One of David Rosenberg’s latest notes touched on 9 economic myths.  If you’re familiar with his stance you probably know what his position is on each.  So, instead of regurgitate them I am going to hijack his myths and insert my own opinions:

1.  Bonds are in a bubble

DR:  No, bonds are not in a bubble.

CR:  No, bonds are not in a bubble.   I outlined my position on this in some detail several years ago, but in short – I think the term “bubble” is being abused in reference to bonds.  Bonds are a fixed income product, which if held to maturity will return 100 cents on the dollar plus interest.  Can you get left holding the bag if you trade bonds?  Yes.  I’ve pointed out two different occasions over the last 3 years in which bonds were particularly risky – January of 2010 and January of 2012.  Both events were followed by substantial declines in bond prices, but not the end of the secular bond bull.    But the bigger point here is to understand what it would mean for bonds to be in a bubble.  A bubble implies risk of catastrophic loss.

But let’s remember a few things – first of all, if you ladder into a bond portfolio and actually diversify across bonds then you can substantially eliminate this risk.  But more importantly, you must understand the potential macro drivers of a bond market collapse.  First, the US govt bond market is not susceptible to Greek-like raids by mythical bond vigilantes (see here for more).  Second, since inflation and not solvency is the concern for an autonomous currency issuer, then we need to always worry about inflation, right?   What are the big inflation risks, right now?  Most likely a supply side oil shock generating a 1970’s style environment (which would likely be followed promptly by a recession) or an economic boom.   If we’re in for an economic boom (which will likely lead to higher wages, higher prices, etc) then you better also be diversified across other asset classes because bonds should never be your entire portfolio.  Bonds serve a specific role in a portfolio – to help hedge and diversify other holdings.  If you’re properly diversified then bond declines (even substantial bonds declines) will be more than offset by gains in other assets.

2.  The LTRO saved Europe

DR:  The LTRO kicked the can.

CR:  The LTRO kicked the can really hard.

I’ve laid out my opinion on Europe previously, but it might help to refresh.  The problem in Europe is simple.  Because none of the countries are autonomous currency issuers they all suffer from solvency constraints.  They can’t print Euro without the approval of a foreign central bank in essence.  So, unlike the USA, they can “run out of money”.   This makes for frightened bond investors.  The problems all arise out of the trade imbalance which essentially forces the core to lend to the periphery to maintain growth.  This is only sustainable up to a point and that point has been reached.  So the issue now is that you must fix the broken currency.  You must make these nations autonomous in their currency.  The only two ways to do that is to create some sort of US of Europe.  Or default, defect and bring back the old currencies.  So far they’re trying to keep the ship from sinking, but the water is pouring in faster than it’s getting bailed out (pun very much intended).  The LTRO was a powerful tool that helps prolong this process.  It’s really just more of the same ponzi backed by the ECB.  The private sector lends to the periphery and on we go.  It won’t work.  They need to do more…..

3.  The US fiscal situation is intractable

DR: Washington must tackle the fiscal problem before it gets out of hand.

CR:  I had to look up the word “intractable” so let me just start by stating that I feel pretty stupid already.  But DR misses the point here.  The USA is an autonomous currency issuer.  There is no such thing as our financial situation leading to insolvency.  The US government is nothing like a household.  It cannot “run out of money”.  Nor is it like Greece or Spain or Portugal or any of the countries in Europe involved in that mess of a single currency.  Remember, the states in the USA are analogous to the countries in Europe – not the US federal government.

So what is sustainable?  Well, as mentioned briefly above – we are constrained by inflation.  We could spend so much money into the economy that it causes massive inflation and destroys our living standards.  I have long argued that inflation and hyperinflation fears are overdone for various reasons (misunderstanding monetary ops primarily).  But the bigger point to understand here is that the USA doesn’t have a solvency constraint like you or I do.  The nation has an inflation constraint.  It’s not a semantic difference.  See here for more.

4.  It’s clear sailing ahead

DR:  No, the economy is still very weak

CR:  I’ve been much more optimistic than most others about the economy.  I was very vocal last year that I thought there would be no recession and once again believed this to be the case in 2012.  But the risks are looming large.  The balance sheet recession is waning, but it’s not over.  The government has propped up the economy through large budget deficits that helped offset the de-leveraging process.  There are signs of healing, but we must not rip the band-aid off.  The private sector is still not quite ready to run with the baton.  See my full view here.

5.  Housing is embarking on a full fledged recovery

DR:  No, housing remains and will remain very weak.

CR:  As I detailed yesterday, I think the housing market is stabilizing, but I think “bottom” calls are misguided.  There will be no event-like bottom in housing.  Instead, I think housing will likely flat-line for years.  We could see good years and bad years, but I think we’re in the beginning to middle stages of a typical post-bubble workout period.  Bubbles rarely bottom and bounce back to highs.  Rather, the extremes from the previous cycle get worked off over long periods of time.  In this case the high inventories and slowly recovering consumer balance sheets will come together to create a rather mundane housing environment for the next 5 years or so.

6.  No hard landing in China

DR: There are enormous downside risks in China

CR:  China is a black box.  I’d have more luck guessing the velocity and vector of Haley’s Comet at this instant.  But yes, I agree that there are enormous risks involved in a country which builds empty cities in the desert and routinely releases economic data that is filled with holes….In short, I just don’t know enough about China to know what’s really going on there.  And I would be shocked if anyone outside of their government really knows either….

7.  The surge in gas prices doesn’t matter

DR:  Gas prices will eat into consumer spending.

CR:  Gas prices will eat into consumer spending.  We seem to have this debate every year now.  And every year people say the same things.  The same analysts find a new excuse for why it’s different this time and their opponents say it will cause a slow-down mid year.  And we tend to see a slow-down mid year.  I see no reason why this year will be different.  Goldman’s Jan Hatzius doesn’t disagree.  But the more interesting effect might just be abroad where gas prices are ripping the hearts out of already suffering European economies.  You think gas prices are high here?  Whew.  Go over to Europe and fill up….Now that’s pain at the pump.

8.  Inflation is coming back

DR:  Inflation is the last thing to worry about

CR:  I am a bit more concerned about inflation than DR is.  But only moderately so.  I’ve been pretty consistent over the years that I am not worried about high inflation, but we are now beginning to see real signs of economic recovery and sustainable credit growth.  This could all be a recipe for a sustained fight with inflation.  Of course, the government could torpedo all of this might cutting the budget deficit massively, but we’ll play that by ear as the year plays out.  I still think there’s upside risk in inflation data from here, but I’d be shocked to see high single digit inflation any time soon.  It’s not the last thing to worry about, but I generally agree with DR that the risks are overstated here.  We need to worry about getting back to full employment and full capacity first….Having an energy plan of some sort would also help.

9.  The stock market is cheap

DR:  The equity market is not cheap.

CR:  I wouldn’t put all your eggs in the valuation metric basket.   Most valuation metrics are relatively misleading except at market extremes.   Most of them are rear view mirror looking or based on guesses by analysts who have no idea what the future actually holds.



Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • hangemhi

    Brilliant piece…. oh but I feel let down by the short answer to #9. But overall I’d put this at the top of the reading list for anyone wanting to understand you and your positions.

  • Jonathan

    ” But the bigger point to understand here is that the USA doesn’t have a solvency constraint like you or I do. The nation has an inflation constraint. It’s not a semantic difference.”

    Your argument assumes that the rest of the world will continue to be willing to hold ever larger holdings of US dollars. The US has a massive trade and current account deficit and there are trillions of dollars held abroad by foreigners. Inflation or no, if enough investors become concerned with the debasement of the currency by the Fed and US government, then a currency crisis will emerge and it won’t matter how tame domestic inflation has been. The wheels come off.

    Given the dearth of alternatives to the dollar, perhaps that isn’t a major risk…yet. But given the hopeless state of the federal debt (hopeless because we lack the political will to do anything meaningful about it), that day will come. The bottom line is this: while being a autonomous currency issuer appears to give us an advantage over the Europeans, it will ultimately turn out to be a curse because it is enabling us to dig ourselves into a hole that we cannot possibly climb out of. The ultimate reckoning will be far worse than it needed to be had we pursued responsible policies while we had the opportunity.

  • hangemhi

    We “lack the political will” to do anything about the 3 main groups holding all those US dollars… 1) our trade partners China and Japan, 2) uber wealthy people, 3) large corporations like Apple and Exxon. If the US debt is hopeless you must also be pointing out that these 3 groups have too much money (which i agree with) and that they will soon have a desire to not have too much money (which seems ridiculous).

  • http://www.pragcap.com Cullen Roche

    I’m just not a value guy so it’s an admitted weak point. Sorry!

  • whatisgoingon

    Cullen are you still bearish on bonds as of now or neutral?

    Also if you have you written about risks of the US trade imbalance I would love to read your work. I understand MMT doesn’t have a concern with the trade imbalance but I believe MMR has some reservations and I would be curious to see if they extend to inflation and treasury concerns. The other harbinger in this is the loss of reserve status of the US but given how the US has emerged from the 2008 crisis, the reserve status is not in question for the time being.

    Basically I’m trying to understand if the trade imbalance (and/or reserve status) needs to be unwound somehow and at what point if ever, you start getting concerned.

  • Larry

    Cullen, thanks for this excellent post, it is very helpful. You said: “gas prices are ripping the hearts out of already suffering European economies. ” The high gas prices coupled with EU fiscal austerity is driving the Eurozone into at least a moderate recession this year. With China also slowing & trying to engineer a soft landing,
    Cullen, don’t you agree that the downside risks to global growth right now exceed the upside potential?

  • http://www.pragcap.com Cullen Roche

    This is one of the primary reasons why my stance on MMR is so production based. The reason why foreigners are willing to hold huge amounts of USD’s is primarily because we represent 25% of all world output. These are claims on huge amounts of US resources. The reserves foreigners accumulate are due to this economic output and not just because they like collecting pieces of paper. So the risk is not that foreigners will become fearful of holding dollars, but that the USA will spend well in excess of productive capacity and generate a currency crisis or that production will crater. Personally, I don’t see either one happening in the current environment.

    But in general I agree that the current account is a worrisome and unsustainable trend. It signifies a nation that is increasingly dependent not on domestic production, but domestic consumption. This imbalance is already causing massive problems in the USA. And yes, I agree that it poses potential risks, but the ship can still be righted. Unfortunately, govt policy isn’t helping a whole lot as we perpetuate the trends of the last 30 years that helped get us into this mess in the first place….So anyone expecting a future of smooth sailing would be wise to put on a life vest because we’re likely to go overboard again given the way these imbalances are persisting….

  • http://www.pragcap.com Cullen Roche

    Europe is in a real mess. I think the outlook for the USA is still somewhat positive. The third leg is China and I really can’t forecast what’s going on there…so, 1 out of 2 with a 3rd question mark. Not real helpful I know….

  • http://www.pragcap.com Cullen Roche

    Still negative on bonds. And yes, MMR is not as sanguine about the CAD as MMT is. I would recommend section 2 on this page for more. It offers a brief overview of our position there. http://monetaryrealism.com/sample-page/

  • Rich

    “I’d have more luck guessing the velocity and vector of Haley’s Comet at this instant.” Velocity is already a vector quantity; back to math class, Cullen.

    Otherwise, good short summary.

  • VII

    The deeper they dig the higher stocks go…so dig baby dig! :-)

    When you hit rock let me know and I’ll flip the whole thing around while the deficit hawks get everything they want. And I’ll put my bear hat on ride this baby back down.

  • http://www.pragcap.com Cullen Roche

    I knew someone would say that! But yeah, back to math class is right. It’s been 20 years…. :-)

  • Jay


    You’ve been kind enough in the past to provide some insight and updates on your investment positioning/performance via your algorithm. Previously, your algo was positioned with a sizable market short position and for the most part it had proven to be futile as the market continued to rage ever higher. Has there been anything in recent weeks to lead the algo to a more bullish stance or do things remain largely unchanged since you last provided some insight? Thanks

  • LRM

    I like the style of this post like the Saut post earlier.
    Covers several areas in “bullet” fashion. Thanks

  • whatisgoingon

    Thanks and it seems this is a dynamic system that has many possible solutions.

    The extremes are being a US like country that primarily consumes (and exports most of the value added production to cheaper locations). And on the other hand being a China like nation that mainly produces (and exports most of the consumption to more expensive locations).

    The ideal situation for a country is to find some stability by balancing production and consumption. This will probably irk some small government proponents that don’t want government interference, but there doesn’t seem to be clear over arching strategic plan to ensure the US remains competitive for years to come like many corporations have. One would think this would be the role of the government.

    Also there seems to be a notion of “positive” consumption (like education and capital investment) and “negative” consumption (like new toys and speculative investments). Ideally the “benefits” gleaned from import consumption also include the “positive” kind that are beneficial to the economy in the short and long run.

  • LSL

    Please explain why we have not spent well in excess of productive capacity at this juncture? Aren’t our humongous debts and current credit crisis evidence that productive capacity has been exceeded and it’s only because we are, at this time, the best house in the worst neighborhood, that we have not experienced a currency crisis?

  • http://www.pragcap.com Cullen Roche

    Most of the classical economists understood the need for balanced trade. So it’s baffling to me how MMT came to this position that the CAD can just be papered over because “we can afford it” – I mean, we can afford it as in it’s not going to cause us to “run out of money”, but we can’t afford it in terms of economic stagnation and decline in living stds. To add – we can’t really afford it because we’re collecting pieces of junk that end up in landfills and China is gaining real jobs, real skills, and real investment. This is, in my opinion, MMT’s very weakest position.

  • http://www.pragcap.com Cullen Roche

    I’d argue that with capacity utilization at 78% and unemployment at 8% we’re still operating well below potential capacity….

  • Work

    VII… I’ve not been tracking this site for awhile. When did your position change so dramatically? What did your team see to cause that?
    Thanks! (I knew I should have kept at it.)

  • hangemhi

    aren’t “foreigners willing to hold US dollars” because they desire to create jobs at home and sell to whoever will buy? Are they going to stop selling to us if we run deficits 10x higher than today? (which is a moot point since we’ll never do that)

    And isn’t China creating new net financial assets like crazy? The world lauds them as economic wunderkinds while they fear monger us doing the same thing on a MUCH much smaller scale? Meanwhile we get imported inflation, not domestically produced inflation. Where’s the fear mongering about that?

    and where is the “subscribe to comments” button?

  • http://www.pragcap.com Cullen Roche

    Yeah, China gets a lot of out this trade. They get real jobs, real skills, real investment, etc. They’re not just getting pieces of paper. America gets cheaper prices than domestically produced and they get pieces of plastic that end up in a landfill in 5 years. For a really wealthy nation and a developing nation that seems like a good trade for both. But I think the CAD represents another growing trend which is the decline of quality production in the USA. It’s not just something that can be papered over forever. There’s a much bigger problem lurking even if it’s not killing us today.

    No comment subscribe button. I’ll look into it….

  • hangemhi

    Our private sector “spent well in excess of productive capacity” during the housing bubble. Mainstream media and our politicians are focused on the wrong debt and malinvestment. The private sector is paying back trillions in debt while their malinvestment McMansions decrease in value. The Gov isn’t replacing that evaporating money fast enough… or at least wisely targeted enough… if they did, we might start producing again.

  • Anon John

    I love Rosie for being a contrarian but he’s been awfully wrong on the markets the last two years. Since he’s moved to Gluskin their portfolio’s performance has been garbage and they’ve seen big redemptions. Partly why there SP has gone from $22.36 On Jan 1, 2010 to $15.00 today… now the rumour on the street is how much time he’s got left at GS before getting the boot…

  • http://www.pragcap.com Cullen Roche

    In fairness to DR he’s been bullish about a lot of stuff like gold and bonds and dividend stocks. Yeah, he’s gotten the equity calls largely wrong and been way too defensive in that regard, but I don’t think you can paint with such a broad brush. And the stock price is up 60% since he joined them. That’s compared to 15% for Goldman Sachs and I don’t see anyone calling for Jan Hatzius and Kostin’s heads. Nor should they….It’s been an awful bunch of years for banks and investment managers in general.

  • chewitup

    Just last week I filled up a Peugeot diesel in Italy for 85 Euro. What is that? $113? Yikes! Good thing the wine was cheaper.

    Intractable would have been a better description for Q6 dealing with China.

  • Mr. Market

    1. The US indeed needs to adress its fiscal deficits before:
    – the US trade deficit shrinks down to zero/too much.
    – interest rates double
    – the USD takes off like a rocket
    But that doesn’t go down too well with all the folks who are benefiting from the about $ 1 trillion US “”defense”” budget, right ???
    2. The US is already insolvent. Printing/issueing money only aleviates liquidity problems.
    3. Nominal interest rates don’t matter. One has to look at REAL interest rates and those could go up to about 8, 10 or 12%. Devastating for ANY economy.

  • Anon John

    Oh I definetly agree CR, it’s unfortuneatly as you well know. Clients and shareholders memory only lasts 1-2 years. We have a client invested with us and Gluskin and the last two years his performance with them has been awful and he had nothing good to say about them. Obviously it’s not all DR’s fault, but he his the face of the firm after Ira…

  • http://www.pragcap.com Cullen Roche

    Yeah, sorry wasn’t trying to come off as defensive, but I see a lot of good people get thrown under the bus in this industry when things go wrong for 18 months. As you point out though we live in a “what have you done for me lately” world and you’ve got 140 characters and 5 minutes to get your point across….Investing requires a lot more perspective and time than that though. I used to LOVE DR with Bernstein at Merrill. They complimented each other so nicely. You’ve gotta have that skepticism balanced by the optimism. It creates perspective. I don’t know if Gluskin has that or not so I can’t really speak about that firm specifically, but I know that the good firms have the sort of perspective or at least try to establish it to some degree….But most fail.

  • Johnny Evers

    Why can’t the LTRO just keep on printing money — or lending it, I know people use the terms interchangably and I don’t know which is the proper term.
    If it’s the answer for the U.S., why can’t it work for them.
    Because from what I’ve seen, the Europeans are actually better equipped to finance their spending in their current budgets. They’re not borrowing as much as we are for their day to day welfare spending as we are.

  • Tom


    You say your emore concerned with inflation than DR….is it because of gas prices? I assume, from learning about MMT/MMR, that since we have a lot of “slack” and excess capacity that a credit expansion or more deficit spending wouldnt lead to excess inflation because of those conditions?

    Could you elaborate some, just as a learning experience for me. :)

  • Geoff

    I can’t speak for MMTers, but my take on their view of trade is that the US (or any country) only has a limited amount of domestic resources to produce things. If China wants to use their limited resources to produce things for us, cool.

  • VII

    I changed.
    I was open to receiving a different point of view…which was my job all along. I forgot my job…but I’ve always been willing to adapt. It is one of my better strengths god/life gave me.

    Here’s what I would say. You can see it all over this site and many others. People take a point of view and that is it. Judgement is in. Sometimes they are open to change but as a whole…you’ll find many will just keep digging in. They will cite…China, Comodities, Australia, Europe, EPS on the SPX, Housing, Unemployment every thing BUT..the SPX/QQQ/Dow. The three things that matter most. Everything else is noise. Just Bloody noise that Dr. Dre Beat headphones will help you.

    Someone here told me how the market was topping out and how the technicals were changing. WTF? Are you kidding me? They have no clue how to identify a top or the technicals and Price action. This is as Bullish as anything ever! But they listen to everything else. Trannies, RUT, NYSE, China, etc.

    It’s funny really how wrong everyone is right now. And when they ask for help they just launch back with why I or B Ferro is wrong. They don’t get it. I’m not wrong…I CAN’T BE. I’m doing what the market is telling me to do. THUS you telling the market it’s wrong. When that changes I will change.

    At some point the market will drop and they will say I’m an idiot. BUT I will be out or short. I have data going back to 1900 which outlines tops. WE are no where near this in terms of price action. They take about 6 months to form. The market ALWAYS warns you then it makes you whole.

    I get it though. If I’m honest. I used to wake up and walk outside…pick up my F.T, WSJ and Barrons magzines. Read them cover to cover. Hit up all the sites looking for stuff. Paid my 1000 subscription to Rosie( i just cancelled on renewal) First one to read why the market was wrong at 9:00 p.t Sunday evening on http://www.hussmanfunds.com dug through other things. ALL NOISE!

    There is only one thing that matters and it’ not anything you’ll find in Breakfast with Dave from Gluskinn Sheff or on CNBC. The only thing that matters is the price action. When that changes..I’ll be the second one off the titanic.

    All the economic stuff is great if your an economists and sure..it matters. But my clients care about one thing. At the end of the year am I going to explain all the reasons why the market should not have gone down or up or are we going to have a glass of wine and never get to that crap and focus on what’s important there family. I can only do that if at the end of the year that NUMBER on there statement is exactly what it should be. That’s all they care about…all the rest is a distraction.

    I might add…if were going to spend time reading about confirmation biases some of us here(I’ll include my fromer self) should recognize the mistake we’ve been making since December and stop making excuses as to why the market is wrong and your right.

  • VII

    Same old story…the ECB and Fed hand out money. The market goes up and they complain about the market going up?

    News Flash…when they guy with the helicopter that says “Bens Money Drop” flies over head..you may want to get underneath it for once. There probably arn’t many more flights left

  • Ben Wolf

    Selling to us also helps China get the dollars it needs to peg the yuan to our currency, which helps their trade surplus with us, which gets them the dollars they need, which . . .

  • jt26

    BTW, I’m not sure if I’ve seen the MMR rebuttal of the “classic explanation” that the US CAD is not necessarily bad, as the CAD acts in the same way as federal NFAs to supply working capital for the global dollar zone. It may still be “bad” for some US citizens, but since the state doesn’t own the dollar ;-}, it is a creature of the currency user. We may not like it, but the alternative is not to let our trade and dollars cross borders, or prohibit foreigners from holding dollars. Or am I thinking about this wrong?

  • Ben Wolf

    Also, countering the financial losses to persisent CADs by spending is self-reinforcing. Higher budget deficits encourage higher trade deficits which require more deficit spending. It gets even worse when budget deficits are declining because there’s no way the political will exists to reverse that trend just to fill in the gap left by outflowing financial assets. I can’t see how the trade situation we’re in is anything but a net loss for us.

  • Dennis

    Cullen, Does your algorithm take into consideration the transfer of money from corporations to employees during the first quarter of each year? To see the massive increase in withholding (that doesn’t even count additions to IRAs and 401ks), due to bonus payments each year, open this link from John Williams’ Shadow Government Statistics: http://www.shadowstats.com/article/withheld-income-and-payroll-taxes-update-2

  • http://www.pragcap.com Cullen Roche

    Stronger economy than DR sees and upside risk to gas prices.

  • http://www.pragcap.com Cullen Roche

    Well what are we saving them for? A long drive? $500 oil? The richest man in the graveyard doesn’t win jack. :-)

  • Ben Wolf

    The U.S. isn’t really borrowing at all. It’s just shuffling around net financial assets so as to keep interest rates under the Fed’s thumb. The ECB however won’t continue LTRO because the Germans are utterly terrified of the inflation bogeyman and, because no one has addressed the EMU’s internal trade imbalances, the necessary money printing will only grow to ever greater heights. So long as the German voter feels like she’s sending her tax dollars to bail out other countries, the political will to continue bailouts will be a short-term thing at best.

  • http://www.pragcap.com Cullen Roche

    China can always just print RMB to buy USD. Same fiscal difference. No need to import dollars to peg the USD. Besides, it’s the threat of the peg that pegs the currency. Not the actual trading by the PBOC.

  • http://www.pragcap.com Cullen Roche

    The CAD is a demand leakage so it requires printing over to fill the leakage. MMT says this is fine so long as it’s printed over. Wynne Godley would barf in his mouth if he read that….There’s MUCH more to a trade imbalance than just a loss of electronic credits. It represents a loss of competitiveness. The MMT position is sort of like losing a football game by wider and wider margins and saying “eh, I know the scorekeeper, we’ll change the points at the end of the game”. Yeah, well your players still suck at football.

  • Ben Wolf

    You don’t think that their current inflation problems makes printing more currency for the FX market more problematic? I’d always considered the dollars they accumulate via trade to be a “free” method of helping them peg.

  • http://www.pragcap.com Cullen Roche

    Nice Ben. Someone has read his Godley. :-)

  • http://www.pragcap.com Cullen Roche

    Yes, I was not disagreeing with you. Just clarifying. You are right. Printing RMB to buy USD is a fiscal operation by the PBOC. Easier to import the USDs though as you said. But like Fed policy, it’s not the trading that pegs the RMB to the USD. It’s the threat. Sort of like holding a gun to a man’s head and daring him to move. The PBOC doesn’t have to pull the trigger necessarily. They just have to raise their voice and press the gun in a little firmer on occasion.

  • Ben Wolf

    I learned about Godley on this site and it’s what finally brought me on board with MMR. Modern Monetary Theory is truly a wonderful thing with excellent insight into how the system works, but it is oddly negligent in certain areas like the trade balance and productivity. I think MMR can do better.

  • http://www.pragcap.com Cullen Roche

    Agreed. We’re just filling in some holes. You see JKH’s latest? He’s filling in the accounting around MMR which is a beautiful thing. And yes, I agree. MMT is fantastic. We just disagree with some of their points and policies….

  • VII

    @ Work- One more thing….I don’t have any advice really on what to do. What I have is no longer mine to share. What I see…every morning….is no longer mine. Thus for now on I’m just passing on freely what I’ve paid for.
    All I can say is I like my life much better. I don’t have to think anymore(yes..if you’v read my comments here..your right..I never started)

    But just focus on that which you own. Until that starts to get speed wobbles like a skateboard down a steep hill..you know your ok. But when the market starts to shake up and down violently your probably topping out.

    It doesn’t mean I’ve had a great quarter. I was late and what I did own just netted out my stupid Shorts in some accounts.

    Keep it simple. Dont’ get distracted by what doesn’t matter.

  • Ben Wolf

    It’s not the amount in aggregate that stimulates, it’s the flow over a specific period of time. It’s like a doctor who recommends an immediate fifty cc chemotherapy injection to deal with a tumor. But instead of giving it in one lump sum the nurse administers one cc per day over a fifty-day period and so drastically reduces the effectiveness of the drug. One massive, sustained, well allocated stimulus over a couple of years is going to have a stronger effect than low-level deficit spending over four or five years.

  • Ben Wolf

    Yeah, who is JKH? The guy/gal is making me feel decidedly stupid with the quality of their work.

  • Ben Wolf

    I’d never thought of it in terms of “implied” pegging. Interesting take.

  • Geoff

    We’re keeping our powder dry for a rainy day. The ultimate form of saving, man.

  • http://www.pragcap.com Cullen Roche

    I thought all you Keynesians hated saving!!!! :-)

  • http://www.pragcap.com Cullen Roche

    He’s my inside contact in the great white north. He’ll reveal himself one day. And yes, he’s brilliant. Especially when it comes to the accounting on all of this.

  • http://www.pragcap.com Cullen Roche

    Better yet, why don’t we at least pull it all out of the ground and create buffer stocks? You guys love buffer stocks right!?!?! :-) Instead, China’s eating our lunch and coming back for seconds.

  • Geoff

    Keynesian? Them’s fight’n words. Cullen, on a serious note, would it be fair to say that MMT and MMR agree on most of the operational aspects, but have different objectives? MMT seems to be mainly focused on Aggregate Demand, where “G” can play an important role. MMR is more focused on productivity, where “I” is at the forefront. So it is really a “G” versus “I” debate?

  • http://www.pragcap.com Cullen Roche

    Well, MMR disagrees with MMT’s view of the way the system is actually structured. MMT builds their approach based on the state’s control and the state’s monopoly. MMT builds the theory from the state theory and the idea that taxes drive money. MMR derives from the idea that the currency is a creation of the people driven by acceptance of this currency by that society. Money is not “driven” by any single factor. MMR also points out that the power of money creation is dispersed away from the govt to the banking system as our system is structured. This is crucial as it disperses monopolist powers out of the hands of one entity. The USA has always been designed to operate with such a dispersion of powers. So the idea of a “money monopolist” is not even consistent with our form of government. But MMT totally misconstrues this point in order to justify govt action when it is convenient for MMT political policies. Our differences all derive from these foundational points (and they’re plentiful). I think it would be safe to say that MMR builds on the trifecta of macro in the order of production>full employment>price stability while MMT’s most importantly policy is the JG leading to an approach of full employment>production>price stability.

  • innertrader

    MYTHS??? Here’s the largest MYTH this country has ever seen! Absolutely everything oBama has done as President is a fraud and invalid, period!


  • Dr. Oliver Strebel

    2. The LTRO saved Europe

    DR: The LTRO kicked the can.

    CR: The LTRO kicked the can really hard.

    Infinite ECB fire power will vaporize the can myth ;).

  • Andrew P

    I see the biggest question of future inflation being argued in the Supreme Court yesterday – the question of ObamaCare. If most of the law remains intact, the fiscal deficit will grow very rapidly from the middle to the end of the decade. The 2020s will then be an era of inflation, like the 1970s on steroids.

  • Andrew P

    Shouldn’t China’s wages be eventually be forced up, and this will in time equalize the labor costs across countries? This should reduce the CAD or even eliminate it.

    Of course, once China becomes rich, there is ALWAYS someone else who is hungry enough to work cheap….

    I still think energy supplies will be the biggest constraint to global GDP growth going forward.

  • Andrew P

    Would you agree that China runs on almost pure MMT since China is a Oligarchy where the PBOC has complete control of bank lending across the board, and a form of JG seems very important to Chinese officials?

  • Andrew P

    The ECB’s fire power is infinite. They can always kick the can harder and harder each time, and even wade into outright fiscal operations. But the political systems in parliamentary republics are not infinitely elastic. If something breaks in Europe, it will most likely be a political failure of some sort.

  • Geoff

    Thanks for the clarification, especially since I know you’ve been over this a hundred times before. Some of us are slow. I certainly understand your focus on productivity, and I can’t say I disagree. However, your rejection of the govt money monopoly idea is more difficult for me to understand. I’m a small govt guy myself, but I don’t think that is incompatible with the state theory of money. Sure, banks can create loans, but for me a loan is not real money. Loans must be repaid. Besides, the loan is denominated in US dollars, which is a creature of the state, is it not? Perhaps I’m simply biased against debt. I don’t have any myself. I prefer to obtain money the old fashioned way, by earning it.

  • LRM

    This post is getting old and the algo is off topic to this post but I have been following this as close as I could so as to see how this works in execution at least. On the Mar 1st update on the Rail data you mentioned you were at that time fully invested in this trade of what you mentioned was to last about 8 weeks. (position was about 4 weeks old at that point) Given the rise in Equities,I expected maybe that this would be a bit more underwater so wondered if an additional addition to the position had been made since the first of the month to reverse dollar average down the cost.
    I am impressed by the patience and conviction and confidence of your well earned method and I am hopeful for your success.

  • Tom

    Romney was born in the 3rd world country of Detroit…can he run for President?

  • Pierce Inverarity

    Go away. You have no idea what you’re talking about and you’re cluttering this site with your trolling.

  • Val. N. Popper

    Bravo VII

    Very well said (even if it is a little late in the upside game) — with this newly found attitude, you will certainly make up for lost time (and effort)

  • http://www.pragcap.com Cullen Roche

    I hate to be vague, but I’ll just add that the index I use for this strategy is flat for the month. And there’s nothing firm about 8 weeks. It’s an automated system so it spits off signals as they come. The average trade is about 8 weeks, but that doesn’t mean it can’t go 12 or 16….The computer generates the output so it’s kind of out of my hands….

  • http://www.limericksecon.com Dr. Goose

    Regarding myth no. 2:

    Said an overwrought Eurocrat wistfully,
    At the nightmare he once dreamed of blissfully:
    “The euro must break up
    Or else we must take up
    The topic of joining fiscally.”

  • Geoff

    Your skepticism of the state I think is certainly justified. Your skepticism of MMTer motives I’m not in a position to judge. However, I did see a comment recently by Scott F on another site that may be relevant:

    “the state’s “monopoly” is generally a monopoly over the price of its own money–the interest rate on its money–and the price of things it purchases or sells. Nothing more than that. Nothing less, either.”

    So it seems that the govt would indeed be justified in setting Treasury bond yields across the entire curve, but not the yields on other types of bonds, i.e. other credit.

  • VII

    Andrew- Did you just comment on 2020 inflation? I can’t even figure out what I’m having for lunch and that’s in 2 hours.

  • jt26

    But again one could say that country X (e.g. China) needs USD assets for USD working capital (positive balance sheet contributor), and the only way they can get them is to trade for them? How is that different then, Joe the Plumber, who needs NFAs from the federal government because of his personal balance sheet issues?

    The only way to resolve this is to define what good and bad is: e.g.
    – country X is bad if it acquires more than Y% of its foreign trade, where Y is defined as [USD working capital financing for global trade][total working capital financing for global trade]x100
    – similarily, Joe the Plumber is bad if he acquires more than his fair share of NFAs …

  • jt26

    fix equation: [USD working capital financing for global trade] / [total working capital financing for global trade]x100

  • http://www.pragcap.com Cullen Roche

    I’m not even that skeptical. I just don’t think the system is designed to allocate that much power to govt. Our whole system is designed to disperse power. Not monopolize it.

  • Work

    Thanks VII. Very good advice. Overthinking can be a bitch. I have a decent straight forward stragey but then I see/read this/that and well maybe one more tweak will really add to it. Or worse, I question what I’m doing and don’t do anything. But then I get stupid lucky which is all the more confusing.

  • VII

    @ Val

    Thanks- No clue about the future…but I will say a decline of 7% or more would be a sign that something has changed.

    Some ugly charts starting to form elsewhere across the Atlantic. My 5% overseas could lose 10%..which would whack me a whopping .005% but my good ness some markets in Europe look attractive. I hope Ben can show Monit how it’s done.

    Longer term…man is Europe looking attractive. For my sons 529 with I shares..out 18 years…what a great opportunity for my boys college fund

    Best to you.

  • Geoff

    Fair enough. On a side note, if the Fed does begin to set Treasury ylds across the curve, and it looks like they are heading in that direction, the method of pricing non-govt bonds will likely change. Treasuries may no longer be used as the benchmark to price, say, corporate bonds. Corporate spreads vs Treasuries would become meaningless. They already are, to some extent. In the old days, corporates were benched off other, higher quality corporates. We may return there.

  • baffled

    I had a query about the US CAD. I think we all agree that it is neceesary for a national government to run a fiscal deficit so that the citizens have money to pay taxes, conduct commerce, save etc. Similary, I feel it is necessary for the world’s reserve currency country to spend i.e. run a current account deficit, so that the denizens of the world can conduct commerce and satisfy their desire to save in a currency that is a good store of value. I realise that the world’s need is not really america’s problem, but CR would you care to comment on this? Is there a flaw in what I am saying here?

  • LRM

    OK, thanks and I realize you have a proprietary system so thanks for the clarification

  • http://www.concertedaction.com/ Ramanan

    Ha ha ha .. Good one Cullen.

  • Dismayed

    I suppose that your projected massive inflation in 2020 will be driven by having 64% of the workforce gainfully employed . . .

  • Dismayed

    I’d suggest that you put your money where your mouth is. Build your portfolio to reflect your beliefs. Hey, this is America. You have the right to destroy your personal wealth.

  • Dismayed

    Can’t truly idiotic people be banned from this site? Please?

  • Work

    I guess my reply got cancelled due to an emphatic word. In any case, thanks for your thoughts and insights. Its hard not to let the noise (a lot of it very intelligent) impact judgment and direction. I have a fairly simple and straightforward approach but there’s always one more tweak/change.

  • Bruce in New Orleans

    Very good ol’ boy. lol.

  • Mr. Market

    LTRO allowed the US to kick the insolvent US can as well. LTRO is simply the european version of what the FED has done in recent years (e.g. in late 2010/early 2011). In that regard I see no difference.

    The Treasury (a currency user) has to issue bonds in order to make ends meet and those bonds are bought by the FED (a currency issuer).

    The only difference with Europe is that there’re no EURO-bonds. I don’t mind that the FED and the ECB are doing this. The more they do it the higher gold eventually will go. And no, NOT as a result of hyper-inflation.

  • Mr. Market

    The larger the US CAD the better it is for both the US AND the world. The rest of the world uses those USD to buy T-bonds and that’s a force pushing US interest rates down. The trouble for the US starts when (not IF) interest rates go through the roof. Because then foreigners will dump their T-bonds pushing US interest rates much higher (falling bond prices.). Then they wil be content to hold cash in a checking account at the FED instead of buying T-bonds. (does Baffled want to hold bond(s) that are falling in value ??).

  • Dan M.

    Ben & Cullen,

    Would the increase in deficits really increase the CAD much? If we import, say, 20% of our domestic demand, assuming the marginal propensity to import stays equal (is this fair to assume?), shouldn’t 4 out of 5 of our deficit dollars stay here at home?

    Am I missing something with the multiplier affect here?

    Further, one would think that if we are weakening our currency by heavy deficit spending, wouldn’t that have a tendency to reduce foreigners’ will to hold our currency, and reverse the CAD?


  • hangemhi

    Do you just try to get the last comment in, hoping no one will challenge you’re idiotic beliefs? You’re like a 16 year old 2nd grader explaining to the teachers that 1+1 doesn’t really equal 2. Then closing your ears when they try to help you. Just stop already.

  • Colin, S.Toe

    You have identified what I believe is called the ‘Triffin Dilemma’.

    Given that ‘swap lines’ from the Fed to other central banks were opened to stabilize the recent global crisis, I have wondered whether similar two-way lines between the major CB’s could eventually replace the single currency (USD) reserve system.

    Among other things, ‘MMR’ seems to be taking a harder look at the unbalanced Current Account situation.

  • Colin, S.Toe

    Comment below intended as a reply to ‘baffled’.

  • http://www.pragcap.com Cullen Roche


    I don’t speak from the MMT framework exactly. Taxes don’t “drive money” under my thinking. You rightly note that taxes are but one facet of currency demand and not even the most important element. I would argue that currency is ultimately a tool based on trust and underlying production.

    I mean that taxes don’t “fund” spending in any 1:1 manner. So yes, taxes are necessary, but they don’t constrain a country from spending.

    Yes, taxes and budget constraints most certainly do influence spending decisions. But those are mostly political decisions.

    Does that help?

  • Mr. Market

    No, I won’t budge unless I read/see/come across information that will change my mind. But until now I don’t see ANY reason to change my mind. The reality simply didn’t present any info that has made me change my mind. That showed I was on the wrong (economic) track.

    However, I did change my mind: Bonds are in a bubble, especially corporate bonds. But that DOES NOT automatically mean that interest rates in the near future could (IMO WILL) go down to outrageous low/lower levels (again).
    More over: Either
    – Nominal rates will go (much) higher in the long run.
    – REAL interest rates will go (much) higher in the long run.
    REMEMBER: Currently we’re in DEFLATION and that equals to “”Credit Destruction””. And bonds are credit instruments.