Q&A….
Another week in the books. I guess that means it’s time for another Q&A. You know how it works by now. Anything goes….
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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30 Comments
I’d like to know if you’re still buying into this downturn. Thanks.
Can you explain why QE isn’t money printing?
I actually keep the post answering this question in my bookmarks bar at all times. Have a look, http://pragcap.com/pomo-flip-matter
Cullen,
I can only imagine how much reading you do every day (and wonder if do “speed reading). I can’t seem to remember you ever commenting on articles in the WSJ (which is not to say you haven’t). I’ve read some interesting op-ed pieces in the WSJ that beg for commentary from the MMR crowd (and/or perhaps the MMT crowd). Do you bother reading the WSJ?
What does the expectation ratio look like lately, and do you think you will post three things I think I think any more? Your commentary was one of the most valuable things on the site in my opinion…
Would you kindly explain how Germany benefited from the Euro in the last decade?
Hi TPC, this is a followup on last week’s Q&A discussion on CB/gov money vs. bank/private money.
First, just to make sure I got the MMR starting assumptions correct, and without getting into a debate on the broad definition of money, let’s just talk about USDs and specifically electronic USDs (not paper currency).
(1) USD = (private+Fed) bank money
(2) government spending is financed by (creating) bank money, but the operational details is a closely-coordinated “public-private partnership” (banks+Fed). The end result is a government bond and a deposit. Although, to be honest I was confused by your comment “…Fed as the currency issuer. We also believe the government needs to procure funds from the private sector in what is essentially a coordinated activity with the banking system”.
(3) the Fed is also a bank so it is, at least, on equal footing with private banks, but not necessarily in a vastly more powerful position (your words are the Fed doesn’t “sit at the top of the hierarchy”)
My questions are just to clarify (1) and the money creation process. Part of my confusion is I’ve previously read Mosler and others say, as examples, that the following can create horizontal money:
(a) credit card companies
(b) foreign entities issuing in USD (e.g. an Indian steel company issues USD bonds)
(c) anyone that issues commercial paper in USD
But, I don’t understand how the above is possible without the banking sector. Right or wrong?
Similarly, can “shadow banks”, e.g. money market funds, or foreign banks, create money without the intermediation of the (US) banking sector (i.e. banks regulated under US law)?
I have a question about the bailouts. I get what TARP did and how “taxpayer dollars” bailed out the banks. But I get confused when people talk about the Fed (fed reserve) bailouts.
What are they specifically referring to (you know, that 8/16/20 trillion number thats always thrown around)? Isn’t it the FED’s job to provide liquidity to the banks when they need it? Were the “FED bailouts” just short term loans (liquidity) at basically 0%? Was this QE1?
The trillions were actually guarantees, not actual (taxpayer) money for the banks and the money market funds.
That’s part of it.
QE1 was an asset swap, whereby the Fed swapped reserves & Treasuries for assets on the private banks’ balance sheets that it normally would have never accepted before the crisis. Namely the Fed swapped out crappy mortgage backed securities for “money good”. This dramatically improved the private banking sectors balance sheet composition, improved counterparty confidence and greased the skids on the credit markets.
There was also TALF, or Term Asset Lending Facility, which helped the credit markets as well by guaranteeing securities backed by auto loans, student loans, credit card receivables, etc. Again, helping unfreeze credit markets.
Another big item was the often overlooked Temporary Liquidity Guarantee Program. Out of all the Fed actions this one probably had the biggest impact and the least press coverage. The Fed effectively stepped into the commercial paper market and backed all of it after Lehman collapsed. When the Reserve Primary Fund broke the buck, the commercial paper market nearly froze up. Money market funds are the primary liquidity providers in the commercial paper marketplace. A negative feedback loop ensued where there was a run on the mm funds, forcing firesale prices on commercial paper, which meant no one wanted to hold it any longer…etc. Huge corporations were on the verge of not being able to meet payroll…so the Fed stepped in and backed all the paper. Like Mr. Market said, it wasn’t that the Fed bought the paper (most of it is strictly overnight anyhow), but made guarantees on a multi-trillion dollar market.
Does anyone know if these guarantees still exist ?
I got the TLGP logistics wrong. That was actually a backstop to inter-bank lending spearheaded by the FDIC. This expires at the end of this year. The Commercial Paper Funding Facility expired back in 2010.
Cullen,
What are you looking to see to call the end of the economic drain of the deleveraging cycle on the economy? Are you looking for a level at which nominal consumer debt levels stop falling, a certain debt to income ratio, debt servicing costs vs. income . . . . And how should we think about the Fed. gov. stepping in to keep consumer leverage higher than it probably should be with uneconomic lending thanks to HUD, Fannie/Freddie and Student loans?
All your work/education here is highly appreciated.
I had a similar question. IIRC you’ve said that the effects of the BSR will recede sometime in 2013 or 2014. What makes you think so? The deleveraging following the Great Depression didn’t end until 1949 at 50% GDP consumer debt levels and we are far from those levels right now.
1. Care to comment on another unvetted comment often used in main stream media/pundits – “There is too much debt in the industrialized world”. The inference is to public debt (US) – so what is your position on this statement?
2. With no apparent “growth scenario” like the manufacturing revolution post depression when FDR devalued the currency to address the debt problem. And the credit/tech revolution post 70s when Nixon removed the gold backing to address the debt trade deficit issues, then why do you expect the world “grow” itself out of debt crisis?
3. What do you think of this solution to address debt/slow growth crisis: That is, what if the central banks of the developed world collectively devalued their currency 40% (or some %) relative to commodities/assets like FDR did during the depression. This would make debt payments “easier” but would increase inflation so it may make sense only if the world finds itself in a deflationary depression. [There are lots of questions like would emerging low debt countries also devalue or maintain a strong currency. And would this work if there is no "growth" driver like the manufacturing revolution benefited US post depression]. Comments could this work and what would be limitations?
Question about the fiscal compact treaty in Europe (starting jan 2013), which says that eurozone countries are not allowed more then .5% budgets deficits. Is that even possible? Without a semi permanent federal government/authority filling up the gap by spending a little?
Pick any of the softballs below:
How do you incorporate physical fitness in to your lifestyle?
How much sleep would you say you average?
Of the movies you have seen in the past 3 months, what was your favorite?
One more softball-
Favorite restaurant in SD.
Cullen,
CNBC recently posted The World’s Biggest Gold Reserves. The US was number one by a wide margin. “Altogether, the total gold reserves of the U.S. equal 8,965.6 tons and would be valued at approximately $418.39 billion in today’s market.” Germany was #2 at $ $174.7 billion. While $418.39 B is a huge number, it’s relatively small compared to $15.7 T national debt. Knowing the dollar isn’t on a gold standard, what would be the expected ramifications on the dollar, interest rates, economy, gold prices, etc…if the US sold all or a majority their gold reserves?
Cullen,
Picked up a market outlook in the men’s room at work this week by Brian Wesbury, whom I’ve seen you linked to occasionally. In it he described himself as anti-keynesian. His opinion was that government spending and regulation were the drag on the economy and tax and spending cuts would turn our plow horse economy into a thoroughbred. So my question is two part.
1. In light of the MMR articles regarding the Fed/Treasury relationship, does government spending “crowd out” private investment?
2. Isn’t a tax cut the same as an increase in spending when it comes to the deficit? What would cutting spending at the same time cutting taxes due to boost GDP?
Cullen, your thoughts on this Bloomberg article:
Ex-Soros Adviser Fujimaki Says Japan May Default by 2017
http://www.bloomberg.com/news/2012-06-15/ex-soros-adviser-fujimaki-says-japan-to-probably-default-by-2017.html
Hve been struggeling with this one for a while..
From an MMR perspective, what if ECB just bought all outstanding sovereign debt in the EMU at current prices and then wrote it off?
1. Is this technically possible?
2. Would this be highly inflationary or just a form of QE?
What brought you to focus on equities investing/trading as opposed to fixed income, currencies, or commodities?
If you were “king of the U.S.” for the day, (a) what would you peg the currenct necessary annual deficit at to push U.S. into an idle growth scenario? The current run rate is $1.2T, barely off the $1.4T max a few yrs ago when tax receipts were substantially lower during depths of crisis. What is your idle # now? $2T annual? $2.5T? $3T? I realize the full answer is more akin to “until all idle production capability is not idle” but what annual deficit do you guestimate that to currently be at so the U.S. generated say 4%+ growth – i.e. enough to take a serious bite out of unemployment.
Second question. Once you did this as king, I assume almost fully by tax cuts (as your general preference stated in many posts) and the economy was revving, and you had to reverse course and remove ‘stimulus’ who would you raise taxes on? What groups would be your first focus – especially knowning any tax reduction, once given, creates unrest among people once it is even hinted it would be taken away? i.e. you would be lambasted on CNBC for being a “job killer” once you take away tax cuts.
in previous comment idle = ideal.
Can you explain to a non american who’s election rhetoric so far is likely to stave off the fiscal cliff the most. Whi will the market benefit the most from at the current juncture of the campagin. Thanks.
There appears to be a sea change in how the Fed views the stock market as a wealth generator the past 3-4 years. It is now an explicit tool to stoke wealth creation and “animal spirits”. Knowing the Fed now targets the stock market, do you believe it will ever be possible for the market to sustain a serious selloff of 40%+ ala 2008 again? If yes, under what scenario? This under the guise that market participatants now have built into game theory that any serious selloff i.e. the previous 2 summers of 20%ish, will bring in central bankers, especially those in the U.S., to support markets. Which can in and of itself reduce overt bearish bets and selling pressure – see the past 4 weeks where people “know the Fed will step in sooner or later if things continue to get worse”. See your comments section day after day for examples. I ask this knowing that QE is just an asset swap and does little but effect pyschology but “animal spirits” is half the game in the market.
This is a bit on the philosophical side (What a shock! – coming from me).
With the present penchant for preventing another “Lehman’s moment”, it occurs to me that the corporate/political world is practicing a sort of “capitalistic socialism”. If failure of a corporation or bank is taken out of the picture, then true capitalism is also a failure.
My bent on the situation is that:
1. if we have socialism, I would rather have it for the benefit of the people, not the corporate structure.
2. the investment plain would be leveled to such an extent that (in true socialistic fashion) all investors would be “equal” (thus negating the benefit of investing).
How do you feel about this?
Cullen, could you please elaborate further on the reason(s) for your new-found, cautious optimism about the equity markets? The ongoing bank problems in the Eurozone aside, economic growth is slowing, worldwide, and will continue to do so for at least the next few months. Although many feel that central bank intervention is imminent abroad, and possibly at home, that probably won’t have much effect on economic growth, although it will certainly help with banks’ liquidity abroad, and provide short-term stimulus to equity markets everywhere. I agree with you that right now, the U.S. economy is still growing slowly rather than sliding into recession, but it’s far from clear if it’s growth rate is lessening or remaining steady, and unlike you, it’s not obvious to me that the U.S. will escape recession over the next year or so.
Sorry if this seems a little basic but I have not seen it discussed anywhere. If Eurobonds are issued as a part of the solution of the European mess, the intended effect is a significant decrease in yield on Periphery debt. However, as someone during the last QA pointed out another effect would be the increase of yield on German debt. So the result of the announcement of the formation of Eurobonds would be that everyone holding German debt would be facing a large mark to market loss? How would you operationally introduce this so as not to reward the speculator and punish those who are actively seeking safty?