The Labor Channel Is Not a Causal Driver of Inflation: VAR Evidence from the United States Thus, inflation and wages are not driven by labor conditions; they respond to the credit cycle and the associated demand and price dynamics. The NK causal chain is reversed.

@ojblanchard1 @FrancoisGeerolf The canonical New-Keynesian three-equation model (NK Phillips–Euler–Taylor system) is not empirically salvageable because its core causal mechanism — slack-induced inflation — is reversed in the data. @ojblanchard1 @FrancoisGeerolf Reversal of the New-Keynesian Inflation Mechanism: Evidence from Credit, Services Inflation, and Labor-Market Tightness

The Fed Tightened Into an Energy Shock: A Policy Error Explanation of the Global Financial Crisis

This interpretation challenges the standard NK narrative that the GFC was the result of exogenous financial frictions or regulatory failure alone (Bernanke, Gertler & Gilchrist 1999). Instead, it suggests that monetary policy itself was a causal amplifier of crisis dynamics. ....by tightening into a negative real-income shock, the Fed mechanically reduced household liquidity, which led to rising delinquency and default rates—first in adjustable-rate subprime mortgages and later system-wide as refinancing options collapsed (Gorton 2008).

Appendix C. Triangulation and Hierarchy of Evidence: Debt, Assets, and the Monetary Function of the Balance Sheet

"Across all tests, posterior belief that financial assets perform the monetary function exceeds 99.5 %, satisfying the “decisive evidence” threshold." The Three Axes of Empirical Proof

This establishes the creation mechanism of effective money.
Nominal purchasing power arises not from central-bank base money but from private and public credit issuance.

The GDP-FX Triangle as Evidence that Financial Assets Function as Effective Money

"This implies that currencies are equity-linked claims, and therefore that financial assets function as money at the macroeconomic level." Theoretical Framing

This proportionality arises because equity and debt jointly define the monetary value of domestic claims:

Empirical Evidence that Equity Serves as Money’s Structural Equivalent

In this sense, equity is money’s structural twin — the endogenous counterpart through which the financial system preserves nominal consistency. Empirical Structure of the U.S. Macro Balance Sheet

This parity implies that macro equilibrium is achieved through joint adjustment of equity and debt values, not through the regulation of narrow money.

Assets Are Effective Money: Empirical and Theoretical Evidence from Balance-Sheet Dynamics

This paper argues and demonstrates empirically that financial assets are effective money: their expansion drives aggregate demand, profits, and inflation with measurable lags and with statistical precision that far exceeds the explanatory capacity of conventional monetary aggregates (M1, M2, or base money). @GeorgeSelgin @SamHLevey Theoretical Framework

@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.