Q&A….THE ANSWERS
Thanks everyone for another good set of questions. I do my best to answer them all below:
Mark: Regarding your “ALEXI TSIPRAS GETS IT….” story. Can you explain to me why Germany should want to sell products to a country (Greece) that can’t pay for them?
CR: Well, Greece was paying for items. They were paying for them in large part by borrowing money from German banks! The problems didn’t begin until the Euro’s flaws were exposed and solvency became a clear problem for each country. Remember, they’re all in this together. Germany helped lend to feed the consumption of the periphery nations and the periphery nations all borrowed to be able to consume. This is a classic case of “it takes two to tango”. The people to blame here are the ones who created a currency union that was inherently flawed….
Eludog: What do you believe is more beneficial to the economy – higher interest rates to benefit savers or low interest rates to benefit refinancing and borrowing? Also, has their been a case historically of a country returning to normal rates after they are near 0?
CR: It depends really. Monetary policy is generally not as weak as it is in the current environment. That’s because monetary policy works in large part by changing the demand for credit by making it more or less expensive. But a funny thing happened during the balance sheet recession – the demand for credit dropped off a cliff so the primary channel through which monetary policy works just stopped functioning.
As for historical ZIRP – I can’t think of any cases other than the current case and Japan when rates were at zero for this long and later led to a rebounding economy. Balance sheet recessions are very unusual so we’re in uncharted territory. There is still debate over how Japan should have dealt with their BSR…..I guess you could say we’re “flying blind”….
PN: Do you own a boat or do you use charters when you go ocean fishing (figured you deserved a softball)?
CR: I bought a boat specifically for fishing. Actually, a reader named “Boatman” helped me find it so many thanks to him for his advice. Now I’ll give you the best financial advice of your life regarding “big boy toys”. Boat owners joke that BOAT stands for Bring Over Another Thousand. And they’re not really joking. So, my advice is to become good friends with boat owners. But never be the boat owner.
Colin: What are your thoughts on this company (Exxon), and the position it will occupy in the US and global economy in the next decade or two?
CR: I really don’t solicit advice on single stocks. Plus my expertise is not really in particular industries or stocks. I’ve always found that single stock picking requires a very specialized expertise in that industry/name or a unique strategy revolving around individual names (not buy and hold). So I can’t really tell you much if anything useful about XOM, but my gut tells me it’s a great company, but where’s the growth outside of riding the hope for peak oil? The goal of investing isn’t to find the company that has already become XOM. The goal is to find the companies who are going to eat into XOM’s market share and become the next XOM. The reason why XOM doesn’t outperform an index like the Energy sector as a whole is because it’s become THE energy sector. Why buy XOM when you can take lower risk in the index? That’s my short take on it….
Whatsgoingon asked a series of questions. I’ll break them down one by one:
1. I hear the media talk about the fact that the size of the Fed’s balance sheet is growing is a bad thing. Do we need to worry about the size Fed’s balance sheet?
CR: The size of the Fed’s balance sheet is not a worry. All they’re doing is swapping assets with the private sector. It’s best to think of the Fed’s balance sheet as a black hole. They don’t need to sell the assets to change policy in the future and there is no risk of these assets leading to insolvency. The Fed won’t “run out of money”. It’s just not possible. And when they need to raise rates they’ll raise the interest on reserves which now serves as a de facto Fed Funds Rate.
b. If some assets on the Fed’s balance sheet are not recouped fully due to default (MBS) does the Fed (and not the US government) become technically insolvent? And assuming the MBS were defaulted on, who bares that cost (I assume it would show up as simply the debasement of the currency as approved by Congress).
CR: There really is no such thing as the Fed becoming insolvent. As a crucial part of the US government it’s silly to think of the issuer of US Dollars becoming insolvent in that currency.
C. What bubble do you think the current low rates are fueling?
CR: Low rates could be fueling debt bubbles, but I don’t really see it. The US consumer just can’t take on huge amounts of debt as they did during the housing boom. The incomes just aren’t there to service a debt boom.
D. Should I be concerned about the Shadow banking systems and why?
CR: Sure. Does anyone really know what’s going on at these big banks? I mean, the JPM trade on Friday proves that Jamie Dimon doesn’t even know what’s going on at his bank. So who else would know? These big banks have proven time and time again that they can’t manage risk. But we fail to implement measures that stop them from doing whatever they want. It’s crazy. But we seem to think banks can manage risk without any controls in place….sigh.
E. What do you or MMR/MMT say about the long term weakeness of dollar?
CR: I don’t represent the opinions of MMTers since I am not an MMTer so I can’t speak for them. But my personal opinion is that the USD is always a case of relative value. That’s just what currencies are in a floating system. There are many variables that go into this so it’s a broad and complex topic that I can’t do justice on in this space. Also, the USD has not really been all that weak in recent years or over the long-term. In fact, the USD index is at the same level it was 20-30 years ago….So, on a relative basis, the USD is just fine. Now, if you’re referring to the myth that the USD has lost 90% of its value then I would recommend watching video #3 in this series.
F. And a few tin foil hat questions if I may
– How can we be sure that the Fed is not secretly “printing money” and not reporting it?
CR: It’s best to think of the Fed as part of the US government. And the US government IS printing money. And they’re very transparent about it by running a massive budget deficit every year. There’s no need to be secretive about it. They’re in your face about it to the tune of 10% of GDP.
G. - I guess related to that how do we know Base money or other statistics are accurate?
CR: If the data were substantially wrong we’d likely see a real-world impact for which there would be repercussions, no? For instance, if Shadow Stats were right about inflation and the BLS was wrong we’d see it in our every day lives. But we don’t. And if we did there would probably be some form of civil unrest. Government’s can’t just lie about what’s going on and hope that the citizens never notice that things are worse than they’re letting on….
H. - Also what are the limitations on the Fed regarding buying assets such as equities etc? Do they need permission to do this?
CR: The Fed is not currently allowed to purchase equities. To see a full list of assets the Fed can buy please see here. http://pragcap.com/wp-content/uploads/2011/08/fed1.png
TPR: What are your thoughts on the most recent white paper & article by Singh and Stella, “Central Bank reserve creation in the era of negative money multipliers”?
Article via vox: http://www.voxeu.org/index.php?q=node/7955
Whitepaper: “Money and Collateral” http://www.imf.org/external/pubs/ft/wp/2012/wp1295.pdf
CR: I have not read either paper. I’ll have to get back to you on this one.
Ted: Any thoughts on the growing desire to find a replacement for GDP as a measure of our economic well-being?
CR: That’s a big big question. It comes down to how one defines living standards. You can have per capita GDP increasing and overall living standards can be declining depending on your definition. It’s a difficult discussion because living standards come down to a definition of happiness. And happiness is different things to different people. Personally, I think that when one uses GDP to evaluate the health of a nation they should understand that this is a purely economic figure and does not necessarily reflect all the potential variables that go into living standards. For instance, GDP was rising in the USA during the mid-2000′s in large part because we were buying so many damn houses. But are we better off because of that growth today?
I don’t think that GDP needs to be replaced as a measure. But it could be useful to create an index that more broadly reflects the living standards of a society. The problem is measuring it. It’s hard to measure what makes a society “happy” or prosperous. It’s easy to quantify GDP so that’s what we’re left with. Other measures of living standards are largely subjective so I am not sure there’s a reliable alternative.
Anon Jon: Any particular books that really changed the way you view the world or how you think about investing? Like Atlas Shrugged or Security Analysis, etc.? Thanks.
CR: If I could pick one thing to read it would be all of Buffett’s annual letters including his partnership letters. The education from those letters is more valuable than just about any investment book you’ll find. The partnership letters are here and the annual BRK letters are at the Berkshire website.
Zach: I recall you saying you think a budget deficit of 8% of GDP or so (I can’t find the link) is what is needed to prevent recession in 2013, can you explain how you arrived at that number? Could international problems and possible further devaluations increase this both through lower exports and the feedback into our private sector? And when do you see the budget deficit be reduced assuming a decrease in our trade deficit and/or a more robust private sector?
CR: I don’t think we need a deficit of 8% to sustain growth. I’ve been saying that a deficit of 8% would sustain growth. I can’t give you the precise break-down of my models on this outlook, but the current budget deficit is enough to maintain modest growth. Given the improvement in credit growth and the balance sheet recession I think we should see continued growth in 2012. The big downside risks are a credit crisis in Europe, a sharp slow-down in China and austerity in the USA. There’s substantial risk of the “fiscal cliff” hurting growth later this year and in 2013. We’ll have to play it by ear though.
VII: Can the TPC create it’s own sentiment survey. All Members who sign in or log in as a member get a code- We all answer it honestly. Can you do something like this Cullen?
CR: I could do this. Do readers actually think it would be useful? I find that there are plenty of services that provide sentiment surveys that offer a much broader perspective….
George: Can there be a orderly Greece exit?
Grexit Would Be ‘Regrettable, But Not Fatal’
http://www.spiegel.de/international/europe/european-leaders-warn-greece-may-have-to-leave-euro-zone-a-832464.html
Greeks May Hold $510 Billion Trump Card in Renegotiation
http://www.bloomberg.com/news/2012-05-09/greeks-may-hold-510-billion-trump-card-in-renegotiation.html?cmpid=
CR: I don’t see how the exit can be orderly. The problem is that it won’t likely end with Greece. When the other peripheral nations see that Greece’s economy begins to recover they’ll do the same and bring back their own currencies. The crisis will morph and ripple through the remaining Euro nations. This doesn’t end with Greece. It ends with sovereignty being established for ALL European nations. That either comes from a US of Europe or many defaults and defections or some combo of the two.
JT26: You usually talk about US economics and markets and foreign stock indices (e.g. Shanghai) in your macro trading. Do you pay any attention to foreign economics, even in those countries that do put out reliable data (Korea,Japan,Singapore,Oz,Canada,Europe,UK), inc. inflation, sectoral balances etc.? If not, why not? If so, are there some that are your favs like US rail traffic, inflation, sectoral balances?
CR: I don’t track foreign economics as closely as I track the US data. The main reason is because I just don’t have the time and understanding of these economies to properly assess each economy. So the short answer is no.
David: First, do you agree that you sometimes overlook the impact(albeit slow moving) of ever-increasing Peak Oil and how it will constrain growth not just in America but globally?
CR: Yes. Oil is a market I am by no means a master of and I certainly haven’t developed a solid enough understanding of the oil market to properly assess such a massive trend. Unfortunately, I haven’t found too many reliable sources on the topic either….Perhaps someone has some that they believe are reliable???
David: Secondly, what’s your view on India/China and their slowdown. Europe-related or something else? In particular China has had a huge housing bubble even bigger than America’s. Are people underestimating what is happening here?
CR: China’s suffering a bit of a double whammy. First, they’ve been printing money like crazy over the years and using it to do some fairly irrational things (like building empty cities in the middle of nowhere). So they’re suffering from a government driven growth boom and the inevitable bust that always follows. Second, Europe is their largest export market so they’re naturally hurting from the weakness there. It’s potentially a massive black swan given the growing importance of the Chinese economy and the unreliability of their data. I’ve said China has the potential to make Enron look small. An extreme comment, but so many things just don’t add up in China that I generally put it near the top of my list of “biggest risks”.
Bill: Question: It is put forward by MMT specifically and Keynesians more generally that in a situation where there is a shortage of ag demand, the economy will fail to restore equilibrium between supply and demand through natural adjustments of debt, income, and prices, in the absence of govt intervention.
CR: I am not an MMTer so I can’t speak for them. We started MMR specifically because of our disagreements with the MMT perspective. MMR also isn’t Keynesian per se. We do not to take a policy driven approach to economics via MMR. Instead, MMR is focused on describing how the system works. I wrote a piece about this approach last week and how I take a Da Vinci style approach to understanding the economy. To me, it’s not about solving the world’s problems. It’s about providing the world with a better understanding of the machine (much like Da Vinci did through his work as an anatomist). Da Vinci’s gift was to provide an understanding. Not to be the surgeon fixing everyone. I think the economics profession suffers from a terribly problem where everyone mixes prescription with description. And in the end the ideological prescriptions end up influencing the description leading to a warped and biased view of the world. MMR tries to separate the description entirely from the prescription.
Regarding your question – the fact is, many prices are “sticky and markets are never as quick to respond or as rational in their response as the true free marketeers always like to think. One good example of this was the 1800′s when we experienced 6 depressions relying on these sorts of adjustments to play out. I’m a big free market guy, but I know how irrational and slow the market can be to understand what’s really going on. It’s not that the government understands any of this better than the market, but rather that there are proactive measures the government can implement to stop these trends from getting out of control. One example I always use is a simple 20% down law regarding house purchases. Would we have had a housing crisis if we’d had a simple rule like this in place? Of course not. It’s like putting breaks on a car. It just makes sense. Government isn’t always bad. Just like the free market isn’t always good.
Bill: Are the twin goals of alleviating poverty and infinite growth equally flawed?
CR: Another big big question. Theoretically, the govt can alleviate poverty tomorrow by giving everyone something that puts them above the poverty line. Some of the recent disagreements on the MMT Job Guarantee were along these lines. I know the govt CAN provide a job for everyone. But does it benefit society to have the govt implement policy like this? I don’t have the precise answer here, but I am certainly skeptical of the idea that govt can solve all of these big macro problems we have just because it has the powers to do so. At the end of the day, this is a balancing act. Just because our govt CAN achieve certain things doesn’t always mean it should. We have to evaluate the upside and downside of policy and choose as a society whether we are willing to undergo a potential decline in growth in order to offer something for everyone.
Wantingtoretire: You indicate that the USA does not NEED the rest of the world to save its future. Does this mean you believe that the US can survive without any external trade. To put this another way, you think the US can isolate itself from other countries and maintain a satisfactory standard of living for all Americans?
CR: If the USA didn’t need any foreign trade I don’t think it would have any foreign trade. If I did say that the USA doesn’t need the rest of the world then I don’t think I meant precisely that. The global economy is becoming increasingly interconnected. We’re all more dependent on one another than we likely want to admit. In theory, the USA could survive without the rest of the world. But that’s not our reality. The world’s a big place and a lot of Americans (myself included at times) need to start understanding that we’re not the only one’s in it.
Sam: I’m curious what MMR suggests for US states (which aren’t currency issuers) looking to stimulate their economies and balance their books. Is there anything individual states or municipalities can do to help end their balance sheet recessions under the current legal framework? Public banking? Raising taxes on the wealthy? Private debt forgiveness legislation? Going into debt? Cutbacks at the state level have been really crippling the recovery, so this is a very serious issue. If MMR can provide a partial solution to this problem, that would be amazing.
CR: Well, MMR doesn’t offer specific policy solutions. MMR is an understanding of the economy. But we can use our understanding of MMR to push the debate forward and put policy options on the table.
As currency users this all starts at the top. As we’re seeing in Europe, the currency users are suffering because there is no federal government to allocate funding where needed. So, in a balance sheet recession, the currency issuer must be the entity that steps up to spend and eliminate the solvency crisis that occurs at the user level. The same holds true for the USA. Yes, cutbacks in state funding have hurt the recovery, but deficits of almost 10% for the last 3 years have also helped us all de-leverage and fix our balance sheets. Europe hasn’t had that luxury and depression has been the result in many countries.
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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27 Comments
Good answers!
As for Peak Oil, you can read various research papers done by Uppsala University, especially by Kjell Aleklett’s group who has done massive 250-300+ pages of all you ever need to know from an academic standpoint. They are quite bearish on Peak Oil, but their data is very solid and it’s findings been echoed by the Joints Chiefs of Command (a top US military command unit) as well by the Bundeswehr(the German army).
Basically Peak Oil is a slow-moving phenomenom which will slowly squeeze out other costs to service larger and larger energy costs. But energy costs in of themselves aren’t the only problem, Peak Oil also pushes up food costs to much higher levels and it acts to constrain economic growth. And in our high-debt West, together with the ferocious slowdowns in the BRICS(India is so far the worst, but China has the bigger potential to be a black swan event as you said, in part because of the enormous housing bubble), this could be very serious.
More on China here, by the way:
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9263196/World-edges-closer-to-deflationary-slump-as-money-contracts-in-China.html
The relationship between Germany and Greece is more complicated. In the past Greece and other PIGS prefered to implement a “”weak currency”" policy. i.e. print lots of money with regular devaluations of the currency but the flipside was higher price inflation and higher interest rates, whereas Germany was able to implement a “”strong currency policy”" (they simply didn’t need to print and devaluate, they had a strong economy). The consequences of that strong currency policy was that Germany can borrow at consistently lower rates than the PIGS. In the 1990s and 2000s rates in the PIIGS came down to the level of Germany’s rates because markets knew the EURO was coming. Investors were reaching for high(er) yield(s) (e.g. german, french, swiss investors (not only banks)) and they found it in the PIIGS. Those low(er) rates in the PIIGS fueled consumption in the PIIGS and meant a stimulus for exporting countries (like e.g. Germany). So, both Greece and Germany benefited.
France choose to change gears in the 1980s, it switched from a weak currency policy to a strong currency policy and it was rewarded with lower interest rates and lower price inflation. So, a weak/strong currency policy is a political choice.
Now with this crisis unfolding in Europe this beneficial “”round about”" goes into reverse. Rates in Greece go (much) higher and squeezes “”growth”" but exporting countries suffer as well.
The current crisis in Europe is the result of policy decisions made in the past (at least) 20 to 30 (!) years !
Those 2 articles are quite interesting and worth a read.
TPR: What are your thoughts on the most recent white paper & article by Singh and Stella, “Central Bank reserve creation in the era of negative money multipliers”?
Article via vox: http://www.voxeu.org/index.php?q=node/7955
Whitepaper: “Money and Collateral” http://www.imf.org/external/pubs/ft/wp/2012/wp1295.pdf
Cullen,
You forgot the Japan Fiscal FUBAR question and whether a U.S. government surplus is always bad?
Thanks,
Oh man. Sorry about that. Here’s the question for anyone who didn’t see it:
“1. Is a government surplus (monopoly supplier) ALWAYS bad, i.e. lead to an imminent recession? I think this is the MMT thought process, but not sure if MMR feels the same.
2. Is Japan FUBAR? Sure their debts are high, but they are a monopoly supplier. Is their aging population and need to seek outside lenders going to kill them? Can the BOJ just make up some new rules and buy all the bonds and keep rates low forever?”
CR: MMR definitely disagrees with the MMT position here. History has not proven that a government surplus is always bad. Now, MMT generally prefers a budget deficit and a trade deficit. MMR doesn’t find any evidence showing that trade surpluses are necessarily negative. Plus, I just don’t think MMT has the foreign sector right. It’s a major flaw in MMT in my opinion. But it molds better with their fiscalist approach (govt spending as their policy solution to most things, another point MMR disagrees on) because it then rationalizes permanent deficits using the sectoral balances. Several Nordic nations are examples of very strong economies with budget surpluses and trade surpluses. Where things go wrong is when you’re running a trade deficit and decide a budget surplus or small deficit is also good. If sustained, it’s a problem.
Japan will not go bankrupt unless they decide to. And yes, they can control rates. They will just set them as they please. And they can’t run out of Yen since they issue Yen and their debt is denominated in Yen. Japan has bigger problems relating to their long-standing balance sheet recession, demographics and general misunderstanding of their affliction. I actually think Japan is much healthier now than most other people believe….
Thanks Cullen. Wouldn’t you agree that this linking of the govt deficit to the trade deficit is one of the most glaring omissions from the current financial/political discussion in our country? I almost never hear anything about the trade deficit, yet everyone has an opinion on the govt deficit. It seems to me that if we really want to balance the govt budget we better figure out how to reduce our oil imports, which accounts for half of our trade deficit. Anyway, I’m much appreciative of this site introducing me to the sectoral balance viewpoint.
Yes, the foreign sector is a glaring hole in the understanding of modern macroeconomists. Not that I am an expert, but I at least acknowledge that there’s a vast misunderstanding there. Godley, Kaldor and a few others really understood this. MMR’s take on the foreign component is very similar to their views and the polar opposite of the MMT view which basically shrugs off any potential problems associated with a current account deficit.
Good stuff Cullen
International flows of money do matter in the context of the financing of the US budgetdeficits.
First of all, remember that having a trade deficit (TD) means that there’s a net inflow of commodities, goods (e.g. oil) and as a result of that TD there’s an outflow of money (e.g. EURs or USDs). Just imagine what would happen when the US would stop paying for that canadian oil today. Canada would cut off that oilsupply tomorrow. No money ? No oil ! But if Canada would stop that oil export it would hurt the canadian economy. So, it’s extremely doubtful whether Canada would cut off that oil export voluntarily
In 2007 the US Trade Deficit was larger than the US federal budget deficit (BD). This meant that with the outflow of USDs foreigners were able to buy all T-bonds issued and with the remaining dollars they bought other USD denominated securities e.g. Agency paper. Remember what Hendry wrote in his latest newsletter. He wrote that China boughts tonnes of Treasuries/Agency paper in order to keep the chinese yuan from rising and pegged to the USD in order to stimulate chinese production. So, all the USDs that flowed out of the US were used to buy Treasuries.
But after 2008 the balance between the TD and the BD changed. The TD became smaller than the BD. That also means that the outflow of USDs isn’t sufficient enough to enable foreigners to buy both Agency paper and T-bonds. So, foreigners started to ditch Agency paper and bought T-bonds instead. But now with the TD at a “”mere”" $ 600 billion (annualized) and the BD at about $ 1.9 trillion, about ($1.9 – $ 0.6 =) $ 1.3 trillion has to financed domestically.
But when the TD (like it did in the second half of 2008) begins to shrink (again) as a result of both falling US demand and worldwide falling commodity prices the TD will shrink as well. Even when the BD remains flat a shrinking TD means that more of the BD has to be financed domestically.
For those who are interested in Hugh Hendry’s newsletter: it can be found here:
http://www.4shared.com/office/CA8XB7OH/TEF_April_2012_120430.html
(I am long the Eclectica Fund)
Thx Cullen.
My question on XOM related less to ‘stock picking’ than wondering whether a company this large and self-contained can have the foresight and flexibility to maintain its dominant position in the face of ‘Peak Oil’. climate and political change, etc; or whether smaller or currently unknown players will take a leading role.
Your answer clearly leans toward the latter. Thanks.
RE, the boat thing. BTDT, and agree 100%.
I would also add a major “ditto” for RV’s. The reality just doesn’t live up to the dream. Mine is sitting in my driveway, with its only value being that it reminds me how foolish I can be with my money.
Thankfully, I bought it used, so the hit wasn’t as big as it could have been, but I still suffered something like 90% depreciation in 5-6 years. I’ve given up hope of selling it, and am now deciding between donating it to a charity or selling it for scrap.
I guess if you were going to live in one full time, it might be a different story (probably the same with a boat). But as a part time “toy” or even “tool” for recreation, IMO, its much better to rent/charter/borrow/mooch, than to own.
Cullen,
Follow up question regarding your comments on Japan. One thing has been vexing me regarding money supplier countries carrying 100%+ deficits to GDP.I understand that unless they choose to they cannot become insolvent but at what point does the debt service become a drag to GDP?
There are so many variables in that equation that it’s impossible to put a figure on it….
A couple of other phrases. Boat, a hole in the water you pour money into. If it flies floats or f—s, it’s cheaper to rent.
The second happiest day in your life is the day you buy your first boat. The happiest day is the day you sell it.
And the 3rd happiest day is when you replace it with a bigger boat.
Cullen, thanks for all the Q & A’s. Well done. I’ve got an early question for next week. What weighting does Technical Analysis have in your overall trading and investing strategies? Is your algo influenced by T.A.? I’m no expert on TA, but it sure seems to me to be a very bearish sign that the previous SPX low of 1343 did not hold today. The fact that 1343 has been penetrated, and the fact that the market has gone down 8 of the last 9 sessions, seems to indicate an intermediate term outlook is bearish. On the other hand, are we so oversold that we are due for a short-term bounce up here? Thanks
Cullen,
Thanks for answering everyone’s questions. Very helpful. When are you going to move back to DC and lecture at Georgetown?
Ha. When Georgetown calls, which I am guessing will be never!!!
Sam: I’m curious what MMR suggests for US states (which aren’t currency issuers) looking to stimulate their economies and balance their books. Is there anything individual states or municipalities can do to help end their balance sheet recessions under the current legal framework? Public banking? Raising taxes on the wealthy? Private debt forgiveness legislation? Going into debt? Cutbacks at the state level have been really crippling the recovery, so this is a very serious issue. If MMR can provide a partial solution to this problem, that would be amazing.
—————
Answer: Public banking can take government money that now goes to wall street, and use it to hypothecate additional loans. By law, fractional reserve ratios mean that up to 10 dollars of credit can be created against 1 dollar of assets. While State governments are not sovereign issuers of money, they can own CREDIT issuance privledge with State Banks. Remember there are two sources of money in the economy, credit and base money e.g. horizontal and vertical in MMT parlance.
When loans are paid back, that represents a drain on the money supply (about 80-90% of the supply is credit). The usury on the loans at a State Bank, can be recycled back into the economy to offset taxes. This represents an efficiency that is not realized with private banks. However, State Banks can be taken over by predators, and then the government now owns the money power as well as political power.
(Private Banks recycle their usury to pay interest on “savings” and also to pay for services; as well they use some profits for bribing government officials.)
In the end, it is the Law that matters.
Taking private banks into receivership and then erasing the bad liabilites is another use of State Power that would help end the BSR. In other words, the bubble drove up the liability side of the double entry ledger causing asset inflation. Now that markets redefine the Asset side of the ledger downward, a magic eraser needs to adjust the numbers on the “banker’s” books. In other words, the asset side of the ledger declined with mark to market, and the liability side needs to follow. MMT nostrums just say “print more money at the vertical level.” Of course this is not addressing the real problem, but at least it acknowledges that money needs to enter the supply to pay down the ledger.
MMT never seems to deal with the private bank “credit” problem. I hope MMR delves into this aspect more thoroughly.
Good luck.
REN
I’ve had some intense arguments with MMTers about this. I believe MMT only applies to one fully vertical component with a true money monopolist (something closer to what China has with state banking). See, there’s no money monopolist in the system we have. Just banks issuing money at will with no real care for public purpose or govt oversight. See the following for some of the points I make on this. I think MMR is MUCH more balanced about the horizontal and vertical description of the monetary system whereas MMT tries to always bring everything back to the state’s powers via the vertical….Which is not surprising because many things in MMT mix the descriptive with the prescriptive and since their prescriptive approach is inherently fiscalist they need to emphasize the power of govt spending in order to rationalize the prescriptive.
http://pragcap.com/understand-the-modern-monetary-system/how-is-mmr-different-from-mmt
Greek debt is now mostly in official hands and subject to international law, prompting an EU expert Mr. Truglia to say on Bloomberg that this threatens a legal nightmare on default; he did not elaborate.
EU countries seem so liberal and forgiving, I suspect they would not sue, especially since it is unlikely Greece could pay even if judgement against them is won in court. Who sues the poor? How do I get a job as an EU expert?
Japan is – most definitely – like e.g. China, FUBAR. But a japanese default (a country can’t go bankrupt like a household or a corporation) WILL have a MAJOR impact on the world economy, including the US. Because Japan is still a LARGE economy. (Think: demand for commodities, US Trade deficits)
Cullen, I read your MMR article. Thanks. It was good, and I’m glad to see progress toward more reality. All of us humans need to navigate the world, and the truth helps us do that. I do have a quibble in the below statement:
“The private sector debts grow perpetually along with the real economy:”
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Actually, real economies have a S pattern, as crops come in and other cycles of productivity happen with the weather and other events. The graph actually shows more of an exponential function, which is the increasing money in the supply being created to offset the interest function.
When people pay their loans back at their private bank, the money leaves their pocket and enters the ledger. The Liability column is driven down at the moment of payment, representing what I call a high speed drain on the economy. If no new credit loans or vertical component spending were to occur, this helps tip the economy over into rapid depression as the supply collapse. A credit driven economy has a sawtooth pattern due to credit expansion and then rapid collapse. Obviously, there is a disconnect between real economy S pattern production and the sawtooth of credit.
During depressions/recessions (inherently caused by the credit system), assets attached to the ledger are appropriated, which ultimately leads to wealth concentration oligarchy. Fiscal policy attaches those assets at time of death or through other taxation means, thus mitigating oligarchy.
The banker can spend his usury profits, which is the delta between Asset and Liability columns. In other words, if a house cost 100K and there was 200K of interest, then the banker profit is 200K (minus inflation losses over time and his costs). The usury stays in the economy if the banker spends or saves, but the principle component of the liabilty drives the ledger to zero, making that component of credit “money” disappear. If the banker saves, then he can create more debt money, putting more people in debt, as mentioned.
The excess government base money from deficit spending, and extra created credit based on banker savings, redound to increases in the supply. Exogenous base money and extra credit from banker “savings” increase the supply. So, I don’t trust the graph. I don’t think you can split out the private component in the supply that easily. When vertical and horizontal mix in the supply, then it is like food coloring in water. Good luck figuring out the mixture after the fact.
Overall, good job. I hope MMR delves a little bit deeper into what money is. Calling it a public good does not put on your x ray glasses and delve into what money is.
Money can behave differently depending on where it is at the moment in the system. For example, money stored demands usury, something like electrons in a capacitor demanding more electrons. Money spent into one of the four modes of production, can help build efficiencies and thus wealth. Money spent into land does not follow supply and demand curves, etc.
REN
REN
Yes, of course there is a business cycle. I don’t mean to imply that there isn’t or that credit cycles only move in one direction. Perhaps my primer needs some clarification there….
Thanks for the critique. It’s always great getting feedback.
I wonder though. What do you think “money is”?
Appreciate your thoughts Cullen.