Q&A….
Well, it’s that’s time of the week again….If you have any questions please let me know. I might be a bit slow to respond this time around because I do, believe it or not, have a life that is going to get in the way this Sunday and Monday. But let me know if there’s anything on your mind and I’ll see if I can help you out with an answer. Remember, 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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What do you think of the idea of non debt based money and the central bank conducting monetary policy directly with the people instead of through a handful of financial institutions?
Money would enter the system evenly across the populace as opposed to the present arrangement where new lending tends to enters the broader economy in an imbalanced manner as a result of profit seeking lending activities. The money system would be driven by the spending patterns of the general public not the confidence and lending behaviour of the financial sector. Also if the CB deals directly with the public and the transmission mechanism is eliminated there will be a quicker policy response (lower outside lags).
+1, even though I wonder what is the difference between taxation and the direct CB policy with people?
If I’ve understood correctly, MMR/MMT says that the govt. uses bond sales to drain reserves out of the system.
Is it possible that a private bank that is neither capital constrained nor reserve constrained creates credit money and uses that to buy a bond? The loan creates a deposit in the banking system, but no new reserves would be created right away. Or does the bond sale always involve a reserve drain somehow?
You often write about how loans create deposits, with the deposit being created “out of thin air”. Does this also apply to bond purchases? For example, if a Spanish bank buys a Spanish government bond, does it create money to do so (i.e. does the bond create a deposit)? And if so, what is the limit to this?
Thanks a lot for your help on this, it’s been bugging me for a while!
I have been an avid supporter for a few years now and try to explain my basic understanding of MMR to others, esp financial/investment people. No one seems to disagree with the logic for a currency issuer but their gut feel is that the markets would punish any government which converted to MMR. How would you see the transition working? Also as every currency needs to be competitive in this world of global trade and capital movement, aren’t their FX constraints in operating MMR? If a government did the right thing, focusing on keeping the economy growing rather than feeling debt constrained, there could be an ill-informed market backlash for some time causing chaos for businesses and jobs?
Could you refute, confirm or comment the following statements:
-to analyze the way monetary system in eurozone works, we can use all what we know about the US system, with the additional constraint that no state can be on overdraft at the central bank
-LTRO does not impact the reserves.
-banks cannot lend money from LTRO, but they can use it for buying financial assets from states or other banks.
-Banks can only “use” reserves for buying financial assets from other banks or from states (US and EZ)
-If the state has a fiscal deficit which is directly funded by the central bank, this is a money printing that comes on top of the money that may be created in the future by the economic stimulus stemming from the public spending.
A addendum +1: Do you say banks don’t lend reserves just because of excessive capitalization (aka, they don’t HAVE to lend reserves)?
I am the one who asked the questions above-Sorry
This may be a beginner’s question, but hopefully others might be curious too…
You’ve mentioned that when designing a position, you try to take a top-down view and begin by forming an understanding of the macro environment. Upon having done so, what are the primary asset classes that you think in terms of in order to implement your viewpoint? i.e. Stocks/bonds, okay… but in addition, credit (i.e. some cds index)? gold? oil? currency? mREITs?! etc… Also, if possible, a brief description of how you feel these various components fit together. (Maybe such a question requires too long of an answer, but even just an example scenario would be illuminating!)
I’m not particularly interested in specific retail investor products, more just your general philosophy on how you compartmentalize your investing options when creating a position. Thanks!!
Every time we had interest rates very low for very long a bubble was created in some asset class. MMR says inflation will not be a problem and you believe we will muddle through. Do you see any risk of a bubble and if so in what market?
thanks!
I’m still looking to continue the one from last week with you, Cullen!! So let me just paste that post in.
“Reading this blog, I often want to jump into a prolonged debate with Cullen. I disagree with him profoundly on a lot of things. While I don’t disagree with some of the base level stuff behind MMT, I disagree strongly with where that understanding takes the MMT & the MMR crowd. BUT, I have to say the quality of content and debate here is second to none.
I do want to push you further on the interest rates part of it, though. The way I see the world from 2003-2007 is this: extremely high commodity price inflation. Moderate CPI caused primarily by a surging share of Chinese imports – lower prices on imported good led by the peg and increased Chinese efficiency. That led to skewed artificially low interest rates which were a big part of a generalized asset price bubble. Consequent rise of overall debt and a vast increase in CA deficits because the incentive structure was falsely encouraging the choice of consumption over savings. That to me is where a lot of the imbalances came from. I’d love to have you poke holes into that argument.
I have read and understand what you argue – but as an exercise, I’d love to hear you play critic on that version of events explaining where the crisis came from.”
DF,
I owe you an apology. I honestly meant to get back to you and just got swamped with other stuff. Will do this week! Thanks for being patient.
No worries, Cullen and take your time. I for one am amazed by the effort you put in, on here. Kudos.
What tail risks do you fear/see in the economic landscape and if you are allowed to say how do you hedge yourself for them?
+1 on the Tail risk question by whatisgoing on. And I would add a Q to Cullen, do you see equity valuations becoming somewhat over-extended here given the BSR and the fragility of Europe and China trying to engineer a soft landing?
http://www.bwater.com/home/research–press/template-for-understanding.aspx
What are your thoughts on Ray Dalio’s template of the ‘Economic Machine’?
Would you fuse the Fed & Treasury together given how closely they work with each other? This would mean getting rid of any private part of the Fed, and just having appointed officials working in the “Fed” part of the Department of the Treasury.
I don’t see the point of having someone from the private-sector sit on the Board of directors in the Regional banks. Don’t you think their influence over the Fed Presidents is kind of “crony capitalism”? I know input from the private sector is important, however, can’t they just get that from normal meetings with private-bank officials?
On the flip side, getting the Fed under the Executive branch would make it highly political, and the POTUS might use the Fed to try and bump up the economy (thus creating bubbles/high inflation).
What’s your take on this?
What would Greece, Spain, Italy, etc. look like if they exited the Euro? Is there more economic damage through continued austerity or by exiting the Euro?
Cullen, I’ve been a follower of this blog since a couple of years now and have always valued your insight into the markets and your generally accurate market calls and predictions.
This year’s short call though, when the S&P was at about 1300 has left me (and I think most of your readers) stumped. Has this been your worst call to date? Are you still sticking with the short call? What would make you call it off?
What does MMR say about moral hazard; since inflation is a ‘soft budget constraint’ rather than a strict budget constraint, and given the amount of work gone into showing the perils of soft budget constraints and moral hazard, how can you ensure governments don’t spend over-zealously and inefficiently?
Here and everywhere else a frequent topic of conversation is austerity. Unfortunately (IMO) many discussions about austerity seem to obscure the specific measures or policies being referred to. For example, in a recent post titled American Austerity, Paul Krugman points to “de facto austerity” under Obama in “an era of huge cuts in public employment compared with previous experience.” I take this to suggest that austerity is simply reducing the public workforce.
Speaking either for yourself or MMR (or both), how would you define austerity? Are there specific measures involved or is it simply a policy goal?
Austerity is the set of potential government policies which would reduce government spending without offsetting this reduced spending through proportional tax reductions. Simply, these policies have the effect of reducing the amount of money coming into the domestic economy without reducing the outgo (in taxes).
The motive to implement austerity is typically related to reducing government debt; if the government’s income remains the same while it spends less, it can run a surplus that can be applied to debt reduction.
The problem with austerity is during times of insufficient demand (as we have currently), it will exacerbate already low demand levels, fueling the problem. By reducing the money supply of the domestic economy, austerity reduces the domestic economy’s ability to make purchases at current prices, which reduces demand, potentially causing new recessions and most certainly further weakness.
Austerity as a policy proposal stems from erroneous fears of inflation and government default.
2008 seemed to primarily be a banking liquidity crisis. TARP took care of making sure there was liquidity for the banking system and re-capitalized them.
2010 and 2011 seemed to primarily be an EMU state sovereign liquidity crisis. LTRO took care of making sure there was liquidity for the EMU banking system which they have used to re-capitalize themselves with the LTRO/sovereign carry trade. This indirectly provided liquidity to the EMU state sovereign bond system.
If EMU bank capitalization is reduced by falling sovereign bond prices, and bank lending is capital constrained, does this increase the likelihood of another major round of EMU state sovereign yield increases? Or, would another round of LTRO continue to “yank the leash” on EMU state sovereign yields?
If fed’s injection of money into the system boosts the stock market, and if the fed does not remove this money, then why should the stock market ever fall?
What do you think is the most overlooked/underrated credit/stock market indicator. (I’ll leave it open-ended, so you can decide what an important indicator means!) Feel free to give us a bonus if you think there is an overrated candidate as well!
What is your outlook for oil this year and its impact on the fragile recovery in the US? Seasonally we’re approaching the high season and everyone is ditching Iranian oil (major cut backs by 20 to 30% in Asia).
Because clearly all these questions are way too easy
I wanted to ask: have you figured out a cure for cancer yet?????? And btw, in 100 years, I need to know who’s going to be President.
Cullen,
Can you explain the impact that QE has had on the USD and also is there any sensible approach to forecasting movements in currencies?
Cullen, Do you really believe the Federal Reserve is transparent?? I have already pointed out how one can not tie the published schedule of purchases of MBS to the weekly changes on the balance sheet and as I have also pointed out everytime there is a large increase or decrease in MBS on the balance sheet (and thus an increase or decrease in high powered monetary base juice)the stock market acts accordingly.
The correlation of large MBS expansion or contraction (over 10 billion on a bi-weekly basis) to SP500 performance is 100 percent. 12/7-28 +23 Billion market bottoms and reverses, 1/04-18 +14 Billion market bottoms and reverses, 1/18-2/1 -10 billion market is down, 2/22-3/07 -11 billion market down, 3/28-4/11 -10 billion market down, 4/11-25 +24 Billion market bottoms and reverses
Since the public can not tie the schedule to the balance sheet the only people that know when and what the Fed are doing to expand or contract their balance sheet with high powered monetary base juice is the Primary dealers…….That is not transparent at all if you ask me and the correlation to the stock market’s performance is quite extraordinary.
Thanks
The Federal Reserve is regularly audited:
http://www.federalreserve.gov/faqs/about_12784.htm
Are you suggesting there are discrepancies in the accounting evidenced from these audits? You realize that isn’t some minor charge your accusing the Federal government of. If you have real evidence of this, you ought to take it to the media. I would like to see it.
I am accusing the FED of a lack of transparency – that is different from accounting fraud. The balance sheet numbers are what they are however the weekly changes in the MBS holdings currently have a 100 percent statistical correlation to the stock market when the increase or decrease 10 billion over a bi-weekly basis.
If you can find the info that tells you when (and by how much)the Fed’s MBS holdings are going to change in the future, please share it because I have not been able to find it thus my charge of a lack of transparency.
It has a 100% track record so its pretty valuable info if the FED is providing it and I just have not found it.
Thank you for the clarification. When I read this, “I have already pointed out how one can not tie the published schedule of purchases of MBS to the weekly changes on the balance sheet…” it read like you might be alleging some kind of accounting fraud.
Where might one observe the example of a failure to be transparent to which you refer?
If you (or anyone) can tell me where the FED publishes the information that will indicate the fluctuations in their MBS portfolio on a go forward basis then there is transparency. If you (or anyone) can not then there is a lack of transparency.
Cullen,
Here’s a question I’d love to see Romney answer, but I’d appreciate to read how you respond: If dividend income were taxed as ordinary income, how exactly is this going to change your investment strategy and what impact will that have on the economy and jobs?
The trend over the last several decades has been a greater percentage of government expenditures towards nonproductive, short term consumption (SS, Medicare, Medicaid, Food stamps, etc.). This is in distinction for example to the 1960′s space program that led tp whole indistries today like satellite technology for weather, communications, broadcasting, gps, etc. USG debt today doesn’t seem to lead to GDP growth to the same extent as in the past. How much of this is due to today’s emphasis on consumption and what do we think we can do about it?
Something very interesting from
Mark Grant:
There are a number of logical reasons why the central banks in Europe buoy the Euro and the first and foremost is that Oil/Energy trades in Dollars so at 1.32 euros to the Dollar Europe has a 32% discount when buying Oil/Energy. This method also allow Europe to buy American goods at a 32% discount so that their imports are cheap while they trade with themselves and Asia at the rate of the Euro and then finance themselves through the ECB and Target-2. They have, in fact, created a closed system that they try to maintain at ANY cost. No government in the history of the planet has been able to close off the financial circle in such a fashion but without growth or Inflation the paradigm cannot go on indefinitely as the ratings agencies and then investors opine upon the scheme.
Hi Cullen,
What do you think would be optimal fiscal policy for the next 1-2 years? Extend the Bush and payroll tax cuts? Extend unemployment benefits? Keep running deficits similar to recent levels? Alter spending levels for existing programs? New spending programs? New tax cuts? Deficit reduction?
Thanks for writing your blog. Helps me better understand the macro economy and monetary system.
Syd
When considering the “optimal fiscal policy” for the next 1-2 years, how would you “cut the budget” or “get rid of tax loopholes” in a way that would actually be significant. Here are the numbers for 2011.
The Total US “Debt” is $15,000 Billion, 30% held by Uncle Sam
10 Largest Federal Contractors FY2011 in Billions of $
LOCKHEED MARTIN CORPORATION $35,828 6.7848%
THE BOEING COMPANY $19,486 3.6901%
NORTHROP GRUMMAN CORPORATION $16,797 3.1810%
GENERAL DYNAMICS CORPORATION $15,249 2.8877%
RAYTHEON COMPANY $15,245 2.8870%
UNITED TECHNOLOGIES CORPORATION $7,721 1.4622%
L-3 COMMUNICATIONS HOLDINGS INC. $7,445 1.4099%
OSHKOSH CORPORATION $7,243 1.3717%
SAIC INC. $6,796 1.2870%
BAE SYSTEMS PLC $6,561 1.2425%
CERBERUS CAPITAL MANAGEMENT L.P. $4,768 0.9031%
total for top 10 $143,143 27.1%
$528,000 Billion was spent on all contractors FY2011
The 10 Largest Tax Expenditures (tax deductions) in FY2011,
In Billions of Dollars
Exclusion for employer-sponsored health insurance $177
Mortgage interest deduction $104
401(k) plans $67
Deduction for state and local taxes other than property taxes $46
Pensions (defined benefit) $45
Step-up basis of capital gains at death $44
Lower rate on capital gains. $44
Charitable deduction (other than education and health) $43
Exclusion of net imputed rental income. $37
Capital gains exclusion on home sales $31
total from top 10 tax “loopholes” $638 Billion
* source: US Budget, Analytical Perspectives FY2011
sorry,
LOCKHEED MARTIN CORPORATION $35.828 Billion
missing source, sorry the above was from 2010
https://www.fpds.gov/fpdsng_cms/index.php/reports/62-top-100-contractors-report
Here are the 2011 numbers in Billions, very sorry I’m using up too many comments.
LOCKHEED MARTIN CORPORATION $42,446 8.00%
THE BOEING COMPANY $21,599 4.07%
GENERAL DYNAMICS CORPORATION $19,442 3.66%
NORTHROP GRUMMAN CORPORATION $15,020 2.83%
RAYTHEON COMPANY $14,771 2.78%
UNITED TECHNOLOGIES CORPORATION $7,908 1.49%
SAIC INC. $7,378 1.39%
L-3 COMMUNICATIONS HOLDINGS INC. $7,357 1.39%
BAE SYSTEMS PLC $6,876 1.30%
OSHKOSH CORPORATION $4,942 0.93%
$147,739 27.83%
all contractors 2011 FY $530,862
BTW this is a fantastic set of tables if you really want to figure what Uncle Sams deficit spending on companies is all about
https://www.fpds.gov/fpdsng_cms/index.php/reports/62-top-100-contractors-report
Here are the 2011 numbers in Millions
1) Why does there seem to be a general resentment towards establishments, esp govts these days? What do you think?
2) IMHO, the Job Guarantee is just an idea that stems from what is possible if the monetary system is viewed from the MMT/R view. In fact, you could have a “re-skilling program” for all citizens/residents to upgrade their education, skillsets and what not to increase productivity, one of the many key things to keeping a country and it’s citizens strong. Another idea on the welfare side is of course, better healthcare and health insurance programs.
It just seems like we’re stuck in this “big vs small” govt argument all the time rather than focusing on what would work best and how to get there. it’s just a colossal waste of time and resources. interest rates, monetary policy, fiscal policy and all that are just distractions from the key issues; all that won’t work if there’s nothing to ‘regulate’.