Ask Cullen
Since the Q&A’s are so popular I figured I’d add a permanent page on the navigation bar so readers can ask questions any time they want. Feel free to ask anything about anything. And if it’s a great question I’ll make it a post. Please bear in mind that I don’t know everything about everything so reader help in answering questions is encouraged, but please only answer if you’re “in the MR paradigm”! Also, it might take me days to respond some times depending on my time constraints and availability. And remember, this is all about education so if you think I have something wrong then let’s push the discussion in the right direction towards a better answer. I don’t give specific investment advice at the website so please avoid specific investment questions. Lastly, as always, let’s keep it cordial. This is all in the pursuit of better understanding so let’s be constructive even in our criticism. Thanks as always.
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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Can you explain why you don’t think the USA is going to have a Greek style debt crisis?
Because the major banks, treasury, and federal reserve operate in conjunction to ensure a government bond auctions don’t fail. Thus the treasury will always have money in its account at the Fed when our government deficit spends. Whereas in the Eurozone there is no such coordination. This leave Eurozone countries to the whims of the market place to raise funds in order to spend.
Consider reading Cullen’s paper (http://pragcap.com/understand-the-modern-monetary-system/understanding-modern-monetary-system) for a better understanding of the monetary system in which a government issues its own fiat currency that is free floating and nonconvertible.
You don’t sound like an “undergrad” to me! Nice answer.
More complete answer here. http://pragcap.com/why-the-usa-isnt-going-bankrupt
Who are you named after?
I don’t believe I am named after anyone. Cullen is an Irish name and I am pretty sure my parents picked up a book of Irish names and liked the sound of Cullen.
granny’s Treasuries are a form of saving: she doesn’t want the debt paid off because that would eliminate a relatively risk-free form of saving for her.
Does the gov ever retire granny’s Treasures early?
…by, say, issuing new Treasuries at lower interest and using the funds to payoff older, higher interest debt? (such as a corporate bond issuer may do)
Quantitative easing. The Fed doesn’t do this to lower the government’s cost of debt but from its misguided notion that banks lend reserves and Bernanke’s steadfast belief in the wealth effect.
The USA’s govt debt is perpetually rolled over. See this chart. http://research.stlouisfed.org/fred2/series/GFDEBTN
HI Cullen, what type of jobs did you have before you got into finance? And what type of “official” jobs did you have in finance before starting this blog? I am interested in the evolution of your career path and how it came about. Thanks.
I sold life insurance and long-term care insurance right out of school because I couldn’t get a job at an Ibank. I slowly worked towards securities sales in the insurance business and was able to get my foot in the door at Merrill Lynch where I joined a team of guys running half a trillion dollars. After 3 years there I decided I hated the business model and left with a small group of clients to start a private investment partnership. I was running that partnership for 7 years until just recently and we generated 17% compound annual returns with very high risk adjusted returns. I am in the process of starting a new RIA that will offer services to a broader array of people and help align my desire to teach and educate with my actual work. I think Wall Street can work for its clients better. I am hoping my new company will set the bar high and change the direction. We’ll see where it takes me.
Hey Cullen! So what is MMR-I’ve found MMT interesting but here I am trying to get a handle on it and now you have a whole new system I got to learn? LOL
If you could-in a few words-clarify what the distinction between monetary and fiscal stimulus is what would you say? Some of the Market Monetarists go as far as argue that there is no fiscal stimulus-it’s just a misunderstanding it’s all monetary.
What I do think I’ve gathered at this point is that fiscal is roughly speaking more directly about the real economy, monetary is more about the financial systemt-after all its creation was to guarantee the banks some stability. Monetary stimulus I think is more about liqiudity issues.
There’s a lot of back and forth lately though-about stuff like QE-does it do much, what does it do? etc.
My last question is the Fed vs. the Treasury. I’ve read some of what you said on this and it seems that you try to differentiate from MMT in explaining what is rather than what maybe should be.
So they often say the Treasury and Fed should be collapsed into one. How would you explain the difference between at present what the Fed and Treasury does?
Would you agree that it’d be a good thing to devlolve the Fed back into the Treasury?
Hi Mike,
JKH, Carlos, Mike, Brett and myself have put in a huge effort to describe the system for what it is. Not what it can be (which is really what MMT does). For us, it’s not about prescribing policy fixes. It’s about getting the operational realities right. You might read more here:
http://pragcap.com/understand-the-modern-monetary-system/mmr-recommended-reading
http://pragcap.com/understand-the-modern-monetary-system/how-is-mr-different-from-mmt
My apologies Cullen-I haven’t visited lately and I guess you have answered some of my questions in your educational system!
Hey Cullen,
You often mention signals your system is giving you. Is this a trend-following system? Can you recommend a good technical book that gives a starting place for building my own system (not looking for a handout, more like a hand-up).
I also get the impression that you sometimes take and sometimes reject your system’s signals (apologies if this is not the case). Usually since systems are a way to take out human emotion based error (loss aversion etc.) can you discuss how you decided to use your system as only one part a discretionary macro approach?
Thanks!
I wrote a simple algorithm using some of my proprietary indicators. The output is generally a contrarian short-term buy/sell signal. One of the reasons I created it was to adhere to a rules based signal system. So there’s no emotion or overriding of the system. It just trades the signals. I am actually in the process of writing a paper and a strategy idea around my findings because the results have been pretty powerful. So more to come.
Thanks Cullen, look forward to reading it. As a follow up, are the indicators economic in nature or purely price/vol related?
Both. It’s the summation of 12 different indicators.
Have you ever tried to contact ZH and explain them MMT?
I am not an MMTer so I would have no reason to discuss MMT with ZH. MR is quite different than MMT. I suggest readers see the links I’ve provided in some previous answers so they’re familiar with the differences.
I know you’ve written about this before, but from an MR perspective, what would be your short response to debunking the Ron Paul/Austrian school crowd?
I actually think Austrians would find quite a bit to agree with in MR. The premise that an economy is based on a foundation of production and that living standards are largely contingent on the expansion/quality of production and optimal use of resources are ideas that Austrians will agree with. But Austrians take the anti govt ideas to an extreme and in the case of Rothbardians they just go flat out overboard. Much of the good Austrian economics gets overshadowed by this extremism. Keynesians do the same thing in many aspects. It’s sort of a tug of war between demand and supply and the truth lies somewhere in the middle. MR tries to really focus on this middle ground while providing the operational realities of the monetary system.
So, I’d say most Austrians are excessively concerned with what the govt does and often confuse the positive impact of govt intervention through deficits. The fact is, a spending cut is the same as a tax increase so there’s a certain level of hypocrisy in some of these political positions. Additionally, I’d say they’re excessively concerned with govt default and our Greek moment. Again, this is not going to happen and I’ve been repeating this for years on end now. Our system is designed so the US govt is a currency issuer and so the banks can always fund the Tsy’s account. This is our reality. In other words, the fix that Greece needs, already exists in the USA. I need to rewrite my opinion on Austrian economics from the MR perspective. There is much good in there, but like most other modern econ schools (monetarism and Keynesianism included) there are extreme positions often based on little more than politics.
Hi Cullen,
Are you a stock picker, bonds or do you fall more towards other types of investments and hope not to be intrusive but what would an allocation look like for the last 2 year period and maybe a buy and hold period, how would your portfolio look.
thank you
Tough to say. When I was running my partnership I did quite a bit of stock/bond picking. Mostly in very specific event driven strategies. But that requires a very involved and arduous research process and I am not sure the strategy can be scaled on the magnitude of 100s of millions of dollars. My research has increasingly turned towards what I view as the holy grail of investing. A strategy that generates 7-9% returns with very low fees, global diversification, high risk adjusted returns and requires a fairly passive approach. While I think most investors think they really want the highest returns, the reality is that they just require adequate returns that helps grow their real wealth in a manner that allows them to focus on what they love in life and work. In other words, the holy grail is a sleep well portfolio that isn’t going to be a world beater, but also won’t blow you up.
So in short, my research is increasingly focused on a global macro, passive/active, low fee approach that helps the average investor do what they do best – NOT WORRY ABOUT THEIR INVESTMENTS. So I’ve gotten further away from stock picking and focus more on a macro strategic approach.
What are your plans with this new “macro strategic approach”?
I just read from the top and think I found the answer to my own question – correct me if I’m wrong, but you’re “in the process of starting a new RIA…”. Any details on that yet? Launching soon? Other details?
Details to come. My goal is to get out of the money management game and more into the consulting side of things where I can really get down and help the people who need help. I think there’s a colossal problem in this country (and the world) regarding our misunderstandings of money and the need to rely on others for “expertise”. Ideally, I’d like to help empower people by showing them that money is not an intimidating thing.
Hi Cullen, this is probably your most southern subscriber/daily reader – Tasmania, Australia (42 degrees south). I left Europe with my wife and 4 kids last year. So far so good.
My question is linked to your point above about the overlap between Austrians and MR: “living standards are largely contingent on the expansion/quality of production and optimal use of resources.” Makes sense. However, in all that is written about Europe and the macro outlook, I never see any mention of the basic issue that for the first time the EU27 is now crossing the point where deaths will outnumber births – irreversibly it seems. Whereas in the US, population is expected to grow from 300m to 400m in the next 40 years, partly due to a pro-active immigration policy.
Do you see this having a major impact on the long term global macro outlook? The new site is great. Keep up the good work.
If accurate, it’s likely that Europe will continue to lose ground compared to other emerging market economies. So it’s not a net negative for the global economy, but it’s a burden for Europe.
Have you read “Debt: The First 5,000 Years” by David Graeber? If yes, what is your opinion on it?
I think it’s excellent. But I go even further back with my premise of money. I think money is something that predates all civilized humanity. So 5,000 years gives us great insights and perspective, but doesn’t tell the whole story. I actually emailed back and forth with David on this point. I don’t think he was buying what I was selling.
If you find the time, could you maybe elaborate on your discussion with Graeber?
I also recently finsished 5,000 YOD. Love to hear your critique of it.
Cullen,
First I just want to thank you for all the work you’ve done here at PragCap and at Prag Cap. I think its great you, a hedge fund manager, will take the time to educate us reader by allowing a peak into your brain. Your writings have tremendously influenced my thinking, which says a lot because when I first discovered your paper Understanding the Modern Monetary System I was influenced by Austrian economists.
Enough of that for I do have a question however. Whenever I talk to people at school who are interested in economics (whether they be econ or business students, members of finance club, or econ professors) about monetary realism they listen, and even agree to, most everything I say however as soon as we are done talking they seem to go right back into their neoclassical thinking. After talking to a professor about MR for nearly 4 hours on a Friday afternoon I told my professor that banks don’t lend deposits and she looked at me like I slapped her in the face, even though she finally came around to the idea banks are never reserved constrained in their lending. But yet when I talk to my friends who are natural science, sociology, and even English (I was genuinely surprised as to how quickly all the English majors accepted the entire MR framework). So I guess my question is this: how can individuals who have no interest in economics readily realize the implications of MR far faster than anyone who claims to have an interest in economics/finance? Could it really be so simple that individuals steeped in the neoclassical framework are unable to break its shackles because MR goes completely against everything they were taught in their textbooks?
P.S. I think you asked about movie recommendations a few weeks ago in a Q&A post and I must recommend Cidade de Deus, or City of God. One of my most favorite movies of all time.
1. I’m not a hedge fund manager. My private fund was small by any standard and I’ve gotten entirely out of the money management business for now. I’m headed in a new direction.
2. I think it’s hard to overcome some of the myths that are taught in schools. We are so influenced by politics and our daily lives that understanding something as large and complex as the monetary system can be daunting and difficult. In order to fully grasp MR you have to be willing to overcome some major biases and preconceived notions. And that’s often easier to do for someone who has a “clean slate” rather than an economist who has spent years working on neoclassical work.
3. I haven’t seen that yet, but I’ve been meaning to. I’ll put it on my list. Thanks so much!
Tacking onto this… Many behavioral psych studies have shown how difficult it is for people to accept things that contradict their previously accepted beliefs. It is much easier to ignore contradictory truths than to change your fundamental understanding of how the world works. With regard to getting folks who are steeped in mainstream economic teachings to accept MMR, in my experience you can’t force it upon someone because their first instinct will be to get defensive about their stance. The greatest benefit is probably in discussing MMR with those who are totally ignorant to economics but have an interest OR those who have studied traditional econ and are starting to question things about it.
Also, you asked why it is easier to convince an English major to subscribe to the MMR perspective vs. an econ/business student. Think about when you were first learning econ (or any subject). In the beginning, you have no choice but to take whatever you are told at face value. Until you understand the basic concepts of any subject you don’t have the tools/vocabulary or framework to argue against it with much power. Easy prey haha.
+1 on the movie recommendation.
Cullen,
Can you draw any conclusions about the accuracy of the birth/death adjustment during a period of seemingly accelerated weakness?
The model works more or less pretty well over time except in those situations where we see major turns in the business cycle which is when I guess it would be most useful to have an accurate picture.
Thanks
Sampling errors are inevitable in this data. I say just use the headline and stay consistent. There are some FAQ’s and commentary on all of this here:
http://www.bls.gov/ces/cesbdqa.htm
http://www.bls.gov/web/empsit/cesbd.htm
Cullen,
You often quote John Hussman in your blog. Hussman had a very interesting research piece about 18 months ago titled “Sixteen Cents: Pushing the Unstable Limits of Monetary Policy”. It struck me as a truly original perspective with profound implications if correct. I’m wondering if you agree with his conclusions?
http://www.hussmanfunds.com/wmc/wmc110124.htm
Thanks.
Hussman is out of the MR paradigm. He’s very good, but I believe he’s making QE more complex than it really is and perhaps misinterpreting the inflation risk of an increase in the monetary base. QE is a simple asset swap that doesn’t increase the net financial assets of the pvt sector. So its inflationary impacts are almost entirely psychological. I’ve discussed this in detail here. http://pragcap.com/understand-the-modern-monetary-system/understanding-quantitative-easing
Heh, that remains to be open question until all swaps are reversed… Example: you swap 1m UST for 1m USD with the Fed. This sounds like a decent collateral and would not cause any inflation threat. Now, I swap 1m of very good CDO guaranteed by a nigerian “prince” (let’s call it “maiden line super 2000″) for 1m USD…. How would it look like in terms of inflation creation?
Cullen,
I would like to know actual details of the Treasury auction process. All steps involved and how the new money comes into creation in the auction process.
regards
Aar Bee.
Cullen will be able to answer it much better than I can but this is the gist of it, or at least how I understand it. Before an auction the Fed, Treasury, and PD will consult one another to determine the required interest rate that will clear the market of reserves so the Fed can hit its targeted overnight rate target. Banks will submit bids at the auction, even it they lack the required reserves, because they can borrow money from another bank at the overnight rate or directly from the Fed at the discount rate (unexpected demand can drive the interest rate lower than was previously planned). The Fed will then debit the auction’s winners’ account and credit the treasury’s Tax and Loan (TTL) account. Thus the treasury will have money in its account, which allows congress to deficit spend.
Also note banks are able to capture the spread between the price at which they lend to the treasury and the price they borrow from the system, so PD have no reason not to buy bonds at treasury auctions unless they think future interest rates or inflation provide a real threat to their capital base.
For a more granular explanation see this http://www.newyorkfed.org/research/current_issues/ci11-2/ci11-2.html
If you are looking for some light reading over the weekend try reading this http://monetaryrealism.com/treasury-and-the-central-bank-a-contingent-institutional-approach/
i’m reiterating the question of Aar bee in different form because i have the same problem: banks can borrow reserves from the fed and currently sit on a mountain of excess reserves. now, they can participate in an auction and some of their reserves might be used to buy the treasury’s securities, but where is the new money creation? after all the reserves were already there to be used.
Here’s what Cullen has to say: “Because banks are not reserve constrained it can only mean one thing – banks lend when creditworthy customers have demand for loans. Loans create deposits, not vice versa. Banks create new loans independent of their reserve position and the Federal Reserve is in the business of altering the composition of outstanding financial assets in an effort to maintain a target interest rate and maintaining the smoothly operating payments system that it oversees. In the loan creation process, banks will make loans first (resulting in new deposits) and will find necessary reserves after the fact (either in the overnight market or via the Fed).”
I might’ve misinterpreted Cullen but I’d say banks buy bonds, lend to the treasury, this allows the government to spend money it didn’t have. Thus the new creation of money.
Right. Govt spends money by either obtaining it from banks or obtaining it from the pvt sector via taxation. Where this money comes from precisely is hard to know, but most of the money in our system comes into creation via the private bank process of extending credit.
The important detail regarding govt bonds is that they result in an increase in net financial assets. That is, when the govt procures tax funds they’re basically reallocating money. When they issue bonds they are not only procuring funds from the private sector, but also adding a new financial asset in the form of the bond.
Aar Bee, I would highly recommend the link that Undergrad added.
A technical issue for the site:
Shouldn’t the questions go in reverse order, with the newest at the top? That way each time I access the “Ask Cullen” section I can start at the top and read down until I’ve hit the post that I’ve already read the previous time.
I could do it, but it would change the order of ALL comments on the site. I am not sure that’s good. Thoughts anyone?
You could switch it, however the problem would still be the same (scrolling down to find where you left off). What if there was a way to number the main comments (1,2,3…) and the replies (a,b,c…). That way you just have to remember what comment you left off on rather than scrolling through the posts. Or maybe there could be a way to ‘bookmark’ a comment. That way there is no need to memorize a comment’s number nor the article it was in.
A forum would really be ideal for what the readers are asking.
I have no idea if that would be something you would want to add or manage on your site, but it keeps discussions neatly contained.
How do banks ‘manipulate’ or fix Libor rate?
I commented on this here. I don’t think there was massive collusion here. Or at least nothing of the magnitude that the media wants you to believe. http://pragcap.com/why-is-no-one-freaking-out-about-the-libor-scandal
Regarding your chart showing no linkage between the trade weighted USD value and the Feds balance sheet expansion… I’m not quite sure what the thrust of your article was… the expansion of the Feds balance sheet has an aim – to keep interest rate low and the monetary control system as “normal” as possible. To that extent it has succeeded. But wouldn’t you agree that it has put itself in a ‘no-win’ situation in the long run ? It cant sell the assets it has bought in the market, and the banks are in no position to return the cash they got from flipping a $trillion of bonds to the Fed. They can’t increase interest rates, ever, until this situation is resolved or GDP will fall off a cliff (again). They could simply “retire” the assets they purchased – but thats simply saying hello to Weimer Economics and the acceptance that the Fed finances gov’t spending, and that would destroy international faith in the greenback overnight. They *might* be able to do it slooowwwly, but the principle is the same. Finally, the fact that the USD is the worlds reserve currency means it can export it dollars to the worlds central banks without fear of hyperinflation, a unique position which no other currency enjoys. This last fact is key to understanding why the vast increase in the Fed balance sheet and QE pumping cash into the system has not resulted in a huge debasement of the USD/hyperinflation. Only when there is a catastrophe in other currencies will the final curtain fall on the USD. It will be the last one standing in a general holocaust of all fiat money – Armageddon will not start with the dollar – it will finish there. People are looking in the wrong place for signs of ‘the end’. Every thing will be normal right up to the point it all goes wrong. Its coming – its just a question of when. Every single time fiat money has been tried it has failed. My money is on history – but hopefully not for a few decades….
I would guess the point of the chart was to show QE is not inflationary and does not devalue the USD. The point of TARP was to provided support for assets, MBS, whereas QE was to stimulate lending because Bernanke thought banks lent reserves plus the markets responded very positively to it and he is a big believer in the wealth effect. I however see no reason why the Fed can’t sell the bonds back to the private sector. Nor do I see why a rise in interest rates would send the economy off a cliff for the private sector, in the aggregate, is minimizing debt, despite zero interest rates. Nor would holding the assets to retirement result in hyperinflation for inflation is a fiscal, not monetary, phenomena. If the world were to loose faith in the USD it would’ve happened already. Instead the world still accepts our dollars as its currency for we remain the world’s most productive economy. If anything you said were true Japan would’ve experienced hyperinflation, remember Japan invented QE, but yet its currency has been appreciating for the past 20 plus years, despite repeated central bank interventions.
Yes, the purpose of the USD chart was to show no signs of currency collapse as many predict.
The Fed can hold onto the assets and still raise rates if they must. They will simply raise the rate on reserves which is now serving as a de factor FFR. Remember, QE is not inflationary because it does not change the net financial assets of the private sector. It might have a marginal impact on rates through portfolio rebalancing channels, but I doubt it’s much….
See here for more on QE:
http://pragcap.com/understand-the-modern-monetary-system/understanding-quantitative-easing
According to this blog article:
http://ftalphaville.ft.com/blog/2012/07/06/1074181/ubs-tackles-the-negative-yield-puzzle/
There is $52.4 trillion debt outstanding in the US compared with $4.2 trillion in 1980. Or 7.9% increase per year.
Is this the same as money created? I mean when roughly $48 trillion of debt is created, some part of it was created by banks, some part created by the US government?
Was this creating money and which part of it was or was not creating money?
Money is created when banks make new loans. Rather, that’s the most important component of money creation in our system. Net financial assets are created when the govt borrows and creates new Tsy bonds.
Have you read my primer? It touches on all of this. http://pragcap.com/understand-the-modern-monetary-system/understanding-modern-monetary-system
You wrote, “The other bit of good news was temp help. Temporary help has been a superb leading indicator of employment over the last few decades.”
Wouldn’t you argue that temp help is no longer a leading indicator but a permanent fact of our new workforce in which employers essentially maintain a just-in-time workforce?
Thx
Perhaps. But I would assume that the first people to go, if demand drops, is all those temp workers. Maybe it’s different this time, but I doubt it.
I agree that the temps would be the first to go, but your initial comment seems to imply that temp employment is a precursor to permanent employment. That is where I’m inclined to think that temp employment is the new “black”. Temp employment, in the current environment, would appear to be a permanent replacement for permanent employment.
Cullen, thanks for your explanations.
I wish for clarification – when QE2 is instituted, why doesn’t purchased Treasuries end up as demand deposits at banks, and banks able to lend more money due to fractional lending? Why can’t purchasing of treasuries and increasing cash cause and increase in M1 supply as the cash is deposited into banks?
QE swaps reserves for Tsy’s. So the private sector ends up holding a reserve instead of a Tsy bond. That’s no net change in financial assets. Additionally, banks don’t lend reserves. Banks don’t lend more money when they have more reserves. They lend first and find reserves later. So, increasing reserves doesn’t automatically result in an increase in the money supply. Hope that helps.
Where can I find the Citi Economic Surprise Index? Is it posted on a daily, weekly, or monthly basis? Thanks.
Not sure if it’s posted anywhere now. Used to be on Bloomberg’s site for free, but it’s gone. Anyone have any ideas?
Hello,
Long time reader, first time poster. Love your blog.
I saw this article proposing a regulatory tax on trades.
“The Joint Tax Committee of Congress calculated that a 0.03 percent tax on all trades…
…A small tax on flipping stock, options, credit default swaps and other derivative instruments would drastically reduce the size of these markets, thereby reducing the opportunities for market manipulation”
Now the primary effect seems obvious, but I was hoping you could offer some insight into secondary or tertiary effects of a tax like this, if it went into effect.
Thanks!
It’s a nice idea in theory, but here’s the issues I see:
1) I don’t see how this will reduce manipulation. I guess the idea is to reduce trading volumes thereby reducing the opportunity for manipulation, but I actually think thinner markets means more manipulation as price discovery becomes less efficient. You see more manipulation in less liquid markets. Not more liquid markets. It’s easier to manipulate the price of an OTC derivative as opposed to a listed stock for instance.
2) A financial transaction tax will be paid by consumers. So it’s really a tax on the consumer. I don’t see how that helps anyone. The banks and brokerages will just pass the higher fees onto consumers in one way or another.
It’s an idea that gets political backing because it sounds nice, but I am not so sure it achieves what it’s intended to achieve.
Have you considered that financial institution manipulation is normally carried on when they trade for their own accounts? I agree this small tax wouldn’t stop manipulation it just adds a little to the manipulation costs but the profits are huge.
chuck
Question regarding bad loans: Loans, whether they be mortgages, credit card, vehicle or corporate that are deemed uncollectible are written down by the lenders to the extent that the collateral (if any) is insufficient to fully offset the lender’s loss. During the last four years we have witnessed a record number of such write downs especially with the collapse of home prices (collateral for all mortgages).
So here is the question: Has the deficit spending by the Federal Government fully offset the amount of these write downs (losses)? I realize that private sector write downs are accounted for as private sector “savings” or decreased debt levels. But a great amount of these write downs – particularly mortgages – have not been realized and certainly have not been fully reconciled. To the extent that these losses have have not been offset it would seem they represent a vacuum or loss of cash flow to the economy.
My gut tells me no. Before the housing bubble popped there was ~52 trillion dollars in private sector debt or about 300% of GDP. This was unprecedented. Never before had the private sector been so highly leveraged (private sector debt to GDP was about 200% at the onset of the Great Depression.) There is also the fact that each financial crisis since 1980 has been papered over; troubled bank merges with a relatively health bank and the new bank makes more loans in an attempt to earn its way out of its hole. Yet again, we’ve opted to let our banks earn their way back to solvency (http://research.stlouisfed.org/fred2/graph/?id=DODFS). I can’t find any data as to how many bad assets have been written down (help anyone) so I’m really just speculating. However I’ve seen interviews in which George Soros says basically the same thing, so at least we are in good company. And you right, banks have become a black hole due to the bad assets on their balance sheet.
Let me get this straight. If the FED buys government debt directly that is printing money.
However, if dealer banks buy government debt and the FED buys it from the dealers, there’s no new monetary assets and therefore no printing money?
Come on all the balance sheets end up exactly the same.
I do agree with part of your article, there is a lot of confusion about what QE is and what it does.
chuck
The fact that the Fed buys the debt on the secondary market is rather meaningless. The secondary market for govt debt is enormously liquid so on-selling the debt is never a problem. Govt bond auctions are “money printing” whether the Fed were buying the debt or whether the PD’s buy the debt. It results in an increase in net financial assets.
The point I am making about the Fed is that it’s not “monetizing the debt”. That is, they’re not financing the Tsy directly. That implies a lack of demand at auction. And that’s never the case.
Thank you for your reply, but it still leaves questions for me:
So you only consider the FED monetizing the debt when they are the only buyers for the debt.
Yet the transaction is exactly the same.
I doubt the US will lack demand for its debt saving a total collapse therefore the FED cannot monetize the debt.
Consider also that the FED buying goverment debt verses just sending a checking account would leave the
FED and the government with effectively the same balance sheets.
It’s an important distinction to me. Let’s run through a brief scenario here. Money is ultimately only stable because its demand is based not only on the govt’s ability to procure funds (tax, enforce, sell bonds) but also because the public is willing to utilize that money. In the case of a hyperinflation what happens is that the demand for money becomes very tight. But its utility collapses. So people stop paying taxes as profits collapse and the utility of money declines. So people actually end up hoarding more money. When the govt has to cover its tax receipt short fall they sell more bonds. But the PD’s can’t be expected to take on all these bonds in a hyperinflation can they? Why would they collect endless amounts of bonds whose prices are collapsing? They won’t. So the Fed has to step in. The Fed is like any bank. It can credit accounts at will. So they gobble up all the bonds. But who cares? The money is already hyperinflated and worthless. That’s REAL monetization.
To me, this is a crucial scenario analysis to understand because it highlights the difference between a hyperinflationary collapse and the QE we’ve been seeing, which to me, is just boring old monetary ops and nothing remotely similar to real monetization because the pvt demand for debt is still very strong. Does that help?
Thank you again for your reply and explanation.
c
Some answers to questions asked by an independent investigator from Oyster consulting answered by George Hartzman on his Wells Fargo Whistleblower filing
http://hartzman.blogspot.com/2012/07/some-answers-to-questions-asked-by.html
Thoughts?
Forwarded to Michael Mashburn, SEC and Daniel Stefek, FINRA
- both of whom recieved NC Securities Division File No. 12 SEC 84, in late June,
who spoke with George Hartzman during the second week of July
http://hartzman.blogspot.com/2012/07/forwarded-to-michael-mashburn-sec-and.html
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From an email sent to xxxyyy
http://hartzman.blogspot.com/2012/07/from-email-sent-to-xxxyyy.html
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From a public records request of George Hartzman’s Wells Fargo NC whistleblower filing
http://hartzman.blogspot.com/2012/07/from-public-records-request-of-george.html
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The potential enormity of George Hartzman’s Wells Fargo Whistleblower filing
on Envision Investment Plans and 4front
http://hartzman.blogspot.com/2012/07/potential-enormity-of-george-hartzmans.html
Hey Cullen, I just read your section on the differences between MMT and MMR, I think it’s a fantastic read and I agree with 99% of it. However, there was one minor aspect that I disagree with. You talk about banks not serving a public service because their ultimate aim and focus is providing a profit for their shareholders. I agree, but I think this is a red herring. To quote Adam Smith: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest”, in other words banks provide a useful service to the public, unintentional or otherwise, and just because they are doing it for self-interested reasons does not stop it from being such. Do you agree?
Hi Brito,
It’s a matter of proportion. Banks most certainly provide some level of public purpose, but they don’t exist for public purpose. They exist for private purpose. The bottom line is what matters to a bank. These aren’t charities. So yes, I am not saying that banks serve no public purpose, but I think it’s misleading to say that banks exist for public purpose or have their interests totally aligned with the interests of the public at all times just because they serve some very useful purposes in our monetary system.
Is that clearer? Do you agree?
I definitely agree with that, however I also doubt Warren Mosler would disagree with that, he can’t be that naive.
Thanks for the extremely swift response btw.
I doubt he disagrees with it either, which is why I think there’s a contradiction in the position. Are banks issuers of money serving private purpose or public purpose? Are they an oligopoly serving private purpose? That’s my contention and I think 99% of the public would agree with me. So if you have an oligopoly serving primarily private purpose then how does this not conflict with the idea that banks are issuers of the govt’s money serving private purpose as part of a monopoly? MMT contradicts this position almost every day in their rants against banks. They seem to know banks are a private oligopoly whose interests don’t align with public purpose, but they make this connection because it satisfies the money monopolist and the job guarantee position. It’s incoherent. MMT should just come out and say that their theory is designed around a progressive policy agenda that requires some institutional change. I have ZERO issue with that. What I have an issue with is describing a system that we have as if it is something it is not. And this is not a money monopoly. It is an oligopoly dominated by the private banks. To me, this is all about getting the details right and educating the public. If people want to agree with MMT’s policy ideas then great. But don’t describe something that you want as if it already exists. That’s just wrong.
Thanks for the clarification, I have a second question if you don’t mind
Which economists (other than the MMTers) are you influenced by? And would you describe yourself as a Keynesian?
Good question. First of all, I would never describe myself as an economist (not that you implied as much, but I want to be clear). Economists earn this designation by going to school and being vetted by their peers. I have not done that. So I am not an economist and people shouldn’t consider me an economist. I’m just a guy who has managed a pretty successful investment partnership and has some level of investment savvy and macro understanding.
That said, I don’t really know where I stand on the economics spectrum. Obviously, Mosler has had a huge influence on my work. But so have a lot of other people. Godley, Lavoie, Minsky, Keynes, Schumpeter, Hayek. I think MR strikes a pretty good balance between the ideas of supply, demand, conservative and liberal. In the end, I think one of the big conclusions MR makes is “there’s a lot of gray area in these macro theories, ie, you can’t say one is necessarily right and the other is necessarily wrong”. So I like to think that MR is a blend of most of the major schools of thought. To me, it’s silly to take an extremist position and say “Keynes is 100% right” or “Austrian econ is 100% right” or “Friedman was 100% right”. They all make important contributions. And they’re all at least a little bit right.
In my personal opinion, anyone who contributes significantly to the understanding of economics, or at least devotes a lot of time in writing or creating theories about the economy is an economist, regardless of whether they learned econ from university or elsewhere, but this is just semantics.
Regarding Hayek, am I right in guessing that it’s mainly his work on the calculation problem that you appreciate, which is why you are not as extreme as some MMTists who call for nationalised banking, JG etc..?
That and the understanding of praxeology are powerful Austrian concepts. As an investor first and someone who has done a lot of work on behavioral finance, I am obsessed with understanding the ways policy influences psychology. It’s not well understood by most economists in my opinion. They think you can just plug in numbers in their models and that’s how things will pan out….It’s more complex that that in my opinion. You can’t model human behavior.
Interesting, what exactly do you have in mind when you talk about policy influencing psychology? I normally associate stuff like that in a Lucas Critique sense in which simple past macroeconomic relationships break down as individuals start to anticipate actions by the government.
I like the Kaldor quote here. He said:
“If (a large trade deficit is) continued long enough it would involve transforming a nation of creative producers into a community of rentiers increasingly living on others, seeking gratification in ever more useless consumption, with all the debilitating effects of the bread and circuses of Imperial Rome”
A current account deficit requires an increasing budget deficit to offset the demand leakage. So the risk a nation runs is walking that slippery slope of a persistent current account deficit and the potential that its goods and services are becoming increasingly less desired by foreign nations requiring more govt spending possibly exacerbating the situation. Could it be that govt spending is disincentivizing the population to be productive in this instance? I think it’s certainly possible. It’s more fun to receive a pay check from the govt and go to the circus than it is to have to work hard and earn that trip to the circus.
Vague thoughts, but that sort of thing. Thoughts?
I certainly agree that a persistent current account deficit could be a problem, I think some of it however can be blamed on the excessively precautionary savings of the east, particularly China. One of my professors was working on a theory combining an excessive consumption boom in the west and excessive saving in the east to explain the problems we face now.
Well first I’ve never met anyone who enjoyed collecting unemployment or food stamps, they would much rather be earning a living for themselves. However I’m not naive enough to pretend there aren’t abuses and disincentives that reduce our productive capabilities.
As to your broader thoughts on potential negative consequences of government deficits, I just don’t really see it given the current dynamics of our current account deficit. First: we didn’t ask the Chinese, or much of the broader developing world, to peg their currencies to the USD. Second most Americans went on a multidecade long shopping spree because they are not financially mature enough to handle credit. This reinforced the developing world’s export oriented bias towards growth, further reinforcing American’s bias towards consumption.
Thus four of our top seven major trading partners (China, Japan, Korea, and Mexico) are really good at making things that can be mass produced relatively cheaply because they, particularly the Asian countries, are very good at following orders. Whereas our specialty is in premium products that require a high degree of analytical, critical, and independent thinking skills.
Broadly speaking, we have a system that fundamentally works, although I’m the first to concede we can do much much better. I really won’t be concerned until iPads are designed in China and produced in the USA, metaphorically speaking.
Sorry if this is a bit incoherent but I’ve my thoughts are rather vague as well.
as for people on unemployment or welfare, make the check large enough and they will be very happy to keep receiving it
MMR needs a Wikipedia page in order to make it more “official” to the masses. Cullen, is there a marketing strategy behind spreading the wonderful words of MMR or is it more of a waiting game before the new kid on the block hits the mainstream?
Thank you for your time in advance.
Wish I had time for that! Wikipedia can be dangerous though. They get some stuff wrong and I fear that MR would get marred compared to some other schools. I am one of the few people who could accurately write the Wiki page and I don’t have time for it.