CNN RADIO APPEARANCE – BOND BUBBLES, RESERVE CURRENCIES & BOOM BUST CYCLES
I was on CNN radio again last Friday to discuss my article on the 9 economic myths. Topics we briefly touched on:
- Is there a bond bubble?
- Is the Fed becoming irrelevant?
- Is the USA losing its reserve status and will this crash the dollar?
- What is the LTRO and has it worked in Europe?
- Why the Euro crisis is not over.
- Is the stock market “cheap”?
- Why I hate PE ratios.
- Why the boom/bust cycle is here to stay.
Listen to the full interview here.
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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10 Comments
Nice one. The guy listened to you and did not entered into rants based on “neo classical common sense”…what a change !
How can there be a bond bubble when holders of the treasuries know exactly what the price of their bonds will be at maturity? Yes, the returns are low — but a “bubble” — I think not.
How many bond holders are really holding their bonds to maturity? … What happens if government bond fund holders see their principal fall on their quarterly statement? … What happens to lending if my assets are marked down? …. Too many questions to be sanguine about the risks in the bond market.
A person who bought a home in 2007 and intends to live there for their entire life is not effected by housing being in a bubble. Similarly for a person who bought a stock for the dividend yield during the 2000 or 2007 peak. There are other risks, like the corporation can go bankrupt or disaster can strike the home.
But a Treasury doesn’t hold bankruptcy risk and provided the treasury holder does not intend to flip that bond before maturity (or is not using it as collateral elsewhere) then the fact that bonds are priced too high (and some would call a bubble) does not really matter.
Commodities (especially oil) is priced all around the world in USD and that makes the USD the world’s reserve currency. So, if (when ??) all around the world oil is priced in e.g CAD then the CAD becomes the world’s reserve currency.
Why would the Saudis want to start collecting CADs? Do they do a huge amount of business with Canada? Do they want to buy lots of products from Canada? Does Canada produce 25% of world output? Your argument is sort of like the old “well China might just stop buying our bonds one day”. Well, yeah, they can stop buying our bonds tomorrow if they want. But they will first have to stop importing USDs through trade and that means doing a lot less business with America. But they won’t do that because they like doing business with America. So let me know when Canada starts buying most of the Saudi oil and producing 25% of world output. Then they can be the reserve currency. Until then, forget about it.
We almost had Iceland converted though!
Good interview. Just a little quibble on the European question concerning Germany / the exporters (Netherlands, Finland, Austria). One of the major reasons for this eurozone crisis in the first place is that the peripheral nations don’t have a way to reduce their current account deficit through a devalued currency; the euro is wayy too overvalued to make their goods competitive. On the flip side, the currency is undervalued for Germany / the exporters, with Germany running a 6% trade surplus, with the Netherlands not far behind. If Germany and maybe the exporters were to pick up and leave the currency (while not triggering a credit or financial crisis), that would bring the new German or Northern currency’s value way up, while bringing the euro’s value down. That would allow Spain, Italy, Greece, Ireland, France, the Baltic states, etc. a way to export their way to growth, while simultaneously lowering Germany & co.’s current account surpluses. Further, with new management in the Euro’s new central bank (probably relocated to France or Italy), they would be much less skittish to engage in bond printing, which would immediately end any fears about sovereign debt and lower yields. Germany & co. would also have to tap into their savings (and presumably consume some of the periphery’s products) to maintain growth in the absence of a huge trade surplus.
Just my thoughts, although it’s possible that a financial crisis could occur from this potential event, and it’s also possible that a Spain or Italy bolts and leaves the euro to export its way out instead.
The more I think about what KainIIIC wrote and what Mr. Roche said, it seems to me that a breakup of the Euro system to individual members is not going to help provide public services to its citizens or raise productivity in the individual countries. Some countries have high standards of living (Greece), and rather low productivity (Greece again). Eventually debt overwhelms. The solution of sorts is to have a centrally issued fiat currency that somehow keeps the status quo. The status quo is something that can only be maintained by spending fiat currency into the below average productivity economies so that this creates about 2% inflation overall (which of course compounds annually), just like we have in the USA. Otherwise, who is going to pay the interest? Just like Virginia (our Greece), these folks are the beneficiaries of our centralized issuer of fiat currency. If we want to live where there are lower taxes and a lower standard of living with less public services, we can move to Mississippi and vote republican.
Topic 2, the need to reduce the National Debt and keep the world chained to the USA’s reserve currency is myth. Just like Mr. Roche explained, we are the big gorilla in the room (that is planet earth). We have 25% of the world’s productivity and have issued into the world’s economy more than 60% of the world’s fiat currency. Unless our country gets blown up or tries to reduce the National Debt and thus it’s productivity to zero, we will have our currency out there in the world. Just because certain countries, that were once enemies of each other, now want to trade and rely upon each other’s fiat currencies — what is the problem? At least they will have less incentive to blow each other up. This cannot displace USA’s money in the world.
These are two evangelical fears (we’re going to ruin our money and we will never be able to pay off our national debt because of deficit spending and QE), based on no understanding at all, much like the fear of God. The only thing to fear is less productivity not our fiat currency. The Fed, the Government, and Goldman Sachs control our fiat currency, thus thou art saved.
BTW If we don’t mind living where there are high taxes and a high standard of living with lots of high cost low value public services, we can move to Maui and vote democratic.