Izabella Kaminska’s counterintuitive model of the modern world

by on May 3, 2013 at 3:39 am in Current Affairs, Economics | Permalink

1) Because of the safe asset problem there is a diminishing return — or even negative return — to QE at some point. In fact, rather than being inflationary, it becomes deflationary.

2) Interest on reserve policy is actually designed to counteract this deflationary — and negative rate inducing — effect. In fact, IOER, or the ability to hold reserves at the central bank for no negative interest cost, shows that central banks are effectively supporting short-term rates rather than depressing them. If not for the ability to hold reserves at the central bank, then rates could very well be negative.

3) The crisis is in many ways a deposit crisis not a debt crisis. There are simply too many deposits seeking principal protection and not enough safe assets to protect against capital destruction by negative rates.

4) Negative rates are a function of global abundance (brought on by technological advances), and a trend that cannot be stopped even by the strongest central bank — unless society regresses backwards (like many goldbugs would seemingly desire). For rates to stay positive we have to hoard almost everything in the world form the people that need it, if it is to have value. The artificial scarcity tactics that have been used through the ages to achieve this, are getting harder to execute because of technological liberation — which is enabling the emergence of collaborative economy which bypasses rates of return.

5) Central banks taking charge of digital money and issuing it directly to consumers is one way to ensure deposits can always be protected from negativity.

6) Value in the capital system, and our definition of growth, is very likely being transformed as a result.

7) Greater efficiency and abundance may also eventually lead to the end of arbitrage.

Here is more.  You will find that differs from the perspectives usually expressed here (most of all #4), but it is always good to pass along contrasting points of view.

uffy May 3, 2013 at 4:30 am

Holy cow that is beautiful stuff. We broke capitalism. Yes, it’s always been curiously entangled with the state but for the currently “rich” countries and the “rich” in less rich countries this system has basically worked, when implemented, for quite some time. Not any more though.

“[T]op quality collateral is simply in such huge demand, that there is a collateral squeeze going on.” In other words we have the capacity to do an awful lot more economic activity but lack the proper institutional context due to some ridiculous fear of “risk”. Ever increasing debt isn’t any safer but we appear to have no choice under this paradigm.

Good times.

uffy May 3, 2013 at 3:23 pm

See also “anti-hysteresis — the possibility that inflationary booms have long-term positive effects on aggregate supply. [A] disproportionate share of innovation, new investment and laborforce broadening happens in periods when demand is persistently pushing against potential.” “Capitalist entrepreneurs are motivated by the accumulation of money claims. In a capitalist economy, it is not mere necessity, but purchasing-power-weighted necessity that is the mother of invention.”


“[B]usinessmen perceive overcapacity all over the place. But that is a distributional phenomenon.”

dearieme May 3, 2013 at 4:57 am

I despair: how can she say “like many goldbugs would seemingly desire”? First, they don’t desire it, they fear it. Secondly, that should be “as” not “like”.

meicate May 3, 2013 at 7:42 am

Interesting that she quotes Richard Duncan, but ignores his key point: that we are at the end of a 70 year credit expansion cycle caused by a reserve currency that necessitates ever increasing global imbalances.

Do these people ever consider that the dollar itself might be the problem, and the above simply symptoms?
There can be no safe dollar assets, when the dollar (or any other currency) has failed as a store of value.

prior_approval May 3, 2013 at 5:37 am

Man, that is an unbelievable number of ft.com links. Down on the quota last month?

Frederic Mari May 3, 2013 at 5:51 am

I wouldn’t go as far as saying that QE is deflationary… It seems mostly ineffective/limited to inflating the stock market/commodities…


Relevant bit: “On Monetary Policy: (…) my main reply to Caplan would be that, no, contrary to what Scott Sumner is claiming at the top of his lungs, monetary policy is NOT more efficient than fiscal policy, merely more politically feasible (at least in the USA. In Europe, neither seem to be politically do-able).

The latest quarterly review from Hoisington Investment makes that case very clearly: “[t]wo flaws exist in the belief that the Fed can create rising aggregate demand. First, they do not directly control M2. Second, velocity is almost entirely outside their control”.

meicate May 3, 2013 at 8:02 am


The red line tells us that all the QE is going to Wall-Street so they can use that money to bid up the stock market … and help the Fed who can point at the Stock MArket and say ‘Loo, we’re doing okay’.

JLD May 3, 2013 at 6:21 am

Why doesn’t Cowen understand that information is the 4th and most important factor of production or the power of Metcalf’s law?

BigEd May 3, 2013 at 8:17 am

Isabella is confused. Central banks go to negative interest rates to keep their currencies from appreciating too much. See recent examples of Denmark and Switzerland. Currency appreciation means disinflation in the real economy. When disinflation goes too far it becomes deflation and negative growth in the real economy. Japan has finally figured this out — after 20 years of floundering.

Whether a cental bank can turn around deflation once it begins remains to be seen.

druce May 3, 2013 at 9:18 am

I think the word you were looking for in the headline was ‘crackpot.’

James Oswald May 3, 2013 at 9:56 am

On point 1, does anyone know of a regulatory barrier to using reserves as collateral? My naive first impression is that since treasuries and reserves are earning about the same interest rate banks could just use them as collateral instead. How can you create a safe asset shortage by exchanging one safe asset for another which is more or less identical?

Mark A. Sadowski May 3, 2013 at 11:30 am

Sometime counterintuitiveness reveals deeper understanding. In Izabella Kaminska’s case it reveals deep, deep confusion.

1) In a deflationary environment money *is* a safe asset. Thus “printing” more of it helps to decrease the safe asset shortage problem. See David Beckworth for related commentary.
2) Kaminska has a highly idiosyncratic definition of deflation, in that she identifies it with negative interest rates. Thus in her world view, by definition, the best way to combat deflation is to raise interest rates. This is related to her pervasive confusion concerning causes and effects.
3) Kaminska’s religious faith in “global abundance” is completely unperturbed by the empirical reality of slowing rates of growth in global real GDP per capita and by slowing rates of TFP growth in the advanced countries over the past 40 years.

One has to wonder why FT employs Kaminska except as a freakshow curiosity to draw in the readership.

Michael May 4, 2013 at 7:15 am

QE exchanges an extremely safe asset for a slightly more extremely safe asset. The total amount of safety added to the system is negligible with QE, and it takes away an interest bearing asset.

google adds very little to global gdp, yet I cannot imagine life without it. The relationship between measured gdp and useful value has never been weaker. Wikipedia is something I use every day, yet it’s entirely possible wikipedia has a negative measured gdp relative to what we had before.

Mark A. Sadowski May 4, 2013 at 10:03 am

“QE exchanges an extremely safe asset for a slightly more extremely safe asset. The total amount of safety added to the system is negligible with QE, and it takes away an interest bearing asset.”

According to Gorton et al. (2012) the total supply of safe assets is in excess of $40 trillion or over 250% of nominal GDP. Any excess demand for safe assets is simply too huge to fill up by creating more federal debt without endangering the safe asset status of U.S. Treasuries. On the other hand QE both reduces the excess demand for safe assets because of increased nominal income expectations while at the same time catalyzes financial firms into making more safe assets because of the improved economic outlook and the related increased demand for financial intermediation.

The interest income from QE does not simply vanish but gets turned over to the Treasury. Moreover about 56% of interest income from Treasuries not held by the federal government goes to non-U.S. investors, so it’s not like the non-federal sector of the U.S. economy loses much that interest income. (In fact, as a consequence, more of that income is retained by the U.S.) And the marginal propensity to consume of domestic Treasury holders is often lower than that of non-holders. For example banks, insurance companies, mutual funds, and other corporations hold about 19% of those Treasuries not held by the federal government. Corporations are already sitting on a very large cash hoard this recovery so contributing more to it would probably be unlikely to add much to aggregate demand. Another 11% of the are held by individuals. But according to Edward Wolff, as of 2007, approximately 60.6% of all financial securities (which of course includes government bonds) held by individuals were held by those in the top 1% of net worth (i.e. net worth of $8,232,000 or more) with another 37.9% held by the next 9% in net worth (i.e. between $882,000 and $8,232,000 in net worth). That leaves only 1.5% of financial securities held by the bottom 90% in net worth. People with high net worth tend to have a low marginal propensity to consume.

Finally, Wikipedia and Google have been around for 12 and 16 years respectively. (Heck, the internet is now 44 years old.) Moreover I can imagine life without Google or Wikipedia, but I’d find it more difficult to imagine life without jet engines, synthetic rubber, frozen food, canned beveridges, TV, radar, photocopiers, ballpoint pens, teflon and automobile AC, which were all invented in the relatively short timespan of 1930-39.

Becky Hargrove May 3, 2013 at 12:18 pm

There is plenty to quibble with in Kaminska’s assertions but I’ll just make a note about point seven. One assumes she sees greater efficiency and abundance as a positive gain for people in general. But…the end of arbitrage? That is also the end of greater attributable valuation for human skill, someone please send her a memo.

uffy May 3, 2013 at 3:27 pm


Becky Hargrove May 3, 2013 at 3:38 pm

Recognizable in monetary terms. Economic activity is one thing: being forced into economic activity one doesn’t desire because other kinds of preferable activity are not formally recognized, is the problem. Many services are not true free markets in the present.

steve May 3, 2013 at 12:28 pm

I was taking the article half seriously when I read the “end of arbitrage”. All I can say is this marks it as quackery. Oh sure, arbitrage may end up being primarily the domain of computers working at lightning speeds. But, the end? Hogwash, there will never be perfect markets.

SC May 3, 2013 at 3:28 pm

Question from a non-economist:

How are 3 and 4 not in some way an obvious intuitive interpretation of our current situation? I thought the whole point of QE was to get businesses to make capital investments (Krugman’s pushing on a string given the current demand outlook) by engineering low bond yields. So broadly speaking, if you’re sitting on a dollar, you can either

a) buy a bond and lose value slowly,
b) buy a share of an index fund and risk letting the market figure it out for you
c) buy physical capital and risk trying to produce actual value, with any gain taxed much more heavily than capital gains

Under the circumstances, why would anyone choose option c? The rational loss-minimizer will suffer through option a and everyone else will speculate on b, exactly what we observe. How is any of this counterintuitive?

Again, not an economist…

Michael Sankowski May 4, 2013 at 7:25 am

Exactly. She is entirely reasonable on this topic of QE, if you consider what is happening in the real world.

It’s important to remember she has done THE reporting and figuring out of the commodity financing “schemes” being used in China.

P.S. I am a co-blogger with Cullen Roche, who has certainly influenced Izabella K, so I am not some neutral third party here.

Mark A. Sadowski May 4, 2013 at 10:13 am

“I am a co-blogger with Cullen Roche, who has certainly influenced Izabella K, so I am not some neutral third party here.”

The same Cullen Roche who has been blogging about the divergence of the US and eurozone economies for over a year now, but only recently discovered that the ECB has never had a QE program, and that by conventional measures the US has actually done more fiscal austerity than the eurozone (in aggregate), not less? That explains a lot.

Michael Sankowski May 25, 2013 at 8:57 am

Pathetic, laughable attempt. This doesn’t even come close fairly summarizing Cullen’s (or my) public writings on the topics of QE and the Eurozone.

babar May 19, 2013 at 8:47 am

maybe what she is saying is that if wealth is possible without large investment there is little return to saving?

kombi fiyatları May 22, 2013 at 5:55 am

For example banks, insurance companies, mutual funds, and other corporations hold about 19% of those Treasuries not held by the federal government. Corporations are already sitting on a very large cash hoard this recovery so contributing more to it would probably be unlikely to add much to aggregate demand. Another 11% of the are held by individuals.

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