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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Hi Cullen,
Suppose the hypthetical where much of the world decides to leave dollar-denominated assets (e.g. Treauries). How does this play out?
1 )If there is not a corresponding amount of non-U.S. government buyers for each seller, this would normally drive interest rates up along the yield curve, right?
2) If the Fed doesn’t want interest rates to go up, does the Fed then HAVE TO ‘soak up’ the selling?
3) If yes, would this be considered monetizing debt?
4) What would have to happen or not happen during all of this in order for the exchange rate for the dollar to maintain it’s it’s relative value?
5) Where would/could all these dollars “go” ?
thanks.
Buyers and sellers must match up. Remember, in a market you can’t sell unless there is a buyer. Price is decided by the eagerness of one party over the other. So, if you really need to sell your house at 100K and no one is willing to buy it for more than 50K then you can’t sell it. If you are eager to sell it then the transaction will settle at 50K. Buyers and sellers must always match up. So, money doesn’t go into secondary markets. It goes THROUGH secondary markets. That is, when you buy a T-bond you are sending money through to someone else in exchange for the bond. The buyer gets the bond, seller gets the cash. The dollars GO to the seller. It’s just like buying a stock on a stock exchange. They call it a stock EXCHANGE because that’s what people do there – they exchange stocks for cash. Buyers of stocks get stocks and the sellers get cash. Buyers and sellers must always match up or there is no market.
Same is true for the US Tsy market. Buyers and sellers must match up. Price is determined by the eagerness of each party to buy or sell. In the case of US Tsys we have to discuss reality. Reality for US tsy bonds is that there is no risk of payment. That is, the US govt doesn’t run out of money at maturity. So bond traders don’t worry about getting paid. They worry about the value of the paper with which they’ll get paid. So they worry about inflation. So, when discussing why bonds might collapse you have to start with this basic understanding.
If the Fed wanted to pin the 10 year Tsy at 0% it could do that. The market can’t defeat it. However, if inflation were running hot this would not be an optimal policy as it would exacerbate the inflation as it would entice more borrowing, etc. That’s why the Fed tries to forecast inflation and stay ahead of it. There’s a funny relationship there between the market and the Fed. I say it’s like walking your dog. Is the dog walking you or are you walking the dog? In times of high inflation it’s like walking a 200 pound rotweiler. The Fed gets forced to act, but still controls rates. When inflation is low it’s like walking a chihuahua. But the Fed can always control the rate. It just depends on where they want it relative to inflation rates.
I say the Fed is only monetizing the debt when there are no willing buyers of t-bonds at auction. Ie, the Fed must finance the US govt because the private sector refuses to do it. In my opinion, this would only happen during a hyperinflation.
Ok. Thanks for the thoughtful response. I should have been more precise with my words when I said “if there is not a corresponding amount of non-government buyer for each seller”… that should have included “…for each seller, at the current price.”
So how does this play out? It sounds like he ‘dog’ is getting bigger and angrier. If more owners of Treasuries are looking to sell than buy at the current price, what exactly “happens” ?
For example, suppose just for a hypothetical… if China attempted to SELL all it’s Trearuies in one day, how would this play out? What effect would it have on the market?… on different interest rates?… on the exchange rate?
This is a common question I come accross when discusinng the MR ideas with people that are unfamiliar. Again, they ask “Ok, if China’s ownership of part of our national debt are these U.S. Treasuries, what would happen if they just decided to sell all of theirs?”
If China dumped all its T-bonds on the market today it would likely cause yields to temporarily spike. Then the market would realize inflation is still very low and prices would settle. It’s sort of like asking what happens if Apple’s earnings don’t decline, but hedge funds decide to sell. What happens? In all likelihood, Apple’s stock price declines in the near-term and recovers when people realize nothing has fundamentally changed. The market for Treasuries remains in a low yield environment because we are in a low inflation environment. As long as that continues the sell-offs in bonds will be a buying opportunity. So the dog only becomes a problem when inflation forces the Fed to act. Does that make sense?
Yes, very much. Thanks.
Ok, so if China dumps all their Treasuries, where do their dollars “go” ?
To the buyer.
Ha… I realize the Treasuries go to the buyer. I mean the other side. Whoever purchases those treasuries from the Chinese government, presumably the Chinese government now has a more liquid form of dollar money things, right?
What’s exactly does China “have” once they’ve sold all their Treasuries?
Cullen,What is the difference in REQUIRED Reserves and EXCESS reserves with regards to how they exist in the feds balance sheet?
Reserves are liabilities of the Fed. Required reserves are reserves held by banks to meet reserve requirements. Excess reserves are reserves held in excess of the required levels. In sum, reserves are determined by the central bank’s monetary policy. Hence, why there are so many excess reserves.
I’ve been checking out pragcap for over a year and really enjoy your insight. Just today I saw an article from BI by Joe Weisenthall: http://www.businessinsider.com/bank-of-england-debt-cancelation-2012-10
Is this something you heard about? What’s your opinion on it (it sure makes my brain hurt)? Thanks.
Hi Ewood. The Fed doesn’t have the legal authority to do this. And I can’t imagine Congress ever giving them the authority. I highly doubt this is something we need to worry about….
What is wrong with these people
Seeking Alpha October 22, 2012 – “Just at the time the economy may need a boost, Australian Treasurer Wayne Swan promises significant belt-tightening in order to meet a pledge of returning the budget to surplus this year. “It means monetary policy can play the primary role managing demand,” he says, giving a very clear push to the RBA to quicken the pace of rate cuts.”
Cullen,
What is your view on this article in the latest Economist:
The rise of the yuan
Turning from green to red
http://www.economist.com/news/finance-and-economics/21564880-yuan-displacing-dollar-key-currency
Thanks!
It’s a matter of output really. If China overtakes the USA in terms of total global output then it’s likely that their currency will be the one that is most in demand from the rest of the world. Hence, it will become the reserve currency by virtue of necessity (due to demand for output). Until then, it’s the USD.
Exactly… the US became & is the reserve currency by default just because we were/are the largest producers of goods (software, food, hi-tech) ever since WW2 –not because of Braetton Woods which was after-the-fact.
And even if you aren’t ‘reserve currency’–so what? Countries like Canada, Australia, Sweden, etc are easily high-living standards, high wage countries without being world reserve currency status
Cullen
Isnt it less about the amount of output but instead the amount of importing. As we became the worlds buyer of everyone elses output everyone held our currency making it the reserve currency. Yes we had high incomes from our own output but it was the spending of those incomes outside of our economy that put us in the reserve currency position as I understand it. So even if China passes us in output, unless they become a net buyer of everyone elses stuff they cant have the reserve currency
Hi Cullen,
Just read you post on seeking alpha about the US recovery and output gap. What do you think about this critique of NGDP?
http://blogs.ft.com/gavyndavies/2012/10/03/professor-woodford-and-the-fed/
Hi Igor,
I offered some thoughts on Woodford’s paper here:
http://pragcap.com/thoughts-on-the-michael-woodford-paper
Cullen,
If you have not already done so, please address the issue of whether cancelling the national debt held by the country’s central bank is a good or bad idea.
Fred,
It’s kind of a waste of time in my opinion. The Fed doesn’t have the authority to cancel the govt’s debt. My colleague Carlos Mucha had some brief thoughts on it here:
http://monetaryrealism.com/ben-bernanke-and-the-trillion-dollar-gift/
Cullen, it looks like no matter what happens Treasury and the Fed will have their top spots open:
http://dealbook.nytimes.com/2012/10/22/casting-dual-roles-at-treasury-and-the-fed/
Check out some of the names on that list… who in your opinion would be the best? Worst? Who would you like to see in there?
Tom,
Good question. Might be worth a full post. I’ll try to put some thoughts together. Thanks for passing it along.
Cullen, having gone thru Orcam’s website, the question on the minds of readers like me is that the sample research shown on that website is awfully similar / same to what gets published here.
As a paying member of that website, will we get some “edge” over the free stuff that readers of this blog would get?
More importantly, will it be actionable market information which can be straightaway implemented in the market?
Thanks!
I actually cannot publish some of the content here that I publish in the research. Regulations don’t allow it. So yes, Orcam is the only place where you will actually find me saying specifically what I like, why, when, etc. It’s also the only place where I provide proprietary indicators regularly updated like my equity algo. It’s much more specific in that regard. Plus, in all honesty, because people are paying for it, I put a bit more effort into those pieces. They’re my very best thoughts. Not that I don’t try my best here, but clients deserve something above and beyond.
Thanks Cullen, that clarifies! Any discount codes for long time Pragcap readers
Came across this Mckinsey paper some time ago, but just started reading it: http://www.mckinsey.com/insights/mgi/research/financial_markets/farewell_cheap_capital
It argues for a coming global investment boom after decades of under-investment. They also argue that savings will be less than investment demand, so interest rates must rise (hence the title “Farewell to Cheap Capital”).
I find this confusing because I don’t understand the economic theory they are using. But from an MR perspective, does it make sense?
I just glanced over the intro page, but it looks like they’re working from a somewhat flawed premise where saving fuel investment. In fact, investment makes saving possible. See here: http://seekingalpha.com/article/175009-investment-makes-saving-possible
I would also add that interest rates are largely derived from economic strength and the Fed’s perception of where rates should be. Banks then base their spread on lending off this rate. So there’s a very tight correlation between most lending rates and the Fed’s overnight rate. This is not to say that the Fed sets all rates, but if overnight rates are at 0% then it’s highly unlikely that investment is booming. In fact, if investment booms the Fed will likely raise rates and put a halt to it….So I am a bit confused by their commentary on rising interest rates. It sounds a bit like the bond vigilante argument unless I am misinterpreting….
Cullen:
I have been reading your stuff for over a year now, and I must say, it is the only blog I check every day now (down from a list of 50). I very much like your view on economics and have read your paper from SSRN 5 times to fully take in what it is saying. However,I still am not able to look at what is going on in the various countries of the world and use the framework to arrive at investment decisions. What would you recommend for the top 5 books/papers/essays as far as further internalizing the MMR economic model, and increasing my understanding enough to make decisions from it?
Joshua, thanks for the compliments. MR won’t necessarily provide you with a framework for generating alpha. It’s just a piece of the puzzle. A bit one, but still. It’s not a holy grail for investing by any means. I simply believe that in order to make sound investment decisions and avoid some pitfalls it helps to have a sound understanding of the system.
Have you read my recommended reading? I recently added an Amazon list of books that I recommend. It’s a mix of econ and investing. You might be interested:
http://pragcap.com/the-best-of-tpc
Hi Cullen.
I like your emphasis on irreplaceable time. It’s true. Your position on the creation and destruction of money reminds me of circuitism (at least as I understand it.) I think that you’re saying:
1)most of our money is bank credit.
2)bank credit is created out of nothing by private banks.
3)bank credit is destroyed as the principal payments are made.
4)so most of our money is temporary money (bank credit).
5)there is always some permanent money (siegniorage) created and destroyed by the Fed as a way of making the system run smoothly.
Is that right? Or did I miss something? After all, if bank credit is both an asset AND a liability then wouldn’t that mean that the money created by the banks loan would have to be destroyed as it is repaid?
Nobody ever gives me a straight answer on this — they get funny.
I would like to add here that a forked over $100 on a textbook that Krugman wrote 2 years ago and I was angered by his description of how the banking system works. Why can’t any of those guys tell the truth?
Hi Terry,
Yes, the vast majority of our money is bank money or what MR refers to as inside money. This money is created and destroyed when issued or repaid, but in the aggregate is almost always increasing. I think your description is perfectly fine. So yes, the straight answer is, loans create assets and liabilities and when the loans are repaid they are destroyed. But in the aggregate, the system does not experience a destruction of bank money because the system is designed for ever expanding bank credit. As you mentioned, the system is designed by banks and for banks and the Fed and the Govt mostly facilitate the use of bank money. In fact, the entire Fed system is designed as a support system around private banks.
Hope that helps.
Question on QE3, defending the HKD/USD peg, and Hong Kong asset prices (particularly property prices) spiking in Hong Kong due to “hot money” from QE3.
Hi Cullen,
As you know Hong Kong is pegged to the US dollar, essentially giving up its monetary policy to the USA. My question revolves around QE3 and property prices in HK. I have a pretty good firm understanding of MMR/MMT concepts and how you view QE as a great “non-event”, i.e. it is just an asset swap which impacts the shape of the USD yield curve, but does not actually add net financial assets into the real economy.
However, please read this article about the Hong Kong Monetary Authority (HKMA – Hong Kong’s Central Bank).
http://www.reuters.com/article/2012/10/25/hongkong-hkma-idUSL3E8LP08S20121025
The senior management released a statement that the 7.75 limit was tested and they had to intervene for the first time in a long time to defend the peg to the USD. They state that QE created hot money, which in turn created more demand for the HKD as more US dollars supposedly flooded the global system seeking higher yield outside of its domestic US market.
FYI, property prices in HK have increased by 80% since 2009. Is this purely demand from China and nothing to do with QE 1, QE 2 and QE 3?
MCL,
I am not sure how QE would cause money to flow into the HKD? Can you elaborate as to why they believe this is occurring?
Cullen
Hello Cullen. I have some observations about the U.S. consumer (70% of the economy), and want to know what I’m missing or where I’m wrong.
In the last 30 years–
1) Reagan was blessed with oil prices collapsing by 75%.
2) Clinton was blessed with the PC/internet boom.
3) Bush was blessed with the housing boom.
As a result, worker productivity and business profits have kept going up (reflected by ever-increasing executive compensation). Yet we now have the infamous 47% (or whatever the # is) that don’t make enough to BEGIN paying federal income taxes. Seems to me that if more people had more money in their paychecks, they would spend more, addressing small business’ “lack of demand”, and allow them (the engine of job growth) to hire more workers, thus turning the current vicious cycle into a virtuous one.
I just don’t see how the causes of the current situation are tax rates (the maximum fed. tax rate has only been lower in fewer than 10 years over the last century), or stifling regulation (profits are doing just fine).
I get the bigger picture factors like globalization (e.g. NAFTA, China), and folks using up their home equity (some of whom over-indulged, others were implored post-9/11 to “get out there and spend”). What I don’t get is no one addressing my points above. So what am I not seeing?
Phil,
Lowering the tax rate means running a larger budget deficit which will result in more income. So I think that gets at your issue. It’s a household demand problem. And that’s largely the result of the credit bubble. So lowering taxes means letting people keep more of their income so they can spend it as they please….
Cullen, what do you think of the idea floated in this article of having the Fed buy infrastructure bonds instead of mbs? http://blogs.reuters.com/muniland/2012/10/31/can-the-port-authority-and-mta-afford-repairs-after-sandy/
The Fed buying munis is the Fed doing fiscal policy once the states catch on and decide to start spending more. I highly doubt the Fed would do this….
Cullen, did you hear about this report? I sure didn’t until today:
http://www.nytimes.com/2012/11/02/business/questions-raised-on-withdrawal-of-congressional-research-services-report-on-tax-rates.html?_r=0
Trickle down hasn’t really worked the way everyone has claimed….Don’t we already know that? You need more balanced policy than just showering the rich with benefits.
My understanding of how China manages its monetary policy is basically this:
They use valuable human and material resources to produce goods to send to the US in exchange for US dollars. The Bank of China exchanges those dollars at a rate into Chinese currency.
Wouldn’t it be more efficient to not use that labor and material resources at all. The Chinese government could just make payments in its currency to the citizens. Wouldn’t the end effect be the same, expect without sweatshop toil and without raw materials leaving the country?
There’s no enough domestic demand for that. US corporations outsource the building of these materials to China so they can benefit from the reduction in prices and fatter margins. China can’t just create that demand by spending more at the govt level.
My question is why should millions of Chinese devote their labor and real material resources to products that go overseas and provide no domestic benefit? If the Chinese government payed these workers to stay home, what would change? The only difference would be The Bank of China would not accumulate as many US dollars, no?
Seems to me to be a moral hazard as workers whose labor is essential for Chinese domestic consumption would feel like the other half is getting a free ride.
“No domestic benefit”? The Chinese have jobs, incomes, training, skills, etc. Further, these companies invest huge amounts of money in infrastructure and the Chinese domestic economy to maintain their overseas operations. How is that not a benefit? I would argue that the Chinese are winning the trade between the Americans and the Chinese. We get pieces of cheap plastic. They get jobs, investment, etc. Having the govt pay them to do nothing foregoes all those benefits. Why in the world would they want to do that?
Ok… so that’s the answer. Developing the skills and infrastructure required to make cheap pieces of plastic is more important than the cheap piece of plastic.
The skills and infrastructure make for more potential future domestic investment which means the living standards in China are likely to grow at a faster rate than in the USA. Of course, the USA enjoys obtaining the cheap pieces of plastic because we’re already wealthy and we like to spend our wealth by obtaining cool pieces of plastic. But the likelihood is that China’s domestic living standards will increase more rapidly as a result of this trade. The USA will likely become less competitive as a result and living standards will increase at a reduced rate. Since it’s ultimately a race to increase living standards I’d say China is winning this trade battle.
“Since it’s ultimately a race to increase living standards I’d say China is winning this trade battle.”
Sure, but they started much lower and are simply trying to catch up, same with India. Id still rather be in the USs situation, ALREADY at a high living standard. The thing is, we dont have to view their gain in living standards as our loss, which many do (not you Cullen I know).
But we also cant expect that our share of the worlds output will stay the same, AT THE SAME COST. For instance we currently consume over 25% of the worlds oil and are only 5% of the population. That CANNOT continue. And if we insist on keeping “our share” of the worlds oil the same we will pay much higher price for it.
Now, lucky for us, the rest of the wolrd does not seem eager to live an exact replica of the American lifestyle. Parts of it will be adopted but our resource wasting ways of our predecessors will not be copied en masse.
Cullen, do you believe in the “Halloween Indicator”, i.e., “sell in May”?
I do not use any seasonal trends in my actual investment strategies….
TPC,
I’m just wondering as to what happened to Asia in the 1997-8 financial crisis. From what i can remember, the thai baht was “sold” massively which resulted in its devaluation and the govts having to ‘use their reserves’ to hold the currency value.
im finding it difficult to understand this from a MMT/R perspective or indeed, even simple supply and demand. why would it be necessary for the Asian govts then to use their USD reserves to prop up the currency? why dont they just issue say, Thai Govt Bonds (Baht) at a 10% interest rate to ‘soak up’ the selling pressure of the baht?
after all, they can always repay debt denominated in their own currency, so the interest rate on govt bonds doesnt really matter right?
OKL,
many countries that are dependent on trade (primarily because they lack sufficient domestic demand for growth) will peg their currency to another stronger trade nation in order to keep the flow of business coming into the economy. China’s an example of this in recent years. China likes keeping their currency competitive because it keeps American businesses outsourcing jobs, investment, etc to China. The problem is, by pegging the currency you create an interdependence. And if China can’t obtain USD via trade they must obtain USD by printing RMB and buying USD on the foreign exchange markets. This is basically off balance sheet fiscal policy. Issuing more bonds doesn’t automatically mean they can soak up USDs. So pegging the currency can creates FX issues. But some nations have no choice but to peg their currencies or suffer lower growth or even negative growth. They can’t be autonomonous because their economy is not diverse enough. This is counter to the MMT position and MR is vastly different than MMT on the importance of foreign trade….
Do you agree with the author thinking that surplus in government spending encourage R&D like what we say in the tech boom? (I think you are in agreement on deficits and the financialization that has occurred post tech boom).
http://seekingalpha.com/article/980881-how-the-monetary-system-and-government-spending-impact-investment?source=email_portfolio&ifp=0
Govt surplus doesn’t lead to private sector investment. Private sector investment is a product of private innovation and credit expansion. So no, I don’t necessarily agree. I think the author is trying to make an anti-govt spending argument where the correlation has very little to do with govt spending. And more to do with private innovation.
Also one more question:
The following quote is quite popular among pundit ” all fiat currencies fail”. This might be the hyperfinflation debate in disguise, but let me ask do you agree with this generally that all fiat “die”?
And do surplus encourage a strong dollar whereas deficits encourage a weak dollar ignoring other factors (rate spreads, risk on/off, etc)
All fiat currencies do not fail. There are hundreds surviving today. The only thing that has failed is all commodity based systems. As far as I know, there are none around today.
Given the fact the U.S. has a self-imposed debt limit, doesn’t government debt need to perpetually expand with growth? Otherwise, the country could not expand money supply adequately. Is inside money adequate for expanding money supply?
Inside money must expand since it’s the primary medium of exchange. Outside money need not expand and is in fact becoming less important as reserve management becomes more efficient and cash/notes become extinct. Inside bank money is being proven as the most important form of money in the economy as it dominates every day life. And yes, it must expand with time as it’s our primary form of money.
Thanks for answering.
With a stable banking industry, inside money should be sufficient for economic functions, especially as we move to closer to the theoretical (and efficient) banking industry, right?
Outside money is necessary because we have private competitive banking. The only way we could really eliminate outside money completely is through a full nationalization of the banking system. And technically, in this case, ALL money would become outside money or govt money. Think of outside money as creating a cohesiveness between banks. So, rather than having a bunch of independent banks trying to settle payments, you have one interbank market where banks can settle their payments with a facilitating entity (the Fed) overseeing the process. So, I don’t think you can eliminate outside money, but as time goes on we’re going to find that outside money plays an increasingly reduced role in the banking system as efficiencies increase.
Hi Cullen, I have a question about the position that taxes are to drain excess money from the system to control inflation.
Suppose the US were to print money, so-to-speak, to fund the new healthcare system. Where would that money be injected, and where would it be taxed, in order to cause the least distortion to the market? Suppose every time you went to the doctor, the single-payer system simply cut a check to the doctor. If that money is created ‘out of thin air’, where do you tax that created money away to avoid inflation in the future? From the doctor? From the employee? From suppliers the doctor pays? I don’t see how you can tax away this money without somehow distorting the market.
JM,
The idea that taxes are money drained from the economy is an MMT idea. Not an MR idea. MR says taxes recirculates money by taking from the private sector and recirculating for public purpose.
So, if the government is injecting funds via a social program, like the affordable care act, how is inflation going to be avoided?
The recirculation mechanism does not matter. Money in via tax, money out to whatever. (Yes, local bubbles can occur).
Cullen, could you walk us through your typical day? No need to give away trade secrets, just in general how you approach your workflow. I would find that interesting.
Have you been self employed for awhile now or just wealthy enough to pursue individual goals?
Great site, keep it up!
P.S. Peter Schiff is calling us the next Greece with a coming bond crisis. Reading the news is funny but sad sometimes these days.
VC,
I’ve been self employed for about 7 years now. It hasn’t always been an easy road. But starting my own companies has always been the best thing I ever did.
I literally just started Orcam so my days now are kind of all over the place. I do lots of admin work and lots of little things that take up big chunks of time. I am still working out kinks and fine tuning processes.
A standard day is usually something like this:
6-9: catch-up, organize.
9-11: website stuff. Mostly Pragcap.
11-2: meetings, client calls, etc.
2-2:30: I always try to nap.
2:30-4: reading.
4-5:30: gym.
5:30-7: random work.
7-10: dinner, time with the family.
10-11: post a few PC posts.
That’s pretty rough, but the days are very full now. Entrepreneurship sounds glamorous, but if you don’t block out the time correctly, it’s an impossible way to live. I used to have this down to a better process when I was running my partnership so hopefully I’ll fine tune this all and get back to something that doesn’t involve me working 12 hour days all week….
Do you think the financial blogosphere is on the decline or maturing into something different?
One of the questions floating around the blogosphere of late started with a post from Tadas Viskanta of Abnormal Returns asking “Where did all the finance bloggers go”. A few of the blogospheres finest replied with their thoughts on the matter which I’ve turned into a thread on my site fifthestate.co. I’m optimistic about the future and hope to one day be apart of the maturing process. What are your thoughts on the current state of the blogosphere and what do you think it will look like in 5-10 years?
Thanks for your contributions and hope you don’t mink me linking to your blog.
Long time reader and believer,
Dani C
I am obviously biased here, but I think the financial blogosphere is on the rise. I just think the quality of the content is being filtered increasingly as people gravitate towards the best of the blogs. A lot of people have been discredited over the years. So it’s hard to find good quality material. So I think it should only get more and more refined over the years. Which is a good thing. That will ultimately make it stronger and hopefully attract strong newcomers to the space.
Thanks for your thoughts, Cullen. I agree it’s only the beginning, which is why I started http://fifthestate.co/ – home of the financial, investment, and economic blogosphere. I can barley keep up with the amount of info being shared between economists, investors, traders, etc…
Cullen, help me understand the limitations on central banks. MMT seems to advocate that inflation (and malinvestment, but for present purposes I’ll just talk about inflation) becomes a problem in an economy (e.g. Japan or US) where the central bank keeps stimulating and adding liquidity to a system. But, as long as the central banks control the VELOCITY of money how can we ever get inflation? Can central banks run up their balance sheets, and their country’s debts ad infinitum? What are the limitations on this power? Will Japan have to look to outside (non domestic) bond purchasers when the interest on their debt becomes greater than their revenues? When do people loose faith in a currency and place their savings in alternate currency-dominated assets. Thank you for entertaining my basic questions.
Evan,
I am not an MMT advocate so you’d have to ask one of them this question. If you’re confused about the differences between MMT and MR you might review this link.
http://pragcap.com/mmt-critique.
Thanks,
CR
Hi Cullen In the past Monday’s Barron’s (11/5/2012)the lead letter To the Editor (A New Theory) explained why the Fed is not “printing money”. If you search “Barron’s Mailbag 11/5/12 A New Theory” it should pop up. The letter was written by me based upon what I had learned from the great help provided by you and others. What was more interesting than the letter itself was that the editor initially rejected it as “not accurate” (his words), as he believed the Fed was “printing money”. However, to his great credit, he was open-minded enough to get back to me and to ask a few questions. After a couple of e-mail exchanges where I explained the logic and also referenced him to other sources of information (such as pragcap) he concluded the letter should be published. It was refreshing to find a “mainstream” writer who was willing to take the time to think through the logic of an issue. Typically, people are not interested in facts which are not consistent with their beliefs. Thought you and those here would find of interest. Thanks.
Thanks Charles!
Cullen, know anything about this”Taylor Rule” from Krugmans blog?
Here’s the PDF to his post dissing bond vigilantes fear mongering and points to the Taylor Rule:
https://webspace.princeton.edu/users/pkrugman/The%20Simple%20Analytics%20of%20Invisible%20Bond%20Vigilantes.pdf
Here’s what the SFFED says ahout it:
http://www.frbsf.org/education/activities/drecon/9803.html
Cowpoke,
That is a wonderful link, from the SFFED, “Ask Dr. Econ” (fresh from 1998). The Taylor rule gets dragged out from time to time, often with an attitude of slight derision by the blogosphere, or so I’ve noticed. It seems legit (Taylor is a Stanford Econ professor, alive, I think). It seems sufficiently persistent that it should(?) have some merit .
I eagerly await a response from Cullen to your excellent question!
The Taylor Rule is an okay guide for monetary policy, but I would emphasize okay. Ultimately, monetary policy is one piece of the puzzle in a normal economic environment (not in a balance sheet recession) and should be put in the correct context. I don’t think there’s any hard and fast “rule” that can guide where the Fed should or shouldn’t set rates. No two economic environments are the same so these models that presume some level of monetary easing or tightening will “work” are often misleading.
I’m new to MMT (having little economics background), but recently have heard a bit about it (Stephanie Kelton interview on Le Show). Am wondering if you could recommend a basic primer on MMT, keeping in mind my relative ignorance concerning economics?
Hi JL,
I am not actually an MMT proponent. We started Monetary Realism due to disagreements with MMT. I’d recommend reading my primer on the monetary system. See below. Thanks.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625
Richard koo wrote an article for the F.T. a week or so ago explaining the balance sheet recession and a lot of the comments were visceral Austrian Balance Budget Swings.
Was wondering what you think about hosting an Ask MR. Koo Q&A session.
If he would be willing, we could all post the questions you could edit them before giving MR. koo a crack at them.
Thoughts?
Senor Koo doesn’t respond to emails from me. I’ve tried to contact him….