Thursday, August 30, 2012

Izabella Kaminska — The unintended consequences of QE: not what you think

By now, everyone is familiar with the mantra that QE is [arghh!] money-printing and that a major unintended consequence could be a chronic and uncontrollable inflation. (One could call this the goldbug, Austrian, Republican case). 
Less well known, perhaps, is the theory that QE could be just as unexpectedly deflationary — because long-term micro yields come to threaten a number of financial sectors outright, as well as general expectations of risk-free returns which lead to capital destructive feedback loops....
Case in hand, the latest Federal Reserve Bank of Dallas working paper from William (Bill) White entitled “Ultra Easy Monetary Policy and the Law of Unintended Consequences“.
The Financial Times | FT Alphaville
The unintended consequences of QE: not what you think
Posted by Izabella Kaminska

4 comments:

Leverage said...

That would be giving FED officials too much credit (but who knows in reality...), but IMO elites have a hidden deflationary agenda, controlled deflation is the plan. Why? Population trends, consumption trends, perception of scarcity and developing world growth.

While in western societies we are STARTING (just starting, since the last 2 decades, and unfortunately this could have a lot to do with income disparities growing and asset accumulation in the top of the wealth pyramid) to disconnect growth from physical consumption of resources and energy we can have a slight (real) deflationary bias w/o the whole thing collapsing.

But having 3 bill more humans consuming at american levels would be a disaster and hence demand must be suppressed and consumption controlled (at least this would be their perception).

Whether we are running out of money or not is just a convenient circumstantial meme. I mean, maybe they are morons as Matt argues, but this meme is very convenient and as such is assimilated and 'believed' to reinforce the preconception of scarcity and the need to control and manage any sort of growth.

IMO the developing nations (specially the big ones) elites and leaders are worried of the problem, and this is why they are not really trying to increase domestic demand and instead rely on investment as a vehicle to grow (and external demand).

Maybe everyone is waiting for the technological revolution that would solve this conundrum and just winning time. IMO historical data shows that financing and monetary problems have never stopped technological revolutions and growth explosions have happened forever when technological milestones have been achieved, the memes ('we have run out of money','too much debt') and the credit system will adapt to these breakthroughs and find ways to break the previous stagnation period. Maybe we really need a new industrial revolution in several sectors (not just IT and healthcare for example) to change paradigm.

Some food for thought.

Roger Erickson said...

"IMO historical data shows that financing and monetary problems have never stopped technological revolutions and growth explosions have happened [whenever] technological milestones have been achieved"

Well said!

However, I'd alter the following sentence slightly.

"the [elitist] memes ('we have run out of money','too much debt') and the credit system will adapt to these breakthroughs [and establish new strategies for extending their rule]

Simple institutional momentum, of holding onto power vs group success. In biology, we call that general concept "phenotypic strength", but it could just as well be called phenotypic momentum.

Oddly, economics doesn't formally acknowledge the well established biology concept of multi-level selection allowing incredibly dramatic agility in system organization. There are a LOT of adaptive changes that can occur simultaneously in any complex, resilient system.

Selecting success out of all that chaos depends not on the goal of keeping processes in dynamic equilibrium, but on invention of the sub-methods for selecting newly adaptive permutations of many process states (i.e., sensing local/global potentials; recognizing control points; applying diverse control methods, etc, etc).

Adequately provisioning a rapidly changing system first requires that it must adequately "instrument" itself, and then adequately de-centralize both feedback and decision-making enough to drive adequatley distributed exploration of the rapidly scaling & increasingly distributed options.

Joshua Wojnilower said...

The Dallas Fed's piece shows they understand the limits of monetary policy, although political considerations may still play a role. Monetary policy provides a bridge to an expected future outcome, but cannot ensure the structure (economy) on the other side is built high enough. Governments, through fiscal policy, must provide institutions and incentives to support (or at least not hinder) growth. (http://bubblesandbusts.blogspot.com/2012/08/federal-reserve-admits-inability-to.html)

Tom Hickey said...

leverage, good analysis. I think that elites do not this. Several years ago a heard a Republican representative on a panel state very explicitly that there is not enough to go around, especially energy (it was a panel specifically on energy) and the US should take whatever steps necessary to prevent emerging countries from seriously attempting to achieve US standard of living in terms of energy usage. I just about fell out of my chair in that I strongly suspected that this was the conscious intention of some, but I never expected to hear it stated explicitly in a public forum.