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’
Greeks May Hold $510 Billion Trump Card in Renegotiation
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.