Open Thread – Have at it….

Long week….I’m fresh out of brain cells this morning so have at it.  You can use this post to ask me anything, sling mud at me, talk amongst yourselves, pass along your wisdom, throw out a link worth reading or whatever you want.  And if you’ve got better things to do then have a great weekend and try to focus on the stuff that really matter – i.e., NOT MONEY.  :-)


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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  1. Im not a macro expert but doesn’t MMT basically believe that sovereign debt of a country with its own central bank (currency issuer etc US, UK Japan) is not subject to bond vigilantes because the CB can buy their debt(in short). Basically these governments can control their bond yields.
    If so does MMT believe that fiscal policy doesnt cause inflation because if it does cause inflation then the CB really cannot buy debt without risking serious inflation and the country could default. I am talking about in general not specifically now. Would that statement be true, that a central tenant of MMT is that fiscal policy has little to no impact on inflation?

  2. I’m still trying to get my head around the Japanese monetary system. Can you (or any readers) come up with a comparison between the US system (which I think I finally understand, thanks to you!) and Japan’s? Maybe this has already been done somewhere, and I just can’t find it.

    As we watch their grand experiment unfold, I think it would be helpful to understand the similarities and differences between how the two systems operate.

  3. Maybe next week u can share some thoughts on the ramifications of the big rally we are seeing in the dollar

  4. Hi Cullen,

    Curious, do we have an interest rate environment where it makes more sense for companies to engage in financial investment rather than capital investment?

    Are they getting better returns from buying back stock and issuing dividends then they are from investing in their businesses (“capital investment strike”)?

    Also, deficits seem to be falling quickly and based upon the Kalecki equation that would suggest that private savings and corporate profits could be impacted unless there is a commensurate rise to offset it. Based upon this nearly completed earnings season which featured a small earning’s increase (based upon greatly reduced guidance and expectations) and a NEGATIVE revenue growth, doesn’t this suggest that profit margins and earnings are poised to fall in the second half of the year?

    What accounts for the optimism in the markets?

    Thank you.
    Thank you.

  5. OK, I admit it. I thought the bottom was going to fall out of things after the first of May. I sold not everything but almost everything and took some nice profits. But now I’m wondering if I jumped off the train too early. I would like to say that with the economic data coming in a little weaker of late, I’m safe to take the summer off and maybe I’ll have a chance to dive back in this fall. But is there risk in selling in May and going away this year?

  6. There are many things I still do not understand. Does the current Fed policy of buying treasuries and MBS mean that the Fed is creating money to make these purchases? That is, $85B is going directly in to the economy (the financial system not main street).

  7. jenish, I believe they think fiscal policy CAN cause inflation if govt spends in excess of productive capacity. Nothing controversial there.

  8. Cullen,

    How do you adjust for the non-stationarity of economic & market data? Because the world is always changing, all data becomes stale or outdated fairly quickly yet this is generally the only way to make future predictions.

  9. Yes the Fed expands its balance sheet to make these purchases, creating reserve deposits for the banks in the process. The banks in turn create deposits for the Treasury sellers (if they are non-banks). For Treasuries purchases from the banks, this does not expand the private sector balance sheets since it’s an asset swap: reserves for Treasuries. For Treasuries purchased from the non-banks it’s also an asset swap: bank deposits for Treasuries, however, in this case the bank balance sheets also expand with reserve-assets and offsetting deposit-liabilities. Nobody’s equity changes. Here’s an illustration:

    The swollen bank balance sheets do no represent money “going directly in to the economy” because:

    The bank equity position doesn’t change. It must still maintain acceptable CAMELS scores, etc. (i.e. it is not completely free to trade reserves for risky assets). Thus excess reserves tend to pile up at the banks.

    The added bank deposits of non-banks can be used for riskier assets. But again the non-bank equity positions haven’t changed, so they may look for income to replace their lost bond yields, but they don’t start off with MORE equity than they had.

    Here are the only places reserves can go, BTW:

  10. It’s also dependent on how that fiscal stimulus is used. Say the Treasury mailed everyone who filed an income tax return with an AGI of less than $250k a check for $20k. If a household uses that cash to pay off debts the inflationary impact would be low. If that $20k is used to purchase new appliances, clothes, etc, the impact would be far greater.

    From a macro view fiscal policy’s effect on inflation is dependent on the health of household balance sheets.

  11. jenish: pro-tip: Cullen will point out that MR is not M M T. But I think Geoff is correct that even in M M T theory, deficit spending is recognized to potentially cause inflation if overdone.

  12. We are about as far from “blood in the streets” as you can get. Stocks are now great investments. When is the last time Wall Street has been referred to as a casino? How big can the bubble get? When will people refer again to the “cost of money”, because today it’s $0.

  13. Cullen,

    I don’t understand the drop in gold. With the Yen plummeting and the real Euro problems unsolved it seems odd that gold is down so much.

  14. Thanks, cowpoke. That post actually DID get me started, but back in April!

    Maybe I should have been more specific with questions like:

    Does Japan have a banking system like the US, where most money is created by private banks as credit/loans, and the central bank mostly acts as a back stop and clearing house for interbank transfers?

    Do they have the equivalents of a separate Fed and a Treasury?

    Do they have the equivalent of “Primary Dealers”, who are basically forced to buy, or make a market for new Treasuries?

    And maybe this one is more political, but who actually controls their budget? Does the PM (or some agency) have the authority to launch fiscal stimulus spending, and decide where it goes, or do they have to work their budget through the equivalent of the US congress?

    I realize this is a lot of stuff, but I think each topic is important in trying to understand how something that might work there will or won’t work here, and vice versa.

  15. I don’t know. Perhaps it’s psychological. Perhaps it’s to lower bond yields and encourage investment in riskier assets (and thus create a “wealth effect” as the stock market rises). Perhaps it’s to raise the price and lower the yields of ALL financial assets thus making real investment (e.g. build a factory… since this might result in a better risk adjusted rate of return) or purchases of real goods and services (thus increasing AD) a more attractive option. But I don’t really know what theory is.

  16. I know you didn’t ask me, but here’s my answer:

    Yes, there’s a risk. There’s ALWAYS a risk. But if you booked a profit, be content with that.

    I cashed out of the market in late 1998. I had made some nice gains in the tech run up, but I couldn’t find anything anymore that looked reasonably priced to me. Plus I had just found our dream home, and I wanted some cash for a big down payment and as a buffer for some repairs and maintenance it needed.

    I kicked myself in the ass multiple times as I watched the market continue to climb over the following year and a half.

    Of course we all know how that turned out.

    Looking back, I made a good call to rotate out of the market and into real estate when I did. Lucky or good, I don’t know. I POSSIBLY could have done a little better if I had waited another year, but I have no regrets about getting out when I did.

  17. Cullen,

    I am trying to argue against my own opinion, that fundamentally the US stock market is overpriced and that whatever the trade might be, from an investment point of view it’s a poor time to put money into US stocks.

    So here are the best “this time it’s different” ideas that I can come up with:

    This time it’s different because we live in a world of fiat currencies and thus traditional valuation metrics such as the Shiller P/E are misleading. There is so much more currency that stocks can be overpriced far into the future in comparison to the past.

    This time it’s different because the US stock market is pricing in energy independence thanks to fracking. So the discount of the stock market due to the persistant longterm costs of imported oil is coming to an end and the market can thus sustain a higher valuation and can do so going forward.

    This time it’s different because the present float of equity shares is about half of what it was ten years ago. Less shares and more money means permanently higher valuations

    What do you think of these ideas that this time it’s different?

  18. Hi TRW, I am in agreement with Jaymaster; when I changed companies in 2007, I rolled my 401k into my new companies system. I was so busy that I didn’t bother to allocate my funds so they were left “idle” in cash. When the bottom fell out, I was eternally grateful for my luck.

    Loosing capital hurts a lot more than the paper gains.

    As to the current market, I did exactly the same as you for the same reasons. I made my yearly goal in 2 months and decided to not get greedy.

  19. Lots of good posts this week so thanks. Take a weekend break and come out swinging again next week.

    You have presented a bit more of the “less robust” economic indicators of late but the markets do not seem to really factor these in at present. How can one determine if the signal coming from the markets is the correct assessment of the healing of the economy? Is there any way of knowing this or is the market just a bet on pieces of paper??

  20. Yes, Japan’s monetary system is private bank centric.

    Yes, Japan has a treasury, the Ministry of Finance, the a central bank, the Bank of Japan.

    Yes, Japan has 24 primary dealers.

    Japan has the equivalent of a US congress, however in this case the lower house takes precedence over the upper house.

  21. It’s pretty similar to ours, yes there are primary dealers and they have a minister of finance instead of a treasury see here is a nice ORG chart:

    Here is the BOJ ORG Chart:

    Here is an outline on the BOJ:

    Here is a video if you don’t want to read all that:

    And it looks like they have 24 primary dealers:

    And here is an informative read on “The main features of the monetary policy
    frameworks of the Bank of Japan, the
    Federal Reserve and the Eurosystem” for compairisome:

    hope that helps :)

  22. Hello All,
    Does the falling Yen and increase in the USD mean that Japan is exporting deflation?

  23. You’re right, we don’t really know what the Fed’s specific goals were regarding QE, other than the obvious (but vague)”improve employment and the economy”.
    Whatever their theory was/is — I still can’t help but think they must be feeling a little desperate at this point. Do you think they under estimated the depth of the balance sheet recession? By that I mean do you think the Fed guessed wrong on how long the household deleveraging cycle would take?

  24. Steve W, I really have no idea! My *impression* is that Bernanke comes from a neo-classical / Monetarist tradition. He was a student of the Great Depression (GD) from a Monetarist perspective (as were Milton Friedman and Anna Schwartz). I’ve never read any of these people’s scholarship about the GD. But from what I understand through 2nd hand sources the Monetarists put most of the blame for the GD on the Fed and it’s “tight money” policies. They also don’t give much or any credit to FDR and his fiscal response.

    The Market Monetarists (MMers) (whom I’m a little bit more familiar w/ because I read a couple of their blogs) think THEY are the true inheritors of Friedman’s tradition… and they lay the blame for the severity of the Great Recession (GR) squarely on… The Fed!! Surprise, surprise! …and again “tight money.” They can’t understand why Bernanke didn’t go all out to “loosen” money in 2007… he being a student of the GD and all.

    So my impression is that Bernanke has several forces pulling on him… I don’t think he’s a hard core Monetarist since he’s stated that “congress needs to step up” (I suppose w/ fiscal policy, right?). On the other hand he’s trying to balance perhaps the traditional Monetarist (e.g. John Cochrane) concept of targeting inflation and keeping it under 2% … with the MMer (Scott Sumner) idea of being looser with the money supply (neo-Keynesians like Krugman are also for this, but also for fiscal stimulus which MMers claim is useless). So it seems to me Bernanke is getting pulled in three directions: keeping inflation low, easing the money supply as much as possible, and admonishing congress that they need to do more. But that’s just my impression!! This is way out of my league!

    This is an interesting post from an MM sympathizer (David Glasner) which reveals a bit of the thinking… in this case involving at least four parties: himself (MMer), Brad DeLong (NK), and two traditional Monetarists (?):

    Read some of the comments too… they’re interesting.

    So in the end I don’t think anybody is satisfied in the neo-classical world… certainly not in the Austrian world (who generally hate QE: see David Stockman)… nor amongst the other heterodox schools. Without congress’s help… I think Ben does get some sympathy from the neo-Keynesian quarter as doing the best he can.

    I can tell you that MMers are in favor of QE4ever as a baby step, but they don’t think it goes far enough: instead of buying a fixed $85B a month they think the Fed should instead use NGDP level targeting and do whatever is required to hit the target. Paradoxically, they think that if the Fed made that intention known, that perhaps their bond purchases might DECREASE! MMers argue if the Fed were just to make its intentions clear, this in itself would do most of the work!

  25. Any thoughts on the chatter out there on H.R. 807 the Full Faith and Credit Act the house past that some speculate could End The debt ceiling?

  26. I’d pretty much take Ben at face value on QE. He wants to drive down interest rates to facilitate deleveraging, boost spending and rescue bondholders. Lower interest rates help you pay down your debt, also facilitates spending — you can refinance, lower your rates and presumably spend more. His bond buying program sends the message that he is going to step in aggressively whenever a market starts to freeze.
    We focus in here on the effects of QE on the markets, but for most people, the ones who are buying a car or refinancing a house or trying to get rid of credit card debt, the program has helped.
    Personally, I have refinanced and saved 200 a month, bought a car at a nice rate and seen my second mortgage interest rate remain low.

  27. With statements like this “but it’s not as if I have said that fiscal policy can’t work or shouldn’t be tried” from David, I think it’s unfair to label him an MMer… which is why I refer to him as an MM sympathizer. Also, I don’t know what those other two are (the ones I called Monetarists)… and one is certainly critical of the other. But Monetarist fixation on keeping inflation low is very vexing to Glasner (and Sumner and Krugman for that matter).

  28. Interestingly enough, the MMers claim that if they were to get their way and their form of “monetary easing” were to take place, then (longer term?) interest rates would actually rise (and like I said before, the Fed might actually end up buying fewer assets!). The consequence? We could have inflation as high as 5 or 5.5% (in a worst case scenario: i.e. if GDP growth were at 0%). I’m still a bit unclear on what concrete steps (other than just announcing the Fed’s intentions) would need to take place for this kind of “easing.” I’m hoping Glasner gets back to me on that!

  29. Thanks undergrad and cowpoke!

    Looks like I’m going to have some interesting reading for the weekend!

  30. Dollar strengthening, gold weakening… sounds about right. But stocks also strengthening. What’s with that? Multi-national high yield firms that have been paying handsome dividends are feeling the stress. You can count on that. Strong dollar is an ass-kicker for currency translation, and unit volume. Bernanke has the whole world playing his game, so I guess it’s back to even. This will get nasty. Game of musical chairs will end so abruptly, some chairs will collapse. I’m not sure if this is Cullen’s quotation, or someone else’s… “escalator up… elevator down”.
    I have some losers that have caught up with my original optimism, strictly on momentum. Fool me once. They’re going on sell limits next week. The fact that it’s starting to feel different this time, must mean it’s not.

  31. This is how I understand it as well. The Fed can only control short term interest rates. It is hoped that the short term interest rates will have a knock on effect on the broader economy but that the Fed can’t just decide they’re going to increase employment or onsumer spending or whatever. The only way they can conduct monetary policy is by influencing economic conditions via their control over the fed funds rate. I think that people sometimes conflate their control over the fed funds rate with the effects on employment, inflation, etc and they shouldn’t, because there is not necessarily a causative link. So I think that the purpose of QE is to control rates which is hoped to have a positive effect on the economy.

    I also think that just a staement can have a powerful psychological effect on markets via expectations – is that what you’re saying is a MMT theory Tom? Isn’t the psychological effect exactly what people are speculating were the reasons for Mario Draghi’s recent statements that negative rates were not off the table?

  32. Yes, but there’s a relation. w/o QE (i.e. w/o ER in the banking system) the Fed can set the FFR to be anything (including 0) using OMOs. With QE, however, the FFR will be zero, unless they set IOR > 0, in which case the FFR = IOR rate. So, for example, if the Fed wanted QE but with an FFR >> 0 (w/o ZIRP), then it would need to set IOR >> 0. “So what?” you might ask. Good question! I don’t know… are there some negative consequences to having a large IOR rate?

  33. It’s true the Fed only targets the FFR (overnight rate), but they have the ability to set any rate they want through OMOs. They’re not doing that with QE, but they are (or were) explicitly trying to have an effect on longer term rates (think Operation Twist). Thus QE seems like a bit of a toothless half measure to the MMers.

    Regarding inflation, well the Fed can target that too… they did that during the Great Moderation (1982 – 2006). The time frame is longer… they set a FFR, come back in a few weeks, and adjust the FFR, etc. In contrast, the FFR is a target they can hit pretty much immediately.

    Now suppose the Fed wanted to target the rate on 10-year maturity bonds, and they announced that. Well they’d have to back up their announcement with OMOs (buying and selling 10-year bonds) to hit their target, but probably many people would get in line with their target right away because they’d realize it’s useless to fight the Fed. I think that’s the kind of psychology the MMers think would result if the Fed were to stop targeting inflation and the FFR and instead do NGDPLT. I think they think most people wouldn’t try to fight the Fed on it’s NGDP level target, and would instead act as if hitting the targeted NGDP level was a forgone conclusion. That’s my take.

    Now what if the Fed actually has to DO something to hit the NGDP level they target? … I’m not sure what it does… but buying and selling assets would almost certainly be part of it. I don’t actually know if having a FFR target is part of it! Maybe!

    One thing’s clear though: the MMers think the Fed should stop targeting inflation… especially targeting it to be a low rate like 2% (in all circumstances). I think they could live with adjusting the inflation target in a “smart way.”

    Even NGDPLT isn’t ideal though, from the MM perspective. They think setting up an “NGDP futures market” would be better… or perhaps creating a new measure by excluding certain items from the NGDP calculation would also be an improvement… but NGDPLT they all agree is a reasonable sub-optimal strategy.

  34. This isn’t MMT stuff. It’s MR. MR states that a central bank can control its own interest rates but cannot control its economy necessarily. Policy is ultimately a response to economic forces. So, if the Fed sees inflation rising it could be forced to respond with higher interest rates. Keeping rates low could actually exacerbate the inflation so the Fed must be proactive.

    There’s no solvency constraint as in the govt isn’t going to “run out of money”, but the govt is constrained by what the real economy does. So if they just print into an economy that produces nothing of real value then default will come in the form of a hyperinflation.

    You have to be very specific though. In the USA we have a massively productive economy with lots of idle capacity. So we can afford to spend more money because it fills the aggregate demand hole. In a period like 2005 where we have aggregate supply outstripping aggregate demand an MRist would be a supply sider and would advocate for policy that dampens demand….So it depends.

  35. Yes to the first question. It’s less expensive for companies to buy back stock today than it is for them to reinvest in their businesses because the economy remains relatively stagnant.

    With Kalecki, you have to look at all the moving parts. There’s a lot more to the corporate profits than deficits though they’ve been a big piece. I would expect increasing pressure on profits as the deficit comes down. Definitely something to keep an eye on as we head into the latter portion of the year.

  36. Depends on your view. I think it’s fine to be tactical to some degree and cautious, but given the low risk of recession I don’t think the data favors a bearish overweight. But that’s very vague and each investor has to account for such things based on their personal needs, goal and risk tolerance.

  37. Good point by JE on the tendency to focus too much on QE’s effect on the stock market. (This is a good thread. Thanks JE, Tom, Cowpoke, etc.)

    There’s no way to get an answer and start firing to this question (unless we can take Bernanke to dinner, get him liquoured up, then fire questions at him directly), but do you think the Fed is satisfied with the effects of QE so far? Some spending has been facilitated. It’s great JE was able to refinance, etc. — many people can tell the same story. I’m just not seeing enough in terms of good trends in many key metrics in the economy. “Muddle through” is what we have — still, and that seems precarious. That’s why I think if Ben could tell us the truth, he has to be concerned (if not leaning towards desperate) about how QE is working out so far.

  38. No economic model is perfect. Mine are mostly about managing risks and understanding probabilities. I would never say my models are perfect, but I think I gauge potential risks moderately well. For instance, I’ve been saying for years now that recession risks were low and that’s driven a modestly bullish outlook for me. I don’t think anyone has a holy grail, but we can understand the big picture and respond to that picture in a more prudent manner than many other approaches would lead us to….

  39. If stocks are your only focus or your benchmark then you’re doing it wrong most likely. I don’t worry about what the S&P 500 does too much. It’s not a benchmark for anyone except gamblers. It shouldn’t be your benchmark either.

  40. As you can tell, I enjoy trying to understand what all the various schools think of each other. I think I could summarize with a few bullet points each school’s complaints about the others: MM, traditional Monetarists, neo-Keynesians, Austrians, MMTers, … and whatever Steve Keen is (post-Keynesian? MCT?). I think I’ve detected a subtle shift in understanding (for the better) amongst the MMers and neo-Keynesians recently at least. But they truly are at each other’s throats most of the time!! :D

    However, my understanding is pretty superficial in most cases! So take what I say with a grain of salt.

  41. Gold is a pretty rock with a decent productive aspect and a sizable faith put embedded in its price due to some currency belief. Take out that faith put and it’s a basic commodity though and not a very good one. The myth that commodities or even gold are a necessary piece of a portfolio is nonsense and is based on false reasoning. I generally don’t mind gold as a small sliver of a portfolio in a negative rates environment, but you should NEVER construct a portfolio around gold.

  42. I’ll reiterate what I said above. If you’re using the S&P as your benchmark then you should seriously email me so I can explain my philosophy with you and run you through the portfolio review process. This idea that the S&P 500 is our benchmark is totally wrong. None of us needs to outperform the S&P 500.

  43. I can’t guess the direction of the market in the near-term. I’d guess we’re way overstretched here, but I’ve thought that for a while. The market can stay irrational longer than you can stay solvent. Never forget that and don’t design portfolios in ways that don’t take that to heart….

  44. Who cares about the debt ceiling. Honestly. They’re not going to default and no one is going to change the structure of the US monetary system by using silly trillion dollar coins or stuff like that. There’s really no point wasting time on this stuff. It’s a political sideshow.

  45. Yes, but it can scare people! And that doesn’t help matters. I know first hand because it scared me (to action) when I was young and foolish (2 years ago! :D )… and yes, I was young and foolish, but I didn’t have a track record of scaring that easy… I gulped hard and rode out the whole 2008/2009 meltdown w/o panicking. (Well, OK, w/o letting my panicking cause me to do something stupid anyway!).

    When the summer of 2011 rolled around,… I didn’t know! I didn’t know what to expect of the loons in congress… they looked just like suicide bombers to me (as far as I was concerned they were indistinguishable from a room full of bearded radicals screaming “Allah Akbar!! Allah Akbar!!” while strapping on their dynamite vests)… so I decided to sit on the sidelines… making my measly 2.2% in my “capital preservation fund”

  46. I would love to see your model portfolio!
    We’ve got hints — no gold, don’t lean on the S&P 500, don’t get burned if interest rates rise, consider it savings, invest for future purchasing power, etc.
    Do you believe in the efficient market theory?
    I know you are paid to share that advice, but how about for the sake of science giving us a bit more.

  47. There is no “model portfolio”. I customize portfolios for people when they use the portfolio review process. There’s no holy grail or one size fits all portfolio for people. It just doesn’t exist.

  48. “Does the falling Yen and increase in the USD mean that Japan is exporting deflation?”

    Basically, yes. And though I’d bet Abe won’t admit it, they’re also importing demand.

  49. Hi Cullen

    On a more global outlook what is you view of the BRICs as an investment right now and what are the chances of the whole world entering a deflation environment similar to Japan?

    Here in Australia mining industry is on its nose, deficits going exponential and almost certain new gov still promising to eventually balance the budgets. Train wreck approaching!

  50. Have you seen any information showing the ratio of QE purchases from banks versus non-banks? It would be interesting to see how much QE actually increases the outstanding stock of bank deposits.

  51. Cullen has mentioned that 20% of T-bonds are held by the banks. But I don’t know if he meant 20% of bonds held in the private sector, or of all bonds. And I don’t know how that relates to QE purchases:

    Regarding “increases the outstanding stock of bank deposits” … Cullen’s explanation for why the loan curve diverges from the deposit curve in this graph is that it’s due to QE (Fed buying from non-banks):

  52. If you do this let me know, I would love to see it. Thanks for all the help you give here on understanding these things. :)

  53. Oh and per Cullen’s exhortation, instead of working on a white paper this weekend as I should be doing, I’m going to focus on what’s really important. Which is Iron Man 3, of course. :)

  54. I’m forwarding the IRS a link to this comment right now! Hmmmm, lets see, subject line:

    “Troublemaker tries to destabilize monetary system!”

    Ha! ;)

    But seriously… I’d be surprised if it actually shakes people’s faith in the system to that extent. But who knows!

    Personally I think they should just simplify the law and get rid of the “tax exempt status” altogether. The very concept shakes my trust a little bit and smacks of unfairness… what if I don’t agree w/ a quasi-political/church organization that’s getting this tax exemption?… so if I started a Satanic Church dedicated to evil… I can get a tax exemption? Ha! (No seriously, … any tax lawyers out there?.. Can I do that? Mwa ha ha ha ha! >:^)

  55. In my view there is no better set-up for a market crash than a case where nearly all the short-sellers have been driven out and routed. I’m not predicting a crash, just saying that now is a pretty good set-up for one. If some truly bad surprising news were to hit the markets, then there would be very few short-sellers to cover, hence providing badly needed buyers. So in theory stocks could hit a total air pocket and free fall. Again, not a prediction, more of an observation. I would not consider today’s market a healthy one.

  56. What CR said. I’ll add a few. To start, supply/demand is way out of whack and will not be balanced any time soon. Count on the bull. Put something in right away and add on pullbacks. Don’t be one of those guys crying “this shouldn’t be happening”

  57. Cullen is very smart but just doesnt get Gold and commodities and you can tell from his response. That being said, its tough to find a balanced view on Gold.

    Gold has been money throughout history and thats why governments hold it rather than paper. Why do we have so much gold if its just a shiny rock? Why are CB’s buying it? Its a backstop to our fiat system.

    Gold is going through a primary correction because it was overdue. Commodities have held up really well and despite extreme bearish sentiment haven’t even made a new low. Forget the CRB which is basically a reflection of Oil due to its messed up weightings. The CCI (old CRB) is what you should track.

    The next macro play is rising inflation and all the money thats poured into junk bonds and the stock market (due to the yield play) will come out and go into hard assets, causing a parabolic blowoff and the end of the secular bull market. Then you’ll want to get back into stocks.

    Gold has been in a perfect negative correlation with US equities for about 20 months. This is what happened in the 1970s for a while. The two were negatively correlated. When inflation hits and stocks begin a cyclical bear, gold will soar. You better hope you have it in your portfolio at that point. Otherwise, you’ll get killed for a few years.

  58. There are a handful of people on this planet who understand money as well as Cullen.

  59. you’re right Tom, the Sheeple will march on.
    However, I hope it brings up discussion about changing the structure of the tax collector.
    taxing Income is such a bad Idea.

  60. No one can fully understand money because no one can ever fully predict the human. :)

  61. Tom me’boy That dude seems radical/anti modern Says he is also an Anarchist. Tom I would have NEVER associated you with his likes.
    Would you be so kind as to elaborate on some of his writings/viewpoints you find interesting?


  62. Yes, he’s an anarchist and a radical… true! But I don’t hold that against him regarding his views on the history of debt (his radical anarchist ideas don’t come into play there… at least on the surface! Maybe I’ve been brainwashed though!).

    Here’s one of the many youtube interviews with him:

    The Austrian thinker Robert Murphy actually does a pretty fair job summarizing his views here:

  63. Here is my white male anglo Christian opinion of David.

    For starters, he has a a mental form of asperger’s syndrome that his surroundings as a youth brought him up in this mindset.
    Look at him in that video. He has very little facial expressions of human excitement and joy/surprise. He is non animated. He shows robotic signs of aspergers lack of human sense of human emotions.
    he makes up for it by hiding behind historical anecdotes.

    Thanks Tom for pointing him out to me. I will read more about him this week end and will have a total understanding of his mind by Sunday evening.

  64. Tom, what I am gathering is, is that his is a world view
    that is secular and simply thinking based on a secular view. I notice he looks at the downtrodden part of social hierarchy and yet over looks personal responsibility.
    Jesus brought us personal responsibility, remember the prostitute and personal condemnation?

    He seems to be really idealistic and not realistic as he claims.
    look at Jesus, there were whores back then as there are now NOTHING HAS CHANGED with human nature. However. the Elites have chosen to use certain “Magic Words” and “Secrete Formulas” that some how solve all the answers.

  65. “It’s great JE was able to refinance, etc. — many people can tell the same story. I’m just not seeing enough in terms of good trends in many key metrics in the economy.”

    Right but then the argument is what would have happened in the absence of such policies. JE would not have refinanced, he would not have $200 extra in his pocket, he might or might not have bought a car, and if he did buy the car he would have to use more of his discretionary income for a car payment rather than spending it in other parts of the economy, his second mortgage rate did not go up.

    In essence the Fed is giving everyone a get out of jail card – at least all the spenders (which is everyone) and debtors (which is most Americans). The offset is a penalty to savers. On top of it all it creates an asset lifting effect – no matter what we or CR believes it is short term stimulative. I buy stock A for $x and it rises to $X+9 rather than $X+7 that it “otherwise would be” without the Fed propping it up. In the here and now that is stimulative. When it all falls apart down the road (if it does) then its a negative but unemployment at that point could be 5% or whatever and the Fed is ok with the offset of their policies hurting at a time when the economy is better off than it is now. But that goes for the stock market. For everything else the Fed has displaced spending on debts (mortgage payments, car payment, to a lesser degree credit card debts) with spending on consumption and increased savings. They can do this until inflation matters. So we should have these policies in place for years. One last effect is the house ATM is starting to rev back up slowly but surely. Low interest rates inflate house prices because the same $1000 of spending on a house can now buy much more house at 3.6% than it can at 5% or 6% or 7%. So housing is priced “higher than it otherwise would be”. It’s all a ‘free lunch’ until/unless inflation returns. If you believe there are macro global things happening that will surpress inflation perhaps for decades more (i.e. more people entering the global labor force every year, more automation of work) we could be talking about no exit from these policies for decades. If that sounds far fetched, go see Japan.

  66. It is an open question if the stock market will ever be allowed to fall >20% ever again in a low inflation environment. The Fed can be hamstrung in a high inflation environment – i.e. barred from more easing but if the S&P falls 20% and with Ben’s “close monitoring of asset prices” I could see him (or Yellen) or whomever simply riding on a white horse and saying we are going to do more – or even jawbone that which seems all it takes nowadays. Hell a full scare that the EU was going to fall apart only could break the market by a factor of 20% and that was when there were small breaks from QE (summers of 2010 and 2011).

    I am not saying markets wont correct, and in fact I think the Fed is getting nervous about what is happening in Japan and US markets – this is my belief due to the leaking of Hilsenrath and some Fedspeak this week. But on the flipside they now have a playbook that has been demonstrated to work (for whatever reason your economic belief system tells you) that pushes assets “higher than they otherwise would be” during 3 major episodes of QE (1,2, and infinity) So for the rest of infinity future the playbook is now there to bring a forceful act to punish short sellers and bring in risk buyers by the central bank. The only constraint being a high inflation environment.

  67. Michael – what do you mean by “supply/demand is out of whack”? What supply, and what demand are you referring to?

  68. “the content of people’s prayers”. You had me there, but your article doesn’t even come close to accusing the IRS of doing that. They asked the group to explain how their prayers outside of Planned Parenthood clinics are considered educational. This type of inflammatory headline drives eyeballs to the article, but distorts the truth which, at least exists in this particular article.

    As for the IRS going after “conservative groups”. That’s just the spin – 501(c)(4) says the group can not endorse a candidate, or run political campaigns. Well, “tea party” is quite obviously a political party – right!?!?! So is it really that shocking that they looked at groups with “tea party” in the name? To me the most shocking thing about this is how liberals are caving to this being an outrageous scandal. The scandal is that NONE of them lost their tax exempt status when it is clear they are political groups.

  69. If this is the wave of the future, how does it end? All advanced economies can not devalue at the same time; or am I mistaken? Will the simultaneous devaluation stimulate enough demand to get the global economy going?

    Hollande is calling for and Abenomics program for the EU.

  70. I don’t buy Graeber’s explanation. Is money really just a debt? I like Cullen’s description in his monetary paper where he describes it like a ticket to gain entry to a theater. Isn’t money really just a means to an end? That doesn’t require that it be debt. It’s just a tool. A social tool that can function as a debt, but mainly just functions to help us exchange things. I don’t see the need to make it much more complicated than that.

  71. Along similar lines, Japan has been deliberately driving its currency down. How much more of this is Germany going to take before they say enough! and demand that the ECB join the mad QE party and start buying EU bonds and foreign assets?

  72. There must be a limit. Even if the mad global QE party can double or triple stocks from these levels, at some point all bubbles end, even bubbles pumped up by central banks. Eventually, there will be too many overleveraged speculators, or oil will pop up, or some geopolitical event will take away the punch bowl. When this sucker pops, it is likely to straight down so fast that it will be incredibly hard for anyone other then HFTs to get out. What concerns me is that the central banks have already used all their tools, and reform legislation stripped the Fed of some tools they used before. What will they do if this bubble implodes at a DOW level of 30,000 next summer when the Congress is still gridlocked?

  73. How can you use stops when these “flash crashes” now happen all the time in individual stocks? As a consequence of HFT, it is all too easy to get stopped out near zero in a stock that has billions in market cap. One moment the stock is at 30, the next tick it is at 0.01, and a few ticks later it is back at 30. There was one of these yesterday in Anadarko right at the market close. The exchanges may reverse some of these trades later, but not always. Stop orders seem too dangerous for me in this environment.

  74. This was simply about winning the 2012 election and worrying about any fallout on the other side. 501c(4) applications of liberal groups were routinely approved and even rushed through the system. Conservative groups were held up and harassed by any means necessary. More importantly, the IRS (and other Federal agencies) was sicced on big conservative donors in order to intimidate them, and also on the few journalists who dared to ask Obama tough questions. [The whole reason to want a 501c(4) instead of a super-pac is 501c(4)'s can keep their donors secret. You are not going to contribute millions to defeat the President if you think the EPA, SEC, DOL, etc... will destroy your business in retaliation.] It also looks like the way this was organized allows the President to disclaim culpability. He gave lots of speeches demonizing his opposition and encouraging his supporters to go after them. Dem Senators wrote letters to the IRS demanding that the IRS go after the opposition. And the Kossaks organized a big public campaign with White House blessing to pressure the IRS into going after its opposition. But it doesn’t look like there were direct orders from the President to the IRS to do so.

  75. Back in my college days, there was some drunk girl who did the same thing. They have windows in stairwells.

  76. By the way, the Presidents OFA group, whose primary purpose is to keep his voter turnout machine intact and boost his Party’s turnout for the midterms, is a 501c(4).

  77. Housing is the elephant in the room.

    After the largest housing crash of the last 80 years the U.S. housing sector has barely begun to bounce back. Supply is low: years of housing construction bust resulted in record low inventories. Demand is high: young people did not stop growing up in the last 5 years and they now want to leave mummy’s basement. Possibly all of them at once, while the low mortgage rates last.

    That will in turn repair more and more family balance sheets, fuelling consumption. Rinse, repeat.

    Hanging on to short positions in this market, despite the highs in equities (which are begging for a correction), will require gigantic balls. Good luck!

  78. Look at Europe and the ECB as a “what if the Fed did not do easing” alternate universe: the moment Trichet increased rates things went downhill and Europe got into a double dip recession …

    So yes, Bernanke could have messed up the U.S. recovery – instead he helped it. That also explains the vicious attacks against his person by leading conservatives: they knew perfectly well that its in Bernanke’s power to tank the U.S. economy in election year 2012 …

  79. It seems that net new asset issuance of stocks and bonds is lagging globally to the tune of 1-2 trillion dollars a year, while bonds are being retired and stocks are bought back. Money continues to accumulate in the upper income brackets, investment options in new business ventures are limited due to lack of consumer demand. That leaves an expanding pool of cash in a shrinking pool of investable assets and IMO explains much of this rally. I think it keeps going.

  80. As you point out there is a risk, there is always a risk. All I can say is that stops have saved me much more than they have cost. I’ve lost very little due flash crashes and most traders I know use them.

  81. Cowpoke, sure… you’re probably right…. I forgot how philosophical he gets, but that’s not the interesting part to me… take that or leave it: the interesting part to me is just the history. How ancient Sumer used exclusively credit. then about 2000 years LATER gold coins were invented (copper in China). He called that the axial age… .the coin age. And that age had a lot to do with military conquest & paying armies… in Europe (Greece and Rome), India, and China. Then near the end of the Roman Empire, coins again went out of fashion (literally we had to go back to credit because there was no one left to mint the coins). So then about another 1000 years on the credit system!… then when the new world was discovered back to coins… and now back to credit in 1971.

    Plus the work with more modern primitive peoples… who don’t seem to use barter (which is what the econ texts say was the beginning of money) except in odd situations (like encountering another tribe). They tend (the world over) to use a “gift economy” which is a kind of proto-credit economy.

    So, if he’s got the history correct, it’s something like this:

    gift economies (pre-history & modern primitives)

    credit (Ancient Sumer, Babylon, Israel… etc: )

    coin (staring around 500 BC when coins are invented)

    credit (After fall of military empires: 500 AD or so)

    coin (after discovery of new world: 1500 AD or so)

    credit (starting 1971)

    And barter is never a major factor! More like a side thing and for odd situations: when traveling, encountering new tribes, … later when doing some foreign exchange or amongst prisoners deprived of normal money. Interestingly enough the greatest of the ancient foreign traders (the Phoenicians) were very late to adopt the coin… they preferred to use their credit system for another 300 years or so after coins were invented.

    So if he’s right, the armchair economists who invented this story of how money arose from barter and then coins (w/o actually looking at the historical, archeological, or anthropological record), have got it all wrong! Barter was always a minor issue: credit came first, then 1000s of years later coins came along, and we’ve been going back and forth between coins and credit ever since.

    It kind of puts the issue of where gold fits into the picture in perspective.

    Finally he points out elsewhere that regarding this history of money, he’s not the only one: anthropologists, archeologists, and historians have had this basic story down for more than 100 years now… and they’ve been telling the economists… but the economists prefer their barter story, so the econ textbooks still have the barter to coin story.

  82. Karl…yep. Low rates and an economy that keeps growing slowly, even if corporate profit comes in just north of stagnant, what kind of PE could that justify? It’s at 14 on SPY now, 30 is not unheard of and everyone wants to beat zirp. We seem to be guaranteed that profit growth will exceed interest growth for some time.

  83. Well, Graeber’s take isn’t inconsistent w/ that. What he says is debt based systems preceded coins by a couple of thousand years. Coins have had at least two major periods of dominance in history. Both forms of money have been a social tool. Preceding the formal credit systems, dominant 5000 years ago, there were “gift economies” … which are also used by modern primitives. This is kind of an unquantified debt system. There’s some evidence that other hominids (apes, chimps, etc.) may actually use a related system (grooming or sex for food, etc.). This isn’t a great example, but this Penn & Teller clip (just the 30 secs or so, starting at this point) perhaps demonstrates a vestige of this gift economy: they were in Egypt, Teller admires a woman’s magic bag (she’s a magician) … and she gives it to him! Not what he expected: but Penn explains that’s part of the culture:

    Graeber has some much better examples in his book with real primitive societies, like aboriginal Australia and the Amazon basin, etc. I found his book to be filled with really interesting examples and pieces of history… interspersed with less-interesting philosophy.

  84. (What Teller doesn’t realize is that he’s now indebted to this woman for life… unless he can one-up her in the gift department)

  85. Much, much more. Germany is deeply scarred by the Weimar hyperinflation, which they (wrongly) believe led to the rise of Hitler and WWII. They are not only ideologically but psychologically opposed to monetary expansion. Even though Germany itself is going into recession (PMIs indicating contraction) and has inflation well below the 2% target and falling, they are still arguing for tight money. Hell would freeze over before Buba called for ECB QE – though they might have to tolerate it if they are outvoted on the ECB governing council.

  86. Cullen,

    Thanks. On the Kalecki equation as I understand it, government dissaving flows to either the household sector or to corporate profits.

    This year, households have been reducing savings at the same time as government has been increasing its savings rate in the form of smaller deficits (increased taxes and slowing spending growth).

    So if deficits fall $400 billion this year wouldn’t this flow through to lower profits? Or does it all just fall onto to the household? Is $400 billion a significant number?

    Sorry if I am oversimplifying but I have a hard time getting my head around the size of the numbers involved and how they translate into EPS for the markets.

    If I had known about and understood Kalecki back in 2009 I would have done exactly the opposite of what I actually did when it came to the markets!

    Combined with record leverage levels invested in the markets this seems like a precarious time in the event profit expectations fail to materialize on a go forward basis. It could fall fast if the margin calls accelerate.


  87. Not exactly, but I was diagnosed and medicated for it for about a year when I had ongoing bad mood swings (hypomania, not full blown) and depression. Not interested in going into specifics of my medical history, but it turned out the mood swings were caused by a completely unrelated physical medical issue – once that was sorted the symptoms disappeared completely.

    So best advice: if you have any mental health issue, don’t go to medication first, even though it seems like a panacea. Make your doctor run all the tests they can to make sure there isn’t a physical condition underlying. If I recall correctly, a significant proportion of mental health issues are the result of physical ailments – including sedentary lifestyle – but they go undiagnosed.

    If nothing is wrong physically, try everything like exercise and healthy diet first to see if that can improve your life, because prescription meds are horrendous and really should be a last resort.

    But, hypomania was pretty fun…

  88. Hypomania? I never heard of that. I just read a bit on it and it seems it would be a great trait if you could turn it on and off at will.
    I bet the trait makes for great salespeople.

    Thanks for sharing

  89. The falling yen is a piece of a larger puzzle. I’ve just completed the reading of the a book by Prof. Michael Pettis, short enough to be read in a week end but dense enough for the next 10 years. This is the book description, just to make you curious:

    China’s economic growth is sputtering, the Euro is under threat, and the United States is combating serious trade disadvantages. Another Great Depression? Not quite. Noted economist and China expert Michael Pettis argues instead that we are undergoing a critical rebalancing of the world economies. Debunking popular misconceptions, Pettis shows that severe trade imbalances spurred on the recent financial crisis and were the result of unfortunate policies that distorted the savings and consumption patterns of certain nations. Pettis examines the reasons behind these destabilizing policies, and he predicts severe economic dislocations–a lost decade for China, the breaking of the Euro, and a receding of the U.S. dollar–that will have long-lasting effects.

    Pettis explains how China has maintained massive–but unsustainable–investment growth by artificially lowering the cost of capital. He discusses how Germany is endangering the Euro by favoring its own development at the expense of its neighbors. And he looks at how the U.S. dollar’s role as the world’s reserve currency burdens America’s economy. Although various imbalances may seem unrelated, Pettis shows that all of them–including the U.S. consumption binge, surging debt in Europe, China’s investment orgy, Japan’s long stagnation, and the commodity boom in Latin America–are closely tied together, and that it will be impossible to resolve any issue without forcing a resolution for all.

    Demonstrating how economic policies can carry negative repercussions the world over, The Great Rebalancing sheds urgent light on our globally linked economic future.

  90. If all traders, small and big, will use stops, how big and how fast will be the drop ? Because it could happen than one second the price is 100 and the next is 70, so you will stop at 70 not 99.

  91. I’ve just read a few comments from noted traders all advising to long the dollar and short the aussie. It seems to me that Bernanke’s policy is having some unintended conseguence, expecially if, as I believe, the main reason of QE was to weaken the dollar in order to kill imports and boost exports.

  92. The advice to look at diet and exercise is definitely a good one, but never discount medication. Bipolar, depression etc. are real and serious medical disorders and often medication is the only thing that will work. Some people may not react well to medication but lots of people tolerate it really well. I think sometimes our society moralizes mental health issues, treating them as if they’re a matter of virtue and people who have them must not be good enough for some reason or another. This is MOST DEFINITELY not true. They are real medical issues, not just feeling a little “sad” or “moody” and taking medication is not a bad thing AT ALL. I’m not a doctor so obvs. you should always consult with your doctor and consider all possible treatment options, including meds. I’ve had friends with bipolar and/or depression illnesses that have wrecked their lives (I had one friend who was in such a pit of deep depression I was calling him every hour to check up on him to make sure he was okay. Scary.) and medication has without a doubt saved them so I wish the best of luck to anyone who is struggling with mental illness.

  93. Tom, I have been reading more on Graeber, Amazon comments are great to see what people think of his work.

    It seems that (philisophical) reduction brings us to a divergence of individual and social interrelationships of people.
    It as almost as if we need a system in place where both credits and fiat and Gifts are used. One where gifts of credits given for philisophical social constructs IE being born and achieving certain social benchmarks finish the 3rd grade and can read you get a credit. Born retarded you get extra credits. And these credits can be exchanged for fiat and more fiat can be gained by all the other aspects of life like work, gambling, investing. But there seems to be a yearn in the system that some basic social needs should be meet.
    Seems like we are close to somthing now with the bank/govt/private relationship but there seems to be a missing part. Perhaps the simple solution would be to allow bankruptcy to wipe out student loans. :)

  94. Hello Adam P. et. al.,
    Thank you so much for that. I’ll check out the book. It feels like the “beggar thy neighbor” mercantilist policies of the 1930’s and that didn’t end well. At least this time, hopefully, we’re smart enough to try an alternate solution other than a trade war.

  95. I had a co-worker and friend with bi-polar for years and I didn’t even know. He started acting strange at work one day. A couple days later his wife calls me and asks me if I know where he is… I guess he didn’t show up at home. I didn’t, but she tells me the whole story: he’s bi-polar and every five years or so his meds stop working and they have to prescribe new meds. As soon as he got some new effective meds, he was back to work and everything was back to normal. I find out later that when his meds quit on him he was paranoid… about me! And my brother (at the same company).

  96. My mother was, she struggled with it most of her life. (She passed away last year at 87.) Lithium (a tricky drug, blood tests must be done often – her’s were monthly – to keep the drug, which is a metal, at a safe therapeutic level) helped her stay on a relatively even keel for over 25 years.

    I am not up to speed on the current best practices for treating bipolar disorder (if that’s even the right term). Having said that, it is a chemical imbalance. If reducing the severity of the swings is a goal, then medication is required. I think exercise and healthy eating habits are smart for all of us, but even more so for those who experience severe emotional swings – meaning severe stress. I also believe cognitive behavior therapy is a great choice for most all of us (at times). I describe CBT as something like “positive brainwashing”. A good book on one approach to CBT is Change Your Brain, Change Your Life by Dr. Daniel Amen. Yes, he hawking diet books now, but his other work on treating depression, PTSD, food and substance abuse, etc. is pretty well respected.

    Seek a psychiatrist (not an internist or family physician) with lots of experience treating bipolar patients. Ideally, that doctor would also be good at “talk therapy” – not one who just prescribes the medication and says “see you in three months”.

  97. Laffer may be taken seriously on CNBC, but even a lot of conservative economists don’t take him seriously anymore (from what I can gather).

    If you want another laff, take a look at these two go at it back in 2006:

    I’m not a fan of either, but Schiff did get the better of him here! I wonder if he ever coughed up that penny.

  98. Thanks Steve W for sharing, CBT (cognitive behavior therapy). Hmm interesting, I just did a bit of reading on it and the concept of focusing on ones issue nowinstead of past makes sense. I think this could also help people with financial investing.
    I need to read more on CBT thanks for pointing out that book.

  99. This seems like the crucial distinction. Does money serve public purpose or private purpose? A purely state money system would have only money that serves public purpose while a bitcoin system would serve only private purpose. Our current system seems to be doing both, but seems compromised by the fact that the banks control the system. If the main issuer of money was the government only then that would mean money was purely for public purpose as opposed to being issued by banks who only create it when it’s profitable for them to do so.

  100. “You may feel a moral obligation to pay your old debts…” … this kind of ties in w/ some of Graeber’s philosophical musings (which I don’t necessarily agree w/ BTW). Ha!

  101. Did you catch his tie in w/ religions? I actually own the book (ebook version) but the philosophy really would put me to sleep, so I kept skipping ahead to the next bit of history or anthropology. I like the concrete examples! … but watching some of those interviews just now… it was interesting about how the Christians were even stricter about the “no interest (usary)” rule than the Muslims way way back… and then how it slowly crept back in as a fine for late re-payments. Also the “safeguards” for debtors he talked about for debt based systems (that he thinks we lack now days). And tying religious salvation to literally clearing away people’s debts. Maybe I should try reading the book again… at least all the parts I skipped over the fist time through!

  102. I heard this on a mtg radio program this morn and sure enough I see it.
    it just got my attention because a co worker of mine was looking to buy a house after selling his and he had a ding on his credit from a cell phone company 6 years ago. The mtg guy convinced him (so he begrudgingly) to pay.
    in the end it didn’t really change his interest rate and was PO’d that he payed it.

  103. Cullen, you write:

    “That’s why conservatives hate fiat money – it exists as debt that makes us beholden to banks or the govt.”

    But what about conservative bankers? Ha!

    Interesting thoughts. Do you think that Graeber more or less gets the history correct though? That’s the part of his work that I find most interesting. What are the parts you disagree with? I try to be on guard a bit when reading him because I know he’s an anarchist. Ha!

  104. Cowpoke, I think you’ve already surpassed my understanding here… My eyes started to glaze over reading your comment just like they did after reading the first review on the list you recommended… just as they did when reading the book itself. 8O

    Studen loans: sounds like a part of the “jubilee”

  105. It will be similar to the outcome of the Great Depression, when from 1929 to 1936 advanced economies raced to exit the gold standard. Those who exited early (the U.S., Germany) recovered faster and grew faster – those who exited the gold standard last (such as France) suffered the most.

    People keep forgetting about the public purpose of fiat money and inflation: to give to those citizens who are working now or those who will work in the future (the next generation).

    Deflation takes from our children and gives it to people who earned their money during the last bubble.

  106. Ah, I see. I didn’t get the idea that all money was necessarily debt from him though… for example when coins were dominant… but perhaps I missed that pt. I did skip some parts.

    Regarding Smith and Marx… from what I understand (admittedly… not much!) these two were at least on the same continuum of thinking… both qualify as “classical economists” don’t they? I thought Smith’s “labor theory of value” (the part that modern Smith/Free-market fans ignore) lead directly (through other classical thinkers like Mill and Ricardo) to Marx’s ideas… whereas the neo-liberal, neo-classical types in the later 19th century really separated themselves from the classicists by rejecting that line of thought (which according to some, very much pleased their plutocratic overlords! Ha!).

  107. There are these “rolling Jubilee” offshoots from the Occupy movement:
    Any Idea Graeber thoughts on it? He was a supporter of the occupy mvt.
    Actually though, I think perhaps we have the tools already.
    For example, Teachers Lobby are constantly yammering on about Kindergarten and now PRE-K and head start programs despite studies show very little if any advanced readiness for kids. In fact some studies find regardless kindergarten or not most kids are at the same level by the end of first grade.

    SO why not shift the pre-1st grade dollars to the other end and cover two extra years of higher ed?
    Why not just take over the public junior colleges and offer for FREE the first 2 years and a lot of people could go on to 4+ education on their own but would have better grasp of what field of study they would choose.
    This would keep the Teachers Lobby from losing monies, keep students from plunging into debt outa high School before they even know what they want to do with their lives.
    AND put the burden of raising a child in the early years back were it belongs on the parents by removing the free ride of State Sponsored Daycare (shhh I did just say that)

  108. From my read of MMers, they’d say the Fed is far from having “used all their tools.” The neo-Keynesians say that when arguing for more fiscal policy. They (MMers) think the Fed is unnecessarily limiting itself… and paradoxically they think the more it SAYS it’s going to do, the less it actually will have to do. I think it’s an interesting idea… don’t necessarily subscribe to it.. but since the MMers have kind of adopted Japan and Abe as about as close to a test of their ideas as there is right now, I guess we can sit back and see what happens there. But from what I see so far, the bit about them (BoJ) accomplishing the lion’s share just by making their intentions known isn’t really functioning as the MMers envisioned it, is it? My bet though: if the Japan experiment blows up, they’ll claim they weren’t doing it right! That’s always the out w/ the dismal science: you never have to apologize or say you were wrong!

  109. Cowpoke, you’ve got some potentially good ideas there. However, let me point out that the research you referred to about Head Start that made a lot of news recently didn’t necessarily tell the whole story. (It was K-3rd grades, BTW, that they found the Head Start benefits dissipated at). But a bit later in that same report there was this (which didn’t make the news as much):

    “Garces, Thomas, and Currie (2000) conducted a non-
    experimental study that reported evidence of long

    term improvement for Head Start participants
    on outcomes such as school attainment, earnings and crime reduction, for some race and gender
    combinations. Ludwig and Miller (2007), using a regression discontinuity design, reported that
    increases in Head Start funding were associated with a decline in mortality rates for children
    five to nine
    from causes of death that could be affected by the program, an increase in high
    school completion, and an increase in the likelihood of attending some college. ”

    Here’s the full study:

    Here’s the bit about the K-3rd grade results:

    “Looking across the full study period, from the beginning of Head Start through 3rd
    grade, the evidence
    is clear that access to
    Head Start improved children’s preschool outcomes
    across developmental domains, but had few impacts on children in kindergarten through 3rd grade.”

    How did I know? By watching the news? Nope… by watching the Daily Show:

    So of course Stewart (who’s left of center) is skewing things here a bit for some laughs at some of his favorite targets… but my take away is that the jury is still out. I do think it’s hilarious that the US military is recommending more be put into early childhood development though! I don’t think the Fox News commentators mentioned that, did they?

    I’m all for getting the facts though… it’s just who do you trust to deliver them?

  110. Tom, your right about the “study you can trust” part aand that’s the rub in this stuff. I know because The wife and I were faced with holding one of our kids back and redoing first grade.
    The system (study) says move them on but some teachers that work with them daily say hold them back.
    The main study was a Chicago based one that was really suspect.
    Bottom line I have seen from raising 3 kids is that some kids by nature hit the ground running and some don’t with regards to early school.. Well heck school in general.
    My youngest has always struggled with school work while the other two are rock stars. Now with regards to running things and bossing people around. the youngest is the best. Bed always made sweeps, vacumes, cleans up messes with having to be asked. The other two struggle with that. go figure..

  111. I don’t think HE says that. But there are people who will say that things like gold are not money because it’s not debt. So they limit money to things that are just debt. I basically think anything can be money because money is just a tool for exchange. It all depends on how that tool is organized within a specific society though.

    Yeah, I was using Smith vs Marx as in capitalism vs socialism. There’s a battle raging in society at all times with regards to the purpose of money. Should it serve private purpose or public purpose. The conservative type thinkers tend to say it should serve private purpose while the liberal thinkers tend to say it should serve public purpose. I don’t think there’s a clean answer there. And it’s interesting to see things like Bitcoin crop up because I think people will tend to veer towards using a private purpose money if they can avoid the taxes. Problem is, avoiding taxes reduces the potential for public purpose. Which is why govt’s don’t like things like Bitcoin.

    Come to think of it, money like Bitcoin proves why concepts like MMT’s “sovereign countries are never revenue constrained” is bunk. If Bitcoin grew to the point where it were freely accepted as a dominant medium of exchange that was untaxed then people will deviate towards using it because they would avoid the tax expenses. Which means the govt would run out of its ability to procure funds which would render its spending abilities reduced. The govt would either have to reduce its spending massively because of the revenue short fall OR it would have to print up about $4T in t-bonds every year to spend. So you’d have all the private Bitcoin spending occurring in the pvt sector PLUS you’d have people avoiding USD and a govt printing t-bonds like crazy. That could be very problematic for the stability of the USD. That’s a pretty interesting thought experiment actually….

  112. I’m not saying there aren’t any problems with meds or how we prescribe them. I’m just saying mental illness is not a moral failing (not accusing anyone here of claiming that) and I think our society has a long way to go on that.

  113. I certainly want to “sling mud at you” but I can’t figure out how I can “push mud” through a copper wire/glass fiber thread from across “the bg fish pond” into the US/up to San Diego/into your face.


  114. I still believe US interest rates WILL rise (in the next 6, 12, 18, 24) in spite of that MR garbage.

  115. Come on man. You’ve been writing that same comment here for 4 years….At some point you have to start wondering if the basis for your theory is wrong. No?

  116. Fun Sumner self-described “rant” today:

    Perhaps a little frustrated? Well it’s only 99.999999% of humanity that’s “blathering on” like idiots. That leaves about 60 smart people who are actually capable of intelligent dialog on the issue… that’s almost one smart person for every three nations! Almost… not bad!

  117. Tom, what do you mean by 99.999% blathering on? I read your post and am struggling to put it all together. Would you be so kind to elaborate on both post so I can retire this evening with my brain less racked?

    Thank You Sir.
    Also, Funny Video, thanks for the Flashback.

  118. is somthing wrong in the forum section? I can’t post new topics. anyone else have an issue?

  119. That’s from Sumner’s point 7 in his rant:

    “And yet the other 99.999999% of humanity continues to blather on about “tight money”…”

    You mean the SNL video? Do you recognize Belushi’s friend??… that guy IS a politician now… a US senator! Do you know which one?

  120. Am I a MJF (Monetary Jesus Freak)?
    Perhaps so, but I think with good cause. You see, I think Monetary Wonks can have a tendency like most “Wonks” to focus on the pure here and now fact driven numbers reality focused double book entry x+x-x=x.
    That’s all and fine from a hard core math perspective, but as human beings, we an X factor that philosophy (or religion) has brought into the game that plays on the one differing thing that separates us from all other living creatures….
    Our Consciousness.
    we are conscious of our decisions and as such have come to adhere to a certain moral code that holds certain concepts higher than even self sustenance.

    Of course I speak from a western educated mindset but I do think that the basic human tenets of needs that apply across the globe because of the conscience mind.

    My question to you is this, WHY then do we we have a propensity to continue to gather more resources for ourselves and store those resources when in reality we only can know for the day what resources we actually will need because our life is finite?

    Why Do We Do This (Build Up Treasures We May Never use)?

  121. Dang Man, Is that Al Franken? I know he was a SNL comedian on on there, but I NEVER SAW THIS and I live in in his State of representation… Unfortunately.

  122. Yeah, I am because of my work schedule. I have been blessed with the easiest Job on the planet for which I make enough money that would feed hundreds if not thousands of people less fortunate than myself.

    So while I sit on my ass timing my next microwave heated sandwich, (and debate the stock mkt value) and then worked it off in the company sponsored workout facility, I do ponder and think about folks like XI and oft times appreciate their innocence because I oft times agree that Ignorance is Bliss:

  123. I remember seeing that back in college. My favorite scene is when he sees the white lady… he can’t get over her pale complexion and red hair and he thinks she must be the ugliest woman on Earth!

  124. Those are interesting thoughts as to why the market is disconnecting from the underlying real economy globally. At some point, cash looks good especially in a low rate / low inflation environment.

  125. Hey Cullen,

    What do you think about Martin Armstrong’s theory that capital will flow into the US in masses creating a Nikkei-1989ish bubble in both the dollar as well as in the stock market? He calls it a massive short that will have tremendous consequences once interest rates rise. Btw, his turning point is 2015.75.

  126. Would love to hear your comments on Zulauf’s latest piece published here:

    He seems to disagree quite a bit with several of your views, esp. on austerity and the developed economies now not being able to resume their previous rates of growth. At the same time he is in agreement on some points e.g. “what could happen to equity markets when investors wake up one morning realizing that money printing does not work in the real economy?”

  127. Why does he think the capital is going to flow into the USA? For 30 years we’ve been running current account deficits so I think he seems to be making a mistake by assuming that the low interest rate environment will result in a trade rebalancing. I’m not really familiar with his position though….

  128. Basically due to the lack of alternatives. At least half of Europe in depression mode already and starting the bail-in scheme, Japan in recession (as always;) and I think China because of legal uncertainty..

    Any thoughts on that?

  129. I accept the premise that at least 70% of GDP is based on consumption. People and organisations having the means, motivation and conditions to buy. This is my cardinal guide, my true North.
    It cuts through tons of intriguing data, graphs, statistics and commentary. So folks can rave about corporate profits being higher than ever as an explanation for a stock market that has gone berserk, has put the cart before the horse, but until more people are earning more we are just spinning our wheels.
    Would you care to comment. Feel free to throw my cardinal rule under the bus and convince me that I’ve got this wrong too. I’m just a bloke who became hooked by the market and have done my best to fathom what unfolds.

  130. Civic Action is a 501c(4) piece of…will anyone in their right mind say that any part of this organization is anything but politically motivated? I’ve also heard the argument that no one has been denied. This is troubling, since it ignores the chilling effect on free speech. Ten liberal groups and ten conservative groups apply for tax exempt status. Ten liberal group applications sail through, while ten conservative groups are asked for “more information”, delaying their applications for months. Some persist, others drop out. No one was denied directly, but the message from the government is clear – if you are conservative, expect to jump through hoops. That’s the scandal.

  131. 501c(4) are and always have been BS. Same with tax exempt status for churches. Fred Phelps and his church (i.e. his family) that picket at the funerals of US Military personnel with signs that say “God Hates America” have a tax exempt status? How about Satan Worshipers? They get a tax exempt status too? We’re subsidizing that? Let’s simplify and just tax everybody! We’ve got no business trying to pick the wheat from the chaff here. We need to crack down on ALL these groups.

  132. The Free Exercise Clause of the First Amendment of the US Constitution bars the US government from limiting the free expression of religion. By demanding church taxes, the government becomes empowered to penalize or shut down churches if they default on their payments. [12] The US Supreme Court confirmed this in McCulloch v. Maryland (1819) when it stated: “the power to tax involves the power to destroy.”
    Pros and Con Read:

  133. Although that would be an extreme example, it does happen as algorythms seek out these areas of supply. If a reasonable stop can’t be found that avoids an area of supply the trade idea may have to be abandoned.

  134. Nice quote Poke…another way of putting it…”If I don’t like you, I will tax you out of existence”.

  135. And to add, look at what has come to light in regards to the IRS targeting specific political sounding groups.
    People in an ethos of divided ideology ought not be entrusted with ultimate power over others. power divided is power checked.
    Imagine aIRS agents as rogue atheist. Or a catholic gone wild or a protestant of irish decent out for paybacks on catholics….

    I think it best this pandoras box stay closed. Seems we have improved our quality of lives with out allowing the govt to dip into the offering plate.

  136. How big an impact on GDP did the devaluation of the Yen have? I read that real wages stagnated despite the better than expected GDP growth.

  137. That’s an excellent argument… but the very idea of what’s political or charitable or religious is under assault here it seems to me … on both sides. The Moveon thing and many “churches” and “charitable” organizations are clearly pushing the limits in my opinion. Fred Phelp’s church seems little more than a hate group to me, for example. What else should be done? Add a bunch of staff to the IRS to sort it all out? Stop taxing any organizations? I never suggested we “tax it out of existence” but it’d be nice if there were a simple way to treat all organizations fairly and equally. The idea of giving a tax advantage to some of these groups doesn’t appeal to me. But maybe we’re stuck with trying to sort out the “authentic” from the “phony” “charities” and churches.

  138. “Ten liberal groups and ten conservative groups apply for tax exempt status. Ten liberal group applications sail through, while ten conservative groups are asked for “more information”, delaying their applications for months.”

    This is pure BS. You have no evidence to back this claim up. What is known is that were a rash of new conservative C4s after 2009. They almost tripled those that can be labled liberal. Additionally even while your status is being determined you are in fact functioning as a C4 AND usually if you are denied you pay no back fees and fines you are just told to cease and desist. Interestingly, you can also cease and turn around and start again with a new name and go through the whole process again using the same donors and roll the funds over. This is a nonsense complaint by the repubs and all this conspiracy crap tying this to some concerted effort by Obama to use the govt to punish his enemies……..? Right. There are many conservatives working in these govt depts. It is not a bunch of liberals working in all depts of govt and any such effort would be already exposed.

  139. Yep caution should be exercised. ya can’t throw the baby out with the bath water. In the grand scheme does it really matter.
    from the macro, the money gets taxed anyways.
    Think about this:
    Let’s pretend You and I believe in ORCAM the God of Monetary Realism. How do we know Orcam is the real and true monetary God?
    Because his written word in the Blogosphere of data bits says so. So we both agree and seek to find favor with this God and look to build him a grand server farm system full of IBM computers to help spread the “word”. So we claim tax exempt status because we are a church/charity which many people before us were wise and felt it fine to not pay tax for our digital ministry and proselytizing of the Austerity Heathens.

    Now a grand conversion starts and Tax Free donations start flowing in by the bucket full because “Orcam is blessing our mission”.
    Now to help grow and spread the message of the Real Monetary Message that Orcam has ordained us to spread, we start spending all that donated money. we buy/build buildings, computers, office equipment etcetc.. that puts labor to work, and the Govt get’s to Tax them so they eventually get the cut they seek. Our God Orcam get’s his message out. and We get our portfolio blessed by the wisdom of Orcam.
    Seems like a Win Win Win… :)

  140. “There are many conservatives working in these govt depts. It is not a bunch of liberals working in all depts of govt and any such effort would be already exposed.”

    That’s true!… some of the most extreme right wingers I know draw a Federal paycheck!… Including my own half-brother at the post office. :D Ha! (BTW, I don’t mind him seeing this, he’d probably be proud of the description!)

  141. They feel they EARN their pay, mostly they object to shiftless blacks getting 240 week doing nothing. I actually agree they earn their pay, the overwhelming majority of state and fed workers work hard and do good jobs. I just think they have failed to do the math and see 1) 240 week is virtually nothing and 2) the total expenditures on these people is less than 10% of what we “spent” on TARP. Its a drop in the bucket. Eliminating it simply takes a few regular customers away form some convenience store owners.

    The savings is equivalent to me putting an extra 25/month in my 401 k and thinking Im really doing somethung for my retirement.

  142. Any PHP, MYSQL HTML5, etc.. with CMS experience freelancers out there? One of my (micro) companies is in need of a kick start. If you are a basic guy/gal with some programing knowledge and yet out of work sitting at home just drinking cheap booze and smoking roll your onwns with a nagging spouse harping on you to get off your dead ass and CONTRIBUTE to the cause. Let me know.
    I can cough up a few shekels to help quash the Nagger N Chief running the house.
    I promise to stroke your creative ego and blame all your short comings on the system… If ya help this brotha out… :)

  143. If the Fed can walk the Dow up to X (say your 30K) before they put on the brakes and it drops 35-40% its still well ahead of where it is now. In some ways I think thats a game plan – knowing there exit is going to cause havoc, to get this thing plateued at some big # so when the “give back” comes its still well in excess of where things “otherwise would be”.

  144. Your concerns are well founded, low levels of income and high levels of debt at the median will likely weight the economy for some time. Just don’t confuse the markets with the economy.

  145. Thanks so much thought this was MMT did not realize differences between MR and MMT. Will read the link someone put up, thanks for all the help!