Millennial Macro

In a monetary arrangement that promotes free capital mobility, capital flight causes either the FX rate to decline, interest rates to rise, a reserve drain, or some combination of all three.  Without having to resort to capital controls, if the CB decides to manage their FX rate then they essentially force the bulk of any adjustment in capital flows to fall on domestic interest rates.

CBO assumption: "When the federal government borrows, it increases the overall demand for funds, which generally raises the cost of borrowing and reduces lending to businesses and other entities; the eventual result would be a smaller stock of capital and lower output and income than would otherwise be the case, all else being equal.  The large amount of debt might restrict policymakers’ ability to use tax and spending policies to respond to unexpected future challenges, such as economic downturns or financial crises. Continued growth in the debt might lead investors to doubt the government’s willingness or ability to pay its obligations, which would require the government to pay much higher interest rates on its borrowing." The 1980s peak in interest rates came at a time when Gov debt/GDP was below 30%!

Kocherlakota , President of the Federal Reserve Bank of Minneapolis: "The job market is, finally, on a highly desirable upward trajectory," he said. "We are more likely to continue on that welcome trajectory if the (Federal Open Market Committee) does not tighten monetary policy in 2015."

“Correlations, sigma along with a host of other risk metrics all assume historical data is predictive. If that were true the French would still be sitting safely behind the Maginot Line.”  - Richard Weissman

Imagine a bus where individuals are seated in a way that infers their perceived social value.  The closer an individual is seated to the front of the bus, the greater their perceived status, reputation, and moral standing.  Given this, the front rows are the most luxurious, safe, and accommodative positions whereas the back rows are quite the opposite.  The further back one is seated the more deplorable the conditions.