Q&A….
I missed Q&A last week and I know some people have had questions that have gone unanswered since then so feel free to fire away here. It’s a long weekend so forgive me if I don’t get around to the answers until Monday night/Tuesday AM. Remember, anything goes. Areas of expertise include dating, poetry, love and cooking so let’s not stray too far from home on the questions. Fire away.
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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I have a simple doubt regarding the concept of Currecy issuer vs Currency user. The ECB can issue Euros at will so how does it differ from the FED?
I am interested in understanding why you felt the need to start MMR? Was it just so you can explicitly remove the politics from all these discussions?
Is there a way for us iPad users to opt-out of being redirected to the ‘onswipe’ version of this site and instead receive the desktop version? I appreciate what onswipe is trying to do but the user interface is pretty rough at the moment and a lot of the “swiping” features they are trying to do dont really work that well at all.
+1. I don’t like onswipe because I can’t readily tell which stories are being highly commented on. I’d also like to see a way to follow specific commenters… the “search archives” function really doesn’t work for anything…. for instance I grabbed a recent story headline and pasted it into the search function – it said “no results found”, but if I use Google and paste that in along with “pragcap” the first result is the story. It finally occured to me to use Google to try to find commenters too and that works OK
Poetry?
Since the year two thousand and eight,
The debt has grown so very great,
By nine trillion dollars as a matter of fact,
So if there’s no inflation, where’s it at?
I’m struggling a bit with this recent article published by some employees of the NY FED:
http://libertystreeteconomics.newyorkfed.org/2012/05/whats-driving-up-money-growth.html
But I’m pretty sure I disagree with this line : “Loan growth (in percent). More lending by banks, much like higher reserves held by banks, requires banks to attract deposits or other liabilities to fund the loans.”
What’s your take on that? And if you have the time to dissect it, what’s your take on the whole piece?
It seems to me that it flows completely counter to MMR thinking.
Thanks.
Does student debt meet your criteria for a bubble?
And if you had to make a wild guess do you think the dollar is more likely to appreciate or depreciate or remain flat over the next year and next 3 years? Related to that – does a strong dollar pose a problem for the US economy?
And what do you make of the recent talk about movement from the reserve currency
- BRICs conducting trade in the non – USD?
- And the China paying Iran in gold for oil?
I’ve read several predictions for a stronger dollar from here. Do you agree (and think the Fed allows it), and what do you think the rammifications are?
Stronger dollar should mean lower commodities, aiding consumers on input and import costs, but will hurt exports. How do you think that nets out?
Probably a dumb question, but why can’t the European countries have a floating exchange rate with each other? Wouldn’t that ease the balance of trade issues that is at the core of the EZ problem?
Could you go over the problem of Japan as of today? My knowledge of the issue is limited. I understand it’s a currency issuer and therefore not limited in its ability to spend. But given their debt/gdp ratio and you mentioning hyperinflation as a possible outcome for Japan, I wanted to hear more on all this from you.
Thanks again for the great work at pragcap.
Hi Cullen
The USA has a Fiscal Union and a Monetary Union.
The EU only has a Monetary Union
Everyone is talking about how the EU should adopt a Fiscal Union like the USA
Does it really matter:
Some states in the USA are in real bad shape, similar to the countries, (states) in the EU.
Think California and others.
California has a mandate to balance the budget, but there sure was a lot of talk the Fed would bail out the states in a pinch.
That’s what the EU is doing with their members, ( bailing them out)
So really what good would a fiscal union do?
Thanks,
Pat
Cullen,
Its sure taking a long time to get your bio up…..MG
What do you think about Warren Buffett’s proposal to issue “import certificates” as a way to force the USA to balance its trade deficit?
http://money.cnn.com/magazines/fortune/fortune_archive/2003/11/10/352872/index.htm
Can’t help but think something like this would have been helpful in Europe, even with their flawed currency.
Cullen-
You have pointed to the “United State of Europe” or something similar as a possible solution to the Euro crisis. And Ray Dalio noted that the current situation isn’t too dissimilar from the US after the Revolution. I feel from the historical/cultural angle this will be near impossible. I mean for the better part of 1000 years some of the cultural groups have at a minimum disliked each other and have fought many many wars. They had a war called The Hundred Years war! I know that was France and England, but you get my point. So I don’t think the citizens of these countries will be jumping to give up some of their sovereignty, especially since its more or less to Germany. I wondered if you have any thoughts on this?
Thanks, Bryan
All of this is a concerted attempt to neuter Germany, pretty much the only economy (and society) in the world that has been run properly, consistently for ~50 years. (Their Nordic and Dutch counterparts notwithstanding).
The real problem the markets and the Yanks have is that the Germans have PROVEN that the social democratic model works – high taxes, immigration, social welfare and free healthcare do NOT stifle business or productivity.
On the contrary, they strengthen it.
Now with the Yanks tanking, Brits sinking and the Chinese getting tied up in financial and demographic knots of their own making, the Germans are trying to bring the rest of Europe into their model.
Yankee corporations must stop this at all costs!
Imagine US workers demanding free healthcare, social welfare, union recognition (and a place in the boardroom) and spousal protection!!!
There wouldnt be enough profit to get involved in Wall Streets money-go-round of fast-buckery, would there?
Topple Germany.
Use the Euro crisis to pin it down.
At any cost.
The Germans are the only Government left in the West that isnt in the pocket of corporations. Thats why their actions look so strange; they’re doing something for their citizens!
Discuss.
I understand that German business is mostly bank financed, as opposed to the USA which is mostly Wall Street financed. How much of the difference between German and US business models is accounted for by financing sources?
As I understand it Germany doesn’t have free health care… employers pay 50%, individuals pay 45% and the Gov pays 5%. What’s more there are co-pays when you go to the doctor. Their universal health care is with a mandate much like Obama/Romneycare. You must have health insurance, and high risk people don’t pay more, nor can you be turned down for pre-existing conditions.
Further, they have two kinds of health insurance…. public non-profit, and for-profit private insureres. The complaint in Germany is that the private insurers pay Doctors a lot more, so those patients get special treatment. Only the rich can afford it, so it is a two-class system. But Germany spends far less per capita on heatlh insurance, and their overall health is superior to the US.
There is actually two healthcare systems in Germany. One is pretty much government controlled, but if you make a certain amount of money or aren’t employed you can opt out and go to a private carrier instead (I did for example, and now pay EUR 3k a year instead of 7k in the govt. system, with better care and service). It’s only slightly less stupid than the US system in that you can choose your insurance carrier instead of having it done for you by your employer. I also don’t have to pay for birth control for people I’m not sleeping with.
funding the wrong wars that lead to thousands of US soldier deaths and injuries, not to mention foreign innocents… no big deal just so long as my taxes don’t go to birth control
The German government is deep in the pockets of corporations. You just don’t read about it, but bribing people in government is actually legal as long as it’s disclosed. Hell the finance minister accepted a bribe from a weapons dealer, cash in a briefcase. Even former chancellor Helmut Kohl was involved in scandals and should have gone to prison. The guy who created an additional pension insurance system which basically just funnels taxpayer money to insurance companies is now employed by an insurance consultant steeped in scandals, after receiving thousands of Euros talking at insurance events. Hell the German President had to resign because he got to cozy with corporate people (well we didn’t get to elect our president anyways).
Cullen, how much weight do you give to Technical Analysis in your own investing and trading? There have been many academic studies that argue that T.A. is not very effective, and it’s accuracy is not a whole lot better than 50-50.
How effective do you think it is? Are there a few practitioners, like Jeff Saut and Ned David research, who do it well?
In your investing, how much weight do you give to fundamental economics vs. T.A.? Thanks
I’ve heard many say that the rally off the March ’09 bottom has been by QE(s), but is that really true? The current P/E ratio is a fairly moderate 15, which suggests that the rally is warranted by fundamentals to a large degree. Perhaps the QE(s) provided nudges, but did they really do any more than that?
I have read your papers on QE, but have some further questions if the FED swaps cash for treasuries, your say this is purely an accounting swap, but it seems to me to be a form of credit creation, because the cash is a liability on the feds balance sheet, therefore the overall credit in the system has increased. My second question has most the QE transactions by the FED been purchases of treasuries off investors rather than commercial banks or are the commercial banks just the intermedtries in the transaction. Hope you can clarify. tks Ray
>Since the year two thousand and eight,
>The debt has grown so very great,
>By nine trillion dollars as a matter of fact,
>So if there’s no inflation, where’s it at?
In the year 2008 of our Lord
Consumers and banks began to hoard
Growth in private debt collapsed
causing a great liquidity trap
New government deficit spending
merely offset the drop in lending
While Bernanke propped up the bad debt
He started the engine, jumped in the cockpit!
Money all ready, but alas he could not drop it
The fuel tank was empty! the chopper started to fall
It turned out the Fed could not print after all!
The market did bounce, although no fuel in the tank
All the new reserves only sat in the banks!
All of the easing was naught more than teasing
Zero interest rates, yet lending still sank
Although prices were flat, unemployment high
Inflationistas went on believing.
The great money multiplier, at last proven a liar
Many sacred texts had to be consigned to the fire
lol
So……Where is the 9 trillion dollars?
The high priests of econ
None vexed or distraught
The old texts continued to be taught
A new gospel appeared
misunderstood and feared
Battle lines formed, all prepared for the fight
Monetary Realism, went the cry!
But will take more than being right
for the old doctrine to die.
You guys can just call me Virgil.
Three questions
1. How does printing money (government deficit) put people to work? If there is deflation and the price of goods fall it would increase peoples purchasing power and at some point create more demand. Printing more money without an increase in productivity just increases prices and people cannot afford any more than they did before. Were the Japanese really worse off with deflation? Using your analogy of keeping score; it doesn’t change the total number of baskets made just because you credit each basket with 4 points versus 2. The same is true if you only give 1 point per basket versus 2. If government can create more productivity with their spending than the private sector can with their spending perhaps it makes sense. Also given this is a balance sheet recession it seems that if the government is going to run a huge deficit it would make the most sense if the government gave the money directly to people through a check or tax cuts.
2.Do you think that labor’s decreasing share of the GDP is a contributing factor to the high unemployment rate. That is, as labor contributes a smaller percentage to each good or service produced, does labor get enough in wages to buy the goods and services they are producing or does a greater percentage go to people who own the capital and therefore create unemployment.
Gov’s can spend wisely and productively… can’t they????? The private sector can spend foolishly, and unproductively…. can’t they????? Why does anyone believe the rhetoric that Gov can’t do anything right… and only leads to bloat and waste? Haven’t you ever worked at a large corporation and seen bloat, waste, bureaucracy, people playing solitaire? I used to sell advertising to the tech industry… companies like HP baffled me… everyone seemed to be working hard, and producing nothing. No one seemed to have any real decision making power and so they spent their time looking busy. Sounds like Big Gov… no?
The housing bubble was the private sector buying 5 and 10 “investment” properties that had no chance of making money. Buying 2nd and 3rd homes they didn’t need. Building 5,000 SqFt homes for a family with 2 kids and a modest income. Talk about waste. Or how about the waste of the dot-com bubble…. no profits, little revenue, 3 to 10 other me-too competitors… and yet the private sector threw money at them. Waste, waste, waste. Yet the only waste anyone talks about is Gov spending.
To me our economy is “Mommy Gov and Daddy private sector”. Mom does the unprofitable things… raising the kids, cleaning the house, making dinner (pardon the sexism). Daddy does the productive/profitable things… making widgets and earning money. The “free market” types want to shrink Mommy’s role and have Daddy do it all. The Gov is mommy… as someone must think long term, make the rules, keep the house in order. The private sector goes out and earns, and puts money in mommy’s pocket to raise the kids, etc.
To me the government is more like an ex-wife than a mom, taking half my money and doing nothing for me
My mom at least loved me, presumably.
You have to agree though that there are a lot of things government does stupidly because the incentives don’t work. For example, saving money in a government role only means you’ll get less money next year. Of course this is how large corporations seem to operate too, but there is presumably incentive to change that for the people high up in the food chain.
“those at the top” really don’t have much incentive these days when they construct golden parachutes worth millions even if they’re canned… funny that my HP example works here too… Leo Apotheker’s $13.2M severance package after 11 months on the job is the private sector wasting… so again, why does everyone claim only Gov wastes?
The Gov also does plenty of good with their spending… sure, there is waste, but by allowing pundits to claim that Gov can’t do anything right, we will continue to get politicians who prove that.
I’ve been spending some time reading Sumner’s blog on NGDP targeting (inc. the archive). He writes well, and his urgency seems sincere, but I find many of his arguments unsubstantiated or weak. I’m just an investor, not an economist, so maybe his deep academic work substantiates all his assertions. You haven’t written on NGDP targeting in a while, have your thoughts changed? For me, I find any economic proposal (inc. NGDPT and MMR) should address (at least):
- productivity
- debt and debt service dynamics
- behaviour under fear/uncertainty (in citizens and businesses); psychology, incentives/free-riders
Could you please explain asset pricing in an MMR/ZIRP regime? The standard model is that an asset that returns x dollars per year costs as much at the principle that would yield x dollars per year in interest (adjusted for risk). If interest rates are zero and expected to be zero forever, this suggests infinite asset prices. Clearly something’s wrong. How does MMR get around this problem?
What do you think of VII and BFerro’s calls this week? Looking at comments on 5/21 VIi said we’re on crash watch and 2 days later he is “all in long”. BFerro was calling for 1800 and now says a crash by end of month. You seem to have some readers who are not only ‘flexible’ but make 180 degree variant changes within hours.
can you link to VII’s “all in long” comment as I don’t recall seeing that… last I saw was “it could go either way” and “stay tuned”. I really don’t get the problems people have with others market comments… people are expressing opinions, and leaving a track record we can all go back on. I find that far more interesting than someone who claims after the fact to have called the market right. who cares if they did a 180… especially when they’ve both explained their MO.
Lastly, the comments section is what makes this site so great…. fun, informative, entertaining… and the ones jumping on VII and B Ferro are going to miss them when/if they’re gone. I used to be a regular on another site that had a couple of very smart, very controversial, very entertaining commenters… the low IQ haters finally ran them from the site and now I check in on that site once a month rather than once per day, and don’t bother with the comments section which has deteriorated into a bashing contest with virtually no intellectual converstation
2+
VII has been remarkably frank and refreshing, it is enjoyable watching other’s trading ideas on this site.
Seems they both have sufficiently thick skin to take the heat.
Thanks for sticking up for the great commentors on this sight.
If you aren’t capable of making 180 degree change in mere hours you probably shouldn’t be trading.
MMT says that the JG is a price/inflation anchor. You’ve said it’s more like a buoy. Can you explain what you mean by that? i.e. what is the difference between a anchor and a bouy? Also, would a Basic Income Guanrantee have the same bouy affect? Thanks.
You (correctly i guess) say that the gvt is able to add NFAs to the economy through deficit spending.But in the case of Eurozone where both the public and the gvt sector have to borrow in order to net spend,is it correct to say that no NFAs are ever added?
+1, wanted to ask this for some time but I’m usually spending my weekends drinking.
another +1 … I’ve asked this question somewhere before but didn’t get a clear answer. It would seems that there must be net new financial assets created somehow, but how? what’s the mechanism? Or are all “new” euros of the horizontal kind? (bank loans)
So, enough of these minor issues. What’s your take on whether Coronado Beach deserves its #1 ranking?
So, got any good BBQ recipes?
Also, the way the monetary system in the USA works, isn’t the social security trust fund just an accounting gimmick?
oh and as you skipped last week, I’m entitled to two answers.