June 20, 2011

The changing futures rate could reflect the market’s changing expectations regarding the inflation rate, real GDP growth rate and credit market conditions. The signal extraction problem boils down to a process of working backwards in an attempt to identify the nature of the shocks or policy changes consistent with the current structure of interest rates. The de-levering of the U.S. economy was partly responsible for the slowdown in the real economy. The lack of confidence in the financial system has led to a collapse in the money multiplier and the credit system and, as a result, the Fed has had to increase cash significantly in order to provide enough transaction medium and bank credit to replace the credit lost as a result of the crisis.

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