David Schawel (@davidschawel on twitter) pointed me to this IMF paper. Singh is almost always worthy of a read and he doesn't disappoint here:
Long time Contrarian Corner readers will recognize the 1st section as the core explanation of a Structural Trap and all the IS/LM shenanigans it entails. "Trappers" know that the risks are 1) a negative rate needed that is so deep it creates a ccy crisis or 2) lack of political gravitas to address the problem of capacity reduction. These factors have combined to debilitate the inflation expectations necessary to escape the torpor. Despite a widely held belief among rational participants that a determined CB can always create inflation (if wanted) and a radical but significant cabal of "Schiffs" warning of The Great Pumpkin's arrival....it has not happened.
The second portion of the paper - and exciting to David and me - is the recognition that V in collateral has decreased from 2011 to 2012 (and I would speculate 2013). This is dis-intermediation at the transaction foundation of the financial system. The paper also shows that The Death Star is a necessary but unproven tool to perform what - should it EVER occur -will be a delicate and nasty function. The upshot for Yellen is the walking back of QE will need to transact at a pace at least as long as the building. And, somewhat logically, Repo will need to be kept just below IOER on the hypothetical way out. I would caution that the missing variable is neither inflation or the employment rate but the uptick in collateral velocity. As indicated in our post Tuesday, given the gutting of Treasury trade desks by the Street, who exactly will perform this function?