Quotes of the week: ZLB and safe assets November 22, 2013 at 10:39 am

A few memorable lines to muse on:

1. From Paul Krugman, talking about the need for negative real rates:

in a liquidity trap saving may be a personal virtue, but it’s a social vice. And in an economy facing secular stagnation, this isn’t just a temporary state of affairs, it’s the norm. Assuring people that they can get a positive rate of return on safe assets means promising them something the market doesn’t want to deliver – it’s like farm price supports, except for rentiers.

2. From Simon Wren-Lewis, surveying the current ideas in macro about safe assets:

there is still plenty of scope for disagreement on the ability of the private sector to manufacture safe assets… [and] collateral is all important in enabling the creation of risky financial assets.

3. A pre-budget standoff remark from Coppola comment.

international markets need safe assets, and at present the only country that can produce them in the quantity required is the USA.

I’m not sure I agree with this, but it is an interesting point as its veracity depends critically on whether you think pseudo-safe assets (such as AAA securitisation tranches) are ‘good enough’. And that, of course, depends on your purpose: capital preservation at all costs or just collateralisation.

Now I am sure I don’t understand collateral dynamics properly in a world where OIS is (very mildly) positive and short term govy rates are negative, but I do suspect that the incentives here are interesting. One to muse on…

2 Responses to “Quotes of the week: ZLB and safe assets”

  1. “Assuring people that they can get a positive rate of return on safe assets means promising them something the market doesn’t want to deliver…”

    No, that’s something Krugman doesn’t want to deliver. We don’t actually know what the market “wants” because ZIRP (which he now wants to double down on) is standing on its neck. Negative rates on “safe” assets mean, by definition, that those assets are no longer safe and such a scenario should cause at least some savers to seek other (hard) assets which are.

    Good grief, cue the white paper on morale stimulation via the Keynesian mechanism of additional beatings.

    Speaking of which I find Interfluidity’s discussion of negative “natural” vs. market interest rates from a couple of years ago to be unconvincing but morbidly fascinating:
    http://www.interfluidity.com/v2/2535.html

  2. 1. I sympathize with Krugman’s attitude, and find it somewhat fitting in that example, but much more interesting is that it can – and should! – also be taken the other way round. If the market doesn’t deliver a certain level of economic activity, why should we force it anyway (e.g. via negative rates, QE etc)? After all that’d be pushing for superfluous activities (according to market judgement), and always ends up in some form of disguised subsidy. No need to count “depression” as bad when it’s reversion to sanity. Do we really need Twitter when the price is food, education and healthcare having become privileges?
    Plus what Mercury wrote, obviously…
    Sorry for the digression, your note is interesting and I’m still pondering that…