Sorry for getting to these late…It’s been a busy week. You guys were supposed to let up on me with the questions. So shame on you for not giving me 30 lobs that I could just crush out of the park….Just kidding of course. Thanks for another set of great questions. I’ll do my best to answer them:
eb: how was rail traffic this week? appreciate all your posts.
CR: Rail data was mixed again. See here for more.
Tyler: Cullen, Thoughts on the idea that current corporate profit margins are unsustainable?
CR: I’ve covered this topic in a series of recent posts (see here and here). In short, I think margins have likely peaked, but won’t collapse unless we see a major decline in revenues, which have been largely driven by the budget deficit during the last few years. So keep an eye on that budget deficit as the balance sheet recession slowly ends….
Jon: Hi Cullen, Just wondering what your 5-year forecast for the S&P 500 or any asset class is.
CR: 5 years is a tough time frame in. Almost entirely unpredictable in my opinion. I tend to be very optimistic about the long-term. The trend in human innovation and perseverance is just too powerful to stay bearish for long periods of time in my opinion. I personally don’t think anyone can forecast precisely what will happen with the markets more than about a quarter in advance or under about a 10 year period. Beyond that, you’re crazy (in my opinion) to be bearish….Not the answer you’re looking for I know, but it’s my view.
Ville: In my opinion in the long run the ultimate cause for mankind’s ruin will be population growth (scarce resources will become even scarcer). Do you think we should control population growth globally?
CR: Boy, that’s a tough one. I honestly can’t say that I’ve ever thought about it, but I guess you’re right. In the very long-run it’s inevitable that population growth will become a huge problem (if it’s not already). I would imagine that this growth will have to be controlled at some point. The numbers just don’t make sense given the depletion of resources and now exploding growth. When that reaches a point requiring action is anyone’s guess….
perpetual neophyte: If you had to deploy cash today, what strikes you as an attractive asset class on a risk/reward basis? Unattractive?
CR: Another tough one. A lot of this depends on your time frame and approach, but if I were going to buy and hold a few assets I have to say that I really like Jeff Gundlach’s ideas to buy Spain and natural gas (I would buy nat gas producers and not the actual commodity). These are assets you should just tuck away and look back at in 10 years….
artifical investing: Cullen, As a student, like you’ve said before, our institutions do not really teach the fundamental reality of how our monetary system works. Do you see any academic work on MMR happening? What schools understand what is actually going on?
CR: MMR is similar to MMT in many ways and the University of Missouri Kansas City has an excellent program with a MMT focus. Of course, MMR and MMT have had some disagreements in recent months so I can’t say that I fully endorse the MMT approach, but that’s as close to classroom heterdox economics as you’re going to get.
Conventional Wisdumb: Cullen, Why does QE help stock prices?
CR: I believe it’s mostly psychological and partly the portfolio rebalancing effect. When the Fed implements QE they are just swapping assets. Reserves for bonds. So the private sector doesn’t have MORE assets after QE is implemented. But there is a widespread perception that QE is money printing or debt monetization. And since markets are in large part a result of perception it’s not surprising that QE would have some impact. The other major impact is the portfolio rebalancing effect. That is, when the Fed removes a certain amount of bonds from the market they force investors to take on more risk to replace these assets. Many managers can’t afford to sit in low yielding assets so they move up the risk chain.
blagosaur: Any career advice for the younger generation in the financial industry? Should I pack my bags and travel around the world while I am young with few obligations? Is it going to be impossible for me to get a job along the coast in this economy?
CR: If you’re going into the finance industry make sure you go in with the right mentality. If you’re going into it to make money and that’s all then your heads in the wrong place. Personally, if you can afford to do it, there’s no better time to travel the world than when you’re young. Trust me, by the time you get to 30 you just won’t have the time or energy….
Whatsgoinon: 1) Why do I have a hard time reconciling that the Fed can control the entire yield curve with the theory of market suppy/demand forces setting rates.
CR: It’s not a matter of if. The Fed can impose its will on the bond market any time it wants. It has the ability to create infinite reserves so the Fed can buy every issued bond if it wants. If they want to be the price setter they can.
Whatsgoinon: 2. I’m confused on reserves (and QE so a few questions)
a. Do reserves from fractional banking differ from reserves from base money?
b. Related to the above, what is the limit of QE in terms of reserves. That is, if the Fed implemented QE to the maximum, would the magnitude of QE undertaken be equal the reserves of the base money in economy or equal to the reserves of base money + reserves from fractional system?
c. And is there any difference in inflation if QE is applied base money or to reserve of fractional banking.
CR: Reserves are essentially required cash held on “reserve” at regional Fed banks. In the USA the reserve requirement is 10% so banks must keep 10% on “reserve” at all times. If a bank has a deposit then it must keep 10% of that on “reserve” at the Fed. There is no limit to the Fed’s ability to create reserves. The creation of reserve does not necessarily result in inflation unless the policy results in changes in net financial assets or credit supply.
Whatsgoinon: 3. Why are currency swaps needed with the ECB (and the Euro banks)?
jt26: Investing/trading-wise how do you approach elections? (Esp. this year with France+some PIIGS – next year with Germany; this year Presidential.)
CR: I do not trade/invest based on elections specifically or pay much attention to supposed Presidential cycles….
BJM: In your opinion, are we in a secular bear market or are the conditions ripe for a secular bull to continue assuming it began in March 2009? I realize you avoid market valuation calls, but I think you could answer from a macro standpoint….
CR: I do believe we’re still in a secular bear and that we can’t officially call off the secular bear until many of the broad secular negative trends (like the Euro crisis and the balance sheet recession) have officially ended….
Steve W: I get the jist of why the Federal government needs to keep spending money during this balance sheet recession, but do you have some opinions as to how Uncle Sam might spend the money more efficiently, or make better choices on how the money should be spent?
CR: There are a lot of problems with the form of spending we implement. I was a particularly vocal critic of policies like the cash for clunkers and housing tax credit which exacerbated debt problems in the middle of a balance sheet recession. Government’s have to be careful in their spending policies because they can so dramatically alter the output of the private sector. I generally prefer tax cuts because it takes the politicians out of the spending decisions, but that’s a generalized comment. Not all spending is bad and in fact spending can be extremely beneficial if properly targeted.
Michael H: Cullen, love your work. Aside from your Web site, what do you consider to be the “must read” list of books and articles for someone who wants to learn about MMR and MMT? Thanks.
CR: Warren Mosler’s site is and has always been my favorite MMT website. You can find just about everything you need there and I think you get a less policy biased view from him. I learned MMT almost exclusively from Warren. As the founder of the theory, he’s the ultimate source and someone I owe an enormous amount of credit to for all he’s done for me. See moslerconomics.com
Of course, I prefer that readers just read my primer for the ultimate in unbiased and apolitical views, but that’s just me!
Rich: As we know banks are not reserve constrained, but are only capital constrained in their lending. One thing I’m not sure of is how a bank would call upon its common stock to cover loan losses…
CR: Issuing common stock helps recapitalize a bank in that it increases equity capital. If you recall, this was the preferred method of recapitalization for the big banks in 2009. This reduces earnings per share and dilutes existing shareholders, but is an obvious benefit versus being insolvent….
Bob Barker: Cullen, You always talk about how during recessions that the Congress can large deficits to offset slowing aggregate demand and/or household desired savings. And then when aggregate demand picks up and/or households desire to save less, then the government can reduce the deficits to control any possible inflationary pressures. And while in theory this is correct, it would seem to me that practically speaking that this would never happend because deficits are “sticky” because politicians never want to make cuts given that people get used to the spending being directed their way as well as the politicians always desire to increase their electability. As such, why should we feel comfortable implementing this kind of deficit increase given how we know it will turn out in the long run?
CR: Bob, big fan of your TV show. It got me through years of my childhood. I always wanted to spin that damn wheel just once. Or play Plinko. That game looked fun. Anyhow, one of my big disagreements with MMT is their idea to replace monetary policy with a fiscal approach to control inflation. I just don’t think this is a realistic view of the world. As you rightly point out, deficits are sticky to a certain degree. Relying on politicians to alter policy on a dime is a pipe dream. Now, I’ve been particularly anti monetary policy, but that’s been because of the balance sheet recession. Monetary policy won’t always be inept….So don’t view my perspective during the balance sheet recession as a broad and permanent belief….
rhp: Cullen, this question was asked by me and another once before, about the ability of ECB or anyone else to create new euros. You linked to another website which was great at explaining how the eurozone handled settling of debts and money flow, but I could find nothing on creation of new net euros.
Question: Does the eurozone have ANY means of vertically creating new euros or was the net amount of euros currently circulating set in 1999 at the time of old currency conversions?
CR: Eurozone central banks are essentially agents of the ECB. They can create Euros, but the problem is that they can’t break the rules as they pertain to budget limits. So, it’s a system where they can technically print their own Euros, but politically they are constrained. It would be like California having a central bank, but having to ask the Fed and Washington DC first before it can do so. So Germany and the ECB run the show in essence.
Wantingtoretire: Does the US need the rest of the world to save its future…………..?
CR: I am not sure what this means precisely. The USA relies on the rest of the world for many goods and services. And this works both ways. Foreign trade is called “trade” because it benefits both sides in ways that are viewed as fair. That doesn’t mean the trade is always beneficial in equivalent ways, but it might appear so in the micro. So, the USA might not NEED the rest of the world to survive, but we certainly benefit from relationships with the rest of the world….
Larry: Cullen, what is your economic growth model forecasting for 2nd half 2012 growth based on sectoral balance data and the other data which you use? Thanks
CR: I actually have an update on this in the pipeline. Stay tuned!
Andrew P: How do you think ECB policy will change, assuming that Francois Hollande is elected President of France on Sunday? In his campaign pledges he has promised to tear up the fiscal austerity pact, and promised to force the ECB to monetize EU State debt across the entire EU and hold interest rates down in every EU State. If he carries out those promises, will the EU recession end quickly?
CR: I don’t think Germany is going to change their policies because of Hollande. But his election certainly points to a change in the trend. The situation is becoming increasingly tenuous. I’ve repeatedly noted that the biggest risk in Europe is Germany stalling on a true solution and the populace eventually becoming impatient and demanding change through unrest and re-elections. We’re beginning to see this now….
Sam A: Cullen, I’m curious on what you think of Hugh Hendry’s latest investment letter, specifically, his notion that China cannot escape an economic crisis that will affect global growth. If he’s right, how can one position to at least avoid the worst of a china led economic crisis.
CR: I have not read Hendry’s latest. Does anyone have a link to this? Maybe I can follow-up tomorrow????
okl: 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. if we need more people/technology to defeat ppl like hitler, then we spend more on military.
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’.
CR: Americans are very skeptical of the state becoming excessively powerful. It’s in our DNA. We know the state has the ability to impose its will on us and do almost anything. It could sentence me to death tomorrow. It could drop a nuke on San Diego. It can technically do many things. But there are constraints on the state because these powers are often corrupted by misguided individuals. There’s no guarantee that many of these big government programs will work for the betterment of Americans. I don’t fall in the camp that says government is always evil or that spending is always bad, but that doesn’t mean I am a full bore supporter of government having a blank check, just because it has a supposed bottomless money pit.
I hope that MMR will provide people with an unbiased and apolitical view of the monetary system and potentially result in a less politicized process regarding the way we all view these debates….I am naively hopeful.
Cowpoke: Will the “Floating Treasury” be of any concern for folks to consider?
CR: I don’t see the point of these instruments. The Treasury is supposedly looking into these instruments in order to find other “funding” sources. As if they can run out of borrowers for US Treasuries. They don’t seem to understand that they issue the currency that is used to buy bonds in the first place. It makes no sense. So no, I see no reason to pay this much attention.