Debunking “The Biggest Scam In The History Of Mankind”

A reader forwarded this video on to me.  Apparently it’s gaining quite a bit of traction online.  The video is called “The Biggest Scam in the History of the World – Hidden Secrets of Money”.  Provocative, huh?  As you can likely guess, the video is about Federal Reserve conspiracy theories, the evils of fiat money and of course, how you can buy gold from the person who made the video.  The video is extremely well done, very convincing, provides lots of historical data and believable claims, but right off the bat I started to see some rather serious errors in the narrator’s claims.  Here are just a few from the first few minutes of the video.

In the first two minutes the narrator says:

“The modern banking system creates currency far faster than trees can grow”

I’m being a real stickler for details here, but technically the banking system doesn’t actually create the currency.  Banks create loans which create deposits.  The deposits can be drawn down to access paper currency, but that paper currency is actually created by the US Treasury who processes orders for it from the Fed system so they can supply it to the US banking system when bank customers need it.  You can read about the specifics of this process here.

Moments later he says:

“Treasury bonds are our national debt”

Right.  But the national debt is also part of the private sector’s savings.  If your grandmother owns a T-bond then the government has a liability and your grandmother has an asset.  When discussing a credit based monetary system it’s best to understand both sides of the ledger.  Otherwise, you’re missing half the picture.  A credit based monetary system can be extremely unstable at times, but just looking at debt levels won’t tell you much about that.  There’s much more to the accounting here.

Seconds later, he describes deficit spending as such:

“[deficit spending] Steals prosperity out of the future so it can spend it today”

The US government has run budget deficits for the majority of its history.  Just to put this in perspective, can you imagine what someone like this narrator would have said back in 1945 when the deficit was over 25% of GDP?  Do you remember how the government “stole” all of our prosperity back in the 1940’s?  Or did the USA undergo a massive economic boom over the 70 year period since then during which it became, by far, the most prosperous and wealthy nation mankind has EVER seen?  A little common sense should make you question the claim that government spending (which has happened for hundreds of years during an extraordinary American wealth boom) necessarily steals future prosperity.  Yes, government spending can have negative ramifications and isn’t necessarily always good, but there’s a bit too much hyperbole in the claim that deficit spending “steals” future prosperity.  That’s just not true in all cases.  The extremely high deficit from 1945 should make that abundantly clear.


Next, he’s explaining QE and states:

“This process is where all paper currency comes from”

As I described above, this is wrong.  Paper currency doesn’t come from QE.  Paper currency is supplied to the US banking system when bank customers have demand for it.  This comes from the US Treasury and the Federal Reserve, but really has nothing to do with QE.  QE does result in more bank reserves in the system, but bank reserves and paper currency aren’t precisely the same thing.  For more on QE please see my primer.

Moments later he defines money in a very peculiar way so that it doesn’t include anything that doesn’t serve as a store of value.  According to his definition money is a store of value, medium of exchange, unit of account, portable, durable, divisible and fungible.  He then claims that gold fits this definition.  But gold doesn’t fit this definition!  First off, you can hardly use gold to buy anything in the real economy.  Try going into Wal-Mart with a bar of gold.  They’ll tell you to piss off.  Better yet, try transporting all your gold around with you where ever you go.  Gold doesn’t even fit his own definition.  In fact, it fails almost completely in money’s most important function – as a medium of exchange.

Of course, most of our dollars don’t serve as a good store of value.  In fact, holding paper currency or even bank deposits is a pretty dreadful way to try to maintain your purchasing power.  Does that mean bank deposits and paper currency are not money?  Of course not.

The video then goes into a money multiplier explanation claiming that banks lend out deposits and reserves.  Anyone who actually understands banking knows this is wrong.  Heck, even Fed employees have written about this in recent years as the crisis and QE has clearly proven that the money multiplier concept is totally false.

By this point you should see what’s going on here.  I didn’t watch the rest of the video because it only took 5 minutes to see a whole multitude of errors.  In essence, the video is just a sales pitch for gold and an anti government agenda.  If you’re into that kind of thing then fine, but you’re being misled so be careful listening to people with such an obvious political agenda….

NB – It’s also interesting to note that the creators of this video are ultimately selling you a product.  They’re selling you gold and silver as seen here on their website.  And they’re using fear to drive you into that product.  But look what they want from you.  After countless hours of video trashing fiat money they’re asking that you pay THEM with…US DOLLARS.  If this whole thing doesn’t set off a great big red flag for you then I don’t know what to say.  Good luck?



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

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. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • Chris E.

    Great stuff Cullen. This is just one chapter of the greater sad movement and history of American snakeoil salesmen. However the travelling circus of modern fear-salesmen is far more egregious and dishonest.

    It’s part of this dopey teabagger, goldbug, anti-immigration, economically illiterate subculture that thinks Obama is a Kenyan and the Fed is a private European bank.

    My uncle listens to all kinds of crazy right-wing radio and I was hanging out with him last week, and ALL the advertisements are about selling survival gear and goldbug crap and seeds and all sorts of vitamin shit. They proprietors of these products are preying on the baby boomers who are scared and dumb. It’s insidious and there’s literally millions of people being bilked out of money in various ways by these slimeballs.

    People here may have differing views on the government’s role, but there’s a reason why we had FTC regs protecting us.

    Selling people useless stuff is economically deleterious. There’s no value-add when people are buying the equivalent of sugar pills or shitty seeds or false information on gold and the economy. The government, in my opinion, should be stepping in to regulate the standards even on the internet of the products being peddled.

    Didn’t intend on the comment to turn into a rant, but this post gave me a lot of thoughts on the bigger picture of what these scam artists are doing to the aging population. Just like the manipulative infomercial people and the evangelical conglomerates selling “holy water” to Social Security recipients.

  • Chris E.

    Er i meant “think that Obama is a Muslim” not Kenyan (he is, after all, half Kenyan, but not born in Kenya).

  • SS

    Great post. It’s so ironic that the video talks about how the US government is scamming everyone when the whole point of this man’s existence is to sell you gold in his own little scam.

  • Sam

    At least finish watching and tell us what else is wrong with the presentation before writing the entire thing off after 5 minutes. I don’t well enough know truth from fiction to debunk or support the content. As to the snake oil, for all we know the guy is selling gold at a 10x return for dollars he’s going to spend on a bunker or self sustaining remote home. I for one, if truly convinced of the fall, would much rather remove myself from the system than participate in the hard currency based transactions and associated risks that it brought upon.

  • Bernard King

    Cullen, doesn’t he say he is using a peculiar definition of currency that includes check able deposits, paper currency, & electronic base money?

    I understand that the reserve limits are entirely illusory, but doesn’t that support his point? In other words, a loan is the bank creating money? You yourself would agree that loans create deposits, not vice versa.

    You are correct the debt incurred during WWII was not stealing from future generations, because it became savings for American bond buyers. But those savings were “paid for” by substantial rationing, wage and price controls, and other government imposed austerity measures.

    Also, I’m not sure if he was explains QE per se, or just “ordinary” open market operations, e.g. bond buying to control the Fed funds rate on the interbank lending market.

    I’m not completely endorsing this video, because it is designed to sell a product, i.e. gold and so its loaded with all sorts of “the Fed is a fraud” b.s. But for newbies it does provide some insight into how money is created in a debt backed monetary system.

  • Cullen Roche

    I might check out the rest tomorrow. Sorry to shrug it off so quickly, but if you understand double entry bookkeeping and basic banking then these kinds of videos get very old very fast. These are the same people who sell all the hyperinflation nonsense. They’re really just selling you gold in exchange for the exact fiat money they claim to despise. That should really disturb people in my view.

  • Cullen Roche

    The “store of value” definition is actually more mainstream than I give it credit for. I just think it’s wrong. Modern money is a terrible store of value. It has been 100+ years. But that has nothing to do with whether it serves our needs appropriately or can help us improve our living standards. And it definitely doesn’t mean that most things we use as money aren’t “real money”. The purchasing power of the USD has fallen 95% since 1900. So what. Our living standards have exploded through the roof. If you understand the dynamic driving that apparent contradiction then you can see why most of these types of videos are nonsense. They just misunderstand how money and living standards relate.

    On the banking point – he’s using the money multiplier. I might be getting to technical with him, but that’s the wrong way to describe our banking system. Banks don’t take in your deposits so they can lend them as he describes. Banks make loans and find reserves and corresponding cheap liabilities after the fact.

    Personally, I think the video gets numerous things wrong. I am 100% in favor of exploring alternative views and figuring out the system on your own, but if you buy into too much of the stuff in this video I am afraid you’ll get led astray in your learning.

  • Bernard King

    Yeah, arguing about what is money is like arguing about what is a marriage. It’s different things to different people, depending on their needs. Some things are just better at delivering certain qualities of money. Gold might be a better store of value. Cash might be a better medium of exchange, and checkable deposits might be a better medium of exchange than cash.

    I agree with on the money multiplier argument – that’s what led me here in the first place! My point is that the premise of the video is to explain how all money ultimately represents debt. The money multiplier segment is flawed, but it does demonstrate how banks can create money. The problem – as you noted – is that reserve requirements aren’t really a substantive limitation on bank lending.

  • Jboy

    You seem to grasp at straws. Just stating at the end they accept American dollars for for there gold well ya obviously. But then they trade them back in to buy more gold and the cycle continues like every other business. And Mike has been educating people since 2001, man I wish I was part of this “scam” back then. Your article more or less kind of a runabout way seems to say what the video has stated he just simplified it. I think i would stick with the guy who so far has been on the 500 percent gain side of Gold. Good luck with the faith of your dollar and 17trill debt.

  • Cullen Roche

    If the straws I am grasping are banking principles and double entry bookkeeping then yes, I have a mighty firm hold on those things!

    Look I am sure that the guy making the videos is a good person. At least I assume so. He actually might be a terrible person. But he seems nice on the videos so I’ll just assume he’s nice. I’m sure he really believes what he says. He seems very passionate about it. That’s great. But I am telling you that some of the basic things he discusses are just flat out errors.

    As for the history of gold as an asset class – well, I don’t think that matters one bit to this discussion. Over the long-term society has pushed forward because people invest in people. People who buy common stock and invest in one another are the people who help us all establish a better living standard because it’s those people who create the amazing goods and services that make life better. The people holding the life’s saving in gold bars in a bunker are contributing practically nothing to that process. It might benefit them, but so what. I am not here to live my life in a bunker with a shiny rock. I am here and I spend my time investing in people and things that make life worth living. If you want to buy rocks and lock them up in vaults then great. I am not going to say you’re a bad person. But I don’t think it’s fair to just assume that everyone who doesn’t buy into that notion is just some naive fool playing a role in the government’s great big “scam”. There’s a lot of people investing in other people and trying to make great things that make life better for everyone around them. And there are also people buying gold bars and staring at them in what is essentially a bet against humanity and innovation. Me personally? I hate that bet. That’s my view anyhow. Who knows if it’s right.

  • Tom Soyer

    ” Banks don’t take in your deposits so they can lend them as he describes. Banks make loans and find reserves and corresponding cheap liabilities after the fact. ”

    Ins’t this even worse than he explain in his video?

  • Cullen Roche

    It’s overly simplistic. The point is, banks don’t lend out reserves in some money multiplier process. Banks make loans and if they need reserves they find them after the fact. The money supply is endogenous. It’s not controlled by the Fed through some money multiplier process as the video implies. The video is just flat out wrong about how banking actually works.

  • Matt

    The point about the living standards you make (and have made many times before) is -so- important. Money serves different purposes and it’s important to understand each and not confuse them. Otherwise you get misunderstandings as (exploited) in this video. If I draw some money from an ATM and walk to a store to buy something, that money is a store of value for me. I hope that by the time I arrive at the store, it still has the same purchasing power.
    However, on a very different level, money serves a different role. In macro, it’s more like the oil that greases the machine and allows it to work.
    So just like you can’t only look at one side of the ledger (debt) while ignoring the other (asset), you shouldn’t look at one role while ignoring the others.

  • Vincent Cate

    Cullen, even in the middle of hyperinflation the local currency is still used as a medium of exchange. It is failing as a store of value, but has not yet died as the medium of exchange. As countries head toward hyperinflation they seem to get gold dealers just popping up. This lets people who need a store of value switch to gold for savings, and yet convert back when they need the medium of exchange. Eventually people get used to saving in gold and silver and then start using it for trade too. Then the fiat money is really dead. Then the gold dealers go away. It is just part of the natural evolution of things. Do not be disturbed.

  • Adam P.

    All people working in finance are trying to sell you a product; this guy is selling gold bars, other people are selling stocks or bonds or a basket of futures on commodities, or a house too big and too expensive for you. Others are selling advice and so on. Depending on our own bias we feel the necessity to let the others know that this or that is bad and what we own is valuable and the right thing to buy. Ther is nothing like a good investment or an unbiased man/woman on this planet. Buy a little piece of everything and enjoy life, it’s short and unpredictable.

  • jhs

    Cullen, how wealthy would the nation be if it had to tax every American $60,000 in order to repay the Government debt?
    I’m not into gold, since I don’t know how to value it and don’t know if I should expect its value to rise when other assets drop, but I’m not sure either of the average wealth of Americans.

  • Greg

    “But look what they want from you. After countless hours of video trashing fiat money they’re asking that you pay THEM with…US DOLLARS. If this whole thing doesn’t set off a great big red flag for you then I don’t know what to say.”


    That which they say is so worthless they are asking you for. I guess they are just helping us out, taking our worthless fiat from us.

  • Greg

    Like those commercials with Fred (I hate govt) Thompson pushing reverse mortgages. The kicker line that supposed to make you KNOW its a good deal
    “And these government guaranteed!!”

  • Greg

    “Eventually people get used to saving in gold and silver and then start using it for trade too. Then the fiat money is really dead. Then the gold dealers go away. It is just part of the natural evolution of things. Do not be disturbed”

    Good to know we’ve got Vince here who’s lived through all of histories hyperinflations and know exactly how they will transpire.

    I will sleep well tonight.

  • Greg

    Personally I think this chase for things to beat inflation is part of the problem. So what if your purchasing power erodes a little bit over time.

    Everyone is running around in these secondary markets trying to find the greater fool til it all collapses. The guys who’ve hoarded cash for a while come in buy them all up and the cycle starts again. Im quitting on that game. I buy what I want now, and put the rest of my cash aside. If there is a project I want to support I support it and not just because what I will get back will beat inflation, but because I want to support the project. Usually Im involved in the project so I get some “real” returns too. This Wall St game is for the birds

    Dont take this as an anti bank rant either. Real investments need to be made and banks play a huge important role in that, its all this casino activity that has everybodies heads all aflutter. The number of economists who look at the Dow as THE metric of economic health is staggering. Putting the cart before the horse

  • Johnny Evers

    1. Grandma’s asset is the government liability. Welll, the government is the people. Maybe I don’t want to be in hock to grandma. Unless … and it’s hard to establish this: You believe the bonds will be bought by the Fed.
    2. Grandma owns very little of the debt. Most of it is owned by the wealthy and foreign countries. I really don’t want to be in hock to them.
    3. The idea that debt is an asset is an accounting mechanism that plays tricks on you. Taken logically, debt is neutral. All those students up to their eyballs in debt? Good, because it’s an asset for the banks! It also leads you to protecting debt at all costs, instead of wiping it out once in a while so that all the money doesn’t pool at the top.
    4. The deficits in the 40s were huge, but put to the end of winning the war and saving civilization from barbarism. They were followed by a long period in which government debt fell. We are in a different mode now — high debts for non-productive use and rising debt levels.
    5. Well, sure they are asking for deposits for their advice. But do you think they will hold those deposits? No, because no sensible person holds deposits for long — they will buy gold or stocks counting on financial instrument inflation to make them wealthy.

  • Bernard King

    Cullen, you are right about one thing: people invest in people. Gold, however, is not an “investment” in that sense. It is a way to store value, and in the long run will hold value better than cash. But then again, investing in the Dow would hold value better than cash (and gold) as well.

    I think gold does serve a purpose by being a hedge against extreme downside risk. (You might even call it the “Zero Hedge”) Right now it seems impossible that the world would ever lose faith in the dollar, but if that happened, society would likely resort to gold or gold-backed money as the medium of exchange.

    In that disaster scenario, all faith is lost in paper currency and paper debt instruments, and everyone returns to gold as money. In that event, worldwide M2 would be swapped out for the worldwide stock of gold. I forget the math behind it, but I believe it works out to something like $13,000/oz of gold. So if you want to hedge against this, you would ask yourself how much net worth do I want to retain in the disaster scenario. If you’re net worth now is $1.3 million (excluding occupied and defensible real estate), and you want to retain that amount in the event of a disaster, then you would want to hold 1,000 ounces of gold. (1000 x 13,000 = 1,300,000).

    Of course, the price you would be willing to pay for your stock of gold is going to reflect your evaluation of how likely this disaster scenario might be. If you were really sure it was going to happen soon, you would pay more for physical gold now. If you don’t believe its ever going to happen, than gold would have no value to you.

    If you are wondering how likely I think ths disaster scenario is, let’s just say I don’t own any gold.

  • Vincent Cate

    Cullen, I now have 38 different ways to explain hyperinflation. Do you think you could show how even one of them was nonsense?

  • Suvy

    “Hyperinflation” may be nonsense, but suggesting that very high inflation is possible down the road or even a debt restructuring is not. These things happen around once a lifetime and when restructurings happen, they usually happen all at once.

  • Greg

    “Eventually people get used to saving in gold and silver and then start using it for trade too. Then the fiat money is really dead. Then the gold dealers go away. It is just part of the natural evolution of things. Do not be disturbed”

    I dont know about the rest of you but I will be less disturbed knowing that Vince, who has personally lived through every known hyperinflation is clearing things up for us.

    What the heck do you know Cullen? Gold rules eventually

  • LRM

    Thanks Cullen for this look at the video.
    I am stuck on the store of value thing I guess due to my family culture of being brought up in a family whose parents were born during the tail end of the depression and lived their lives by working hard and saving money in the bank.
    Despite some serious time on your site I still have a bias to this savings culture of my childhood.
    Keep hammering away at these videos so that us older folks that worked under the belief that what we saved would be a store of value can eventually realize the big error of this belief.
    Your certainty of understanding the money system and desire to educate is appreciated as these well done videos can trap a biased mind !!!!!.

    Do you think that the IMF idea of taxing on a one time only the savings accounts in the order of 10% to help sovereign countries with debt is a wise idea?

  • Morgan Warstler

    “Right. But the national debt is also part of the private sector’s savings. If your grandmother owns a T-bond then the government has a liability and your grandmother has an asset.”

    Terrible answer.

    The guy means, your grandma should have ANOTHER asset, one in the private sector, since in his preferred world – the govt. doesn’t borrow money.

    Deal with his true meaning. Govt. ought not be issuing debt. At minimum it should run a current account balance.

    This is why mentally thinking in terms of NGDPLT is helpful.

    Under MM, ANY govt. deficit is essentially driving up rates of borrowing for private sector.

    Under MM, we IMMEDIATELY feel / see the effects of bad fiscal. it’s brutal and relentless in showing us every flaw int he govt. policy.

    Question: do you understand this about NGDPLT?

    Meaning, not do you believe it, but can you grok, the analysis that gets us there?

  • Geoff

    “The govt ought not be issuing debt”

    So the private sector ought not have any equity?

  • Geoff

    LRM, I don’t think anyone here is knocking saving. The debate is about where we should allocate our savings in order to, at minimum, preserve purchasing power. The gold bugs seem to believe that dollars should be a savings vehicle. They think dollars should be a store of value, I guess they want to hold dollars under their mattress. However, most of us here believe the dollars are mainly a medium of exchange. Savings should be allocated elsewhere, like in bonds or stocks etc.

  • Morgan Warstler



    Imagine we default on all Fed govt. debt. today , massive crisis, everybody is “privately poorer” – grandma has no asset.

    Now we have govt. with no debt.

    We pass a Balanced Budget Amendment. We limit Federal spending to 10% less than last years tax receipts, each year we refund the remainder.

    If govt. ever owes anyone at the close of the year, we kill all elected officials.

    Create any rule set you brain needs to FIAT GOVT> WITHOUT DEBT.

    OK then, now in this place:

    1. Is there still money?
    2. Are there still banks?
    3. Do markets still function?
    4. Is the still ownership and property rights / equity?

    I don’t care if you like the status quo more, that’s not the discussion.

    Just admit all those things occur without govt. issuing debt, so we can get on with discussion.

  • Suvy

    It’s not so crazy in countries without developed financial systems. When we save money here, we do so in the form of stocks and bonds. When someone in China or another country without a “modern” financial system do so, they usually do so in the form of bank deposits.

    In the US, no one ever really saved money in the form of straight cash because before we had a sophisticated financial system, no one trusted the US banking system. Throughout the entire 19th century, the US had extremely low savings rates and all the savings that did occur happened in the form of either specie, land, or some other kind of similar asset.

  • Morgan Warstler

    Geoff, again, not quite.

    I’m pretty sure that IF most gold bugs were shown a free market based govt. that on the fiscal side ran zero deficits….

    MOST OF THEM, would have a different view of “inflation” and whether money was a storehouse of value.

    See what most of them want is to make the trader class a LOWER STATUS group.

    And with govt. debt off the table, traders and govt. officials, and “bankers” lose quite a bit of status.


    This is why I so enjoy NGDPLT, bc it essentially woos the gold bugs, it says:

    1. don’t worry about the inflation bit.
    2. bc we’re going to adopt a MP that shrinks govt spending and debt.


    This is a natural progression:

    Hayek beat Keynes, and left the other side the gold bugs to rant and rave.

    Friedman used monetary to beat back Keynes, not all gold bugs came aboard but he was a small govt guy…

    PK does his liquidity trap dance, and for a brief moment the neo-Keynesian resurgence occurs, when BAM

    Sumner and his merry band of MM, start stomping Keynesianism to death.

    The thing is MM has MORE to offer gold bugs than Friedman did. His monetary base growth was nice…

    but MM actually turns the Fed into a government slashing election robot.

    And when it happens, the gold bugs are going to RELAX, bc what you are claiming the are asking for, isn’t really what hey want.

    MM can give them what they want.

  • Morgan Warstler

    Keynes beat Hayek. derp.

  • Geoff

    Morgan, personally I’m not a big fan of a balanced budget amendment because it would render the system extremely inflexible. As per Minsky, the private sector is inherently unstable and naturally tends towards disequilibrium. When the systems goes to an extreme, like it did during the financial crisis, the public sector can act as a counterbalance. Are you familiar with sector balance approach?

    What’s the big deal with govt debt anyway? It could be eliminated tomorrow in one giant QE with very little inflationary consequences. The only difference would be that the private sector would hold cash instead of treasury securities.

  • Joe

    My client, a community bank president, said to me on his way out the door, “Gotta run, I’m going cold calling on businesses around here.” “Why?” I asked, as I also am a salesman. “Gotta go find some cheap deposits so I can make some loans!” he replied.

    Tell me, then, how banks do not use deposits to fund loans?

  • Eric Webber

    This is a great article and the facts Cullen outlines are true. but this doesn’t mean that all “fiscally conservative” folks are “dopey teabagger, goldbug, anti-immigration, economically illiterate subculture that thinks Obama is a Kenyan and the Fed is a private European bank” as you put it. It means that NO ONE is the beholder of all that is true in this world, regardless of ideology. I am a Jeffersonian Classical Liberal (libertarian Constitutionalist in today’s vernacular) – but this doesn’t mean I agree with abolishing the Fed as many libertarians do. Being free means we ought to discover what is true (and that means sometimes agreeing with the opposing ideology). It means that I believe that the solution to our problems involves the degree to which we are made free (and the answers are not always obvious). Economic freedom is a very large component of that – and is why America has prospered so greatly over the past 200 years -and is why America changed the world from one that revered Monarchies and oligarchies to representative democracies. I believe very strongly in sensible government spending – but this belief doesn’t mean I think we should abolish the Fed, nor should we go back to a “gold standard”.

  • Cullen Roche


    Govt bonds are the same safe assets MM says there aren’t enough of. When you guys figure that out you’ll see where many MM ideas go astray.

  • Suvy

    I view gold as an alternative form of cash, so I agree with you. That being said, cash can be smart to hold on to at certain times. Honestly, I think the best hedge against inflation are productive assets. So highly inflationary times almost always benefit the very rich and the middle class usually gets wiped out.

  • Geoff

    Who said deposits don’t fund loans? I think it is JKH who coined the phrase “loans create deposits but deposits fund loans”.

    Banks are in the spread business. They need cheap sources of funding, like deposits, so they can make a profit on their loans. Your friend was probably emphasizing the CHEAP part. If he can’t borrow at a low rate, he won’t be able to find profitable loans.

  • Cullen Roche

    Banking is a spread business. Banks want cheap liabilities to maximize their spread. But banks don’t literally lend out deposits. They simply want deposits (or other cheap liabilities) to maximize their profitability.

  • LRM


    If a central government never has to balance its budget, ie, the quantity of tax collected will always be less than the quantity of government spending, why bother with a budget and why bother with taxes?
    Do you have any examples of societies that have survived long term with a steady natural rate of growth using a system that does not require a balance of budgets?

  • Cullen Roche

    Yes. The same hyperbole used by one side is often thrown back in the same manner by people on the other side. That’s unfortunate. It’s not dopey or idiotic to question govt actions. It’s only dopey if you question it from a misinformed position.

    Ultimately, this is a discussion about the right size of govt. And neither extremist view is right…..

  • Geoff

    The USA. :)

    Seriously, I’m actually a small govt guy. I would be OK with a law that limits govt spending to a certain percentage of GDP.

    So deficits would still be possible, but more likely through lowering taxes.

  • Geoff

    BTW, there is a general perception that govt spending is out of control but check out Cullen’s recent post on the topic. Govt spending has actually remained fairly stable as a percent of GDP. It has been the deficit that swings around, mainly to compensate for what’s happening in the private sector.

    You could even say that the govt deficit is endogenous (at least partly).

  • Johnny Evers

    That’s the critical point, imo.
    Median wages have been flat for 25 years because our purchasing power is eroding.
    People who are good at the game of buying and selling ‘financial assets’ do well, partly because government creates reserves or buyouts to support those assets.
    In the financial crisis, real assets like real estate plunged in value. Labor’s value fell. … But government policy propped up the price of financial assets.

  • Vincent Cate

    Well, not always gold. Often instead of gold people have switched to some other currency, like the dollar. Clearly you can’t switch to the dollar if the dollar gets hyperinflation.

  • Vincent Cate

    The point is that early on they use something else as a store of value but not as a medium of exchange. Often they do this even when it is illegal or “black market”. This way you only have to trust the guy who is changing the money. Eventually what they are using as a store of value can also replace the local currency as a medium of exchange, again, even if it is illegal to do so. When all those who follow the law go broke, then only the black market remains.

  • Suvy

    It’s already happened in India.

  • Greg

    Sorry bout that, it took a while for my first response to show up so I thought it was lost

  • Geoff

    Are you comparing India to the USA?

  • http://pragcap Michael Schofield

    I don’t see any collapse but I do see a red hot market. Of course Cullen’s probably right. But if he isn’t, the S&P won’t go to zero overnight. There will be plenty of time to buy gold if it is needed (ha). Smart people stick with what’s working.

  • Vincent Cate

    Do you think India operates under different economic principles than the USA?

  • Geoff

    All I know is that the USA is the word’s biggest producer and everyone wants US dollars. India, not so much.

  • Greg

    Now its obvious, Morgan Warstler is Scott Sumners alter ego as has been suspected (by Mike Sax I think). Only Scott Sumner himself would anoint Scott Sumner THE pinnacle of economic thinking.

    If Morgan is in fact his own man then I must question his intelligence (I have always thought that despite other flaws Morgan was a bright bulb), since he elevates Sumner to “pinnacle of economists” status and Scott Sumner doesnt understand that something priced at 100 cents and something priced at 1$ are actually priced the same!!

  • Cullen Roche

    Do you think Peyton Manning and Cullen Roche run a 2 minute drill differently?

  • Geoff

    I bet Cullen Roche could run way faster than Peyton Manning. How such an awesome QB can be so slow and seemingly unathletic is beyond me :)

  • Billiejones

    Can you please expand on this Cullen? ….I mean beyond posting a link to your papers. Call me lazy but I simply don’t have time to read them all the way through.

    It seems as though you are arguing a technicality here….i realize that there are sources other than deposits for banks to access…..but ultimately it seems that the vast majority of banks loans are indeed funded by deposits……after the fact or otherwise.

    When i was completing grad school my capstone project was consulting for a small community bank (6 branches). Maybe they weren’t yet enlightened by how the banking system really works but consistent with Joe’s anecdote they were very focused on attracting low cost deposits and managing NIM.

  • Cullen Roche

    You disagree with me? I’m shocked! :-)

    Your arguments are always filled with contradictions. The rich pay the vast majority of the taxes in the country so they’re the ones funding the majority of the “hock”. The top 20% pay over 60% of all taxes. And the top 40% pay over 80% of all taxes. So what’s the big fuss from you about? You act like the little guy is just forking over the bill to the rich. That’s not the case!

    You keep saying the USA doesn’t produce anything. That’s bull. We produced more output in the lats 15 years than we did in the entire previous 200 year history of the USA.

  • Billiejones

    “I am here and I spend my time investing in people and things that make life worth living.”

    – So you invest purely for altruistic purposes? Why not start a nonprofit or better yet join a monastery if the only investments worth owning are those that give you warm fuzzy feelings? I don’t want to come across as a jerk because i genuinely like you, but in all fairness this is similar to the criticisms you leveled at Maloney’s video. You do profit from Orcam financial don’t you? You are encouraging us to accept a economic theory that you directly benefit from through Orcam management fees, no? To be clear, i think its great that both you and Maloney have businesses and profit from your efforts as I do mine….but its a bit silly to call the kettle black or play holier than thou. If you had watched it all the way through and recognized it for what it is (a super simplified way of explaining ONE accepted view of the banking system) then i think you would realize that Maloney indeed agrees with many of the points you make. He says in the video that money is created by banks, not the fed. Nitpicking what constitutes “money” is missing the point IMO.

    Anyways I appreciate all of your work Cullen and as I said I do genuinely like your style, but I think articles like this where you focus on arguing irrelevant technicalities (i.e.: he has a different definition of “medium of exchange” therefore all of his points are invalid or snake oil salesman pitches.) detracts from the real value of you Blog. JMO.

  • Billiejones

    Its not like Maloney has a monopoly on gold or silver…….its a commodity. People can purchase from ANY dealer they wish….or not purchase at all.

    How is this any different from Cullen creating a Economic THEORY: MR (of which there are several other theories, all attempting to explain the same phenomena) and also profiting from those that wish to invest in or subscribe to his theory via Orcam Financial? This site is plastered with Orcam ads for god sakes. I dont knock Cullen at all for it, i think its great and he should continue. I do however recognize the hypocrisy in calling someone a Snake oil salesman or insinuating lack of integrity for pitching a particular investment strategy (as narrow as it may be) when Cullen is doing the same thing.

  • Cullen Roche

    These people are selling fear, monetary collapse, dollar collapse, economic collapse and then using that to claim that people should pour their savings into the physical gold and silver that these guys sell at a huge mark-up. Are you seriously comparing my business model to that business model? How can you honestly say they’re remotely similar??? My business is a fee only advisory firm. I probably could have made a lot more money if I’d just gone to a big Wall Street firm and worked 80 hour weeks selling their products. But I couldn’t bring myself to work under what I thought was a business model that didn’t really serve the client. I basically sell understandings and principles. I sell a way of thinking about the world. In fact, if you do a portfolio review with me I’ll tell you point blank that the main goal of the process is to ensure that you are NOT a repeat customer and that you don’t pay management fees ever again in the future. It’s a business model designed around the client and not maximizing my revenue. Like everyone else in the world, I have a particular expertise and I sell that expertise to other people. You do it in your work and everyone reading this does it in some capacity. Is my expertise altruistic? I don’t know. I believe the principles I sell are objective and about as unbiased as you’ll find in this field. But I could be totally blinded by my own biases.

    Frankly, I find it pretty absurd that you’re comparing my business with the one in the video. Their business is selling fear, hyperinflation, the end of the monetary system, a conspiracy theory and bunch of poppycock. I find it hard to believe that so many people take their ideas seriously and I just think it’s absurd to compare my work with anyone who espouses this sort of nonsense. I’ve been debunking this garbage talk for years now. You discredit yourself when you defend this sort of nonsense when these people have been spouting the same nonsense for 5 years straight. Buy gold, buy silver, sell bonds, sell the dollar, sell stocks, the world is ending, hyperinflation is coming. And then people defend their views because gold has rallied. Sorry, but that’s just a load of crap.

    In my opinion, the idea of investing in rocks is just misguided. It is fundamentally wrong and I think it’s a view that people should reject. But hey, I am an optimistic person. And I happen to like most of the human race. So I prefer to build a framework for understanding the world that is built around investing in other people and helping the world make progress.

    No one has to believe anything I write here. But that’s the beauty of it. I lay it out there and let the reader digest the evidence. I could be totally full of shit. I don’t know. You decide. No one’s perfect. And no one’s perfectly altruistic. I have never lived my life purely to make a lot of money, sell gimmicks or end up the wealthiest man in the graveyard. In fact, if there’s one thing I can guarantee you it’s that I’ll probably never be outrageously wealthy because I don’t believe in hoarding an unnecessarily large amount of personal financial wealth.

    As I said, I am sure that the people who made that video are good people. I just don’t believe in the principles they sell. That doesn’t make one of us good and one of us bad necessarily. So don’t take my comments as a negative personal attack on anyone who owns gold or believes in gold. And sorry if they come across as offensive. That was not my intent.

  • Cullen Roche

    You’re now comparing my business, which is a fee only consulting firm, to a business that ONLY recommends gold and silver that is purchased from them for a 6-8% mark up? You’re comparing my views, which have been pretty optimistic and objective to the views of people who claim the system is literally a scam that is about to implode on itself? Are you serious?

    Plus, no one buys any theory or ideas from me. It’s totally different. In fact, my MR paper is online free. All of the educational resources I offer are free. I don’t make any money off of them. My actual business has very little to do with economic theory. In fact, almost all of the revenue I generate comes from portfolio consulting so it really has nothing to so with MR or what I usually discuss here on the site. People come to me because they think I have some financial expertise and they want advice. And I give it to them for about a tenth of the fee they’d pay at the average Wall Street firm. Is that really the same thing as selling bars of gold at a huge mark up for commission? I certainly don’t think so.

    If people want to bad mouth me for creating a certain view of the world that I think is right and then describing that view to the world, then be my guest. I could be wrong. And if I am I hope I am smart enough to reject my own views and change course….

  • John Daschbach

    If you step back and work out the money multiplier view and Cullen’s view you find they are really the same. It’s a semantic distinction. You can understand this by writing down a simple 3 agent model with a single bank and two non-bank economic actors. Starting from either viewpoint, the differential equations you derive are exactly the same. Money creation is a dynamic process, but in a real sense an illusion. Money has no real economic value (this is pretty much true for Gold [it does have some economic value, but for most purposes other metals are better] as much as dollars), therefor the integral over money has to equal zero at all times.

    You can create a mathematical system where all real productivity is exchanged in real time (tau -> 0) for consumption derived from simply taking the world we live in and taking the limit of tau -> 0. Money goes to zero.

    In some sense money is an economic fiction, but a very useful one.

  • Cullen Roche

    That’s not correct. The money multiplier model is based on a fixed reserve quantity. That’s not how banking works. Banks are not reserve constrained. They make loans and find reserves after the fact. If the banking system in the aggregate doesn’t have the necessary reserves then the Fed supplies them.

  • Eric Webber

    Agreed, and I do not know exactly what the “right” size is, so I error on the side of the constitution, which also happens to be the law of the land. For me it is a question of optimization, as opposed to one of alarmism. While I believe that government spending and the size of government has been too large on average over the past 50 years, it does not mean that I should resort to alarmism and try to convince the public that a catastrophe is imminent. The US has produced more wealth in the last 50 years than the rest of the world combined over its entire world history – because we were among the most economically free nations the world as ever seen. So, while I believe that government spending is too large, I still believe that we will prosper going forward. I just do not think we’ll prosper at an optimal rate – but life for Americans will still be very good. And I sure as heck will not listen to snake oil salesmen who would have me buy into one of the largest asset bubbles the human race has ever seen.

  • Vincent Cate

    Sure, the timing will be different. But the same mechanisms that make inflation in one country work in others.

  • Cullen Roche

    Here’s a great example of the difference in our business models. My average consulting fee is 0.2% and I show the client how to avoid ever paying fees in the future and never charge a recurring fee. I just went through the ordering process for one of their bars of gold and they charge a 6-8% mark-up. You think hedge funds are bad? You think mutual funds are bad? This is on a whole different level….I mean, this is one of my actual areas of expertise – advising clients on how to build optimal portfolios and avoiding the snakes out there trying to rip you off selling products. This is about as bad a fee structure as I’ve ever seen. If these guys were really trying to do people a favor they’d be telling clients to buy the gold ETF rather than selling the physical gold at a 6-8% mark-up. That’s just a rip-off. Sorry. There’s no other way to describe it. The more I look into this the worse it looks.

  • Frederick

    That’s really sad. Is there a worse fee structure in the world of financial products?

  • Vincent Cate

    People in 1987 thought there would be time too. Sometimes crashes happen so fast you will miss your chance.

    If China announces they had purchased options and futures for gold to the amount of $1 trillion in underlying and will be collecting on all of this gold then the price could shoot up in an instant. This would actually be a good move for them. The dollar would crash, China would be the world superpower. Sure, they would have to sell their goods to someone else, but if you are doing vendor financing this is easy.

  • Jim

    Fear sells well. Fear of cellulite. Fear that 800 airbags might not be enough. Fear of merely average educations. Fear that the Chinese will stop paying us to buy their junk.

    There’s a reason every Republican who spoke at the 2004 RNC Convention used film of the Twin Towers coming down as a backdrop. Wisely, someone’s marketing decision trumped someone’s political decision. Even the Democrats, who ordinarily like to focus on a better alternative, went to a platform that screamed, “Hey! That guy is scary!” Fear lost to fear, but not by much.

    Fear sells, and it will do well for me this Holloween season. No overhead, either. I’m not even buying a mask. Now shut up and buy, or I’ll take your family for a ride in my ’57 Chevy, no airbags -_-

  • SS

    Cullen doesn’t tell you one think sucks and then ask that you pay him with it. The equivalent of what these gold people do would be Cullen telling you that the internet sucks on his blog while providing evidence of this through his many articles on the internet.

    These guys aren’t really “scamming” people. They’re just being extremely disingenuous. And as Cullen notes, the fee structure is highway robbery. If they were just educating and being good samaritans they’d tell everyone to buy gold futures or gold ETFs at the current market price and not their rip-off price.

  • Anonymous

    If we have produced more in the past 15 years we should be seeing a big jump in our living standards.
    I didn’t say we weren’t producing stuff, just that the gains are going to the wealthy.
    We had more dramatic jumps in living standards in the 1890s (rails brought costs down, people starting moving off the farm), the 1920s (a chicken in every pot, cars, washing machines) and the 1950s (the take-off of the Affluent Society) than the past 15 years.

  • socal

    i think you bring up a good point (not specifically directed here as i enjoy this site and the education that Cullen offers) but generally speaking when you hear one pundit or another speak about the economy. everyone has a dog in this race, that’s for sure.

  • socal

    he might be selling something, but who isn’t? on that point, the federal reserve, jp morgan, john boehner, tand he entire us gov’t are all selling something; and none of it is done for charity or babies. who is buying and who is selling, that is the pertinent question for me. i agree though that it is certainly worth noting that he has a conflict of interest.

  • Cullen Roche

    Median inflation adjusted net worth was up 30% between 1998 and 2007. It got wrecked in 2009 and we haven’t had an update in recent years, but I presume it’s approaching its highs again which means we’ve actually seen substantive gains in median net worth over the last 15 years. So no, it’s not all going to the rich as you claim.

  • Johnny Evers

    Way to cherry pick data. Up 30 percent between 1998 and 2007 — yay!
    But this is 2013, and as you say, it got wrecked in 2009, so we’re negative for the past 15 years.
    Here is a study from last year that showed net worth for lower and middle-income families hit a *43-year* low.

    Income and net worth have grown increasingly skewed in the past 20 years. Do you dispute that?

  • Auburn Parks

    You sure attract some “interesting” POV’s here at pragcap. Gold-bugs, hyperinflationists, inflationists, “its always just around the corner!!!”, deflationists, its a riot reading some of the comments at times.

  • Auburn Parks

    Lets see Vincent, we’ve been on fiat money in the USA for 54 out of the last 79 years and we’ve yet to experience any serious demand driven inflation, is there a point where you may need to rethink your POV? Or is the fact that hyperinflation hasn’t happened yet jjust further proof that its only days away?

  • Cullen Roche

    You said we haven’t seen an increase in living standards in 15 years. So I used 15 year data. We haven’t had an update on the Fed’s household net worth survey since 2010 (they won’t update it until after this year), but I can piece the parts together from their flow of funds report and that will definitely show an increase in median household net worth since 1998. From 1995 it will have almost doubled. Go back further and the story looks worse and worse for your claim. So no, I don’t need to cherry pick at all. Your claim is just flat out wrong according to the entity that produces the most reliable household net worth data.

  • Suvy

    Vincent is right. It’s just that the “threshold level” is much higher for the US. The US also doesn’t ever need external financing, but the same stuff can still happen here.

  • Suvy

    “Hyperinflation” happens usually once a lifetime. It may not be “hyperinflation”, but a highly inflationary policy may happen. It might even happen with a debt restructuring. Debt restructurings usually happen once in a lifetime, so saying it hasn’t happened in your memory doesn’t mean it can’t happen. The sample set you’re using is too small. Risk lies in the future, not in the past.

  • Suvy

    You’re also thinking this kind of inflation is deman driven. That is a mistake, this kind of inflation is a cost push. This kind of inflation works through the FX market and through asset prices. This kind of inflation works by pushing up the price of productive assets as the currency becomes worthless and imports become very expensive. This kind of inflation completely wipes out the middle class.

  • Suvy

    That’s the way to do it. Take something someone says that you disagree with where they may make valid points and call them nutcases. How nice and wonderful of you.

  • Geoff

    It looks like JE and VC have found their 3rd Amigo in Suvy. What mechanism? You mean the velocity of M might some day go ballistic? All 3 of you have been around here long enough to know that “M” (as in the Monetary base) is just a facilitating feature of the system. Therefore, there is no Velocity of M. The term is meaningless.

  • Vincent Cate

    The world has not seen these kinds of debt and deficit numbers in the G5 countries since WWII. After WWII the deficit was eliminated because most of the spending was on the military which was cut way back. Hyperinflation happens with the kinds of debt and deficit numbers that Japan and the UK have. The USA is close to the danger zone.

    I have been interested in hyperinflation for around 4 years, but not 54.

    Suvy has taken care of other stuff.

  • Geoff

    VC, do you realize that the US deficit to GDP is probably below 3% as we speak and could easily drop to 2% by next year?

  • Billiejones

    I think you are missing the point here Cullen. EVERYONE thinks that the services they offer provide more value than the competition….EVERYONE in business thinks that their particular niche product or service is the best at that respective price level.You provide very good info and while i haven’t used your Investment consulting services, im sure they are top notch as well……but realize that the wall street firms you claim you are competing with would say that the value you provide isn’t even in the same ballpark (whether it is or not is irrelevant, the point is perception). They would claim they offer nationwide physical locations, execution services, trading platforms, analysis, nationwide recognition, trust services, wire services, administration services and many other products. Value is in the eye of the beholder. To be clear, i happen to agree with you that the investment services offered by the large banks are WAY overpriced (especially under $1M) and incentives are not aligned well, but thats just my perception….its all relative.

    Maloney is offering services no different than yours. He provides his version of educational services for free as well( just like you). Did you pay for the video you watched? While you or I may not agree with the conclusion or points in those articles/videos etc., the same could be said about your services, or anybody else’s for that matter. You are making the mistake of assuming that your paradigm is the correct one and that anyone with a differing paradigm is wrong or pitching low value services etc. To be clear, Im confident that everything you do is top notch, the quality of info on this site is excellent……..Maloney believes his is excellent too…….as does the large Wall street firm. Im not trying to beat a dead horse , but frankly you are better than this. The value of your blog is that it is open-minded and willing to entertain opposing views at a higher intellectual level by arguing facts. Nitpicking technicalities, overlooking the actual point of Maloney’s material, and failing to actually watch the entire video before disregarding the conclusion based upon silly technicalities is below the standard that I have become accustomed to on this site. I don’t agree with everything Maloney says, or you either for that matter but i would expect that you would attempt to understand the material and argue the points in an intellectually honest way before making sweeping generalizations or making accusations while assuming that your own business practices are any better. (BOTH of your business practices seem above board to me)

    If we are to believe Maloney, he sells PM’s and uses profits to reinvest in PM’s…seems consistent with his message IMO. If we are to believe you, you advocate a certain portfolio mix, (maybe in line with MPT?) likely consisting of equities, private placement deals, bonds, some cash etc. Should we disregard you as a snake oil salesman if you accept anything other than diversified portfolios as payment? You do accept cash for your fees right? and then subsequently invest them in your own portfolio according to your own risk tolerances right? Maloney believes Gold is HIS optimal allocation…….you think he’s wrong, he thinks your wrong……News flash you are likely both wrong …as am I. Show me an economist/Financier/Investor that thinks his assumptions are always right…..Ill show you a fool.

  • Vincent Cate

    While it is true that the velocity of money is usually calculated it is a real thing with a real meaning.

    We also know that the velocity of money depends on interest rates and inflation rates.

  • Auburn Parks

    You are literally talking nonsense. Nothing either of you has said has any basis in reality. Nor is any of it going to happen. But keep beating your heads against that wall while we point and laugh at you.

  • Auburn Parks

    Suvy, if anything that you ever said here resembled reality in the slightest, then I might take you seriously. Alas, you seem incapable of living in the real world and seem to prefer to look at the world through some fantasyland colored glasses.

  • Odie

    That chase is the actual driver for economic growth and will probably be the undoing of our monetary system. If you have a real return of $100 (for example $100 at 3% after inflation for 23 years) you can now purchase for $100 more goods and services that you could not do before. The only way to do that is when the economy has increased output through enhanced productivity and/or more workers. That means in a way we are all forced to work harder and harder because some guys invested capital decades ago and expect now to receive a real return for it. Since capital+interest grows exponentially our productivity will also need to grow exponentially which on a planet with finite resources is not going to happen forever.

    At some point the expectation that you can have a ROI > inflation will fail once productivity is not growing much anymore. There will be a hard awakening for people who relied on compound interest to have a comfortable retirement. In a sense, financial advisors (not meant personal Cullen) are selling the illusion that we can always grow productivity and that exponentially to boot. Highly unlikely IMHO. Unfortunately, I have the feeling we are probably close to that break-off point so it will be us who get handed the short stick.

    P.S. That is where Vince and Suvy miss the boat about the problem with our monetary system by focusing on government debt or Fed reserves.

  • Billiejones

    WOW, I hope you aren’t serious. Everything is relative. charging 0.2% as low as it may sound can also be highway robbery…..its all relative. O.2% on a $10m account would be $20k. Indeed a paltry fee…….but it depends on the level of service you provide. I dont expect you to detail anything here, but for example if your “value add” is showing people how to diversify via low cost ETF’s then you too are taking advantage. taking the “vanguard approach” is a genuine and solid strategy for the appropriate clients, but its also a strategy thats available for free all over the internet with minimal effort. Im sure that you are providing more sophisticated advice, but the point im making is that it is all relative.

    As for the 6-8% premium gold, with the exception of buying 400 ounce london good delivery bars I would challenge you to find another physical source where you can buy at spot price. 8% is indeed high but not the exorbinant prices you claim…..ALL small denomination PM’s carry premiums and a PORTION of that premium is generally recaptured on sale as evidenced by the “sell to us” options on most dealer sites.

    As for ETF’s they are a great option if you choose the right ones, they carry premiums and have associated fees as well though….i’m sure you knew that. You are making some sweeping generalizations about a market you clearly haven’t spent much time researching…. which is fine, but as I say I have come to expect more from you. I dont know how to fix cars and I wouldnt presume to tell the mechanic hes overpaying for his parts inventory.

  • Bond Vigilante

    Still stuck in “Hyper-Inflation” mode ?

  • Paul

    How much of the public debt really owned by the private sector?

    In other words, is anyone’s grandma really stupid enough to own T-bonds?

  • Geoff

    Good point, Paul. Grannie don’t own too many Tbonds but other parts of the private sector do like mutual funds, pension funds, banks and insurance companies.

  • Odie

    Maybe I can take a stab at it. Imagine someone comes in for a mortgage loan. The bank creates the loan and the corresponding deposit in the customer’s account. Then the customer buys the house and the deposit gets transferred to another bank. Now the bank is short on reserves because it still has the loan but not the deposit. If it cannot attract more deposits it will have to borrow the required reserves from another bank or the Fed which will reduce the interest spread between the mortgage loan and the loaned reserves. Hence, the bank will have lower earnings. Any bank will therefore try to attract low-interest deposits to avoid paying higher interest on borrowed reserves.

    Nevertheless, at the time the mortgage loan was made no one checked the bank’s deposits to see if there were enough excess reserves available to make the loan. Or have you ever heard of someone who was told by a bank:” Sorry, we don’t have enough money right now to make the loan.”? That’s what is meant by “loans create deposits” not vice versa.

  • Cullen Roche

    I think you missed my point. I fully understand that these gold sellers think their message is right. I am simply providing an explanation of the basic components of their message that I think prove their message wrong.

    You clearly don’t agree that it’s wrong. That’s fine. I embrace the fact that people can come here, read the info and reject it if they want. I am not selling an ideology. I think my views are right obviously. But you’re free to disagree.

    Personally, I would be very concerned about buying into this whole notion that high inflation is coming, the USD will crash, the whole monteary system is a scam, etc. But that’s just me.

  • Auburn Parks

    Here’s a good breakdown:

    T-bonds are a necessary part of the world’s US dollar savings portfolio.

  • Jboy

    Cullen you do bring up some good points for sure.
    As for holding part of a guys portfolio in rocks does kinda suck. But also getting involved with a market at it peak or close to, with Jp Morgan constantly in the media paying fines. Kinda freaks a guy out with the high frequency trading, algorithms, derivitives. also the growing number of people on food stamps. I’m just not sure I’m feeling this recovery. I actually hope I’m wrong and everything picks back up. But already a loss in 23 billion over a Minor government shutdown and now there is going to be no taper this year. After 6.5 trill has been used already. I haven’t loss faith in humanity either just trying to cover bases. Also why is the federal reserve even needed why doesn’t the treasury just print it’s own money interest free.

  • Geoff

    I wouldn’t say “necessary” but there is certainly a dearth of other safe fixed income assets out there.

  • Odie

    The wealth of a society cannot be money as any monetary asset carries an equal monetary liability (debt) on the other side of the ledger. From a balance sheet perspective those monetary assets and liabilities add up to zero. Thus, the net worth of our society are the material and immaterial goods and services we produced using that money. Things like houses, cars, tools, but also education, health(care) etc. When we want to grow as a society we need to grow those assets. Our focus on money is completely misguided. It is like believing owning a stove is the ultimate goal and forgetting that the food you are cooking on it is the really important part which sustains you and your family.

  • Cullen Roche

    I said “average” billie. Regardless, I don’t charge more for higher accounts so even the $10M account doesn’t come close to paying $20K to me. That would be absurd. So no, don’t go accusing me of “highway robbery” just because you’re using the same extremist tactic that the video does to make a point….

    If buying physical gold always costs 8% more than buying futures or ETFs then I don’t know why any sane person would deal with that. That’s a rip-off. There’s no other word for it.

    I think you’re trying too hard to defend the indefensible here. You seem to advocate some of what the video says even though the video is pure unadulterated fear mongering and is filled with inaccuracies. If you want to defend that then fine, but don’t expect me to. I’m not holier than thou, but it is a little insulting to compare a guy selling fear and 8% marked up gold to someone who runs a low fee consulting firm teaching fairly mainstream macro econ and investing principles. They’re apples and oranges.

    I think your comments are extremely unfair and an attempt to rationalize a view of the world that has been thoroughly disproved for years now. Look up the history of Maloney’s views. He’s been predicting the same nonsense for years. It’s all been wrong. The hyperinflation never came. The inflation never even came. The dollar collapse never came. The system never collapsed.


  • Auburn Parks

    Necessary in the sense that at the end of the day those excess reserves created through deficit spending must be deposited into securities accounts at the Fed if they want to earn interest.

    Necessary in the sense that pension funds are generally required by their charters and statutory frameworks to hold at least some default risk free financial assets

    Necessary in the sense that SS must put the excess funds into T-bonds by congressional decree

    Necessary in the sense that some foreign Govts want to maintain a somewhat fixed currency relative to the dollar to maintain their domestic employment and export policies.

    Necessary in the sense that financial institutions use them as collateral when transacting.

    Necessary in the sense that there are still plenty of people that choose to put their money into T-bonds because they are risk averse and simply wish to guarantee a nominal value for their savings and usually a real positive or at least close to neutral position on their savings.

    So sure, if you ignore all of the above, then maybe T-bonds aren’t a necessary part of the world’s US dollar savings portfolio

  • BillieJones


    Good explanation, Thank you.

  • Auburn Parks

    The Fed is the nation’s bank. It is the bank of other nation’s central banks. The Fed is the commercial banks’ bank. It is a clearinghouse for the trillions of dollars worth of transactions that occur between individuals and thus their banks daily. Its there to ensure smooth operations between the banks and to guarantee that all bank money clears at par with each other and with US Govt money. It is there to set the benchmark interest rate. The Fed is there to be a provider of liquidity when necessary and to support bank lending expansion. The Treasury could just create its own money, but then the Fed would lose control of the Federal Funds interest rate. Maybe you think that would be a good idea, but the above reasons are why the Fed was created by Congress in the first place.

  • Geoff

    Haha, all good points, man. :)

  • Cullen Roche

    Thats not right. The pvt sector has a substantial net worth that is represented by govt net financial assets in addition to shareholders equity, etc. We’re talking $100 trillion dollars here in net worth….the expansion of this is not misguided at all as it is the cornerstone of the tool that gives us access to real goods and services.

  • BillieJones

    Quite Sad. I think anyone following this thread will see the hypocrisy in your statement. Maloney sells a service with a particular view and you slam him for it… sell a service with a particular view and its holy….Ok got it. Im no Maloney apologist but hypocrisy is a sticking point for me. Good luck to you.

  • Cullen Roche

    You’re absolutely apologizing for him….That’s all you’re doing here. You’ve spent the last few comments trying to convince other people here that my business, which is a fairly boring fee only consulting firm that sells no in-house products, is somehow comparable to a business that is based around selling the collapse of the monetary system to people.

    How can you actually believe that? I find that very hard to believe. And frankly, the “sad” thing here is that there are so many people out there who, after years and years of this nonsense being disproved, are still gullible enough to believe in it. And you’re here defending them and trying to tear me down when I’ve been the who was right about this stuff and has maintained for YEARS that hyperinflation was wrong, that silver was in a bubble, that stocks and bonds would do well, that the system wasn’t collapsing….And yet you demonize me? Why?

  • Vincent Cate

    Bernholz wrote the best book on hyperinflation. He used deficit as a percentage of government spending. His number is deficit over 40% of spending. The US got up to this level but has come down some.

  • Morgan Warstler

    Cullen, MM is totally comfy never buying a single govt. bond. It he NOTHING to do with what gets bought, I know this, bc I care what gets bought, and from whom it gets bought, and Scott? he could care less.

    And let’s remember you’re the weirdo who acts like law today is law tomorrow.

    Try and be super clear, it makes you sound more confident.

  • Cullen Roche

    Honestly, I am shocked that anyone would attack me in this manner for highlighting some basic errors in what is clearly an ideological fear monger video….

  • Morgan Warstler

    Geoff, c’mon dude, maintain some intellect integrity.

    You wanted to argue the “need” for govt debt – by making it the opposite side of the private ledger

    I said, let’s model no govt debt – hey it WORKS! works just fine.

    I said, Geoff, you WANT govt debt, but that has nothing to do with being NECESSARY.

    SO, you have now admitted govt. debt is not NECESSARY, it is simply something you want, or don’t mind etc.

    The point here is having political / self -agency wants has NOTHING to do with your wants being necessary.

    Let’s say it clearly, Geoff’s goals are not necessary.

    Now we’re further along.


  • Morgan Warstler

    Govt. spending has not remained stable, if Cullen suggest it, he’s an idiot.

    19% of gdp revenue = 19% of gdp spending = STABLE . Any extra spending, is to some degree less stable.

    BC the fiscal multiplier is nearly always < 0

    And MP Always moves last –

    CULLEN, it'd be great is you got this… what Scott is really saying doing is SINCE Fed gets whatever it wants…

    ANY govt debt, any fiscal overspend, is negative.

    He's a tricky sum bitch.

  • Geoff

    Morgan, Net Financial Assets come in three forms (cash, reserves, treasuries). What I’m saying is that you could switch the treasuries into one of the two forms.

  • Geoff

    other two.

  • Auburn Parks

    With no Govt infusion of Net Financial Assets, how would the private sector satisfy its desire to net save?

    You are completely ignoring the cyclical nature of endogenous money. Sure we could live in a world where there were no injections of financial wealth by We The People, but why would we want to live in that world? Your model wouldn’t be drastically different than the reality that was the gold standard. The busts would be full on debt deflation events aka depressions. Just like the 6 depressions we had prior to the Federal Reserve and finally fiat money. You model is bad, and so is your logic and apparently you want your fellow countrymen to suffer. We need Govt to provide debt free (from the private sector POV) financial wealth.

    Lets face it, Morgan’s goals are bad for society, he wants the people to suffer.

    Moving along, thanks for playing.


    See how easy that was to turn your own silly words around on you.

  • Odie

    I said society, not private sector. Sure the private sector is positive but only because the government is negative (and neglecting foreign asset holders). All monetary balances of government, private sector and foreign sector add up to zero. (I define monetary asset as an asset that can only be exchanged for a fixed amount of $.) And you don’t need to put the value of a real asset in $-terms for it to have a value. Take an apple, it can feed me and maybe sustain my life for another 24 h. If its value is $1, $10 or $100 is irrelevant. Same for a gallon of gasoline; it can propel my car for ~25 miles whether it cost me $1 or $4. When we want to grow the assets of our society we want to plant more apple trees or find more oil. Just increasing the size of the $-assets will do nothing if output stays the same.

    Money is useful for creating demand and exchanging assets but at the very end only those real world assets will count and give money value. If there is nothing to exchange it for even 1 billion dollar will have a value of zero.

  • Auburn Parks

    Yeah and did his book take account of the supply of endogenous money? Was bank money expanding or contracting at the time? If there was no net private debt expansion. We would by definition have deflation since both productivity increases and population growth or inherently deflationary. So to stand pat, from a money supply perspective, is to have deflation. This is all so simple Vincent, maybe its just time for you to give up.

  • Cullen Roche

    I dont think NFA are necessary, but the financial system would be a lot less stable without them. Its like the reserve system. Its not necessary, but.banking would be a lot less stable without it….

  • Vincent Cate

    Hyperinflation is defined in terms of price level inflation.

    As hyperinflation starts, bonds crash. Banks no longer make long term loans. Maybe 14 days is the most you can get. So “credit and bank money” crash as hyperinflation starts. So if you define deflation as the money supply (including bonds) going down, then you will say there is deflation even as 99% of the people say there is hyperinflation.

  • Geoff

    Right. I know its dangerous to say things like “the private sector can’t net save without a govt deficit” because it sounds too M M T but sometimes it’s helpful to frame it that way when people are overly concerned about the govt debt.

  • Auburn Parks

    Cullen, I would think that the evidence of depressions following sustained surpluses throughout the history of the USA would leave the burden of proof on you to explain away the historical evidence.

    Obviously, Govt surpluses with a corresponding trade surplus are different. But with a trade deficit, again the burden of proof is on you to show why the sectoral balances graph should be discounted.

    On a side note, lets do some reductio ad absurdum;
    What would be the likely outcome if the Govt ran nothing but surpluses every year forever? And all those trillions of dollars just accumulated on a Govt computer spreadsheet to never be used again?

  • Morgan Warstler

    Auburn you are intellectual weakling.

    MY GOALS and YOUR GOALS are not issues.

    What GEOFF prefers?

    No issue.

    My only point here has been since beginning…

    NONE OF YOU, including Cullen, are doing ANYTHING other than taking your personal preferred social / political outcomes and posturing as monetary theorists.

    I win, the moment you mention MY GOALS. (that’s why I talk like I do, to break your BS and make you admit you are just and stupid sociologist.

    Don’t take it personally….

    In less than 2 sentences, I forced Mosler into being a sociologist.

    HINT: the way you can tell a real economist is by how quickly they break down and get pissed when your alt.theory screws their social goals with their pants on.

    It’s just me as King Solomon.

    All I do is craft econ policy which forces poseurs into submission, I essentially threaten to split the baby in half, and the ones who hold desperately onto their econ goals, are liars, the ones who say “fine take the baby” – they are true.

    If you REALLY believe what you believe about econ, you wont mind it when a giant asshole shows up and starts preaching about why achieving his goals is important.

    None of you believe anything about econ, you are all just desperate to gain more status than you have now.,. its ugly.


    Hi Cullen,
    I have a similar discussion on my forum and I replied to your post there (site is I agree that this video has several flaws but I would disagree on 2 things: when you sell something, of course you will have conflict of interest and will want to promote your product by different ways. You promote (indirectly) your services via this blog and it is ok! I do not see any problem with selling precious metals and doing movies to sell their products. The second thing is that you stand to protect current financial system: it is fraud, pure fraud. In every language it is called something for nothing but in English it is called Federal Reserve banknote (or dollars), if I can create something that does not cost me anything why would someone want to accept it? Why would someone has to be pushed to accept it by force? You should exchange value (a product or service) for value (another product or service) not for faith or promise of some kind. Anyway, in my financial forum i discussed what i think about current financial system

  • Auburn Parks

    One more thing, I would just respond to you in the same way. Sure, its not technically impossible for the economy to operate without deficits by the Govt (in our current trade deficit environment), but why would that be a world we should wnat to live in?

    Just like we could do away with the Fed, the economy would still go on, America wouldn’t end, but why should we want the most likely negative consequences that come with that reality? Its not necessary to life for the Fed to exist.

    Sure, we could go back an Articles of Confederation like Govt structure, its not necessary to have our current Constitution to exist as a land mass with people in it, but why should we want this scenario? Its not inherently necessary to have our laws organized under our current US Constitution.

    We could have the state own all the means of production, the sun would still rise in the east and set in the west. America would still be a country, but why would want this. Its not necessary to have our specific form of capitalism.

    In the sense that our current way of life is as good as it is, all of the above, and Govt deficits are necessary.

  • Cullen Roche

    For instance, the pvt sector was in deficit from 95-07 in the USA. It can happen, but it contributes to instability.

  • Morgan Warstler

    also IT IS WRONG. No econ model of worth requires govt.

    If you can’t figure MP w/o govt – you are NOT and economist.

    Don’t care about your preferences. LET GO, you don’t matter.

    If you can’t do it, you are not doing econ.

    Econ doesn’t need got. not in theory not in practice.

    Generally your econ theory has to be able to SUSTAIN govt. messing it up – see anti-fragile

  • Morgan Warstler

    Dear weirdo, 95-97 were AWESOME for economy and politics.

    Think BEST time your life has ever seen.

  • Cullen Roche

    Morgan…I was agreeing with you.

  • Auburn Parks

    As usual Vincent, your interpretation and description is wrong.

    Inflation or deflation is the positive or negative change in the price level at two different points in time.

    Productivity increases raise the quantity of goods and services for sale ceterus paribus. If the money supply stays the same, by definition we have deflation.

    Population increases raise the quantity of goods and services for sale ceterus paribus. If the money supply stays the same, by definition, we have deflation.

    during a private sector debt deflation, the money supply shrinks in the aggregate. Assuming the decrease in production of goods and services due to laying off workers is less than decrease in the money supply, again by definition, we get deflation.

    If the private sector creates $1 trillion in net debt (and all that money is spent) and the Govts budget is balanced, and we produce 1 billion widgets. The price level is $1000.

    Now say the private sector creates $0 in net debt but the Govt creates $1 trillion to buy all 1 billion widgets. The price level is exactly the same.

    It doesn’t matter where the money comes from. Cash registers, or the price level don’t discriminate.

    Thats why you can never look at either thing in isolation. Is the Govt deficit too large? I don’t know, what’s the private sector and foreign sector doing?

  • Auburn Parks

    Cullen, I never said the economy couldn’t ever have the private sector in deficit, only that its an outcome we should try to avoid due to the after effects that have historically followed.

    But one thing we can logically conclude. The private sector could never be in deficit permanently. Eventually they would run down their financial assets and run out of money and the whole system would collapse.

  • Auburn Parks

    Yeah, and neo-liberal economics is supposed to be the paragon of intellectual discourse? Economists have just got everything right. Their models are perfect reflections of reality. Do you honestly believe the garbage that comes from the tips of your fingers?

  • Odie

    If grandma has money in her savings account she most likely “owns” indirectly T-bonds. A bank will only pay interest on savings when it can buy some interest bearing asset with that deposit. However, since grandma can take out the money from her savings account at any time that interest bearing asset has to be very liquid and safe. Thus, to manage that risk a bank will hold a substantial part of its assets in US treasuries which fulfill both requirements.

  • Odie

    Did he also check that no other countries got over 40% deficit spending and did NOT experience hyperinflation? Otherwise, that criteria is as good as saying: a cough and fever means someone has the flu. Yes, could be but could also be the symptoms of a myriad other infections.

  • Cullen Roche

    Yeah, but you’re still missing the key point. The private sector has a massive net worth claim against itself and the non-pvt sector. This net worth is the core of the credit structure. When you go to the bank for a loan the bank wants to know that you have collateral that can back your credit. It does not say “oh, sorry, the financial assets of the rest of the world net to zero so you can’t borrow”. The bank looks at its credit and your credit and makes a loan. That’s it. They want to know that you own bonds, stocks, real estate or whatever. Real assets might make up a part of this, but it’s also largely comprised of financial instruments. This is the key part of the credit structure and our focus on it is not misguided at all.

  • Cullen Roche

    AP, I am essentially agreeing with you as well. It is definitely a situation we should avoid because it creates unnecessary instability in the credit system. But there’s no hard rule that says the pvt sector NEEDS govt issued NFA. It helps a lot. But it’s not necessary to have a working economy.

  • Cullen Roche

    Lots of angst in this thread. Understandably and expected. But still – I am actually shocked by the number of people who have compared what I do (or what other reputable advisors do) to what’s being done by the people who made this video. They are selling you fear. They are selling you the concept that the world is going to crash. That the dollar is done. That the entire finanical system is a fraud and a scam. How could anyone, in their right mind, compare what I do to that view of the world?

    Look, it’s fine to believe that the world is messed up. It is. But let’s be careful with the hyperbole about the whole system being a scam or on the verge of crashing. I am not going to twist your arm to believe that they’re wrong, but I think it’s pretty crummy to compare what I do to what is being done in this video. It’s night and day. Maybe they’re right. But you know what – I’ve been debunnking this conspiracy theory hyperinflation nonsense for the better part of 5 years. At what point do people begin to seriously question the judgement of those spewing this nonsense? Ever?

    Frankly, it’s pretty disheartening that so many people continue to be fooled by this sort of stuff. I’m no saint, but these people have been wrong for years and repeatedly prove that they don’t understand basic accounting or basic banking or basic anything. Why do they gain any attention at all???? Is the political message and ideology really that attractive that people can just reject facts in favor of fear? I just can’t understand it.

    Sorry I even raised the topic. It was obviously a big waste of effort.


    You just said yourself why they gain any attention: they create fear.

  • Cullen Roche

    I think it’s sad that people buy into fear. I don’t sell fear. I sell hope in education. Hope in humanity. Hope that we will progress. Hope that the system isn’t the conspiracy theory and fraud that so many think. Maybe I am naive. But one thing I won’t do is peddle fear for dollars….

  • LVG

    “Maloney is offering services no different than yours. ”

    Maloney is not offering the same thing Cullen is offering. Maloney is offering a scam. He’s offering the end of the world. He is relying on people to fall for his lies so he can sell more gold. This isn’t remotely close to what Cullen does.

    Cullen, why do you let these gold bugs post here? They’re all the same. You won’t change their minds. They don’t want their minds changed. They want the world to end. They want to believe the system is a scam. So screw them.

  • Odie

    Cullen, I am sorry but I have the feeling you do not get the really important point about why we actually have an economy. I am talking about the actual ultimate goal for us humans which is to stay alive and reproduce. Our monetary system is only a tool in that quest but many treat it as it would be the goal.

    Money in itself has no value (the same is true for other credit assets). The only point of money is to exchange it at the very end for some real good or service which requires an economy that produces those using labor/energy and resources. Nevertheless, those products are the only things we care about because we need them to support our lives. Ask as many people as you want if they would like to take food, tools or money with them to an uninhabited island. No one in his right mind will choose the money as also no one is taking out a loan to have bigger numbers in his checking account.

    Imagine for a moment that all monetary assets (cash, deposits, bonds etc.) and with it all liabilities get wiped off the earth. Are we back in the stone age? No, because all the goods and the effects of the services we bought with that money are still there. Those represent the net worth of our society. We would get the same scenario if everyone would go and pay back all their debts (neglecting interest and fees). Money would disappear but we would still have a positive net worth. Maybe you can more easily make that point visible for you when you take Tom Brown’s balance sheets, add some purchases of real assets and then pay back all liabilities. Those real assets will be the only things that remain with the labor and material that went into making them as the corresponding liabilities. Those we usually don’t consider; hence the products will be the net worth.

    I understand the importance of money (and credit) in our society to create demand, to keep our economy going and allow the easy exchange of products. But without those products we would not be alive and that is the ultimate goal.

  • Jim

    “Why do they gain any attention at all????”

    They just yell the loudest.

    “Sorry I even raised the topic. It was obviously a big waste of effort.”

    Nonsense. Someone’s gotta yell the smartest.

    Plenty of your supporters see the value of revisiting this sort of thing now and then. No one has a stake in closed minds getting fleeced. That’s what Election Day is usually for.

  • Suvy

    Here’s the problem Geoff, you don’t know the event. What it does is that it makes you more sensitive to shocks(whether internal or external). It increases the possibility (and mainly expectation) of something going wrong.

  • Suvy

    Of course, governments are pro-cyclical when politically beneficial and anti-cyclical when politically beneficial.

  • Cullen Roche


    I think we’re talking past one another or maybe just using similar terms differently. Everything you just wrote is in my paper on the monetary system that I write years ago. We’re not disagreeing that money is a means to an end. What I disagreed with was the comment that our focus on money is misguided or that the “the net worth of our society are the material and immaterial goods and services we produced using that money”. When I refer to net worth I always refer to balance sheet items. Monetary items. Net worth is a financial construct. And it matters enormously for understanding the monetary system, the credit system etc.

    I think maybe what you’re referring to is what I would refer to as true wealth. That is, the real things we find as wealth are things like time, friends, family, food, freedom, etc.

    Anyhow, I think we’re saying the same thing with different terms or maybe I was just nitpicking at your comments in which I apologize.

  • Cullen Roche

    I don’t ban anyone unless they’re really offensive. I provide the site and the comments because I really do think it’s an educational resource where people can ask questions and engage in useful debate that helps everyone. I don’t have all the answers, but I do find it extremely disheartening that this “end of the world” crowd has gained so much momentum and attention. They’ve been wrong for years now yet no one seems to care. It’s terrible. And they’re literally making people dumber by regurgitating the same politically motivated nonsense time and time again without anyone pushing back and pointing out how they’ve been wrong about so much for so long. And then for some readers to accuse me of basically running a business model that is based on the same type of fear based pump and dump – well, that just takes it a bit too far for me to stomach. I mean, how hard is it to see that these people have been selling a myth for years now? These are the same people who have been predicting hyperinflation, dollar collapse, economic collapse, etc for years. And they’re directly benefiting from selling that fear. It’s disingenuous, based on total inaccuracies about how the system works and incredibly destructive. selling gold at a 8% mark up after you’ve spend countless hours scaring the hell out of people with a message about how the monetary system is on the verge of collapse….How is that remotely close to what I do? Being compared to that is just about the worst thing anyone could say to me and proves that they really haven’t taken the time to understand my views, approach or business.

  • Cullen Roche

    I hope you’re right Jim! But I have to be honest. I don’t have a whole lot of hope. I’ve been preaching this message now for almost 5 years and I feel like it’s getting nowhere….It makes me wonder why we even bother.

  • Scam_Exposed

    Cullen, nice post. I’ve followed Maloney’s work for years. He’s been wrong about just about everything. Here are some posts from over the years:

    In 2010 he said stocks were set to crash and hyperinflation was coming:

    Stocks have rallied 50% since then.

    In April, 2011 he recommended buying silver.

    It has fallen 60% since then.

    In 2009 he said bonds were “silly”.

    They’ve rallied 25% since then.

    The only thing he recommends is physical gold and silver and he recommends that you only buy it from his company. He’s a snake oil salesman.

  • Lance

    Hyperinflation cannot commence, or be sustained, without wage growth. Period. End of foolishness.

  • Lance

    Yes, sadly, one increasingly needs hip-waders to navigate the comments on this site. Civil enough (thank goodness), but ignorant in the classic definition of the word.

  • Lance

    No, it wasn’t a waste. It helped to separate those who’s comments I (we) should bother to read from those that are just not worth the bother.

  • Mr. Market

    Another myth. Hyper-Inflation is simply literally printing LOTS of banknotes AFTER the bond market has collapsed. Nothing more, nothing less.

  • Greg

    I think you are doing the right thing here Cullen,

    As far as conspiracies and fraud, fraud is definitely endemic to any monetary system. Theres always the guys who will try and get something for nothing. The free rider problem is huge in all aspects of social living and we spend much of our energies trying to detect free riders and deciding how to punish free riders.

    Conspiracies? Well many try no doubt to leverage their position with the recruited help of others and they work together with plans. Is this conspiracy or coordination? If you dont like what they are doing you call it a conspiracy, if you like it you join in and call it a positive movement.

    One thing I THINK us average guys can be assured of is that the big fish are fighting each other more than they are fighting us. Sometimes their shenanigans threatens to take the whole thing down but very very few want that outcome I think.

    Maybe Im being naive

    Keep fighting the fight Cullen, your goals are noble, unlike Warstlers.

  • Morgan Warstler

    When we compare econ models, we can judge their strength based on the number of conditions necessary to get the story told.

    I’m not saying there has to be no govt.

    I’m saying REQUIRING govt. to make your model work, is a fat ding against your model.

    If your model works without govt. it will work with govt. too. and it will be better than one that requires it to work at all.

  • Auburn Parks

    Morgan, That is some true word salad right there brother. Some pseudo-intellectual spittle. You models about how an economy would work without a Govt are meaningless and irrelevant. There has never not be social structures and institutions in human society. It the definitive cultural adaptation that separates us from the rest of our kindred animals. So go ahead and pretend you models without a govt tell you anything meaningful about a world that does not exist now and never has existed.

  • Mr. Market

    The video:
    – assumes that Hyper-Inflation is inevitable. It isn’t.
    – assumes the USD is “toast”, it isn’t. The US bond market is going to collapse/ be “toast”.
    – assumes the FED is “printing money like mad”. The FED isn’t, when it monetizes debt then it issues MORE credit (!!!).
    – assumes banks are creating “money”/currency. They’re not. they are creating credit.

    – the world is going to crash because A LOT OF debt that investors hold is not going to be repaid. (incl. T-bonds).

  • Greg

    “I’m saying REQUIRING govt. to make your model work, is a fat ding against your model”

    We are ALWAYS going to have govt, it should be modeled in properly, not in some politically motivated fashion.

    Its the models without govt that are STUPID, you think countries of 300 million plus arent going to have a govt?

    Some entity will have the ability to create money from thin air, it must be that way since it is an invention and not a discovery, so the only question is how to model in that entity to your economy.

    You seem to think it better for only the current private owners of capital to have that privilege, that somehow they have earned that privilege.

    Many of us disagree. We’ll see how it all plays out. I’m betting on the people in the long run.

    A great con job has been done (but its now being exposed) convincing people that we have been living in the age of too much economic consideration for the worker and not enough for the owners, when the converse has been mostly true.

    People are seeing their bank accounts, what they actually own and how much they work and comparing it to what the loudmouths actually own and control and saying “whoaaaaa something is wrong here.”

    The same old tricks are being tried. Its the black guys, its the welfare queens or the Obamaphone bots that are taking your hard earned dollar there bluecollar guy, not Mr CEO or Mr shareholder, but the math is not adding up anymore. The amount going to the “welfare” group is pennies compared to the 100 dollar bills being funneled upward, and this is starting to become clear. CRYSTAL

    Its interesting Morgan that you’re here demeaning Cullen and other folks here so loudly. Why?

    Just ignore us. We are dirty fucking hippies

  • Odie

    Yes, Cullen, I was actually surprised by your comment because what I said is not that far off from what you had written before. However, I refer to net worth also as a balance sheet item but on a macroeconomic scale. Take all macro-players in a closed economy (government, banks+Fed, businesses, consumers) and make their balance sheets. Now cross off all monetary assets and liabilities (cash, deposits, bonds/loans etc). What will remain? Only the goods and services we had produced until then plus the resources and labor we can still use for future production. They will not have a $-amount associated with them but who cares? The utility of a car remains the same whether it is “worth” $0 or 1 million dollar.

    That is why I am saying our focus on money is misguided. Any creation of a monetary asset will at the same time create an equal monetary liability. In net terms within a society they always balance to zero. No one can save money if not for someone else who has the corresponding liability. Thus, a country as whole cannot net save money for the future. What we need to do is enhancing productivity while preserving limited resources because those will determine future output.

  • Vincent Cate

    “No one can save money if not for someone else who has the corresponding liability.”

    Gold is nobodies liability. Gold is money. You are wrong.

  • http://pragcap Michael Schofield

    Imagine my surprise. After taking a day off from politics, economics, and markets I come back to this thread, which expressed an idea so obvious that it seemed surely people would quickly tire of it. 157 comments and much of it nonsense. “Who the f*** is morgan worstler?” I wondered. After a few minutes on his website I see that he is just another “economist” with a political agenda, and a rather extreme one at that. It makes perfect sense. Now that the wealth is concentrated at the top, let’s see what can be done to keep it there. How ’bout a balanced budget amendment? And to manage imbalances in the economy? Well, how ’bout this dandy one-dimensional NGDP gizmo? No Sale morgan. Did you ever hear of checks and balances? Do you honestly expect people to have blind trust in the Wizard of Oz as he alone pulls levers from behind the curtain? Maybe you’re new to this country, but around here we like to have at least two parties involved. Google “checks and balances USA. A very deep pile of shit from another self-anointed Christ of the Economy. I’m tempted to call morgan a well-educated and conceited idiot, but more likely he is a conceited huckster. Go f*ck yourself morgan.

  • Suvy

    It’s called a wage-price spiral.

  • Cullen Roche

    Again, I’m referring to financial instruments. Of course you can find a rock, call it money and say you’ve net saved. Unfortunately for you only about 1% of stores in the USA will for payment. So yeah, it might be money, but it’s a pretty bad type of money.

  • Suvy

    For once, I agree with you Auburn.

  • Morgan Warstler

    Ever heard of bitcoin?

    Get off the idea you are talking “economics” you simply hope to use monetary policy as tooll for govt.

    And that’s not economics.

    Here’s another thing not economics, but a fact, none the less:

    Govt. is a tool for the hegemony.

    Money is a tool for hegemony.

    In America, the hegemony wisely pitted the money at odds to the government.

    (If you don’t think the Fed reigns in govt. If you don’t think it moves last, gets what it wants, it is hard to have a discussion. Our most liberal Fed governors, are massive inflation hawks compared to any of MMT “seizes the presses and IRS guys.)

    They could have merged the bank and govt. but they chose not too. Just like they chose not to be a parliamentary democracy.

    But don’t be angry at the hegemony…

    In America the hegemony is the top 1/3. They own everything. The run everything

    You too can someday be part of the hegemony!

    Economics is atomic scarcity, and digital non-scarcity.

    It’s unlimited wants, limited means.

    And at macro econ is “interesting” but macro disappears if we all go bitcoin, have a single currency, etc.

    But asserting that your economic model is great while it lies entirely on govt. debt….

    That’s silly.

    If you go back look at beginning of 21st Century, they we actually prepared to run MP without any govt. debt.

    That’s 15 years ago.

  • Suvy

    That’s the way to do it. Attack people personally for understanding the historical record. Think about it as an asset manager. What assets would you want to hold in a highly inflationary environment? Productive assets and real assets, which are owned by the rich alone.

  • Suvy

    Do you not understand feedback and nonlinearity? The dose response isn’t linear, so second and third order effects are often the decisive factor and volatility suppression resorts in blowups while external and internal shocks matter a lot more than you’d think.

  • Cullen Roche

    Well, actually, you’d still have a huge shareholders equity claim on the right side of the balance sheet. Some people might call this a “liability”, but it’s also part of net worth. All of the financial assets and liabilities of the closed system don’t really add up to zero unless you eliminate equity, which is a pretty silly way to view things in my opinion. So I don’t think we’re seeing this the same way….To me, the value of corporations in the country is perhaps, the most important balance sheet item that exists since this represents the value of the entities who create all the goods and services you are referring to….These items are more interconnected than I think you’re viewing them.

  • Morgan Warstler


    I was just explaining to Cullen, that if he wanted to win over the goldbugs, it’s better / easier to talk abut MP without basing it on govt. debt.

    He said,

    “Right. But the national debt is also part of the private sector’s savings. If your grandmother owns a T-bond then the government has a liability and your grandmother has an asset.”

    I said

    “Terrible answer.”

    I think Cullen would likely agree, the goldbugs don’t want govt. debt being a asset, but ask Cullen…

    Either way, I’m not an economist, I’m a problem solver. And before you decide you grok my politics, please noodle:

    Guaranteed Income / Choose Your Boss

    It’s built for Occupy Wall Street, the Con Black Caucus, and the Tea Party. Who else claims to do that!?!

    PLEASE READ MY PLAN, and if you think any of the three groups wouldn’t support it tell me why.

  • Billiejones

    I dont subscribe to an “end of the world scenario” at all. I would challenge you to show an instance where I did. In fact I pointed out multiple times that i don’t agree with most of Maloney’s points….i don’t agree with all of yours either, Cullen. Perhaps thats a cardinal sin in the MR church? I do find it rather comical though when one ideology assumes their paradigm of the world is correct” and other peoples paradigm of the world is “wrong, or a scam”. You guys realize that Maloney and his followers are saying the exact same thing about your views right? ….I have a news flash for both of you…..its likely both of you are wrong, especially the further we look out on the time horizon.

    My ENTIRE point all along( and i believe my messages reflect this) is that it is hypocritical and foolish to assume one paradigm is correct and disregard alternative paradigms simply because we disagree with a couple technical definitions…….this is the definition of foolishness. It seems many of the MR parishioners here believe that MMT or MR are sciences…if so whats the prescription? lets write a letter to Bernanke and the treasury immediately and solve this pesky slow economic growth. As for alternative views; Is Maloneys view alternative/niche….sure…..but so is MMT and MR. There are several other more widely accepted paradigms that think both of you are wrong.

    As for what constitutes a scam, i think its a matter of perception. Charging ANYTHING to tell someone how to diversify via ETF’s is considered a scam by some….and i started my career in financial consulting. unsophisticated financial advice like asset allocation /MPT via ETF’s is free ALL over the internet. In terms of VALUE it is a matter of perception and the clients needs. As For Maloney selling Gold at a premium….it can also be considered a scam…..again just a matter of perception.

    As an example, Do any of you guys drink bottled water? or have a Sirius/XM radio membership?……these are also scams by your standards…..water and radio can be accessed with virtually no premium, yet I’m confident most of you pay for this bottled water……..because YOUR perception is that it has value. The hypocrisy here is really pretty sad.

    As an aside, why did you re-sfuffle and delete some of the comments in our conversation, Cullen? I’m sure it was just a glitch. Regardless, MY perception is that this blog has just become another sad entrenched viewpoint….its too bad because it had a lot of promise. I expect this comment wont be up very long because it qualifies as heresy in the church of MR….Best of luck to all.

  • Billiejones

    Im not sure how my pointing out that ANY paradigm can have value or cautioning against sweeping generalizations and disregard of entire paradigms automatically made me a “gold bug” (I’m not), but its worth noting that it is widely accepted that alternative assets (including gold) have a place in any portfolio. Some names that you may recognize with allocations to gold include: Ray Dalio, Jefferey Gundlach, Marc Faber, Kyle Bass, George Soros, Jim Rogers et al. These gentlemen are widely regarded as the best in their respective businesses. Do they hold outsized allocation to gold?…no….neither do I for that matter. But do they automatically dismiss gold investing as a “Pump and dump” or a scam? The majority of these same names also advocate physical ownership ……..I’m sure they are wrong……Cullen is definitely right. MPT and most prudent asset allocators advocate 5-20% (depending on risk tolerance etc.) to alternative assets including Gold, silver……….this is an industry NORM. Im all ears if you can show consensus that your paradigm of 0% allocation to precious metals is the accepted norm (its not).

  • Cullen Roche

    1. These people, who you’re now defending, have been predicting all the things I’ve been debunking for 5 years straight. So yes, there is a certain level of “my paradigm has been proven right and there’s has been proven wrong”.

    2. I don’t disagree with “technical” points here and I am shocked that anyone would claim that the difference between my view of the world and Maloney’s is “technicalities”. He’s calling for the end of the fiat monetary system. He’s saying the whole system is a scam. He’s saying the USD will collapse. You say that’s just “technically” different than my views ? Are you even familiar with my views? I am actually stunned at how far you’re stretching the truth here in an attempt to defend Maloney’s position….

    3. You’re accusing me of running a scam via my business? Are you kidding me? I don’t just provide cookie cutter Vanguard services. I audit people’s entire portfolios. I audit hedge funds and institutions and run models that are 10X more sophisticated than anything you’ll get from your average advisor. Only then do I provide customized recommendations. And those recommendations aren’t the Vanguard “passive investing” dogma that many people promote. So I don’t think you really have any idea how my business model operates.

    4. Selling water, something all people actually need, is not a scam. You’re just stretching the truth here again to make your past comments look reasonable.

    5. If you’re going to come here and defend the views like the ones in this video then maybe this isn’t the place for you.

    6. Good luck as well.

  • Cullen Roche

    Stop trying to defend this view or compare it to what Ray Dalio or GMO does. That’s absurd. I’ve also recommended VERY SMALL amounts of gold for people. That doesn’t mean it’s remotely close to what you’re describing. Maloney is recommending that you put your entire savings in gold and silver. He hates bonds, stocks and anything dollar denominated. His view is polar opposite of the people you cite. You’re an apologist for an extremist view of the world and now you’re trying to defend the fact that you’ve compared real businesses to what these people are doing. Sorry, but what I do and what all the investors you cited do, are NOTHING like what you’re defending.

    I am actually shocked by some of your comments. How could anyone defend this nonsense? He is calling for a collapse of the entire system. He says it’s a scam. And here you are defending that view? How can you justify that???? Even worse, how can you compare reputable businesses to that?

  • j jordan

    thank you-well said

  • Billiejones

    “Cullen, why do you let these gold bugs post here? They’re all the same. You won’t change their minds. They don’t want their minds changed. They want the world to end”

    – Agreed, keep the MR church pure……no dissenting opinions or honest debate about alternative viewpoints. All rise to pay tribute to the church of MR……if you guys could see yourselves from an outside perspective you would feel foolish.

    I follow many blogs/information sources and i do my best to pick ones with very different viewpoints from each other to gain a more diverse viewpoint. Whats funny is that each blog/viewpoint believes their paradigm of the world is THE correct one. Obviously this isn’t possible. The best thing going for Pragcap was that it started with an “open mind” and was willing to challenge preconceived notions……now it has devolved into watching 5Mins of a 30 min video and summarily disregarding an alternative paradigm because of a disagreement in a couple of technical definitions (that are irrelevant to the larger point in this case).

    ie: what is the definition of “money”?….who cares, in this case it had nothing to do with the point of the video. Call money widgets or argue whether paper or Gold are really stores of value or used in transactions….its irrelevant to the point of the video. I suppose you would need to watch more than 5 mins to get the main point.

    ie: arguing over whether the banking system relies on a money multiplier model or if capital to back the bank loans is sourced after the fact………who cares…..WITHIN THE SCOPE OF THE VIDEO its irrelevant. In fact the sourcing of capital after the fact better supports Maloney’s point but it was likely too confusing to include in a simple animated video.

    I dont agree with everything Maloney says, but im not foolish enough to summarily disregard anything including MR over technicalities that have absolutely nothing to do with the point.

  • Cullen Roche

    So, if anyone rejects the view that the monetary system is a “scam” or that the USD is going to “collapse” then that automatically means they’re closed minded and part of a cult? I’m shocked that seemingly reasonable people will spend so much time defending such a ridiculously extremist view of the world.

  • Billiejones

    I have defended MR and MMT points as well on other blogs……..believe it or not, there are just as many people out there who believe your paradigm is crazy……you seem to be “shocked” by a lot of things i have said, so this revelation must make you downright outraged.

    Assuming that you have found the elusive magical economic paradigm just because the last 4 years have matched up with your viewpoints well is beyond foolish. It seems to me that the reason we have so many different economic theories all attempting to describe the same phenomena is because each has been correct at a particular point in time. Each economic theory’s strengths show in particular cycles……but none have been able to accurately describe ALL cycles/time periods. MR will be the same…..which isnt to detract from your work… are in good company……this has been the fate of ALL economic theories at one point or another. The one benefit of this blog and MR used to be that it wasnt the typical entrenched viewpoint……you were willing to analyze alternative viewpoints in an intellectually honest way before and make adjustments as necessary. Its a mistake to stray from that standard IMO. Obviously you will do as you see fit.

  • Vincent Cate

    Cullen, can you point to any URL on the Internet that is a more serious intellectual challenge to your views on hyperinflation than the above 2 URLS? If not, it would seem you are avoiding the most serious intellectual challenge to your views. To me this seems out of character for you.

  • Cullen Roche

    I think you know that most of what you just wrote is not an accurate representation of what I think. But you’re trying to blur the lines between the “end of the world” crowd and my views. Sorry, but you’re really reaching. I mean, hell, you just compared the sale of water at a mark-up, the most important resource on the planet, to selling gold at a mark-up, which is something that no one on the planet needs at all. That’s one of the most misguided things I’ve read on this site over the last 5 years. And you think it’s “sad” that people can’t understand the point you’re making. If you can’t see how ridiculous your comments are getting then I don’t know what to tell you. Please Billie, give me a little more credit than this. You are trying to defend the indefensible here. I might not have all the answers to everything, but defending this conspiracy theory “end of the world” nonsense is just taking it a bit too far….

  • Cullen Roche

    No, there are ZERO serious intellectual justifications of hyperinflation in the USA. :-)

  • Geoff

    The conspiracy theorists/hyperinflationists have been wrong for a lot longer than five years. When I can’t sleep in the middle of the night (which unfortunately is often), I turn on Coast to Coast AM radio. I’ve listened to George Norry (and before that, Art Bell) for at least 15 years. They’ve been talking about economic collapse the entire time. Same goes for guys like James Grant, whose letter I’ve been reading for a very long time. The guy looks and sounds brilliant, but he’s basically been wrong for at least the past 25 years! I don’t know how he has any subscribers left. I guess the comentors here who said that fear sells are right.

    Sex sells, too. Gold is sexy. :)

  • FXTrader

    Bridgewater, DoubleLine, Quantum Fund and funds like those ones are nothing like these scammers selling gold. What are you talking about man?

  • FXtrader

    Your efforts are hardly a waste here Cullen. You’re just fighting a very powerful political and uneducated tide. It will take years for you to make a substantial effort on the overall understandings. You’re doing great work and those of us who have followed you for years and understand the validity of your message know that there’s huge value in your work. Don’t let the critics get you down.

  • Suvy

    Again, could you attack substance rather than someone personally. Gimme a break dude.

  • Greg

    “I think Cullen would likely agree, the goldbugs don’t want govt. debt being a asset, but ask Cullen..”

    BWAHAHAHA … it really matters what goldbugs want in this regard. Its an accounting relationship that will always hold. A minus sign on the govts balance sheet MEANS a plus sign on the non govts balance sheet. I guess you want to do away with accounting now

    Grok that!

    Frikking creationists dont want evolution to be a scientific theory either.

  • Cullen Roche

    Thanks. I have to admit though – I don’t think my message or any similar message is really getting out into the mainstream. We’re not just facing a tide. It’s more like a tidal wave. Just look at this video on Youtube. It has 8400 likes and just 250 dislikes. His claims are so outrageously absurd that it leaves me feeling pretty hopeless that the response to it could be viewed so overwhelmingly positive….


  • Greg

    Pretty impressive rant Schofield!

  • Odie


    I admit, stocks are kind of in a grey zone but are they not also liabilities of the issuing company? And what is their value when the company is not going to produce anything?

    Taking your Walmart analogy: I do not care with what you can pay at Walmart; I care about that there actually is a Walmart. If there is none it does not matter if you have cash, checks, gold, the entire Apple stock etc. They will all have a value of zero.

    I don’t really like it but let’s look the classical QMT equation: MV=PQ. Everyone in the economic blogosphere worries about growth in M and/or V and/or P; seldom do I here someone mention Q. However, Q represents the real goods and services we need. No Q, no humankind. Our primary goal must be to grow Q or at least sustain it at an appropriate level, the others are secondary and easily within our control. What goes into Q? Energy (e. g. labor) and matter (resources) to make products. That means real physical units that are bound by the finite limits of our world. Can we really grow that forever? Can we even grow that to a point when we can say “enough is enough”? And when we get there what happens to M, V and P?

    Imagine we have a limit of 100 tons of food per year. Nothing we do will grow more of it. Now, we expect our savings to still grow by let’s say 3% per year. What will happen? Either P will rise or people put more money in savings and V goes down. Still, no one will have more to eat. Now keep the population growing by 1% per year. They will still have a positive return, they all get richer in monetary terms. However, there will be less and less food to eat per person. In reality, everyone is getting poorer.

    That is what I mean when I say we concentrate on the wrong side when looking only at money. How many monetary assets there are, what is the level of inflation etc. all those discussions are moot if we cannot keep growing the real assets of our society. That must be our goal, not the size of our financial wealth.

  • Odie


    First, you do not get my point either. Please see my response to Cullen. Or imagine you are Robinson Crusoe. What would you like to have: A barrel of food, a box of tools, or a chest full of gold?

    Second, you need to do proper accounting. The liability is the labor to dig out the gold and shape it in a useful form. Physical energy to be exact. For the gold itself, that is what we “owe” the earth. We are lucky because mother earth will not call in the loan or charge interest. However, she has pretty non-negotiable credit limits.

    Third, when you want to use gold as money you want to give gold miners control of the currency and allow them to buy up everything? How is that supposedly better than a fiat currency where everyone can create money and acquire real assets? Are you owning a gold mine yourself or what is your interest in enriching gold mining companies?

  • Cullen Roche

    That’s fair. But I think there’s a more interconnected relationship here than you’re maybe giving it credit for. The credit system is just an accounting representation of what our labor hours can purchase in the real world. And that credit system is backed, in large part, by the value of the real goods and services in the economy and the equity component represented by the corporations that make those goods and services. Equity is not really a liability. A negative net worth is not equity. It’s just negative liabilities. A company with negative equity does not owe ANYTHING to its shareholders. That’s why they’re at the bottom of the claims barrel. Equity is just assets minus liabilities. And the residual is the value we place on the firms that create everything you’re focusing on. And that figure is a cornerstone of the entire credit structure. This stuff is all interconnected in a modern monetary system. I agree with you 100% that people should understand that money is a medium of exchange that is merely giving you access to real wealth. But does that mean it’s misguided to focus on the monetary constructs that are the central tool giving us access to those goods and services? Not in my view.

    That’s all I am saying.

  • Vincent Cate

    If you read both of those they are not trying to justify hyperinflation in the USA. They are not predicting hyperinflation anywhere. They are trying to explain hyperinflation in general.

    The fact that I was wrong in a prediction long ago is a poor reason to ignore me forever.

  • Vincent Cate

    And “long” is only relative to the time we have been talking. In real terms it is not so long. :-)

  • SS

    Are you now saying hyperinflation isn’t coming to the USA?

  • John Daschbach

    I should have said that as long as banks can obtain reserves at the discount window they are the same at the upper limit. They are exactly the same at the lower limit, the amount of money in the system goes to whatever the initial amount was if all loans are paid back.

    At all times, with either model, the amount of money in the system is equal to the initial amount plus the amount outstanding in loans.

    Without a Central Bank supplying reserves, the maximum money supply is fixed by the limit of the M_0 * sum( (1-RR)^n, n=1,infinity) for RR > 0. Clearly that situation is impossible in an economy that grows with compound growth without compound deflation.

    In the end, the money supply goes to the limit of zero without loans outstanding unless you have some initial amount of money. But since money has zero real value economically that number has to be zero.

  • Vincent Cate

    I am saying that understanding the mechanisms of hyperinflation, even in many different economic theories, is something I think I have done. This is like understanding how a forest fire grows when the forest is dry. Predicting when hyperinflation will start is like predicting when a forest fire will start, a much harder thing that I do not wish to claim mastery of, yet.

  • http://pragcap Michael Schofield

    Thank you for the link, and the civility of your response, I certainly did nothing to earn it. My apologies for the coarseness of my rant. However, I have problems with any system that relies on only monetary or fiscal balancers. Too rigid and no realistic backup plan in case of failure IMO. The only real problem with the present system is idiots at the controls and I guess there always will be that problem. And of course an ill-informed electorate. I may give those links a look but I am no fan of far left or far right policies.

  • http://pragcap Michael Schofield

    Thanks but Mr. Warstler responded like a gentleman and I wish I would have toned it down.

  • Greg


    Dont feel too bad though. Its something many of us do from time to time. Mr Warstler is one of the worst violators on the internetz when it comes to incivility. I know you dont want to stoop to that level and I respect that but if anyone deserves it he does. Sorry I feel that way, but he really rubs me the wrong way.

  • Suvy

    What? I agree with everything you just said in that comment. I don’t really see how I’m “missing the boat”. Of course infinite growth can’t happen on a planet with finite resources. I don’t really see how this has to do with anything what me or Vincent says.

  • Morgan Warstler

    Actually, I’m into NGDPLT precisely because it is rules based, there is no human agency problem.

    You set the dial, and the machine runs for decades or more before anyone thinks of touching the dial again.

    Whats more the transmission mechanism (how the money enters and leaves) ceases to be a Goldman Sachs thing, and can begin / end with Small Businesses.

    And trust me, I encourage you to let ‘er rip, I can still tell when there’s a argument being made or not – I prefer an internet that feels like adult roller coasters.

    Flame wars are sad. But wit that cuts to the bone, well that’s just dandy.

    I have always enjoyed assuming everyone online is drunk, one thing about drunks is that they are honest.

  • Mr. Market

    Predicting Hyper-Inflation is a “piece of cake” WHEN one understands the dynamics of debt & credit. And it’s clear you don’t understand that.

    Reading Robert Prechter’s “Conquer the crash” (which is rightfully called the “Deflation Bible”) will (help to) enlighten you.

  • GLG34

    Wow. Let me summarize how crazy your comments are:

    1) You’ve compared diversified and well respected investment firms to guys selling a gold scam.

    2) You’ve compared water, a vital resource, to gold, a relatively useless resource.

    3) You’ve compared MR to a religion just because MRists aren’t open-minded about views that believe the entire monetary system is about to collapse.

    Best of luck to you. You sounds like you’re really going to need it with this sort of thought process.

  • Nils

    Once you have at least 50 ways we’ll all be convinced. But the moment you’ll have 50, the amount of ways hyperinflation can be explained will rise exponentially and then we’re in trouble. You’ll see, just don’t say I didn’t warn you.

  • Dave Tek

    Debt does pull forward demand. Let’s put it this way, if the national debt were 25% of GDP right now, how much more stimulus could have been done? Debt only fails to pull forward demand if 1. it costs little to service and 2., if you never intend to pay it back. If we intend to pay back the debt, 17 trillion dollars will have to come out of the gov’t’s part of the economy some how. As Eric said you have to look at both sides of the ledger.

    It’s all well and good, as you can see from the chart posted above, if you grow faster than your debt. Debt grew at about 4.5% this year, has the economy? Even with recent “revisions” to the GDP to include things like R&D and IP, it hasn’t. This makes bond holders trigger happy; I don’t think many people expected to see yields on the 10Y jump to 3.00% from 1.4%.

    If we intend to stay in perpetual debt, fine, but as the actual numerical value of the debt increases, it is more vulnerable to percentage it must be serviced at. If debt servicing needs increase, the gov’t will come looking to the lowly citizens for more revenue. Look at FATCA, it’s witch hunting for taxes.

    My point is, I don’t think these people are as economically illiterate as you think. Guilty of sensationalism, over-simplification, maybe.

  • Morgan Warstler

    It’s pretty clear the guys attracted to Cullen, don’t actually intend to ever pay it back.

    The thing is though guys, and this is to keep things are “real” as possible:, we have two recent experiences that should give you great pause:

    1. When Bill Clinton saw interest rates go up, he suddenly had 33 cents of every tax dollar going to pay off debt.

    That was the real reason for him saying “the era of big govt. is over” – he TOLD everyone this exact thing, during his 2012 speech at Dem Convention, he said CLEARLY understands how political budget realities change when debt gets rolled at 2,3,4,5,6%

    2. Inflation doesn’t get you out of the debt, bc rates go up with the inflation.

    The point is underneath a lot of folks here is a kind of youthful power trip about running the MP towards ends that don’t benefit the folks with money.

    And Debt has this awesome thing about it, if you don’t pay it, you know tomorrow, nobody will loan you money, which is why I always say to people, “debt is meaningless” and it is true.

    IF, and ONLY IF, you are prepared to live on a current account balance, haircuts, inflation, or just paying it down, is ALL possible.

    But since none of you are ready to live only on revenues, most machinations about MP etc are silly.

    When you get the stomach to say “this nation will live on revenues” and mean it… you will find league with gold bugs.

    Because that’s all they actually want.

  • Jeff

    So, you’re telling me that a monetary system that never allows the citizens to get out of debt and the bankers guaranteed profits FOREVER, is a good thing? Maybe if you’re the bankers. That is exactly what happens in a debt based monetary system. Where is the money for the interest? That’s right it doesn’t exist, so the insanity continues, round and round we go, down the rabbit hole, whatever.. until it collapses.

    Tell me again why you prefer slavery? Well, at least you had the nerve to call it a debt based monetary system, now if only the populace could figure it out.

  • Nils

    For most debt there’s a way out.

  • Morgan Warstler

    There’s a way out IF and ONLY IF you are ready to live on current account balance.

    And if you are ready to do that, well thats the ball game.

  • Jeff

    You all seem to be knowlegdable about monetary policy yet you don’t even know the most important factor? The US dollar is the world reserve currency, in which at least 60-65% of the world has to use the $. As long as the demand for $’s are in high demand we can continue to produce nothing and export nothing but dollars and still look good on paper. As soon as thats not the case….Hyperinflation will ensue.

  • Geoff

    “It’s pretty clear the guys attracted to Cullen…”

    He’s handsome.

  • Dave Tek

    1. Debt jubilee.
    2. Run a current account surplus AND a trade surplus at a greater rate than your debt service rate. Once at par you’d have to run neutral current account. Forever. You can’t borrow to pay for stuff from overseas either.
    3. Default, implied or otherwise.

    Any of these sucks dollars out of the system. All dollar denominated assets will deflate. The dollar would be strong, which would make #2 exceedingly difficult.

  • Nils

    So who should run the deficits then?

    I meant it more in relation to the slavery comparison. Most debts can be discharged through bankruptcy. It’s not that easy to get out of actual slavery. It’s quite an egregious analogy given the hyperbole.

  • Nils

    It’s pretty clear the guys attracted to Cullen, don’t actually intend to ever pay it back.

    Pay what back exactly?

  • Dave Tek

    The idea of debt-based money is about control. If there is no interest tied to an originator, it must be tied some other obligation – a bit of gold, a barrel of oil, maybe a man-hour of labor. As long as the obligation is in place the issuer can pull levers to make people want more or less issuance.

    Perhaps the debt-based money system is more like indentured servitude, where you are under contract to work a certain amount of time. You can leave the contract at the risk of negative consequences. These risks are enough to keep most people in the system.

    The world needs a liquidity pump? Why does there have to be a reserve currency? We already know the US would be much worse off without it, so that might explain why it is deemed necessary.

  • Dave Tek

    The national debt owed both internally and overseas. Really, you could only hope to pay off the debt held overseas – canceling SS and Medicare sure would get the masses riled up though.

  • Jeff

    What is debt really? In our society money doesn’t exist until there is debt, so essentially there is no money until someone earns it to pay back that debt. As far as a way out once you’re in, two options, pay back or default.

  • Nils

    Why do you think it needs to be paid back?

  • Jeff

    I feel the reserve currency is holding us hostage. Granted it has given us the standard of living we all have grown accustomed to, but it has grown to the point where it is literally holding us hostage. No, matter how much we print the dollar gains in value? If one has any economic sense at all they can see the man behind the curtain. Everything I see points to the world going away from a sole dominate reserve currency, or at least one controlled by one country, and it will probably hurt a lil at first, but then we will take off. (Best case controlled scenario, Worst case; Hyperinflation)

    That is the story that should be hyperbole, yet 99% of the populace has no clue, nor would they even if explained.

  • Morgan Warstler

    Nils, don’t be circular, neither of us said it HAS to be paid back, we said if you don’t pay it back there are consequences.

    The BIG ONE is only true if you can’t live on what you can kill.

    If your country is running a current account balance, then SURE! default or SURE! pay it off. or SURE! haircut.

    But if you cannot live on your tax revenues, default means tomorrow you WILL be living on your current account revenues.

  • Morgan Warstler

    Boys, I’m going to ping Cullen on twitter…

    This is the best article today on the subject, it gets into the real life reality of default. Notice it QUICKLY becomes about whether you can sustain yourself, not just in taxes, but in real resources.

    This is the deeper underlying discussion about why free markets are so important.

  • Dave Tek

    We are definitely victims of our own success. The reason gold buggish people tend to want sound currency is to lock in what we’ve “gained”. Right now we fight wars, spy, drone, and coerce the world in to maintaining the petrodollar. This is tremendously complex and expensive. An alternative may be just to have the best, most stable currency on the block. But then you can’t borrow to have the huge military, social benefits, bail outs, infrastructure etc. otherwise you’re back to using wars to defend the currency status again.

    We can’t have it all in the long term, so what are we going to choose? And are we going to choose ourselves, or let other outside forces decide?

  • Dave Tek

    Great article.

    The underlying resources are key. Japan is running huge trade deficits because they have no natural resources besides slightly radioactive fish. With a debt well north of 200% of gdp and a shrinking population, it’s only a matter of time.

    I do take issue with having enough domestic oil; is Canada going to roll over and send us their tar sand resources for our worthless dollar?

    If the dollar did collapse in such a way, the reserve currency status would be abandoned, and every country would have to buy precious oil with their currency of account. The countries’ financial state would have to be evaluated before completing the price and sale, the way perhaps it ought to be.

  • Tom Brown

    Maybe it’s more like predicting when the Earth will fall into the Sun. There’s lots of potential energy there (just like your dry forest) but what you’re missing is the collision with another planetoid that will get us out of our stable orbit and allow that potential energy to be released. As it stands we’re in a happy relatively stable relative minima (our current orbit).

    So maybe what you’re imagining as a stray spark, or a carelessly handled match… is in reality an atom bomb to get the fire going (maybe that forest is damper than you think… sure the potential energy is there, but you’ve got to bake off the extra water first).

  • Jeff

    I am glad you pointed that out. Imagine our gov’t having to actually function on the constitutional principles it was founded on. Just imagine the govt having to ask permission before taking on the afore mentioned.

    As to what we choose, we won’t or aren’t and it will be forced. We squandered our priveledges.

  • Jeff

    If, 4 years ago, I would have told you that the benchmark interest rates were being manipulated in such a concerted effort, as has been proven to be the case; what would you have said? What about the fact that not one person is going to jail for it?

  • Cullen Roche

    I would have informed you that the benchmark rate is always manipulated by the Fed by changing the amount of reserves in the banking system.

  • Greg

    “The reason gold buggish people tend to want sound currency is to lock in what we’ve “gained””

    I think thats a pretty insightful comment Mr Tek. I agree completely.

    AND I think its really quite an unreasonable “want” if you want to know the truth. Nothing you get or have gotten is forever, you CANT lock it in. And we shouldnt have a monetary system that allows you to or makes you think you can.
    I’ll even add that they want to lock in what theyve gained WITHOUT ANY ADDITIONAL WORK!. Its as if they accumulate some level of savings, by forgoing some prior consumption opportunities and then 20 years later say
    “Hey now I want to consume that stuff I didnt 20 years ago….. and it better be the same stuff!!”

    Now, if during that time you “saved” you took that saving and invested in things that made those future desires available for you….. great, good job!! But if you just took that saving, sat on it,and just traded already produced goods trying to find a greater fool to pay more and more for it, you have no right to cry “inflation” when your savings doesnt get what you think it should.
    If you want something get it now, otherwise invest in something that will help produce something you might want in the future….. or shut up when your “savings” doesnt keep up with inflation.

  • Cullen Roche

    A debt based monetary system is just a set of accounting relationships. That’s all. Everyone who gets up in arms over the “debt based monetary system” is usually just misunderstanding how it actually works. They look at all the debt and start screaming or something. As if there is no other component to the debt relationship aside from the debt it creates.

    Real assets, like gold, are no one’s liability. Pieces of gold just exist. But we don’t have a barter system because a barter system is inefficient. So, we use an accounting system where claims represent a relationship that gives someone access to a certain amount of goods and services. That’s all a credit based monetary system. It’s one step evolved from barter. These claims can be created by anyone, but in a modern system are primarily controlled by the banks who create them within the regulated payments system.

    You can argue that this system is unjust or unfair, but it is not inherently unstable. It can become unstable and corrupted, but there is nothing about this accounting relationship that automatically makes it unstable.

  • Dave Tek

    That’s completely backwards. The fiat that makes up 100 trillion in “wealth” is based off of the underlying asset. An economy that has many goods and services available is “worth more” than an economy with few goods and services available.

    The reason people with billions of dollars are considered wealthy is they have massive potential option to buy real world goods. If there are no real world goods to to exchange for their fiat, that wealth is worthless. Alternatively, if their dollar denominated asset drops in perceived value, again it is worthless.

    Economists need to stop pretending that their policies are the main drivers. They are at most 3rd or 4th order factor and reactive. Underlying resources and real things are what drive economies. Ex: If the US was able to produce 10 million bbl/day as it was in 1970, the economy would be growing at 3-4% again.

  • Cullen Roche

    Dave, I say the exact same thing that you just wrote in all my work. Money just represents a claim on goods and services. Money is a means to an end. Not THE end. I’ve been writing this for years. Maybe you’re not that familiar with my work?

    What’s “completely backwards” is the idea that “money” needs to be some “real” thing like gold. That’s just BS.

  • Cullen Roche

    Oh no. The “debt servicing” argument again. A fiat currency issuer like the USA, can 100% control its debt servicing costs. The debt service is a budget item! If the govt doesn’t want to pay you interest on debt then it will just stop. Or if the debt service cost is too high then the govt will choose to stop paying interest on pvt sector savings and spend that money in other ways. It’s a budget item! Saying they don’t control it is like saying that a corporation or household can’t control how much they spend each month on their credit cards.

    Yes, these people are economically illiterate. And no one should defend their ideas.

  • Johnny Evers

    Like most systems in nature, it’s stable only if it’s allowed to break down.
    And it’s only stable if those with the liabilities agreed to assume them.
    But we have a corrupt system in which those of us with debt ‘assets’ were protected and bailed out, while those of us with liabilities lost jobs and real net worth.
    We have political corruption and we have a huge divide between lender and borrower.
    Like Taleb writes, our system is extremely fragile because it’s now allowed to fail at the weak points.

  • Dave Tek

    Why does the money have to be loaned into existence? Why not just issue some as needed? We especially have the technology now to determine the money supply fairly accurately. Especially since most of the Fed’s 0% loans are liquidity trapped on banks’ balance sheets at the moment.

    Well every bank would be asking for more issuance. The first the get the currency and “put it to work” benefits the most. Without an obligation attached to it, there is no way to limit this other than issuance volume. So the interest tied to the dollar is about control.

    Few large macro systems are inherently unstable simply because of their sheer momentum. However they are all subject to internal and external disturbances acting on them. One never knows when a resonance frequency might be found.

  • Cullen Roche

    Let me get your position straight. There’s too much entitlement spending and too much welfare (too much money going to the elderly and the poor), but you’re also complaining about how the system benefits the rich?

    Which is it Johnny? Does the govt send too much money to the poor? Or does the system unfairly benefit the wealthy?

  • Greg


    We produce 6.5 bil barrels a day ( and have grown at a higher rate the last two years then we ever have in modern times) PLUS we produce natural gas. Our total production of those two is more than Russia or Saudi Arabia.


    Where is the 3-4% growth?

    Oil production isnt necessary for growth, energy production is and we produce plenty. We have started to grow domestic production AND we are using more energy efficient things. Its not the oil production thats holding back our GDP.

  • Cullen Roche

    Why not just issue money? Good question.

    Who would issue this money? The state? How would they choose who gets it? How much would they issue? The current system is based on credit. It is a market based system where those who have credit have access to money. Banks compete to find creditworthy customers. They control the issuance based on how profitable it will be to do business with those who have access to it. Free market lovers should embrace this system. Instead, many of them demonize it. Would you rather have the state issue all of the money? How would that work? I am open to the possibility, but I don’t know if a state run monetary system has ever actually worked….

  • Geoff

    “Why not just issue money as needed?”

    Because then you wouldn’t be issuing money, you’d be issuing equity, or wealth.

    Money doesn’t equal wealth.

  • Johnny Evers

    Income and net worth inequality is very real.
    If you could address that problem we wouldn’t need all the unsustainable handouts to the poor.

  • Johnny Evers

    Is a T-bond equity or wealth?

  • CuriousLurker

    Well, CR, you’ve “saved” my brother, Me, and my mother. My stepfather…….. not so much (he’s old and closed-minded).

    If you pick up one starfish (out of thousands) that is lying on the beach, and throw it back into the water, have you done a service, or was it a waste of time?

    It was not a waste of time for that one starfish.

  • Cullen Roche

    You’re contradicting yourself again. The “handouts” take from the rich and give to the poor. The rich pay the vast majority of taxes in this country. The top 20% pay over 60% of all taxes. And the top 40% pay over 80% of all taxes. If you think there’s great inequality then you should love these handouts. But you don’t. And you don’t ever provide a different solution. I’ve done that. I say tax all secondary market transactions at the ordinary income rate. There’s more taxes on the rich. But you don’t want that either. You don’t want anything. You just think the system will fix itself like it’s a broken leg that just magically heals all on its own. Sorry, but the monetary system is a lot like the human body and when it’s broken there are things we can do to fix it rather than just waiting and hoping for it to fix itself.

  • Geoff

    I’m not sure what you’re getting at, but if your are asking if deficit spending adds to private sector equity, I would say yes.

  • Cullen Roche

    A t-bond is a net financial asset. It is a pure asset for the pvt sector with no corresponding pvt sector liability. This adds to the private sector’s financial net worth

    I don’t know how many times I’ve explained this to you. (breath Cullen, breath).

  • Dave Tek

    Free market lovers tend to demonize this system because as you said in another post, the Fed has been manipulating the benchmark rate since its creation.

    Suppose a very creditworthy but low on capital borrower walks into a bank and wants a rate equivalent to his creditworthiness. But ah, the bank can’t comply b/c the Fed raised its borrow cost and the bank would make nothing on the spread.

    Also the Fed has been a horrible forecaster. With all the tools at their disposal it seems difficult to determine why that would be the case.

    I’ll have to think about the state issued money thing…..

  • Johnny Evers

    So deficit spending does create wealth — but you said we can’t issue money because that would be like issueing wealth.
    So why issue bonds that pay interest when we could just spend directly. (In theory, I know it would require the rules to be changed.)

    The idea that a T-bond isn’t a liability for the private sector only applies if it’s equity and not debt.
    At the very least, a T-bond is a liability for the private sector in that the interest costs are a burden to the private sector.

  • Cullen Roche

    Well, by definition, the existence of the Fed creates a manipulated overnight rate. The fact that reserves exist at all means the overnight rate will be determined by the quantity of reserves outstanding unless the Fed intervenes to change the rate. If the Fed didn’t exist then the lending rate would be purely controlled by the banking system since the overnight rate would be a function of the rate that banks want to pay one another. That system proved highly unstable because interbank lending was the byproduct of risk taking capitalist entities with very little oversight. So someone’s going to “manipulate” the overnight rate no matter what. You can either have banks manipulating it or you can have the Fed set it. Pick your poison. We have a Fed system because interbank clearing controlled entirely by banks was highly susceptible to banking panics. The Fed system smoothed this out and has actually been a huge success as a clearinghouse.

    The Fed doesn’t control the entire lending structure though. The Fed merely targets one small slice of it. Banks lend at a mark-up based on the cost of their liabilities. The Fed doesn’t control whether CitiBank wants to charge you 10% on your credit card. CitiBank controls that. And you control whether you can pay it.

  • Jeff

    “The current system is based on credit. It is a market based system where those who have credit have access to money. Banks compete to find creditworthy customers. They control the issuance based on how profitable it will be to do business with those who have access to it.”
    There in lies the problem, the game is rigged, those(countries mainly) with the highest risk are still getting the favored loans and being rated less risky than those that need the capital now, are less risky, and could be giving the global economy a much needed boost in growth.
    I’m not even talking about the risky loans prior to 2007, even though nothing has changed.

  • Cullen Roche

    Johnny, the govt is just a big redistributor. Those interest costs are a benefit to some and a cost to others. If Johnny Millionaire owns a million dollars in bonds then the interest to pay those bonds comes mostly from some Billy the Millionaire. And huge amounts of the rest of the spending go to Joey Welfare and Granny Medicare.

    The wealth inequality you speak of is largely due to the fact that the wealthy don’t pay much in taxes on their financial assets. I ran a small hedge fund for years and paid mostly capital gains rates which was ridiculous. We justify this because we claim that secondary market transactions contribute to investment. But this definition is totally wrong. Secondary market transactions are savings allocations that don’t contribute at all to actual investment. These transactions should all be taxed at ordinary income rates. Now, you can go off on one of your rants about how all of my views benefit me and my clients. :-)

  • Johnny Evers

    Taxes redistribute wealth.
    Deficit spending adds whatever you want to call it — net financial asset, which represents real wealth.
    Your capital gains tax idea makes sense.
    However, taxing money that flows to the wealthy doesn’t really address why this is happening.
    I suspect it is because the wealthy are able to use the in the financial system at the expense of others.

  • Jeff

    Perception is reality isn’t it.

  • Cullen Roche

    I can’t be positive, but my guess is that it’s mainly due to the effect I speak of. The rich deal with financial assets. And if those assets are taxed disproportionately then they’ll keep an outsized amount of the income paid on these assets. Smart wealthy people know that the way to maximize wealth is to own tax efficient financial assets. If you’re even smarter you shelter it in something like a LLC and just write off all your expenses against it. Double whammy. You can be rich as hell and pay something like a 10-20% tax rate. This is basically what a guy like Warren Buffett has been doing for 50 years. He didn’t just get rich picking stocks and companies. He used the tax code to his favor. If you taxed secondary market transactions at the ordinary income rate you’d see a lot fewer billionaire hedge fund managers in the world.

  • Jeff

    I see inflation as a tax that redistrubutes money from the poor to the rich.

  • Nils

    Even worse, Buffet then has the stones to argue for higher taxes “on the rich” – but just talking about income tax, knowing full well it won’t affect him.

  • Dave Tek

    So what is? Debt? If oil prices were $50 a barrel that wouldn’t jump start growth?

    If rich people deal primarily in finance then middle class people deal primarily in real world assets. Several construction workers can build something worth millions in gdp. I would say that the finance world is humming along on all 12 cylinders while real world asset dealers are running on 2.5.

    Since the middle class person doesn’t have much net capital, the greatest thing you can do for him is to lower his cost of living. Same with many small businesses. Transport and raw materials cost increases eat margins. One major way to alleviate this is to reduce prices for energy.

    Of course you COULD make the argument that part of the problem is everyone is riding the Bernanke put instead of bothering to make real world (riskier) investments…. But the Fed is completely impartial, apolitical, and beyond reproach…..

  • Jeff

    Also, how much wealth have private central banks aquired through this “service”?
    Example: Fed buying $85 Billion/month in mortgaged backed securities(property). So, they aquire assets by forclosure with money they loaned, then printed. See where I’m going? They don’t produce anything, add no real value to our economy and now everyone wants to get rich without producing anything.

    “The best way to rob a bank is to own one.”

  • Alex

    Wouldn’t that be a default? I didn’t know that a fiat currency issuer (of which the US is a hybrid as a user of inside money) could simply decide to stop servicing its bonds without consequences to the value of the dollar and said bonds and notes? And if the costs of using inside money to fund the government were to become too high, wouldn’t dropping the FED model have incalculable consequences to dollar denominated assets, as well as the dollar itself?

    That seems to be a major theme in your arguments, that its silly to talk about how the US is broke because congress could change the arrangement with inside money bank deposits and simply credit accounts with dollars? Wouldn’t that have an incalculable impact on the value of the dollar?

  • Cullen Roche

    What I am saying is that the US govt could start issuing, say, 1 year t-bills at 0.25% and just keep the rate there forever if it wanted to. And it could roll over all the outstanding debt into that rate as it comes due. There’s nothing stopping the US govt from controlling its interest costs. And people will always buy these bonds because they can either hold currency at face value minus inflation or they can hold these bonds at face value minus inflation PLUS 0.25%. There’s a reason why really smart people own US govt bonds. They know it’s a lot like currency, but with a free interest rate attached to it. And smart people will always want to hold those bonds so long as there isn’t wild inflation.

  • Nils

    So you are against the fed controlling the price of credit but you are for the government controlling the price of energy?

  • Nils

    You may wanna read up on that again, looks like you got it backwards.

  • Dave Tek

    Oh no, my point was that if the energy could be produced (if it existed at a cheap enough price to produce) it would help more than anything else. Energy touches nearly every part of the economy except the finance (maybe HFTs need gigawatts, I’m not sure). So if we’re not growing at 3-4% I would say expensive energy is preventing the middle class person and the small/med business from pulling their weight.

  • Nils

    Not much can be done about energy though. We can just hope scientists come up with something good soon ;)

  • Hap

    Does the government determine interest rates? I was under the impression both the markets did that. So, the Fed controls one aspect of rates, but if there is hypothetically no demand for US 1 year T-bills at .25%, how can they issue that paper to market participants not willing to pay to receive that rate of interest? If the government can control its interest costs, then why was short term paper so ‘expensive’ for the government to borrow at double-digit rates during the 70s? Why couldn’t they just determine they would only issue those T-Bills at a cheaper rate? I am confused how the government could theoretically issue these .25% Bills ‘forever’ as you suggest.

    (I am not being an antagoist, I wish to learn from this comment. Thank you.)

  • Hap

    Correction: Both the markets & Fed from 2nd sentence.

  • Cullen Roche

    Why would there be no demand for that paper? If there’s demand for dollars then there would definitely be demand for a govt issued note that pays you face value at maturity plus interest. As I said, the alternative is owning currency for 1 year or owning the bond for 1 year plus the interest. No brainer, right? Even with inflation this is still a no-brainer because SOMEONE holds the currency and some smart person will always fight to hold the bond because it’s very similar to currency but with the interest. So the Tsy can determine what rate it wants to sell the bonds at and they’ll always find buyers because they’re the issuer of the ONLY risk free dollar denominated assets in the economy.

    The govt could have still issued 0.25% t-bills in the 70’s. But it made a policy choice not to do so. They thought it was better to try to suppress inflation by raising interest rates. That was a policy choice, not one that was forced on them by the bond market. If currency users don’t want to hold bonds that are risk free with an interest income then that’s their loss. They’ll end up holding currency instead whether inflation is high or not.

    The only environment in which the bonds would totally collapse would be a hyperinflation. But hyperinflation isn’t just high inflation. Hyperinflation is usually economic collapse caused by output collapse, war or some other extreme event.

  • Alex

    How would the FED control the risk free rate of return? My understanding was that the fed controlled the range T-bills and notes traded within via OMO’s and forward guidance. Would that system be undermined by fixed treasury rates? And if they were, would the governments obligations become an upper bound to the rate if say, the fed wanted to cool things down?

    P.S. I completely agree that the national debt is too large argument often misses the key point that government debts are owned by someone, by a 70ish% clip Americans. It’s the pressures it puts on the current operational realities of the fed system that worries me.

  • Cullen Roche

    The Fed could just pay interest on reserves. No one would lend at the overnight rate lower than what the Fed supplies.

    Fixing the overnight rate would obviously kill any option of using monetary policy to cool inflation. Then again, if inflation were really running out of control it’d be because growth was too high and I doubt the whole interest servicing cost idea would be a big issue.

  • Dave Tek

    How do you explain the jump from 1.4% to 3.0% on the 10Y with no change in Fed policy? There’s a bond market, it isn’t just determined by Fed policy. Other countries’ Feds have lost control of their bond market before.

  • Cullen Roche

    The US govt lets the bond market determine the long rate. If the Fed wanted to set the interest rate on the 10 year they would just name an interest rate and smash any bond trader who challenged them. Right now, the long rate in the USA is a function of the market’s perception of future Fed policy. So the rise from 1.4% to 3% was a function of expected normalization in Fed policy. If you let the market choose though the bond trader will always ask to be compensated not only for holding bonds of certain duration, but they’ll want to be compensated for inflation as well so the negative real rate on the 10 year never made sense to begin with. In other words, 1.4% was never a sustainable rate given that core inflation was 2%.

  • Hap

    Again, I am trying to educate myself here on this topic. What you are suggesting is that the govt could issue bonds or bills at an interest rate lower than the prevailing market rate if it so choses?

  • Cullen Roche

    My point is that the US govt can determine ANY interest rate it sells its bonds for if it so chooses. If the Fed wanted to set the long bond at 1% for eternity it would just name the interest rate and challenge any bond trader to try to move them off their 1% target. The Fed, with its bottomless barrel of reserves, is an entity you don’t want to pick that fight with.

  • Hap

    Has the govt ever sold its bond/bills at rates below the market?

    You seem to be suggesting market participants, whomever they are, indirects or directs, domestic banks, foreign banks, or foreign sovereigns, would puchase 1% rates, thus dictated by the govt, when the prevailing rate is 3% or more? Who would even bid for those when they are not given the prevailing market rate of interest? Seems like it does not add up to me.

  • Geoff

    Happy, Treasury bonds were trading at negative real rates for a long time, and still are at the short end. If that’s not “below market” I don’t know what is.

  • Tom Brown

    Inflation at a rate lower than expected takes wealth from debtors and gives it to creditors. Inflation at a rate higher than expected does the opposite: moves wealth from creditors to debtors. Inflation matching the expected rate is neutral.

  • Tom Brown

    Debts don’t have to be paid back. Does your credit card company want you to pay off your debt or let it ride?

    Because individually we all think we’d like to pay off all our debts, we think that collectively it would be a good thing if we all paid off our debts. I don’t think that’s true. Isn’t that a fallacy of composition? (If I stand up I can see the game better, thus if we all stand up we’ll all see the game better)

    But actually it’s not even clear that it’s true for the individual:

    If inflation is trending higher than expectations over time, it’s better to have gotten into debt: then you get free wealth paying off debts denominated in old more expensive money with new cheaper money.

    If inflation is trending lower than expectations over time, it’s better to get out of debt (and instead be a creditor) otherwise you’ll be paying back cheap money loans from the past with more expensive new money.

  • Tom Brown

    Are you saying that the only reason to ignore you forever is if you’re wrong forever? :D

  • Cullen Roche

    Yeah, it’s happened quite a bit over the course of the last few years. For instance, headline inflation in January was 3% while the avg rate on marketable US govt debt was 2.037%. Getting inflation protection from a govt bond is just a bonus. Most people will buy govt bonds because they’re the risk free asset in the economy that pays interest.

    For instance, China gets USD’s via trade or whatever. They can either hold those USDs in a checking account losing purchasing power or they can buy US govt bonds which is like a savings account earning interest. Even if they’re losing purchasing power they’re better than holding the currency at 0%.

    Make sense?

  • Tom Brown

    Well I’m now blocked from leaving comments at that “Scam” site. :(

    Someone should comment that the video creator has a bit of a swollen head: what they’re trying to sell us is a scam all right, but hardly the “The Biggest Scam in the History of Mankind.”… they’re going to have to work on their game a bit to deserve that.

  • Morgan Warstler

    I hate when talk goes like this. The fed answers the hegemony, just like the govt. does. The Beavers? They are the hegemony. All the big fish and medium fish in small ponds they ultimately have veto power over the “banks” and govt.”

    Instead say, a Fed that set a non-discretion, rule based computer program up, one that was approved of by the hegemony, well then, if a banker of bond guy OR over eager Congressman (like Barney Frank), well the machine would teach them all a thing or two.

    This gets across both the strength and the legitimacy.

    See only the hegemony can truly put heads on pikes, it’s important then to maintain passive voice when mentioning any of the lesser forces.

    This helps to dial back the Fed on top stuff, it calms nerves, and speaks truth.

  • Cullen Roche

    It’s a fool’s game. What you have going on there is a group of fools selling a greater fool’s theory to fools. In the end, they’ll all end up losing. Maybe Eugene Fama was right – an efficient market will quickly part a fool and his money. The sad thing is, I am willing to bet that the companies who actually sell the gold don’t have much exposure to the price of the physical. If they’re smart they’re keeping their book flat or maintaining very little inventory and then scraping the mark-up price that they sell at. They’re basically generating a risk free 3-4% or something. Nice little business. But it all depends on selling the front end message which is pure fear. It’s not really a scam, but not a very prudent way to help people protect their assets either….

  • Hap

    I can no longer comment on previous discussion… So, inflation rate = market rate of interest, sir? So, 3% inflation = the market rate of interest? Again, not adding up. You seem to be continuing to suggest that regardless of market conditions that the govt will continue to have demand at any chosen rate of interest which seems deeply flawed.

    As far as those selling physical metals, I am fairly certain whatever inventory is purchased is immediately hedged in spot or paper markets. Therefore, if XYZ Metals is selling your that silver coin/bar at 3% markup to current market value, that is their ‘profit’ – that margin of existing prices to current prices. But if they ran their inventories to zero when silver was trading north of $45/oz., I am willing to suggest they have little to no exposure to cost basis at that level.

  • Cullen Roche

    Think of a US govt bond like a savings account and currency like a checking account. Will people hold currency when inflation is 3%? Of course. Would most people prefer to hold their savings in a savings account that earns greater than 0% if the alternative is to hold the 0% checking account? Of course. Even with inflation of 5% or higher people will still choose to hold bonds at negative real interest rates because the alternative is currency -5% whereas the bond is -5% + interest.

  • Hap

    Ok, unless I am grossly mistaken, there is absolutely no way that the govt can dictate interest rates for its bonds/bills lower than the prevailing market rate.

    If the 1 year surprising spikes higher to something extraordinary over the inflation rate (assuming some circumstances beyond anyone’s guesses) to 5% and the yield curve inverts, but the govt decides it cannot afford to finance its short term paper above 1%, then there will be continued demand just because it is US paper, yet the market is trading @ 5%. No chance. So, should that day ever present itself, I will show myself back here to acknowledge that you were correct in that invalid assumption. I will gladly admit if I am wrong, but this seems illogical and ultimately impossible.

  • Cullen Roche

    I don’t see how you can deny it. The average marketable rate on US govt debt has been below the rate of inflation for much of the last few years as I showed earlier. This isn’t something I made up. It’s just facts.

    It’s not really a debatable point. The Federal Reserve is the monopoly supplier of reserves to the banking system. If it wants to tell the banking sector that the price of something is X% then it doesn’t ask for permission. It sets the rate and challenges any arrogant bond trader to fight it. Smart fixed income traders recognize this point. You don’t fight the Fed because the Fed is the reserve monopolist.

    We are users of the currency. If you want to participate in the US banking system where deposits are denominated in dollars, then you have no choice about the matter. You can either participate, use deposits and save in your deposits. Or you can be a smart user of the currency and at times choose to save your money in something that is also risk free, but pays interest. Whether the govt chooses to let you earn 0%, 1% or 100% is totally up to them. If the govt chooses to exercise its authority over the cost of its bonds then it matters not what the “free market” says about it.

  • Sharon Green

    Thank you for your counter on this video, Cullen. The video says nothing about borrowing from ourselves at the present value of future GDP, using the Keynesian Economic system that has kept us out of a depression since The Great Depression, of which Bernanke was an expert. Spending during troughs and austerity during booms…banks do not “print” money.

  • Hap

    If the govt ever targets a rate of interest for its Treasury bills, notes or bond lower than the market rate, I will gladly come back here and concede your victory. Everything else you are saying is not the point I am trying to establish. You keep going off about inflation vs. market rates. These are not the same things. If the govt has ever set the arbitrary determination for its rates below the prevailing rate of interest given by the markets, please cite the examples. For an intelligent man, you are losing me on this critical point where you erred.

    Fact: the rate of inflation ≠ the market rate of interest.
    Fact: the Fed only manually sets the Fed Funds rate.
    Fact: the Fed, through asset purchases, which have been clearly telegraphed to the universe via QE, purchase a variety of interest rate securities of specific maturities, thus moving the longer dated securities’ rates lower (we can both agree price is inverse to yield, so $40B – $85B per month of buying is going to increase the price.)

    These are not the issues which you continue to miss in my point. You continue to stick to the maxim that ‘the govt’ can arbitrarily establish rates to whatever is declares. This is false and if it happens when the govt ever, if ever, decides that financing cost of whichever maturity is in excess of the prevailing market rate of interest and they manage to hold an auction at below market rates, I will gladly come back here and admit you were correct. Otherwise, you are just incorrect in that assessment of this analysis.

  • Cullen Roche

    If you think the Fed can’t set interest rates then fine. I give up.

  • Dave Tek

    The Fed can target interest rates across the belly of the curve by targeting which issuance it will buy with QE. Without QE I don’t think the Fed has this ability. Feel free to prove me wrong. A great example is the move from 1.4 to 3 on the ten year. They held the line there and we did not cross the rubicon.

    However, what the Fed does can trap it. Targeting low interest rates give investment banks a nice spread on the fed window vs the stock market. So the stock market becomes a “safe” alternative to bonds. Can the Fed levitate both?

    Another issue is that of the non-investing side of banks, if they cannot make money on the window/stock spread, they will be forced to dial up lending. They certainly have the reserve requirements met. The Fed does not want this as it will stoke inflation.

    I looked at the US debt clock. Derivatives are 600+ trillion dollars. But they are dropping at a rate of 1MM per second. At that rate it will take 2 years for it to vanish. Perhaps that’s how long QE will last.

  • Cullen Roche

    The US Tsy doesn’t need the Fed to buy bonds if it decides it will never issue another bond over 1 year at a specific rate. The Fed does not dictate the rate and issuance of the US Tsy’s debt. Still, the Fed could buy all US govt debt at whatever rate it wants. Anyhow, you guys seem to disagree. So be it. I am not here to twist people’s arms into believing me.

  • Odie

    You are missing the boat because that mechanism will happen with a government debt of 16 trillion or 16 billion. The nominal size of our debt holdings will be irrelevant to an “end-of-growth” inflation. In fact, the government could and maybe should increase the debt even more but in the process create assets that enhance future productivity while preserving limited resources. That will be a way to “save for the future”. Not by putting money in savings vehicles (+gold) and think we are prepared for the hard times ahead.

  • Odie


    However, the top 10% hold 75% of the wealth in this country so you can say they do NOT pay their fair share. The problem is the “rich” do not spend that additional income back into the economy. Instead, the government needs to borrow it back to spend it in their stead. Every time it does that it gives out a receipt (Tsy) and pays interest enriching the well-off even more. The “poor” that get the handouts have not the luxury of saving anything so the money will go back to the rich and the cycle continues.

  • Cullen Roche

    Hey Odie,

    I am definitely not demonizing the people who are recipients of govt spending. I am perfectly fine with the govt taxing the wealthy more and taxing secondary market transactions at regular income rates. That would hurt me substantially, but I think it’s the right thing to do. So don’t take my wording the wrong way.


  • Odie


    I saw your comment to raise the capital gains rate to income tax levels so I think we are on the same page here.

    I was just these days thinking a bit more about the interest problem and I am starting to think what absurd concept it actually is. The standard narrative is that foregone consumption and risk need to be rewarded. But let’s look at the alternative if there are no monetary savings: You buy a real asset which is probably not useful for you now; maybe in the future but who knows?! There is also a real risk involved: Our ancestors could not save much food because most of it spoiled too quickly. Now we just can save money and buy whatever food we please years later.

    In essence, that we have money which can be saved forever is already a luxury. Does it really need an additional incentive such as interest? And maybe inflation is just the price we pay for that luxury.

    Just some recent thoughts…

  • Satan2Liberals

    Sorry I didn’t find your supposed myth busting all that convincing.

  • Satan2Liberals

    That attitude demonstrates too much hubris to be taken seriously whatsoever.

  • Nils

    Odie, the question of what’s the “fair share” is hard to answer. Fairness is not a concept that exists in nature…

  • Fay Valentine

    Well, i watched the video and me conclusion is the following:

    1. The Banks take the provid of lending money (that they don´t have)
    to people, that want to buy goods now, and pay later in form of
    “interest” that have to be payed with money that don´t exist.

    Conclusion: The Bank is always the winner, the people are always the
    looser. They have to work extra for the benefit of the bank, to get
    extra money from somebody else, which is at the end the total looser and
    lost everything (to the bank).

    I learned that is is common practive in the usa to loan money
    to buy something now and payback later. Speaking for me, i safe
    money in advance and pay cash. Therefor the only use of a bank
    for me, was to store my safed money. I learned in shock, that
    even great companies loan money for investments. That i can´t

    Golden Rule: First Save than Spend -> No Risk, greater profit
    Loan and pay back with interest -> High Risk, possible default

    2. The Bank takes no risk and is bailed out by the tax-payers

    3. Goverment Bonds are a silent tax to the backdoor
    It is true, that a Bond is also a value paper with interest, but
    the interest has to be payed in form of taxes or new bonds.
    It is a snow-ball system and a spiral to doom.

    4. The Problem is not the Goverment or the Fiat-Currency, it is
    the Finanial System based on Profit and interest. The Interest
    has raises the Dept so high, that no goverment can pay it back.
    The Video shows this very clear. There is more dept than there
    is Money. This system will collaps, like all the hundreds of
    other (fiat)currency systems before. It´s only a question of time.

    5. I would not jump on gold, but i invest in silver
    Over the centuries of mankind the gold/silver relation in value
    was 1/12 to 1/20. Currently this relation is at 1/62. Either gold
    is more than 3 time overrated or silver is 3 times underrated.
    Silver is more scare than gold, because it is used in large
    quantities in the industry. (mirrors, integrated circuits, solar
    panel, powerlines, textil-industry e.c.)
    The total silver reserve on this planet is estemated to last
    at least 20 years.
    All of that makes it a perfect hedge for my retirement saving.

    (Sorry for my terrible english)

  • Nils

    Thanks for playing.

  • Hap

    Still missing the point.

    HYPOTHETICALLY, if “the market” for 1 year paper is 5% and the govt declares it will only offer 1% for their 1 year bills, you are suggesting investors will accept that 1% coupon vs. the market rate of 5%?

    This has NOTHING to do with Fed Funds rates, QE purchases to influence (not set) rates of longer dated notes and bonds.

    I am proposing a hypothetical instance, not a present circumstance of real negative rates or where inflation is or what the color of alien blood is… things that have nothing to do with what I see as illogical to the argument you continue to stick to stubbornly which again is this scenario I keep proposing.

    I keep suggestion a scenario where 1 year bills are trading at 5% and you continue to avoid the question with your wholly belief that ‘the govt’ or the Fed (they are not the same thing, which I am sure you are aware) can peg 1 year bills to 1% and ignore what the market rates are offering.

    So, I wish you luck in whatever your blog or education this site is dedicated towards. If you can reference a time in history that this has happened that the largest debt market on the planet as worked outside of the constraints of market pricing of its yields, I would love to read up on this event. And should said even ever occur in the future, I’ll happily step back here to comment and bow to your wisdom. Otherwise, your logic is horribly flawed and stuck in the present and ignoring my hypothetical event of ‘the market vs. the govt.’


  • Odie


    Current behavioral research is showing that your statement is most likely not true. Toddlers as young as 15 months already show a sense of “fairness”:
    Even our primate cousins reject unequal pay:

    Humans are social animal and there is evolutionary pressure to adhere to social norms that benefit the group over the individual. Nevertheless, the question arises in this particular case about taxes on the wealthy whether we would consider it fair to base the taxes paid on income or wealth.

  • Dave Tek

    Oh I see what you’re saying. You’re assuming status quo. But let me clarify one thing, Argentina can’t do this right? I mean you are saying that you need the cleanest dirty shirt currency and reserve status to pull this off?

  • Johnny Evers

    No fair suggesting things that have never happened will happen, without addressing the potential negative consequences.
    MR is basically proposing running up so much debt that the only way to deal with it is for the central bank to buy it.

  • http://pragcap Michael Schofield

    Basically it’s just another conspiracy theory. Identify a guilty party, soothe the reader by suggesting that it’s out of his hands. (Believing “there is something I can do” creates angst). This one tries to sell something. All it needs to be successful is a good supply of morons, no worries there.

  • Nils

    Well I make four times as much as some people but pay 20 times as much in taxes. Hard to say whether that’s fair or not. I don’t think I’m 4 times as well off.

    We might be social animals, but the social structure of a country is far more complex than that of a small tribe.

  • Nils

    Johnny, MR isn’t proposing anything.

  • Johnny Evers

    Hi, Nils.
    In a roundabout way, MR is presenting this, because it advocates policies that will lead to a situation in which there will be so much federal debt that the only way to deal with the interest payments is for the Fed to buy bonds or issued debt at .25 pct.
    Or at the very least, MR dismisses policy ideas to deal with debt that escalates faster than growth.
    Look, I think the direct issuance of money is an idea some advocate. It will be easier to push the idea when it’s the only potential way out of the situation we’re in.
    We’ll see how Japan does it.

  • Cullen Roche

    The Fed can set the price. It is the monopolist. If the Fed wants the price of potatoes to be $100 each and it has the legal authority to buy potatoes (which it doesn’t at present) then the price of potatoes will go to $100. The Fed becomes the market because it is the reserve monopolist. I don’t know how else to explain this….

  • Johnny Evers

    Well, of course it theoretically can do this.
    But you’re not dealing with reality of such action or the consequences.
    First of all, the Fed chair would probably be fired on the spot.
    Second it would create a panic in world markets.

  • Cullen Roche

    So, if you bring up a hypoethtical hyperinflation & debt scenario and then I counter it with a hypothetical of my own then your hypothetical stands and mine gets brushed aside as nonsense.

    I give up.

  • Johnny Evers

    I think the scenario Hans presented is extremely likely.
    Something like:
    $20T in short-term debt rolling over, 5 pct inflation, the market demanding 5 pct on T-bonds.
    That would be $1T in interest payments, which would be politically risky.
    Your solution was that the Fed will issue bonds at .25 pct and/or buy bonds.
    Now you’re saying that’s not your solution?!
    OK — what happens in that situation?
    Are you saying that T-bonds will remain lower than inflation?

  • Odie

    Rates are essentially set in the pre-auction treasury market when the market starts to anticipate the yield of the new treasury issue. The bids at the day of auction will come in at the rates determined in the days before. The Fed can with its ample purchase power nudge the market towards the rate it envisions. Sure, not in fell swoop from 2% to 5% but from 2% to 2.3% should be no problem. See also:

  • Cullen Roche

    I don’t know what you’re confused about or even debating. There is no “free market” in govt bonds in the USA. We are not Greece where the market sets rates and the ECB is a foreign bank with no central treasury. The US govt is the price setter if it wants to be. The US govt doesn’t have to let the “free market” determine the price of its bonds. The Fed is a reserve monopolist. If it wants to set the price of bonds then that’s the end of the story. If the US Tsy wants to sell 30 day notes at 0.25% or 100% then that’s the end of the story. And unless hyperinflation breaks out then you have to play their game because it’s the only game in town. There are no bond vigilantes in the USA. No one can force the USA to pay more interest than it wants to pay. I am sorry to break your “free market” heart, but it doesn’t exist. There are market takers (like you and I), there are market makers (like banks) and then there are market monopolists (like the Fed). If the Fed wants MBS to be worth 100 cents on the dollar then presto changeo. If the Fed wants Goldman Sachs to survive then presto changeo. End of story. That’s how this stuff works at an operational level.

  • Odie


    The solution is simply to not use monetary but fiscal policy to deal with this. Cut spending, raise taxes. That will reduce spending power of the private sector and keep growth of prices more in line with growth of output again. Btw. There are no $20 T treasuries being rolled over per year. FY 12 it was $8 T and with the decrease of T-bills versus notes and bonds, less debt will need to be rolled over the coming years.

  • Johnny Evers

    Again, yes. The Fed CAN do these things.
    But I ask you again — what will happen when negative rates continue and if the Fed begins to buy debt directly (and not in a roundabout way via QE)?
    If our ‘safe money’ continually loses real purchasing power, isn’t that going to generate negative consequences?
    This isn’t a hypothetical. It’s happening now.

  • Cullen Roche

    Your safe dollars in your pocket and your bank accounts are always losing purchasing power. Are you throwing them in the trash because of that? Of course not.

  • Johnny Evers

    Thanks, Odie.
    I took the $20T estimate from a few years down the road. Most of it I understand is shorter maturies now.
    Fiscal policy might work, except that tomorrow’s spending has already been enacted into law today. And budget cuts and tax hikes are impossible politically. And MR would tell you those things would cause a recession.
    Again, we are being backed into a future in which we monetize government spending.
    Let’s see people defend that.

  • http://pragcap Michael Schofield

    There’s an article on Josh Brown’s site about David Rosenberg. Seems his tilt towards bullishness is pissing off his followers, not because he was wrong, but because he is abandoning his bearishness. Seems they are calling him a traitor. The name of the article is “Demented”. That’s the word I’ve been looking for.

  • Odie


    None of the things you worry about is happening right now. Money is not losing purchasing power; inflation is lower than desired.
    The Fed does not need to buy the debt of the government. The treasury has no funding problem. There is actually TOO MUCH demand for treasuries. Hence, short-term rates are lower than desired.
    What is happening right now is that consumers and businesses are not spending enough. Output could be higher but is restrained by consumers and businesses not spending.

  • Johnny Evers

    Cullen: Of course I don’t throw away my dollars.
    I only keep what I need for a medium of exchange.
    The rest I allocate to maintain my purchasing power, as Orcam suggests.
    T-bonds used to be a good place to do that — what do I do in a future in which that’s not possible?

  • Odie


    T-bills have been tredning down since 2009:

    Fiscal policy may not only work, but will be the most powerful tool to stop inflation. Sure, there are political constraints but those are mostly there because politicians don’t understand the impact of fiscal policy on our monetary system. If we start acknowledging the tight relationship between monetary and fiscal policy we could finally bring this debate back to earth. Running a government surplus will reduce GDP growth which is precisely what you want when you have accelerating inflation.

    Don’t forget that government spending is private sector income. As long as that income is backed by an economy that produces real goods and services for purchase there is no problem.

  • Odie

    Precisely, it is not that nature does not know fairness but that it was never designed to be applied to a huge, interconnected society like we have today. That leaves us with two options: Forego the interconnected economy and go back to small tribes or evolve our social relationships to keep pace with the scientific and technological advances we made.
    I would prefer the latter but I am really worried about all those people who cry “Me, me!” all the time and who look at a society only from a microeconomic point of view.

  • Nils

    What’s fair and what isn’t is entirely subjective. You can’t measure fairness. If nature was fair, I’d be tall and handsome ;)

    Have you ever read “the selfish gene”? There’s quite a lot of game theory examples there.

  • Tom Brown

    I loved “the selfish gene.” Great book.

  • Geoff

    Nils, you don’t need to be tall and handsome when you make 4X as much as other people. :)

  • Tom Brown

    Cullen if you were on a TV panel with Matt Kibbes, and he said his favorite tag line “We’ve got to stop spending money we don’t have” how would you respond? Qualified agreement? Qualified disagreement? A question back at him?

  • Cullen Roche

    I would ask him why he thinks we don’t have access to money. Borrowing rates are at all-time lows and tax receipts are at all-time highs. As far as the govt’s “access” to money, it’s never been better!

  • Nils

    I wish, Geoff ;)

  • Geoff

    I prefer your answer to the typical M M T response, which would probably be that the govt has unlimited access to money because they are the monopoly supplier. But that type of response tends to cause people’s eyes to glaze over. :)

  • Tom Brown

    That’s a good response. I don’t know how many times I’ve seen Matt on various programs recently. He’s the head of “FreedomWorks” a Tea Party organization. He’s always very polite, even tempered, and comes across favorably even when he can’t get a word in edgewise. However, when he does manage to get a word in edgewise, it’s always “We’ve got to stop spending money we don’t have.” Rather than address this message head on, the other people (hosts or other guests) just go off on another tangent. Obviously that’s his primary message. If he has a chance to say anything, that’s what it will be. I share your opinion on this and I wish sometime on some show somebody would simply put your question to him. It’s so frustrating! I’d love to hear his response to that.

    I think people would be really interested in that question put to him and the follow up discussion. But the conversation never seems to go there.

    Instead the implicit consensus seems to be “well, ok, that’s a given, but lets talk about other stuff: let’s talk about how extreme the Tea Party is, or how unreasonable it is” etc. The funny part is Matt’s personality is a testament against those other complaints about the Tea Party. But a giant opportunity to discuss what’s foremost on Matt’s mind (and presumably the minds of other Tea Party folks) is squandered.

    That’s why we’ve got to get you on TV Cullen… the conversation could take a turn for the productive!

  • Nils

    Instead we have people like Jim Rogers of Broken Record LLC repeating the same old story since the 80ies, yet somehow they still put him on TV and nobody ever calls him on his bullshit.

    I hardly ever see anything productive on TV, and most other media is crappy as well because so called journalists either can’t be bothered to do research, trust self-anointed experts too much or simply don’t have the intellectual capacity to grasp a subject.

    I think it’s called Gell-Mann amnesia…

  • Nils

    Seems I edited too much.

    And yet we trust them to report accurately on topics we don’t know much about. I think it’s called Gell-Mann amnesia…

  • GLG34

    Seriously. Jim Rogers, Peter Schiff, Marc Faber. These guys all say the same old tired thing every time they’re on TV. Why does anyone listen to them?

  • boby

    @Cullen Roche

    You sir are just trying to justify a system that is obviously feeding you. You are part of the problem, not the solution.
    Thank you for nothing.

  • Cullen Roche

    I actually am not saying whether the system serves us well or not. I am simply pointing out that the system is not the scam that some people claim it to be. But hey, if you want to buy gold and silver and stare at it for the rest of your life as you wait for the world to burn then be my guest.

  • Owen Prescott

    I was suspicious by the fact they might be bias. Can anyone recommend me some good books on the economy and how it works, either on a global scale or the UK? I am unfamiliar with a lot of the terminology so nothing to advanced.

  • yuter

    The whole word is always facing economic crisis over economic crisis over and over again. We need a reform and a HARD one. The system is just fine? I am 100% sure that you are not the one that is suffering consequences of this system. Why do people are listening more and more the ones criticising this system? Because of fear??? NO. Because of PAIN. Because of the disparity of the rich and the poor and that all the resources that are being sucked up by those parasites.
    Don’t think that people will be satisfied with your pseudo debunking because this system is a ever growing PAIN machine and people will always wants explanation for their PAIN and SUFFERING and you are certainly not helping anybody here.

  • Nils

    Don’t think that people will be satisfied with your pseudo debunking because this system is a ever growing PAIN machine and people will always wants explanation for their PAIN and SUFFERING and you are certainly not helping anybody here.

    Just because you don’t like it doesn’t mean it’s wrong. Just because most of the people don’t understand even basic commerce, accounting or economics doesn’t mean it does not apply.

    Giving people bogus explanations or a boogey man to explain their PAIN and SUFFERING is a business as old as pain and suffering.

  • Morgan Warstler

    You misspelled BITCOIN.

  • Nils

    Fear sells.

  • Nils

    It’s also feeding you. You aren’t starving right?

  • Reader

    Cullen – why don’t you address this video properly instead of dismissing it after 5 minutes? I think your views are threatened by this explanation. To quote Jim Rickards on what he thought of Michael Maloney’s video:

    “You know for years before I got involved in really studying gold and some of the things
    I write and talk about today I was a monetary economist for decades, you know
    in your video you talk about the primary dealers, I was chief counsel and chief credit officer
    for one the largest primary dealers for ten years so I had an inside seat on the Treasury market and have had the privilege of working with several former Vice Chairman of the Board of Governors: Johnson and David Mullins going back to the 80’s and 90’s so I’m very immersed in what you’re talking about I thought it was extremely accurate, extremely clear, I didn’t think you were stretching on any points it was is really like something out of a PhD course except that it was very easy to understand…”

    Jim Rickards has better qualifications than you and he is applauding the video. Review the whole video. Respond.

  • Nils

    Might I trouble your for a full reference for that quote?

  • Cullen Roche

    I actually went up to 10 minutes. But sure, I’ll go back and watch some more just for you.

    -At 10 minutes he says the “true definition of inflation is an increase in the money supply”. This is Austrian economics nonsense. This is just purely wrong. Inflation is rise in the price level. There is ABSOLUTELY no hard and fast rule that says the money supply will lead to price increases. That’s just wrong. You can easily have a deflation with a rising money supply so it’s really not helpful to define inflation as an increase in the money supply.

    In the next section he goes off on some rant about how the Fed is committing fraud by collecting the interest on US govt bonds. What he doesn’t mention is that the Fed remits interest on the bonds BACK to the US Tsy at the end of each fiscal year. That actually reduces the federal deficit which is something Maloney complains is too high through the video. So he’s just flat contradicting himself here.

    Then he goes on some constitutional rant stating that the current system is unconstistutional. This is total nonsense. The Fed system was created via Act of Congress. It’s not unconsistitutional at all. This is just political nonsense.

    Then at 16:40 he says that this system benefits the govt and bankers the most because they get “to spend the money into existence first”. But in the last section he said “92-96%” of the money supply was created by banks when they make loans. Loans create deposits. Banking 101. Who gets those deposits first? The borrower! So he once again proves he doesn’t understand basic banking.

    Then he goes off on the usual nonsense about how the Fed is “owned” by the banks because they get a measly 6% dividend from the Fed. If you look at the Fed’s 2012 annual statement you can see how ridiculously misleading this claim is. They paid EIGHTY EIGHT BILLION back to the US Tsy and just 1.6B in dividends.

    Total distribution of net income 90,516
    Dividends on capital stock 1,637

    Interest on Federal Reserve notes expense remitted to Treasury 88,418

    I could keep going, but almost every line in this video has basic errors in it. He’s just selling you fear and nonsense. There’s really no reason for anyone on the planet to watch this video for anything other than a good laugh. Sadly though, I am sure his phones are ringing off the hooks from lemmings who want to buy gold from him.

  • Tom Brown

    Try right here on pragcap under the “Education” tab at the top.

  • Greg

    “So what is? Debt?”

    Yes to a degree but not govt debt, private debt

    ” If oil prices were $50 a barrel that wouldn’t jump start growth?”

    Might some, but we would also get less oil production. Some companies cant make any money til oil hits 80-100$ barrel

    “If rich people deal primarily in finance then middle class people deal primarily in real world assets. Several construction workers can build something worth millions in gdp. I would say that the finance world is humming along on all 12 cylinders while real world asset dealers are running on 2.5.”

    Agreed. Thats what I was talking about in my other comment to you.
    Saving money and trading crap on a secondary market is NOT investing, building something is. Too many rich people are not investing they are just playing in the Wall St casino. Yes their markets are rising buy there is little real activity to support it. It wont last

    “Since the middle class person doesn’t have much net capital, the greatest thing you can do for him is to lower his cost of living. Same with many small businesses. Transport and raw materials cost increases eat margins. One major way to alleviate this is to reduce prices for energy.”

    Lowering the price for energy will lower the supply of it rather quickly. Now, we can forgive some debt and lower the cost of living that way

    “Of course you COULD make the argument that part of the problem is everyone is riding the Bernanke put instead of bothering to make real world (riskier) investments…. But the Fed is completely impartial, apolitical, and beyond reproach…..”

    Agree completely except the last sentence but I think you might have a tongue mark in your cheek

  • yuter

    “Just because you don’t like it doesn’t mean it’s wrong.”
    You are right. I’ll tell you want is wrong then.
    A system that allows and encourage inflation IS WRONG. A system that steals working class hard earn savings IS WRONG. A system that protect bankers mistakes and their frauds IS WRONG (no I didn’t forget about HSBC). A system that corrupt politicians to help accomplish their agenda IS WRONG. A system that is leaving tons of people behind IS WRONG. A system that allows an ever growing disparity between rich and poor IS WRONG. A system that encourage over-consumption and encourage producing trash instead of stock IS WRONG. A system that crush anyone who is trying to criticized it IS WRONG. This system is wrong up and down the river, no matter which way you look at it and no matter how hard you are trying to justify it. I’m pretty sure you are one of those parasite that is taking advantage of this scam for trying that hard to justify yourself of the goodness of this system but I’ll tell you this: You cannot stand before your creator and claim … it is not a lie. You are part of the evil until you denounce it.

  • Gloeschi

    I was surprised Rickards endorsed this video. My suspicion is he was tricked into doing so. He knows better than that.
    Regarding “stealing future wealth”: I think what the video wanted to say is that current deficits (and hence debt) must at some point be paid by future taxes; in my understanding, government debt is a claim on future tax (-payers). No government debt can exist without any taxpayers standing behind it. Cullen might disagree. Maybe elevated government debt was only sustainable since GDP kept rising? Imagine a world in which GDP would have fallen over a longer period. You can’t tax your constituents enough in order to keep debt-to-GDP stable. See Greece. GDP keeps falling, and even if they had managed to reduce debt a bit, debt-to-GDP would still have gone up.
    Inflation: depends on how broad you define “money”. For a pet store owner it doesn’t matter if you pay in cash, debit card or credit card. We live in a debt-based monetary system, so money = debt. I like to use TCMDO (Total Credit Market Debt Outstanding) as a measure of money outstanding. It’s at $56 trillion. It doesn’t matter if the Fed printed $2 trillion – it is dwarfed by the amount of deleveraging by ABS alone (from $4 trillion to zero). Banks are deleveraging. Households are deleveraging. The Fed is simply helping the government to sell big chunks of debt in order to replace those other sectors.
    Inflation usually (not always) needs strong real income growth (which is not the case). The only way I could see inflation is if the Fed / Treasury would trash talk the dollar (imported inflation). However, the US is not very trade-dependent, and it would take a huge drop in the dollar to move the needle. Alternatively, producers of raw materials might begin pricing their stuff in a currency other than the dollar (but that would require the fall of the USD as #1 reserve currency, and that’s a long-term process).

  • Johnny Evers

    I think Cullen will eventually ‘denounce it.’ I think he’s being very cautious with policy prescriptions.
    Just my impression, anyway.
    The system is flawed in the ways you describe. At best, we’re muddling through, and eventually there will be pressure to change things.

  • Hap

    Don’t hold your breath on him denouncing it; ever. He & I exchanged a debate about market pricing of interest rates vs. ‘the govt’ or the Fed. I continue to disagree that the govt can determine an arbitrary rate of interest for its Treasury auctions at a whim. Whereas he continued to argue about what present levels of inflation and not to fight the Fed. Clearly, he is a bright young man, but completely deluded as to what dictates prices in the real world.

  • Vincent Cate

    Cullen thinks that the Fed could peg short term interest rates at 0.1% forever and the government could borrow at these rates and things would be fine. I am sure things would not be fine. I am not sure how best to explain or prove it though. To me this is his best argument (wrong though I think it is) at the moment.

    First, if they did that, it seems clear there would be about $15 trillion in bonds not rolled over. So I think there would be like $15 trillion in new cash, and hyperinflation. But this does not convince him since he counts bonds as part of the money supply and does not agree the velocity of money will go up just because people got out of bonds. So it is hard to pove even massive monetization would cause prices to go up.

    I think Japan with 0.2% on 5 year bonds is trying what Cullen says the Fed could do. So I think we will get a demo of this failure. But each situation is different, so even that does not prove anything about the USA.

    Do not see how to get a meeting of the minds on this.

  • Cullen Roche

    The point I keep making is a factual one – the Federal Reserve is the monopoly supplier of reserves. If they want to set the price of govt bonds then they will simply name the price. They could set the long bond in much the same way they set the overnight interest rate. The fact that they set the overnight rate PROVES that they could set any rate. The Fed dictates price if it wants to. That’s all there is to it. End of story. Could bad things happen if the Fed did that? Sure. But that doesn’t mean the market controls the yield on US govt bonds if the Fed decides to exert its powers over prices. A better case is Greece and the ECB. As long as the ECB is a willing participant in the Greek bond market there is no “free market” in Greek bonds because the ECB effectively becomes the price setter by exerting its monopoly powers.

    I know this concept bothers a lot of “free market” type people, but it’s one they should really just get over. The Fed is a fantastically powerful entity. If it wants to set the price on TVs, interest rates, or whatever then it can do it. That doesn’t mean this is a good idea or will have no negative ramifications. But denying it is just denial of operational facts.

  • Hap

    Let’s just get around the hyperinflation concepts and the goldbug theories (which I am neither denouncing nor agreeing with) for this purpose of illustrating my point. His argument is that the government (or the Fed) can dictate the market price for its interest. This is so flawed, it is beyond comprehension. The ONLY market the Fed physically affects are… Fed Funds, thus the name.

    A Treasury auction is created to issue new paper; bidders place a variety of bids with their size where they would like to purchase this paper. If 1 year rates are at 5.0% there is absolutely no way that the government or the Fed or the Treasury can decide they will only accept 1% (or any lower) rates. It will never happen. If, by his logic, this was remotely possible, then these interested parties (the Fed as he has suggested) would never have allowed the 10 year to spike to nearly 3% because Doves, Inc at the Eccles Building would be worried about the deleterious results on housing and mortgages as a result. And ta-DA! We have seen that decline in mortgage applications since those rates did spike since May. Therefore, this ‘non-market pricing of interest rates’ theory is so horribly flawed, I almost feel bad.

    If he returns to discuss what “HAS” been happening vs. what ‘COULD’ happen, I would still get more giggles. And I will await the day when the government dictates its own determined outcome of rates of interest it chooses to offer below market rates and concede defeat. That day will never come, so I have decades left to live and await such an outcome.

  • Vincent Cate

    I agree with Cullen that if the Fed is willing to make enough new money it can hold interest rates down by buying bonds. This is clearly going on in both the US and Japan. The 0.2% interest on 5 year bonds in Japan is not a free market rate really.

    They can do this for awhile but I don’t believe it is sustainable. Just not sure how to convince people.

  • Cullen Roche

    No, that’s still not right. It’s not about quantity. It’s about price. The fed just has to name a price like it does in the overnight market. That’s all! They don’t have to print trillions to control prices. The Fed sets the overnight rate by declaring the target rate and then managing fluctuations via open market operations. But it’s the naming of the target rate that does all the heavy lifting. Once the Fed names a rate the market front-runs the Fed because the market knows it can’t compete with the Fed on price. That’s how the Fed sets prices.

  • Vincent Cate

    If the market thinks the Fed is lowering interest rates then they will front run the Fed. If the market thinks that everyone is getting out of bonds then they will sell short to front run other sellers.

    The only way the Fed can really control the price is if it is willing to buy all bonds for sale below that price. So if they set a price, they lose control of the quantity. You can see this in Japan. Sure they have 0.2% on 5 year bonds, but they are having to increase the money supply by an average of more than 1% every 10 days. If they could just name a price and sit back without buying, they would do that. It would not work.

    There is a supply and demand situation, it is just that the Fed with the ability to make money has an unlimited buying power. So they really can force up the prices on bonds, at the risk of losing control of the quatity of base money.

  • Johnny Evers

    To set the rate on T-bonds, the Fed needs to buy T-bonds, as it is doing right now.
    I agree the Fed *can* do this.
    I don’t see, though, that if the Fed decides rates will be 1 percent (for example) that the market will go along with this and not start looking for other options. So the Fed will buy more and more bonds.
    My issue with the current state of affairs is that this is something that seems inevitable. Our policy options in a high debt, high deficit world are very limited. Fiscal policy is impossible and raising rates is impossible.

  • Morgan Warstler

    Cullen, please dear god man.


    The Fed is weak tea. The Hegemony is king god.

    The fed is OVERLY concerned with public perception NOW. There is a normative system in place that binds them.

    Imagine if the top 1/3 of America got REALLY gets pissed off at the Fed.

    Look, just to pass the ideological turing test, can you tell me that you truly understand the point I’m making?


    And pssst! it’s the likely voters that DECIDED to not let Treasury run MP.

    Those bastards the hegemony they demand your FEALTY.

    So, if by chance I’m right, do you have any point or policy proposal that can CREDIBLY HAPPEN, where the hegemony approving it is whats credible.

  • Cullen Roche

    So you’re arguing that people won’t buy 1% t-bills with, say, 5% inflation. Yet, every day for the last 100 years people have held 0% bills with avg historical inflation of 3.5%. I don’t think your math is adding up there….

  • Cullen Roche

    NO, that’s not true. If the Fed didn’t buy the bonds then the Tsy would just issue them at 1% just like it issues cash notes. And the bonds would mature every year at par and anyone who sold the bonds would feel like an idiot for foregoing the 1% interest rate in favor of holding a cash note that yields 0%.

  • Morgan Warstler

    Cullen, you do realize the Fed has to be able to run monetary policy without govt. debt, right?

  • Odie


    You really do not get it. If the government cannot roll over its debt there are two options:
    1. It does not pay out the principal upon maturity (default) which means the population just lost the amount of whatever debt is due.
    2. It cancels other spending or hikes taxes to pay back its debt on the expense of the taxpayer or federal fund receivers.

    In both cases, debt gets destroyed which means money gets destroyed. Taxpayers and/or debt holders will have LESS monetary assets. You just put the economy in the biggest DEFLATIONARY sinkhole you can imagine because people will have either less savings or less income.

  • Johnny Evers

    Well, geez, let’s do it then.
    And why 1 percent. Why not .25 percent?

  • Cullen Roche

    Morgan, the Fed doesn’t actually HAVE to run monetary policy at all. We choose to let the Fed fiddle around with interest rates and QE. The Fed doesn’t have to do anything except make sure the payments system works. The Fed is a clearinghouse. It has no responsibility to be the market maker in interest rates or really anything else. You free market guys and efficient market thinkers like Sumner should love the idea of getting the Fed out of the markets, letting them play clearinhouse like they were originally designed to do and stop with all the other tinkering….Instead, guys like Sumner scream about efficient markets, rational expectations AND the need for Fed policy. Sheesh. Do you think he even realizes how many contradictions and misunderstandings are in all of that?

  • Johnny Evers

    Debt isn’t money.
    If I borrow money from the bank and then declare bankruptcy, my deposit is still out there. The bankruptcy is neutral — bank loses an asset, I lose a liability.
    Overall, the economy benefits, because the debtor is free to create wealth. Also, money was created that is not tied to a liability.

    It might be different if T-bonds were money. But Cullen says they’re not.

  • Vincent Cate

    Governments that can print money never take the choices you have listed. They always make more money to pay off debts. This is not deflationary. Can you find a single example of a government with debt in its own currency equal to over 100% of its GNP that chose one of your 2 options instead of printing money? I don’t think so.

  • Odie

    Nonsense, the bank loses capital; it has to make up the lost loan or why do you think regulators worry about the capital position of banks? Why did the government and Buffet had to inject capital into the banking system after Lehman went down? There is no free lunch.

    And sure, a bond is not money in the sense that you can pay with it at Walmart but a monetary asset in the sense that you can exchange it for an equal amount of $ at any time. Take your CD (if you have one): Now let the bank declare it is not paying it back. Would that really make you spend MORE money? Would you not say you LOST money?

  • Cullen Roche

    You’re thinking too micro. It’s not really neutral because the bank takes a writedown on its capital. So the aggregate private sector is worse off because you have a household that isn’t creditworthy (because they defaulted) and you have a banking system with less equity.

  • Odie

    And where is the population that out of the blue decided they are not going to save any money anymore? Because that is what they are doing if they are no longer buying gov bonds.

  • Johnny Evers

    In the big picture, the financial system is more healthy when bad debt disappears.
    If there is no ‘free lunch’ why do we protect institutions that made bad loans?

  • Johnny Evers

    We can only save by buying government bonds?

  • Odie

    And I want to add that you should name what you are really worried about: That our political leadership will be unable to implement the right policies to deal with those problems. I actually share that skepticism. However, that has nothing to do with the size of the gov debt. Instead we should do what Cullen is trying here: To explain to the public how our monetary system is working that we can implement the right policies to keep our economy growing. Hyperinflation scare tactics are counterproductive.

  • Cullen Roche

    No, the private sector is actually healthier when the debt expands and leads to productive output which increases the net worth of the system. If the debt is simply contracting then nothing positive is really occurring. You’re just shrinking. The whole purpose of money is to create other things and increase future production. Debt/credit is just one instrument that allows us to do that. You’re doing the “debt is always bad” thing. Stop thinking of debt as being necessarily bad. Start thinking of debt as being good when it results in future production and being bad when it’s just used to leverage up the financial system. I’m way oversimplifying here, but you’re thinking too micro.

  • Johnny Evers

    I agree that debt is positive when it results in future production.
    But that isn’t happening the past 10 years.
    Studies show that it takes more and more debt to increase GDP.
    In the micro, a man who can only pay interest on his debt doesn’t help the economy. In the macro, a society that borrows to consume isn’t investing.

    PS: How much borrowing is done to lever up on financial instruments and mortgages (which is a financial instrument.)

  • Vincent Cate

    When you get interest rates of 0.1% and inflation of 5% or more, people realize they are better off buying real things than buying government bonds. In all hyperinflations people stop putting their money into government bonds. Really.

  • Cullen Roche

    Maybe you’re right. But when the Fed triennial balance sheet survey comes out in 2014 I’ll show you that that is wrong. Just a heads up. :-)

  • Odie


    Sure, you can save cash. Instead of making an interest bearing loan to the treasury you make an interest free one to the Fed. Or you can take the higher risk and buy corporate bonds or shares. Or do you want to hold private debts like mortgages?

  • Cullen Roche

    If this was true then no one would hold cash ever. It’s obviously wrong. Savers are often indifferent about saving in 0% cash notes and interest bearing notes. The interest is just a bonus to knowing that your note is worth par, which all govt bonds are at maturity because the US govt has no solvency constraint.

  • Vincent Cate

    Cullen, Hussman has shown that the higher the interest rate the faster the velocity of money. It is a continuous function, not binary. Less and less people will sit on cash the higher the interest rate.

  • Tom Brown

    Well I asked Lars Christensen (MMist) what he thought of the video… and got a reply from George Selgin (free banking advocate):

  • Odie


    Of course people are going out of cash once interest rates rise. Who is holding cash when you can get 10+% on your savings account? Just to show how meaningless velocity really is what happened to spending and inflation when interest rates were that high? Take a look at the early 80ies when Hussman’s high rates occurred. It has been proven empirically numerous times that higher interest rates reduce spending and with it inflation. Any model that shows differently is describing the moon’s economy but not the one on earth.

  • Vince Cate

    Odie you are confusing two different things. Yes, of course people will try to get out of cash with higher rates and so increase the velocity of money. Once you think about it, it does seem clear.

    When Volker raised interest rates above the inflation rate then there were not so many people borrowing new money into existence and the inflation rate went down. If inflation is at 15% and interest rates are 5% then any idiot should be able to make money by borrowing new money into existenceand you get inflation. This is the real flaw in Cullen’s “just have the central bank set interest rates at 0.1% idea” probably.

  • Johnny Evers

    Odie, you can save in all kinds of vehicles — govie debt, munis, stocks, corporate bonds, REITs, gold, property.
    Maybe one reason we see the run-up in stocks is that nobody wants to hold cash for very long.
    I suppose that if we continue to have inflation higher than T-rates then it could spur spending; unfortunately, the wealthy are already spending, and any new spending would have to come from people who don’t have deposits or access to credit or wage hikes.

  • Odie


    Most of the assets you mentioned I posted already. And please do not mix up gold or property with monetary savings. Those are real items that you purchase; not financial products. In addition, all assets except gov bonds have one flaw: There is a risk of default/loss. US treasuries do not carry a risk premium (although that may happen soon when the GOP continues with its nonsense). With any of the other assets you may lose money. When people are concerned about the future they want to save in the most risk-free asset there is: gov bonds. The current problem is: There are not enough bonds so interest rates are the zero-lower bound. Some of those excess savings end up in the stock market as you guessed already.

    Where did you find the stats that the wealthy are spending already? The one group that could spend would be businesses whose contribution as %GDP is close to historic lows.

  • Odie


    So with other words you are saying now that the Fed should just raise the interest rate high enough that people will stop borrowing and start saving instead which will reduce spending and therefore inflation? What happened to your and Suvy’s position that higher rates will promote inflation?

    I personally think that your whole discussion by how much the Fed can control rates is rather pointless. I agree with Cullen that no bond trader in its right mind will pick a fight with the Fed. However, the Fed will not need to even start that fight. The Fed can raise rates to a point where it extinguishes any inflation; probably by causing a recession but still better than double digit inflation. There will be no “feedback loop” due to high government debt. I am almost sure those models neglect the fact that higher rates mean banks are loosing capital, tax receipts increase and only a small portion of the gov debt needs to be rolled over in any given year. Any inflation that we may face at some time in the future will be due to supply-side problems not because we have too much debt.

  • Vincent Cate

    Odie, there are two different things that impact inflation. One is that interest rates have a big influence on the velocity of money. The other is that when the Fed is loaning out money at less than the inflation rate they will have lots of customers and have to make lots of money. But these are 2 different things. You can not just look at one and ignore the other.

    If central banks could intimidate markets forever then we would never get hyperinflation started by a bond panic. But this seems to be the normal way for them to start.

  • xmart

    “-At 10 minutes he says the “true definition of inflation is an increase in the money supply”. This is Austrian economics nonsense. This is just purely wrong. Inflation is rise in the price level. There is ABSOLUTELY no hard and fast rule that says the money supply will lead to price increases. That’s just wrong. You can easily have a deflation with a rising money supply so it’s really not helpful to define inflation as an increase in the money supply.”

    What an Austrian economics nonsense? Did You ever heard about The Quantity Theory of Money?
    Till 1930 at least, inflation was an increase in the money supply.

    How the money is created in UK see

    “If you look at the Fed’s 2012 annual statement you can see how ridiculously misleading this claim is. They paid EIGHTY EIGHT BILLION back to the US Tsy and just 1.6B in dividends.”

    What about 16 trillions of dollars, big banks were secretly given years before?

    The video only tells the true, which is inconvenient for government and also finacial advisors.

  • LVG

    Go buy some gold, crawl in back into your bunker and shut up.

  • Eric Webber

    A good book regarding Gold, and economics in general, is: Gold Bubble: Profiting From Gold’s Impending Collapse by Yoni Jacobs. This is a great book for outlining the fraud that Gold has become over the past 10 years, and outlines why it is destined to collapse to under $700/oz.

  • Eric Webber

    Gold traders typically fear QE and hyperinflation, despite the fact that right now Deflation is a much greater threat. Study Japan over the past 25 years – and you’ll see that QE does not necessarily lead to Hyperinflation.

    Gold traders have a misconception for how QE works;

    i. Most Gold traders believe: The Federal Reserve buys government bonds in the open market and thereby swells bank reserves. The banks then put these reserves to work by lending them out which eventually leads to hyper-inflation.

    ii. In reality QE works more like this: Bank reserves, or deposits at the central bank, have a singular role, to facilitate management of the payments system. They are used to settle transactions among banks and never leave the possession of the banking system. Indeed, in most systems, deposits at the central bank can only be held by banks, thus they are never lent “out” of the banking system. Consequently the notion that the quantity of bank reserves somehow constrains or enhances lending in a fiat money world is completely erroneous. Consequently, monetary policy actually has little to do with money. It is more accurately thought of as the control of precisely the interest rate at which the central bank provides the reserves (over which it has a monopoly of creation) that are demanded by banks.

  • Eric Webber

    Well, in my opinion a general rise in prices is a symptom of inflation – not inflation itself. This can come from an increase in money supply (which would have to be ridiculously huge) or an increase in economic activity or worse both. The Fed is not likely to cause either of these things to happen. The power of the Fed is widely overstated; at best they do not harm the economy and at worse they cause some misallocation of resources. Buying gold for any of these reasons is just plain stupid.

  • Eric Webber

    Inflation is the “push” of money through an economic system, not merely the same as the increase in CPI – as CPI changes represent a symptom of this push (which represents the interplay between the money supply and the activity around that supply). This push is dependent at least in part on the money supply and economic activity (you cannot naturally have one without the other bearing government intrusion). This “push” can be dependent on money supply, if and only if it is very large and there is at least some economic growth. If the rate of economic activity is decreasing, the increase in money supply is not likely to cause an increase in CPI at least until the growth rate becomes sufficiently large. If, however, the CPI is increasing at an alarming rate that is not supported by economic growth, then it is likely due to something unnatural such as a ridiculous increase in money supply (which no rational government or reserve banking system would ever enact). Furthermore, changes in CPI is a relative thing. Having a highly increasing CPI is not by itself a bad thing as long as it is supported by the growth in GDP. A 10% increase in CPI might sound alarming, but it is not if your GDP is also increasing by 15% – in which case you have an incredibly booming economy. The Fed is not likely to cause any of these factors, and its affect on the economy is way over stated. In Fact, the San Francisco Fed performed a study whose conclusion was that the current QE policy in place is having no affect on the economy in 2013, whether positive or negative.

    There is no way America is going to become the next Weimar Republic, whose high increasing CPI was mostly the result of market action against the mark after the installment of war reparations that were required to be repaid in hard currency and not the rapidly depreciating Papiermark. The highly increasing CPI of the 1970s America was caused because dollar-holders abroad became nervous. There was a run on the dollar, which many foreigners and Americans thought was overvalued shortly after Nixon broke the last link to gold. Following this, Poor economic policies then plagued the economy for the next 8 years. Today’s situation does not match either of these, and we are likely to be fighting low inflation or deflation for the foreseeable future, or at least until America’s economic Freedoms are greatly increased.

  • HankB

    Cullen, I recently read Maloney’s book Guide to Investing in Gold and Silver. He actually details his allocation which I thought you might find interesting.

    He says he always recommends a 50-70% allocation in gold an silver because it’s “an incredibly safe, no brainer investment”.

    He says he’s “heavily biased towards silver”.

    He says the remainder is in mining stocks. In total, he says he has 80% of his assets in precious metals and mining stocks.

    So let’s assume he’s 50% in physical metals, 30% in mining stocks like XME and 20% cash. Let’s also assume he’s true to his word and overweight silver relative to gold by assuming he’s 40% in silver and 10% in gold.

    Since 2006 this portfolio would be up 68%. Since the 2011 high in silver it would be down 40%. Since 2003 when he says he started managing portfolio he’s probably done quite well.

    There’s a little perspective for you.

  • Eric Webber

    If he is doing this, then he is literally the most retarded investor on planet earth (assuming he continues to hold his positions). Gold and Silver are massive asset bubbles, and have recently popped. Gold will eventually fall back to 2003 levels, and potentially lower. At least half of the gold miner companies out there will either scale way back, or simply go bankrupt as they represent the most leveraged industry on earth. This is an incredibly stupid time to hold precious metal positions – and that is why folks who have a vested interest in the gold industry are resorting to fraud.

  • Eric Webber

    There is a chance that hyperinflation occurs!! The probability is about as good as you winning the jackpot lottery. So why don’t you go buy some gold on those odds! Hyperinflationists are just like global warming alarmists; they are emotional folks who absolutely refuse to look at the facts, people who resort to alarmism to make their points. Low inflation or even Deflation is without question the real threat that America faces. This could be the case for years to come. Study the Wiemar republic or the 1970s American economy, and you’ll see there are absolutely NO similarities between those cases and what we are seeing today. Instead, America is much more closely mirroring Japan, who has been fighting deflation for 20 years.

  • Eric Webber

    There is always a reason to be worried or afraid for the future. Folks in the gold industry are playing on those fears, and gold investors have become doomsday speculators. This is an incredibly illogical way to invest your money. Meanwhile, whilst you wait for that “doomsday scenario”, your gold investment will have lost 70% of its value OR MORE – which means you’ll need another 235% gain to get back to Break Even. And, all the while you’ve been waiting for the “end of the world”, equities will have climbed another 30% OR MORE. This means you just made a 90% swing error on your real potential to earn, and would require you to make an additional 300% to get back to where you would have been if you had instead invested in the broader equities. Your risk for investing in Gold is absolutely enormous – all because you were betting on the coming “apocalypse”.

  • Eric Webber

    There is always a reason to be worried or afraid for the future. Folks in the gold industry are playing on those fears, and gold investors have become doomsday speculators. This is an incredibly illogical way to invest your money. Meanwhile, whilst you wait for that “doomsday scenario”, your gold investment will have lost 70% of its value OR MORE – which means you’ll need another 235% gain to get back to Break Even. And, all the while you’ve been waiting for the “end of the world”, equities will have climbed another 30% OR MORE. This means you just made a 90% swing error on your real potential to earn, and would require you to make an additional 300% to get back to where you would have been if you had instead invested in the broader equities. Your risk for investing in Gold is absolutely enormous – all because you were betting on the coming “apocalypse”.

  • xmart

    As Milton Friedman qouted:
    “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”

    So you are partly right, but do we need infinite increase in money supply? Many says that it is necessary to have a growth. But it is big myth.

    We can have growth even with contstant money supply! It can work like we see in technical part of economy mainly computers. Technical development makes goods cheaper, so you can buy more even without increased money supply.

    And this appoach can be used also in other areas. So with economic growth the prices would slowly decrease.

    Moreover do You still trust official CPI numbers?
    Here are real numbers

    Try to hear this interview with Puru Saxena – in second part
    Nobody in trading den belives in this “bogus numbers” for government. But important is perception of masses…

  • Cullen Roche

    All I know is that non-income producing assets with a historical standard deviation of 30 are enormously dangerous. Calling them a “no brainer” investment is just reckless. From the perspective of a financial advisor, this sort of advice can be described no other way. It’s just pure reckless and is based on a lack of understanding of basic allocation concepts and very basic micro and macro econ. I sincerely hope people aren’t falling for this idea. It’s one of the more dangerous portfolio recommendations I have ever come across. And trust me, I have seen some incredibly shady stuff in this industry….

  • Bernard King

    Exactly. Gold is (at best) a hedge against the collapse of debt-backed money and spontaneous, worldwide adoption of gold in its place. Not likely to happen. That’s why they call it the “zero” hedge.

  • really?

    1 US dollar in 1900 can buy how much?
    1 US dollar in 2013=??

    1 ounce of gold in 1900 can be CONVERTED to US dollars, THEN buy how much???
    1 ounce of gold in 2013=??

    Gold bugs aside. Tell me another form of ‘currency’ (clearly you need walmart to accept your currency to make it viable) that has held up to the same ups and downs long term as gold.

  • Eric Webber

    What exactly is your point here? You are upset because a dollar in 1900 could purchase more than a dollar in 2013? Are you even sure about that? What could you purchase back in 1900? In 1900 there was a much lower standard of living, and far fewer amenities that Americans could afford & enjoy. Folks back then could not afford a car and no one was flying. Today in America most folks are driving cars, and almost anyone can fly. Oh, and we put a man on the moon in 1969! Today Americans enjoy all kinds of amenities that our ancestors could not. More wealth was produced in America over the last 100 years than the rest of the world combined in its prior history combined – yet you complain because you think the dollar in the year 1900 can not purchase as much as it can today. Commodities and especially gold have experienced incredible wild swings in value over their history – and having a currency backed by them decreases your flexibility tremendous.

    Ironically, Advocates of the gold standards tend to be believers in free markets who don’t like government interfering in the free market. Yet a gold standard means that the government, or some other authority, is interfering with free market forces in a powerful way.

  • Cullen Roche

    You’re not thinking about purchasing power in the right way. The thing you should be thinking about is how much your labor hours can purchase today in dollars. For instance, in 1960 our labor hours purchased about half of what we could buy today because we are that much more productive. Thinking about the purchasing power of the dollar in real terms doesn’t account for wage and salary adjustments over time. Our wages actually purchase substantially more than they did in 1900.

    It’s a little ridiculous how Austrian “economists” misunderstand this and gold bugs perpetuate this myth. It’s just a flat out mistake. I mean, even a little common sense should make you seriously question the idea that our living standards have declined by 95% since 1900. Btw, stocks have crushed gold since 1900. But those are assets denominated in dollars. That’s different than just looking at the currency. It doesn’t mean stocks are great “currency”.

  • socal

    “i’m making money off this system and my team is winning, so shut up.”

  • jkhtrip

    Your comments are all hot air, and a bad attempt at sophistry. The definition of Inflation is a game you play and you know that it has changed along with the dictionary. At least you should Know! Now you mention the Austrian school of Economics as hogwash, yet you also fail to state what school of Economic thought you adhere to and you also fail to admit that in fact, it is the printing of money, be it electronic or cash is irrelevant, as it is the purchase of assets that have no buyers, and are no good, otherwise investors would buy them up and no intervention would be needed. Why did the Banks need them to be taken off their books? The fact that interest accrues, and not to the government as the government has nothing, and produces nothing.. that does steal value from the existing monetary unit and you also do not mention the various mechanism which the taxpayers are being cheated by “hedonic quality adjustments” which understates the inflation used in calculating some components of Industrial Production” and the “false” and misleading way the BLS manipulates the statistics so as to hide the true(REAL) rates they report which is why they use the word “nominal” as opposed to Real. What about the “CORE” CPI? Why do they need to massage the “food and energy” costs, and I do know their explanation, but I dare you to find one average citizen who has not seen food costs rise, and gas yo -yo but overall YOY it is up. What about Unemployment, PPI, CPI,CPI-U, CPI-W C CPI(CHAIN WEIGHTED CPI-U) are “methodological changes designed to move the concept of CPI away from being a measure of the cost of living needed to maintain a constant standard of living.” Now lets address the statement that “You’re not thinking about purchasing power in the right way. The thing you should be thinking about is how much your labor hours can purchase today in dollars.” This is completely false. Wages and savings are not the same thing. Your attempt to address one and not the other says much. What matters is the Purchasing power of your monetary unit, whether it be wages or savings. Prices do not go up in a REAL Economy where their is free competition and to think so is to believe that a centrally panned economy is just and possible over the long run. To not consider the Purchasing power of ones savings and to look only to what your labor hours can purchase in today dollars is a silly statement. Anyone who knows what a good Money is knows it has specific quality’s, and the one that has and will fail is the “store of Value”. It is amusing in a twisted way, to think that you would tell an 80 years old couple that their savings does not matter because what matters is what their labor hours can purchase in today’s dollars. Yet they do NOT have labor hours as they are too old and retired. It gets even more obtuse when you attempt to tell someone who no longer has a job, but has savings that their money does not purchase what it use to which means it does not keep them at a constant standard of living and this also applies to someone who is employed. It now takes two to earn a living wage today precisely because the scheme does not work forever. To be sure this is the first time in History that at least one country was not anchored to a real Money that cannot be counterfeited by a Monopoly such as this third Central Bank in this countries existence. Keynes even said “By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”John Maynard Keynes and he also said,”I work for a Government I despise for ends I think criminal” John Maynard Keynes,and to quote J.P. Morgan,

    “Gold and silver are money. Everything else is credit.”
    J. Pierpont Morgan

    Now I did that and did not quote one Austrian Economist. To not know that Gold is the Ultimate store of value because it captures VALUE in the form of the factors of production and cannot be “printed at will”, and has NO counter party Risk. It is also used in many commercial uses and it is being accumulated by Central Bank around the world. Why have the BRICS nations, and even England and Japan began to trade with their own currency’s? That means they are slowly phasing out the use of the USD as the sole Reserve currency. Why has the IMF even called for a new Monetary system? Do you think we have GOLD in our vaults for no reason. Why did India buy 200 tons of GOLD from the IMF?

    Also this statement that follows is false,”There was a run on the dollar, which many foreigners and Americans thought was overvalued shortly after Nixon broke the last link to gold….” Why did he break the link? In fact it was Charles de Gaul of France who called for GOLD to paid because they knew our Gold Reserves at the “official Price” were cheap because of the Vietnam war and Johnson so called Great Society That means the dollar was over valued, and it was in fact a “defacto” default by the USA You can make up anything you wish but common sense and a little real facts will serve people better. WE do not have to be a “Wiemar Republic” to still have Hyperinflation and nobody knows how the End Game will play out exactly, but those that receive the NEW money first do get the greatest benefit and the Velocity of Money at some point will increase, as too many dollars chasing too few goods and services combines with Repudiation of the Dollar by other country’s who have long been unhappy with this situation and the power they wield can be seen in the way Putin backed Syria and stopped the USA from making a move. Their are other stores of Value,such a Precious Gems and company’s with exposure to the South and East, which is where shift is taking place. Surely things are not as they were in the 1900’s as we are the most indebted nation in recorded History.

  • Cullen Roche

    How can you declare my work to be “full of hot air” when you aren’t even familiar with it? If you don’t know what school I base my thoughts from then how could you so confidently reject my views?

    Maybe familiarize yourself with my work before shrugging it off so quickly. Don’t you think that’s fair?

  • Eric Webber

    Maybe you should get your own website to write articles. Seriously, do you think anyone is going to read your post if it is twice as long as the original article written by Cullen?

  • MP

    Yet, you sir are also feeding your own agenda by trying to persuade others into buying your fiat financial products. Good luck!

  • Cullen Roche

    You pretty much nailed it. I provide low fee financial advice based on a sound understanding of the monetary system and modern finance. The people who sell gold provide VERY HIGH FEE non-financial advice to try to line their own pockets by scaring people into believing their agenda about the end of the world, hyperinflation and the end of the US govt.

  • Dehan Sharuz

    Dear Cullen,
    thanks for sharing your knowledge with the world.

    If i may, i would like to ask a quick question. Please do correct me if i am wrong.

    My understanding is that during this hyperinflation, the dollar’s value plunges down to pennies. Which results in price increases since we now need more of that currency to buy the same. But i also learn that hyperinflation does not effect debt. Meaning usd 1000 owed still remains USD 1000 owed to the banks regardless of what the value of the dollar is.

    If this is true, those who get this right, are able to buy gold now, sell at much higher prices later and get rid of their debt? And does that mean the US government can do the same with its debt? And lastly, how significantly do you think this event will effect other third world economies or thier currencies out there?

    Please keep in mind, i’m no economist / banker. Just n avg. guy trying to be prepared for the worst. Would highly appreciate it if you could be kind to explain this to me

    Thanks in advance.

  • Bryan DiMicelli

    I find it a bit odd you didn’t bother to watch the entire 30 minutes, but I’ll take you on your word. I agree with your counter points here, and also find gold salesman are no better or worse than anybody selling anything else. They’ve got an angle and they’re trying to work it.

    However, what I do not see here is a refutation of the idea that the gold standard was an inferior system, or that the federal reserve’s debt-based economy is in the best interest of the American people.

    I see you indicating the period following the war as a time of economic success, but you ignore important details, like the manufacturing capabilities of much of the world being crippled, allowing the state’s to grow against limited competition.

    I am glad you’re looking to insure accuracy in the video, but there are many other such clips pointing to the obvious flaws of a central bank. Are you here to claim you are a proponent of maintaining a central bank?