Cardiff Garcia has a great post about safe assets and the quest for collateral. In the end he asks

Does the shadow banking system’s relationship to monetary policy have any implication for the Smithian/neo-Wicksellian view, which awaits the natural rate of interest imminently rising to and exceeding the federal funds rate?

The short-short-short answer is that from the looks of it right now the real economy driving the natural rate up will outrun the collateral contraction.

The short-short answer is that I will admit I am growingly concerned about what happens when we cross over to the other side. I have not looked into the details but from a 30K foot view I imagine that we will soon hit a point where the issuance of private safe collateral reverses, which could push some part of the economy into an uncontrollable boom.

My baseline expectation is that there is a non-trivial chance it could be housing all over again. Though again, I don’t know the details of the market.

In any case it’s a pickle because the fundamental asset problem remains and there is no clear way to stop the boom-bust cycle when private collateral is so strongly pro-cyclical.

As I hinted at, at Kauffman the ideal strategy would be for the US government to run massive deficit – most efficiently by dramatically reducing taxation at all levels and transferring the burden for Medicaid and Higher Ed to the Federal government and the massively opening up to immigration.

Thus allows us to support the issuance of massively more public collateral and have it backed by a larger population. Absent something like this I think there is no obvious way to avoid this.