sheet (global-identity) view and shows why the 10-year is a function of Ω = Debt/GDP and its dynamics." Core state variable

Replacing r* with Ω: Logic and Evidence Why This Displaces r*

Credit as the Hidden Driver of Inflation
Robust Evidence from Bonds, Growth, and Inflation

....."the prevailing view in macroeconomics has been that long-term interest rates (especially the 10-year yield) represent the market’s expectation of future growth and inflation."
....."if credit explains the majority of bond movements, then the credit cycle must be the dominant force shaping both growth and inflation." ....'we show that credit growth, and credit-driven variables such as GDP, profits, and equities, explain the majority of the variance in bond yields."

“Does credit drive the 10-year?”

Direct credit→yields (this session’s 5-VAR): very strong (IRFs + FEVD), comfortably ≥99% on its own. Credit (BIS): ~44.5% (1q), 37.3% (4q), 42.5% (8q), 48.4% (12q), 46.0% (20q)

Inflation: A Balance Sheet Perspective

"An alternative is to return to the balance-sheet foundations of national accounting, where inflation can be derived not as an expectations anomaly but as the reconciliation of liabilities and productive capacity." ..the reconciliation of liabilities and productive capacity.

Bonds are driven by growth, then inflation — as debt-dilution inflation predicts... Thesis. In a debt-dilution framework, when credit grows faster than real output (Ω ≡ Debt/GDP rises), the first effects show up upstream in activity and corporate earnings; with lags, those pressures propagate into persistent consumer inflation.

Wages are the main proximate channel moving Services LEH,....
.... but they’re not the origin of the shocks; they reflect upstream conditions (housing/profits/FX-oil) that then pass through to service prices with a 2–4 quarter lag. Here’s the hierarchy

Debt Saturation and Fertility Decline in Japan

Japan’s fertility decline is best understood as a long-run demographic adjustment to debt saturation. Housing costs play a short-term reinforcing role, but the level of debt/GDP provides the structural anchor that locks fertility into a downward trajectory.

Long-Term Test: Private Credit, GDP, and Wages (AHETPI)

Wages are NOT an independent driver but are structurally constrained by the credit cycle via GDP. ...

....the higher baseline confidence is mainly because the data length and robustness are much greater in the long-term test. Long-Term Test: Private Credit, GDP, and Wages (AHETPI)

Robustness Write-Up: Private Credit, Wages, and GDP (Post-2016, VAR(1))..... The 3-variable VAR(1) test validates and strengthens the bilateral findings.
Credit is the leading force, with GDP and wages as dependent variables. The robustness is high, and the triangulation provides added confidence against “oranges vs apples” problems in wage measurement.

This result empirically demonstrates that the official PCE index is a mechanical transformation of real-time rent inflation, modulated by known lag weights and averaging procedures—not the result of forward-looking price setting or expectations-based dynamics. This finding materially strengthens the argument for a structural—rather than expectations-based—theory of inflation propagation.

"The observed linear relationship between profits, debt issuance, and interest rate spreads is not explainable within Neoclassical theory.

It contradicts its core assumptions and supports a monetary-demand-driven model of profit determination." Profits are Proportional too the Total Debt issued (and do not care whether Government or Private)