Q&A…THE ANSWERS
No dating questions this week. I am beginning to get the sense that the readership does not understand the breadth and scope of my understanding in this department. Oh well. Back to wonky questions about the monetary system I guess. Here goes:
brazzo: 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?
CR: The key point to understand here is that the US government can always essentially fund itself through its relationship with the private banking system and the Fed. The Primary Dealers are required to make a market in government bonds and the Fed ultimately can serve as lender of last resort. The existence of a printing press is not a secret as we all know. Due to what the Fed has called a “symbiotic relationship” the only real risk of insolvency is through inflation or a self imposed default. So there’s no such thing as the US government “running out of money”. It just won’t happen. Europe’s national central banks can also tap the ECB for funds (in theory), but there is no political will for this. In essence, there is a political divide between the state governments and the ECB, which is essentially a foreign central bank. So you have a real funding risk and a real solvency risk for each of these governments. Getting Euros to them is not a matter of whether they can create the Euros. It’s a matter of political unity. And it’s not there….
FrankH: 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?
CR: I have always had just one intention regarding my work on the monetary system: to teach the operational realities of the system to the readers in an unbiased and objective manner. In this regard, I was very attracted to many of the operational realities of MMT. Ideas like an autonomous currency issuer not being able to “run out of money” are potentially world changing ideas. Unfortunately, as I’ve gotten deeper and deeper into MMT I’ve found that it is not just a description of the monetary system and in fact creates a completely alternate reality in some cases. I’ve compared MMT to the movie Inception in which the dream sequences get increasingly blurry the deeper you get. Now, there’s a lot of really great material in MMT and it’s far better than the neoclassical stuff we’re all used to, but it’s got some baggage I prefer not to carry around with me. With MMR I am trying to truly create an unbiased and objective understanding. Nothing more, nothing less. It’s an unusual approach in economics….
I’d add that MMT’s descriptive components are directly intertwined with its prescriptive components. It’s like most of modern econ. The real goal of the thinking is creating a cure for economic woes, rather than just understanding the monetary system. Market Monetarists use NGDP Targeting. Keynesians use counter-cyclical spending. MMTers use the Job Guarantee. And in doing so they all try to conform a policy response to the economic reality. MMT creates a description that fits their prescriptions and parts of these descriptions are just flat out wrong in my opinion. Ideas like banks serving public purpose, the hierarchy of money and the money monopolist are all inaccurate descriptions of our reality, but help MMT explain why the Job Guarantee is necessary.
Some people think my split with MMT was political, but this is entirely wrong. What irked me about MMT was its inflexibility in its stances on policy. I naively believed that I could change 20 years of academic work on MMT and separate the descriptive from the prescriptive. I was obviously wrong. And in splitting off from the MMT crew I’ve discovered how their prescriptive ideas appear to have cluttered even some portions of the descriptive elements of MMT.
MMR takes a totally different approach. In a recent article I described how Leonardo Da Vinci had a huge impact on medicine through his anatomical work. He wasn’t performing surgeries and saving people. All he wanted to do was understand how the human body worked. And in doing so he gave the world a great gift. Economists are always offering solutions to everything. Which is great. But I don’t even think the world understands how the monetary system works so we are getting ahead of ourselves. How can you apply the right policies if your view of the world is based on an inaccurate foundation? Obviously, I am no Da Vinci, but I am trying to copy his model here. I want to offer a purely descriptive understanding of the monetary system. How people use that in their politics and solutions for saving the world is up to them. But get the operational realities right first….
In Accounting: 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.
CR: Yes, if you swipe the bottom left hand corner on the iPad you can bypass the Onswipe page. If readers really hate this format then please just complain en masse. I’ll get rid of it. No problem.
troll: 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?
CR: Inflation is a function of aggregate demand,
With slack so great, the economy has been less than grand,
A balance sheet recession has caused near depression,
Thanks to political ignorance, we risk further economic compression. :-)
Seriously, that’s it in a nutshell. With 8.5% unemployment, low capacity utilization and just a general malaise, you’re not going to get high rates of inflation. The demand and pricing power just isn’t there because consumers are still way too weak, primarily due to the balance sheet recession and its lasting impact.
jaymaster: 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?
CR: Banking is a business of spreads. So banks want to attract the lowest cost liabilities they can. I wouldn’t use the same terminology the NY Fed uses. Banks don’t “fund” their loans with deposits. Rather, they match the cheapest liabilities with their assets to maximize profits.
whatisgoingon: 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?
CR: It’s certainly a worry, but nothing of the magnitude that we saw with the housing crisis for instance. Don’t quote me on these figures, but a quick google search shows that there is about $1T in student loan debt outstanding and $14T in mortgage debt outstanding. So the student loan problem is roughly 1/14th the size of the recent housing debt crisis. Nothing to scoff at, but not the ticking time bomb that housing was in 2006….So it’s a big concern and a potentially disastrous trend if it grows larger, but it’s not going to crash the global economy like the housing bust did.
On the dollar – you have to be more specific. Remember, currencies are always relative to another currency. The dollar relative to what? The Euro, the Yen, etc? The USD basket is relative to many currencies. Personally, I am not afraid of a broad currency decline in the USD relative to global currencies. Unfortunately, this is such a broad index that it’s very difficult to be specific about it.
As for USD strength, it depends. In a secular bull the USD will likely rally as it’s seen as a strong relative currency. In a secular bear like we’ve been in the USD will likely remain a safe haven asset where it declines during periods of so-called growth and rallies when fear comes back. This chart is good for reference:
On reserve currency status – remember, reserve currency status is largely a function of economic size (there are other factors as well, but production is the primary driver). The primary reason why foreigners hold dollars is because they accumulate them during foreign trade. They don’t just end up with dollars for no reason. If the USA is going to lose reserve status then some other country or region sharing a currency has to prove to the world through production and economic prowess that their currency is superior to the USD.
reemarketeer: 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?
CR: See question above on stronger dollar. The US economy is largely consumer driven so lower commodity prices would likely mean lower oil prices which means a stronger consumer. It’s hard to envision how that wouldn’t help the US economy….
Roger Ingalls: 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?
CR: There’s no such thing as a dumb question. Only dumb answers (see this post). The EMU is made up of nations sharing the same currency. So it’s a lot like the USA and the states. The states in the USA don’t have trade rebalancing via currency exchange rates. So they require the fiscal aid of the federal government to alleviate periodic imbalances. The EMU has neither a floating exchange rate nor a federal entity to spend.
Frenchy: 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.
CR: Japan suffered a massive bubble in both real estate and equities in the 90′s. When the asset prices collapsed they suffered a balance sheet recession very similar to the Great Depression in the USA in the 1930′s and somewhat similar to the USA’s recent crisis. They’ve experienced a series of starts and stops in the economy largely due to policy errors, negative demographic trends, etc. The big difference between the USA and Japan was that Japan suffered a business-led balance sheet recession while the USA suffered a consumer led BSR that was tied mostly to real estate as opposed to the double whammy Japan had with collapses in both equities and real estate at the same time. Japan’s businesses have spent 20 years de-leveraging so while other negative trends might persist in the Japanese economy, they’re likely moving beyond the big broad negative trend that has hampered their corporations for the last 2 decades. I certainly don’t agree with Kyle Bass’s idea that Japan is the next Greece. As a currency issuer they aren’t going to “run out of Yen”. So the bigger risk is hyperinflation and not a debt crisis. But given the health of Japan’s corporations, the diversity and size of their economy and the role of the Yen as a partial reserve currency, I’d say hyperinflation is a relatively low risk in Japan.
pat: 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?
CR: I only see two real solutions in Europe. You either give each country sovereignty by establishing their old currencies and giving them the chance to rebalance growth through the ability to print money and devalue their new currencies relative to their trade partners. OR, you create a fiscal union like the USA has. Personally, I think Europe is likely to become further integrated as time goes on so going backwards towards the old currencies makes very little sense to me. A fiscal union in Europe would achieve the same things it has achieved in the USA. The biggest advantage would be stability. The USA doesn’t suffer state insolvency crises once every few decades because they have the power of the US government backing them. The Federal government is ALWAYS spending money on the states. On average, about 20% of state budgets are aided by federal spending. This is a huge persistent “bailout” if you want to think about it like that, but it avoids constant imbalances and creates stability. California is never going bankrupt. The Federal government would never allow it to happen. Greece doesn’t have this backing. The USA has lots of weak states or members who don’t pull their weight. But we don’t kick them out because we’re politically unified. Europe doesn’t have that unity. They need to find it.
MG: Cullen, Its sure taking a long time to get your bio up.
CR: A lot of big changes are happening with my business so I am kind of in a state of flux right now. More to come.
Ted: 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?
CR: Buffett’s idea is attractive. These trade imbalances are generally a sign of big broad trends, which, if persisting, can boil over. Any measure that helps to keep these imbalances from getting out of control is beneficial. I discuss the MMR position on the current account balance in section 3 here.
BG: 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?
CR: Yes, the social and historical aspects are the hardest part to overcome. The USA had a similar problem though obviously not to the extent that Europe has. The north and south in the USA still get at each other in many regards. But through unity we’ve become the most powerful economy in the world. I know the problems in Europe are far larger and have persisted much longer, but they’re not becoming less intertwined. The global economy is becoming a smaller place as time goes on and Europeans are essentially being forced to live under one roof. There’s just no escaping it. So it’s best for Europe to live and let live. Easier said than done!
Larry - 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.?
CR: Depends on what you mean specifically. Some forms of technical analysis, such as historical data, can be extremely helpful in understanding the probabilities of certain events and how the future rhymes with the past. Charting, a form of TA, is little more than a visual of this data and the fundamentals driving past prices. Charting is excellent for perspective, but is only a compliment to fundamentals in my opinion. I don’t put much weight in “bear flags” and “inverted hammers” and stuff like that. There’s a lot of datamining in those “indicators”. I use TA and historical data quite a bit in my work, but that’s more an effort to understand how the past is prologue.
My investment approach uses a big top down approach. So I start with an understanding of the monetary system, break this down to an understanding of its impact on specific markets, and filter that into a specific strategic approach. That’s all driven much more by fundamental work than anything else, but I do certainly utilize elements of charting and TA in my work….
Quaternion: 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?
CR: This is a common idea. To me, the market rallied for simple reasons. Yes, QE1 helped stabilize a crashing market. But so did lots of other policies. The main driver, to me, has been the 10% persistent budget deficit. If you’ve read some of my stuff on Kalecki, then you know that deficits can have a huge impact on profits. Once the govt stabilized the markets by essentially backstopping them via various policies, the deficit did a lot of the work driving profits. For instance, the ECB has had QE in place at times, but many of the European markets have crashed. Why don’t these analysts ever discuss this when claiming that QE did all the legwork? I think they want to claim that “money printing” helped boost prices, but I don’t think they quite connect the dots. Yes, govt spending helped. But the govt doesn’t need the Fed to fund its spending. That implies that without the Fed’s help the Treasury couldn’t obtain funding in its account. That’s simply not accurate.
Ray - 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.
CR: When the Fed buys bonds they take an asset from the private sector and replace it with another (reserves). This doesn’t increase the net financial assets of the private sector. The Fed implements monetary policy through the Primary Dealers so they’ve buying bonds from the banks. It’s impossible to know where these bonds come from though….Certainly, the banks are acting as intermediaries in some of these transactions.
theppel - 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.
CR: That’s a pretty broad question. Personally, I think govt has one big strength – it can’t “run out of money”. So if we could learn to harness this power of govt in a productive manner it would be an extremely powerful resource. Instead of entrepreneurs financing new operations through onerous loans or private partnerships, we could learn to harness the govt as a funding source. I’ve offered up my Innovation Initiative as a possible solution here.
Of course, the govt does finance a lot of things and over time has produced many great benefits to our society (national highway system, the internet, etc). So govt is not all bad as it is often portrayed. Can it become corrupted and abused? Absolutely. The lack of a profit motive often makes the govt more lax in its decision making. So the fear of govt is understood, but we the public need to check these measures and ensure our leaders aren’t abusing their powers. I think we can rectify these issues to some degree by streamlining spending and forcing spending to meet certain requirements that are in-line with the true goals of an autonomous currency issuer as they stand with regards to inflation, production, etc. But before that can ever happen we have to get over the myth that the govt is “running out of money” or becoming the next Greece. So for now, it looks like the austerians and the “govt is always bad” crew have the upper hand.
jt26 - 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?
CR: I’ve had some moderately productive discussions with David Beckworth and Scott Sumner. We’ve discussed ways in which I believe NGDP Targeting can “work”. For instance, the Fed could buy municipal bonds and finance the states directly or they could peg long rates at 0% or something essentially making credit a true cash equivalent. But the muni option is really fiscal policy so why not just use fiscal policy? And the rate pegging idea just adds more debt to a private debt problem. So my big problem with NGDP Targeting and monetary policy in general has been the basics of the balance sheet recession. And monetary policy and trying to get debtors to take on more debt (when they’re trying to pay down debt) is a self defeating policy. So no, my position on using QE and NGDP Targeting hasn’t really changed much.
Brian - 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?
CR: MMR isn’t really a “regime”. It’s just an understanding of the monetary system. It always applies. And MMR doesn’t say rates should be zero forever. MMT says this. MMR does not agree with the MMT stance that rates should be permanently zero and that monetary policy is useless at all times. Monetary policy is a blunt instrument particularly in a balance sheet recession, but this won’t last forever. So maybe your question is best asked at a MMT website?
Curvo - 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.
CR: I really prefer not to opine on specific reader’s investment positions. I just don’t know enough about their approaches to do so. It would be inappropriate of me to say whether their ideas are good or bad based on the anonymous comments made by some on a website like this one. Sorry.
JK - 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.
CR: At the risk of being attacked by MMTers – see this article.
KG21 - 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?
CR: The EMU govt’s are currency users due to political constraints. They can technically print money and create NFA’s because they have their own central banks with access to the ECB. But there are rules hampering this access. This is a political constraint. So it’s not so much about creating NFA’s in Europe as it is having the ability to eliminate the risk of solvency.
Colin, S.Toe - So, enough of these minor issues. What’s your take on whether Coronado Beach deserves its #1 ranking?
CR: Coronado Beach is a pretty spectacular beach. The Hotel Del on one side and the hills off Pt Loma on the either side make for pretty spectacular scenery. Then again, I think San Diego is pretty much the best city in the USA so you’re talking to someone with a serious bias here!!!
Nils - 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?
CR: I don’t do anything fancy with a BBQ aside from your standard fare (steak, chicken and corn is about the extent of my repertoire), but I can give you a mean fish taco recipe if you’d like. But I recommend you catch your own fish for it. :-)
On SS – the amount of “funding” Social Security has is largely a political choice. If we want to credit SS with more funds then we have that choice. I’ve used the analogy of the govt being a scorekeeper in the past, but I really shouldn’t use metaphors like this because they’re misleading to some degree. The govt really does need to obtain funds to spend (the Treasury is technically a currency user while the Fed is technically the currency issuer) and through this symbiotic relationship the US govt is a currency issuer without a solvency constraint. But we should be precise on the operational realities. The short answer is, SS really does need to have “funds”, but the amount of that funding is largely a political choice. So I wouldn’t say it’s just an “accounting gimmick”, but it’s a myth to say SS is “running out of money”.
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.
Follow Me:
68 Comments
Japan is most definitely a basket case and standing in line to become another Greece. Having a current account surplus (CAS) from 1990 up to 2011 saved them from foreigners forcing Japan to “”reform”"/”"restructure”" the japanese banking system in the last 22 years. But now that CAS has gone.
Aside from the incorrect Greece comparison, Japan reported a 1.6b yen CAS recently….
I guess falling commodity prices have played a major part as well in achieving that CAS. But it also means Japan is able to “”kick the can down the road”" even more. And a more severe crash up ahead when consumers around the world continue to retrench.
I agree, Greece is a currency user and Japan is currency issuer. But that’s IMO the only difference between the two. In that regard I actually think that Greece will suffer less because it isn’t able to “”print”" its own money like Japan can.
“I actually think that Greece will suffer less”
It’s always Greece “will” suffer less or “eventually” this or that will happen. Why don’t you analyze what is or has happened. Greece is in a depression. Japan is and has been a utopia for the past 20 years compared to Greece.
The belief system that is guiding you thus far is and has been an absolute disaster.
Japan has a trade surplus and just reported 4% (annual) GDP growth – why wouldn’t they be ok? As long as they grow their debt at a lower rate than their GDP growth, they should be fine. If you want to bring demographics into it, well, that’s a different matter.
For anyone paying attention the past few years, this has been one of the big lessons learned: all debt is not equal and that being a currency issuer is crucial. The US and Japan are not Greece! Why is Spain in trouble when they were running a surplus a few years ago?
contrary to popular belief, most hyperinflation is caused by shortages, not money creation by itself (90% drop in production in Weimar Germany due to all of Germany’s industrial(manufacturing & energy) workers going on strike for 8+ months to protest the invasion of French/Belgium troops to confiscate hard goods & Zimbabwe’s 30%-57% drop in production from expelling all the educated whites
Deflation doesn’t work too well for lowering prices becauses most businesses/consumers have loans they have to repay with fixed monthly payments & thus cutting prices cuts their income & making them unable to make their loan payments –businesses thus just cut production & layoff workers to lower supply of goods & keep prices up…
theppel asked how gov deficit(money creation) put people to work.. it does so in the same way private bank money creation(aka loans out of thin air) do so…
Because all spending is somebody else’s income & rovided that the economy isn’t at maximum production when there’s idle unemloyed workers, idle closed factories, etc),
the increased money supply increases demand that stimulates more production (because businesses decrease production & layoff workers when they have less sales & they increase production & hire more workers when they have more sales, unless they are a monopoly..
–When there’s a moderate-to-high unemployment, Gov spending is only using idle resources that would otherwise be unused, which thus actually increases production/supply of goods& services & can actually offset or drive down inflation as the increased production increases supply of goods/services that meets the increased money supply
As CR noted, gov funded internet & interstates.. moreso, it also invented & directly funded:
1. Antibiotics (penicillin was discovered by UK gov doctor Alexander Fleming working at gov hospital in 1928 but UK’s conservative gov in it’s austerity refused further funding to research it until the 1940s when America’s deficit spending then funded it’s further development & mass production)
2. Radar (Naval Research Laboratory)
3. MRI Machines (gov Universities of Illinois-Champagne & University of Manchester)
4. the first computers (gov comissioned their invention/funding for census & artillery ballistic tables –the term ‘computer’ was actually first used to refer to the mathematicians the Army hired to compute artillery ballistic tables)
5. QuikClot (instant clotting agent)
6. GPS
See more charts using Fed Reserve facts here:
http://rodgermitchell.com/myths.html
[Declining deficits lead to recessions. The reason: Debt and money are synonymous terms. A recession is a money-starved economy. Stimulating an economy requires adding money.]
Contrary to popular wisdom, every recession is preceded by declining federal deficits. Every recovery coincides with increased deficits. The reason: A growing economy requires a growing supply of money.
1. Oil/energy prices cause inflation, NOT federal deficits -evidence/facts here:
http://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/
2. http://www.RodgerMitchell.com Daily Economics Verifiable EVIDENCE by CEO/MBA economist at http://rodgermmitchell.wordpress.com/2009/09/07/introduction/
&
http://rodgermmitchell.wordpress.com/2011/07/09/why-bank-lending-leads-to-recessions-a-counter-intuitive-finding
You also forgot that Al Gore came up with the internet, but that’s mainly to spread ManBearPig awareness.
The Republican falsehood that Gore claimed to have invented the internet was derived from his sponsorship of a bill to make the internet available to the public. Until then only the military and scientists (who developed it) had it.
I know, I just love to make fun of Al Gore. The internet was probably one of the greatest achievements of the US government, and it is somewhat based on manned space flight which led to the development of miniaturized electronics. So in a sense, without the US government you wouldn’t have a computer or Iphone
haha, Al Gore didn’t invent the internet although gov did fund it’s invention & development around 1973 (Vint Cerf & Kahn when Cerf was at gov UCLA along with other universities). It was finally completed around the early 1980s
The gov also funded the development & invention of & subsidized nuclear power for 30 yrs before it became profitable.. think on that the next time you hear Republicans/CATO complain that the US gov shouldn’t fund/subsidize green energy, etc.. nuclear power now provides 80% of French power & about 20% of US power
Like any capitalist enterprise, the US gov works best as a venture capital investment bank that funds technology research, development to make things more productive & cheaper (by increasing supply of products, energy, etc) or efficiency
It’s great advantage is that it can fund risky technology like internet, nuclear power, antibiootics, (which all took decades) etc for without fear of bankruptcy with almost unlimited funds (until maximum employment is reach at which point possible inflation would be it’s limit)
iPad readers can bookmark the following link if they want to avoid Onswipe version:
http://pragcap.com/?onswipe_redirect=never
Thanks for the terrific Q&As Cullen!
Reposting: My salt to the inflation debate:
There is productivity and production, but at least production is constantly stimulated by too easy monetary policy (and constant credit growth leading to exponential rise in private sector and probably total market debt). At some point debt (at least private sector) cannot rise more, which automatically causes a balance sheet recession or even a depression (like we had since 2008).
If one looks at change of (private sector)credit/GDP growth it used to be 1:1; currently it reached something like 8:1, meaning $8 credit growth needed to generate a meagre $1 GDP growth. This growth in needed credit expansion vs. a unit of GDP growth is clearly not sustainable, so we are where we are in the Western world.
Now you say Chinese inflation is fine, as long as it produces employment, rising living standards etc. But they also clearly suffer from the above’s problem – China is long past the level where their “inflation” (inflation stimulating production) produces REALLY productive GDP growth (we know that make work projects increase GDP, but not living standards). Many of Chinese waste of capital and resources are still well hidden and not yet recognized by the public (or admitted by their administration in transition), but I do not believe that they are fine with their inflation. It is now destructive, but hiddenly so.
You also mentioned that in the USA, over the last 10years inflation was positive, butliving standards have declined (for the median). So you have the same problem.
The solution for a taxi driver, who has not slept over 5 nights (and days) is not to exponentially increase his coke intake, but to finally have a good night’s sleep.
Reposting:
rhp: “The gov’t HAS to increase the money supply to keep the wheels of the economy lubricated.”
I think tihis is a fallacy.
Real GDP growth depends on 2 things: population growth and productivity gowth.
Now are you going to tell me that people will stop multiplicating or inventors will stop inventing if there is not inflation?
Many of you guys say how you believe in human ingenuity. Now do you really believe in human ingenuity or do you believe in human ingenuity conditional on inflation? I believe in the former. We have had great technological progress (and GDP growth) in eras with flat price levels. The GDP growth rates of the industrial revolution may have been more volatile, but the average rate has been similar (or better) than today’s.
Finally consider this on productivity (the non-inflationary 1800s were not that bad after all):
http://www.iimahd.ernet.in/users/anilg/files/Articles/declining%20worldwide.pdf
InvestorX, it’s not inflation per se that’s needed –it’s just that a growing population requires a growing money supply to hire the new people & invest in new projects.
Also, there were decades in the US in the 1800s when banks were allowed to create & print tons of money via loans –even businesses & restaurants could create money & print their own money, which led to crazy booms (just like a gold rush when finding more gold results in boom times for countries on a gold standard.)
Also, the US colonies could & did print their own fiat currency called colonial script & Benjamin Franklin wrote that was the real reason the colonies prospered & boomed & that the real reason the US went to war with Britain was because Britain revoked the colonies power to print their own fiat currency, causing the colonies money supply to contract & goto into recession as businesses & consumers had to reduce spending & investing.
Later under President Grant, the power to print money by businesses & banks was severely curtailed when laws requiring gold/silver to be used to back all loans & serve as severe loan reserves –and the paying off the national debt resulted in a contraction in the money supply that led to a 15+ year depression
Thank you Jason for your wisdom, it can sometimes be required on this site.
I agree with you that private credit creation out of thin air was going on in the 1800s in spite of the gold standard etc. But according to the other, newer definition of inflation – CPI – there was practically zero inflation (except for spikes during wars, but then prices returned back to the original level).
My point is that the benefits of inflation are overestimated nad one needs to differentiate b/w CPI inflation, private sector credit creation and whether the latter is somehow anchored (be it gold standard or risk of default / bank run) or not. And that too much inflation (of what we have definitely had) is not good and even more inflation cannot be the solution (just logically)
http://21stcenturycicero.wordpress.com/fraud/how-benjamin-franklin-made-new-england-prosperous/
Jefferson agreed with Benjamin Frankin on the danger of big banks using their influence to create a system that favored the banks & monopoly on money.
One of the greatest founding fathers was Benjamin Franklin (who invented the newspaper & postal system in the colonies).
He wrote that THE REAL REASON FOR THE REVOLUTIONARY WAR was NOT TAXES but the Bank of England/English King forbidding the colonies from issuing their own fiat currency known as Colonial Scrip that the colonies used to fund their hiring & commerce.
Note that the battle between gov & bankers has been going on for centuries –and in England where bankers funded the civil war for decades to put their puppet on the throne, the bankers won & owned the King & his advisers/parliament for centuries too
&
bankers also tried to form coup de etat & tried to enlist Marine General Smedley Butler to overthrow FDR in the 1930s after he took the US off the gold-standard but fortunately, General Butler turned them in
but
the kangaroo Congressional investigation prevented calling witnesses & investigations into the matter because those Congressman were owned
by the bankers/robber barons that tried to overthrow FDR:
Anyways, back to Benjamin Franklin’s writing that the REAL REASON for the Revoluionary War was not taxes but banning the colonies from issuing their own fiat currency:
“Franklin added that this was the original cause of the American Revolution – and not the tax on tea nor the Stamp Act, as it has been taught again and again in history books. The financiers always manage to have removed from school books all that can throw light on their own schemes, and damage the glow that protects their power.
Franklin, who was one of the chief architects of the American independence, wrote it clearly:
“The Colonies would gladly have borne the little tax on tea and other matters had it not been the poverty caused by the bad influence of the English bankers on the Parliament, which has caused in the Colonies hatred of England and the Revolutionary War.”
the colonies were NOT EVEN ON THE GOLD STANDARD (which was why they prospered..only when England forbade it & made it go on the gold-standard dependent on the Bank of England did the colonies suffer–the real reason for the Revolutionary War)
–they were using ‘fiat’ paper currency known as ‘colonial scrip’, which Ron Paul ignores.
The ‘colonial scrip’ was issued to fund hiring, business projects, consumer purchases, etc –instead of the population having to borrow money from the private banks at interest.
http://21stcenturycicero.wordpress.com/fraud/how-benjamin-franklin-made-new-england-prosperous/
Around 1750, this New England was very prosperous. Benjamin Franklin was able to write:
“There was abundance in the Colonies, and peace was reigning on every border. It was difficult, and even impossible, to find a happier and more prosperous nation on all the surface of the globe. Comfort was prevailing in every home. The people, in general, kept the highest moral standards, and education was widely spread.”
When Benjamin Franklin went over to England to represent the interests of the Colonies, he saw a completely different situation: the working population of this country was gnawed by hunger and poverty. “The streets are covered with beggars and tramps,” he wrote. He asked his English friends how England, with all its wealth, could have so much poverty among its working classes.
His friends replied that England was a prey to a terrible condition: it had too many workers! The rich said they were already overburdened with taxes, and could not pay more to relieve the needs and poverty of this mass of workers.
Several rich Englishmen of that time actually believed, along with Mathus, that wars and plague were necessary to rid the country from man-power surpluses.
Franklin’s friends then asked him how the American Colonies managed to collect enough money to support their poor houses, and how they could overcome this plague of pauperism. Franklin replied:
“We have no poor houses in the Colonies; and if we had some, there would be nobody to put in them, since there is, in the Colonies, not a single unemployed person, neither beggars nor tramps.”
Thanks To Free Money Issued By The Nation
His friends could not believe their ears, and even less understand this fact, since when the English poor houses and jails became too cluttered, England shipped these poor wretches and down-and- outs, like cattle, and discharged, on the quays of the Colonies, those who had survived the poverty, dirtiness and privations of the journey.
At that time, England was throwing into jail those who could not pay their debts. They therefore asked Franklin how he could explain the remarkable prosperity of the New England Colonies. Franklin replied:
“That is simple. In the Colonies, we issue our own paper money. It is called ‘Colonial Scrip.’ We issue it in proper proportion to make the goods and pass easily from the producers to the consumers. In this manner, creating ourselves our own paper money, we control its purchasing power and we have no interest to pay to no one.”
The Bankers Impose Poverty
The information came to the knowledge of the English Bankers, and held their attention.
They immediately took the necessary steps to have the British Parliament to pass a law that prohibited the Colonies from using their scrip money,
and
then ordered them to use only the gold and silver money that was provided in sufficient quantity by the English bankers.
Then began in America the plague of debt-money, which has never since brought so many curses to the American people.
The first law was passed in 1751, and then completed by a more restrictive law in 1763. Franklin reported that one year after the implementation of this prohibition on Colonial money, the streets of the Colonies were filled with unemployment and beggars, just like in England, because there was not enough money to pay for the goods and work.
The circulating medium of exchange had been reduced by half.
Franklin added that this was the original cause of the American Revolution – and not the tax on tea nor the Stamp Act, as it has been taught again and again in history books. The financiers always manage to have removed from school books all that can throw light on their own schemes, and damage the glow that protects their power.
Franklin, who was one of the chief architects of the American independence, wrote it clearly:
“The Colonies would gladly have borne the little tax on tea and other matters had it not been the poverty caused by the bad influence of the English bankers on the Parliament, which has caused in the Colonies hatred of England and the Revolutionary War.”
This point of view of Franklin was confirmed by great statesmen of his era: John Adams, Jefferson, and several others. A remarkable English historian, John Twells, wrote, speaking of the money of the Colonies, the Colonial Scrip:
“It was the monetary system under which America’s Colonies flourished to such an extent that Edmund Burke was able to write about them: ‘Nothing in the history of the world resembles their progress. It was a sound and beneficial system, and its effects led to the happiness of the people.’”
John Twells adds:
“In a bad hour, the British Parliament took away from America its representative money, forbade any further issue of bills of credit, these bills ceasing to be legal tender, and ordered that all taxes should be paid in coins. Consider now the consequences: this restriction of the medium of exchange paralyzed all the industrial energies of the people. Ruin took place in these once flourishing Colonies; most rigorous distress visited every family and every business, discontent became desperation, and reached a point, to use the words of Dr. Johnson, when human nature rises up and assets its rights.”
Another writer, Peter Cooper, expresses himself along the same lines. After having said how Franklin had explained to the London Parliament the cause of the prosperity of the Colonies, he wrote:
“After Franklin gave explanations on the true cause of the prosperity of the Colonies, the Parliament exacted laws forbidding the use of this money in the payment of taxes. This decision brought so many drawbacks and so much poverty to the people that it was the main cause of the Revolution. The suppression of the Colonial money was a much more important reason for the general uprising than the Tea and Stamp Act.”
Today, in America as well as in Europe, we are under the regime of the Scrip of the Bankers instead of the scrip of the nation. Hence the public debts, everlasting interest charges, taxes that plunder purchasing power, with the only result being a consolidation of the financial dictatorship.
also confirmed here & more details on the profiteering banks on what happened afterwards as banks took over politics & the money system in America here:
http://www.xat.org/xat/moneyhistory.html
Great stuff JasonH!!
England’s filth and poverty was deliberate government policy and Franklin only said what was most politically expedient for himself.
Jason:
Thanks for the link, most interesting.
However, if you read to the bottom, most of the “quotes” attributed to Ben are unverified, and there are numerous inaccuracies.
It IS a good story, but sometimes the facts get in the way.
Ok, so you believe that government, being independent issuer from the banks will
a) not become corrupted by its god-like power to print
b) will only print as much as necessary and finance only positive NPV projects (something that the USSR proved wrong)
c)government will restrict itself from growing its share of GDP
I find this naive (the well-intended dictator theory would actually have a better chance with a dictator, not a democratic government, especially if the latter is bought and paid for by lobyists).
So I am for checks and balances (be it for govt or private bank printing). And I am not buying in the theory that you need expanding money supply for a growing economy or the theory that one needs to save the bank bondholders or otherwise the banks will fail and will drag with them the economy. I do not accept the lazy theoretical foundations of bankers’ blackmailing of every other taxpayer.
1) Anonymous, the USSR was ON A GOLD STANDARD (that’s why it collapsed because it ran out of gold & couldn’t issue more currency)… all gold-standard countries collapsed during severe contractions of the money supply (such as recession or the Great Depression), which results in them getting off the gold standard(like the US did) or defaulting.
HALF of the US economy is CREDIT/LOANS –about $6-7 TRILLION in loans/credit akak money creation by private banks every according to the CIA World FActbook & other official sources –that’s money created out of thin air.. when banks reduce their loans/credit (aka money creation), the economy contracts …
http://rodgermmitchell.wordpress.com/2011/07/09/why-bank-lending-leads-to-recessions-a-counter-intuitive-finding
for comparison, the US gov deficit spending aka gov money creation is just about $1 trillion per year, which is why it’s been so medicore in counteracting the reduced money money creation by private banks (which is about $1 trillion below normal) because the amount is just enough to tread water but not high enough to counter the contraction in private bank money creation
2) As someone scientifically educated, It’s not what I or somebody else “believes in”, it’s mathematical fact that a growing population requires a growing money supply or else more unemployment/poverty results because there’s more people so the pie needs to be bigger or the slices are get smaller because it’s being divided by more people or people go without.
example: you have a room(country) of 200 people & $1,000 dollar money supply… that’s $50 per person on average… with 5% population growth per year (100% growth in 20 yrs), that’s 400 people in 20 years .. if the money supply is the same, you now only have $25 per person… thus, you need to expand the money supply or else there is insufficient money to fund the hiring & spending by all the new people
In reality, of that $1,000 money supply: it’s more like the top 2 people own $200 dollars between them, the next 18 own $600 between them, & the next 36 people have $40 between them, 4 people have $0 dollars between them (the wealth disparity)
A rising tide lifts all boats ONLY if the pie gets bigger (ie, if the money supply increases) or else the the top just gobble up & increase their share of the pie
3) The gov should NOT save private investment banks nor private bank holders (that would be privatizing profits while socializing the losses & creates bad incentives).. Glass-Steagull was repealed so that commercial & investment banks could mix.. China bans their mixed banks from engaging in risky investments & outright banned derivatives, CDS, MBS, etc
if commercial banks fail, the gov either takes over/nationalizes the bank & places it into recievership (FDIC insurance) & replaces the management & letting it go bankrupt –it then is either sold or operates as a non-profit bank or other agency funding projects (ie,FDR’s Rural Electrification AGency & forerunner of the Small Business Administration under FDR gave out the equivalent of $500+ billion in low-cost loans to fund businesses & electric power that gave power to 90% of people outside the cities)
More info from MBA/economist Mike Norman & Warren Mosler:
http://mikenormaneconomics.blogspot.com/2012/05/dirk-bezemer-credit-is-what-credit-does.html
http://mikenormaneconomics.blogspot.com/2012/05/peter-soos-time-to-stop-rewarding.html
http://mikenormaneconomics.blogspot.com/2012/05/ann-pettifor-calls-rip-off.html
http://moslereconomics.com/proposals/
sorry for the grammer mistakes, I forgot some words (English is my 2nd langauge) but meant to say that private bank money creation is $6-7 TRILLION per year, half of the US economy, according to official sources like the CIA World Factbook & other sources (easily verified, since public banks & Federal Reserve must list all their loans/credit they’ve created in yearly statements)
Anon,JT, Highly recommend reading more of Warren Mosler’s sites & economist’ Mike Norman’s site for more info:
Seven Deadly Frauds of Economic Policy http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf by Bank CEO/economist Warren Mosler or click for here for shorter summary of Modern Monetary Economics 101
5. http://MoslerEconomics.com -Daily Insightful & Most Accurate Verifiable Economics Analysis by bank CEO/economist Warren Mosler
6. http://MikeNormanEconomics.blogspot.com One of the BEST Daily Analysis by Chief Economist & FoxBusiness-Bloomberg contributor expert Mike Norman, formerly of S&P
as well as Rodger Mitchell’s again full of easy-to-read charts with facts/data pulled from the Federal Reserve (easy to miss since my posts are too full of info)
Oil/energy prices cause inflation, NOT federal deficits -evidence/facts here: http://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/
2. http://www.RodgerMitchell.com Daily Economics Verifiable EVIDENCE by CEO/MBA economist at http://rodgermmitchell.wordpress.com/2009/09/07/introduction/ & http://rodgermmitchell.wordpress.com/2011/07/09/why-bank-lending-leads-to-recessions-a-counter-intuitive-finding
I would not recommend reading the MMT websites. They will lead you astray. Stick to the operational realities and avoid the MMT political shenanigans.
http://pragcap.com/understand-the-modern-monetary-system/understanding-modern-monetary-system
That’s why I recommended Rodger Mitchell’s site,which is chock full of charts/data from the Federal Reserve & he’s against the Job Guarantee –he does lambast deficit-hawks/Tea Party as well as conservative Democrats who want to raise taxes
Mosler’s MMT site isn’t very political even though he’s for the Job Guarantee
Bill Mitchell’s site is political which is why I didn’t list it even though he has some very detailed data
Your link is great, CR.. I actually include it my sig as part of my sig on political forums to get the MMR word out so that we have better solutions instead of the gold-standard myths taught to everyone in grade school & Harvard
Thx Jason. I find the MMT sites confusing for novices and even experts as MMTers fail to communicate how their work is theoretical more than based on operational realities. I started MMR to cut out the politics and the confusion so I am not trying to be a jerk, but merely steering my readers in the direction I think will suit them best.
Again, I would not recommend the MMT websites. They will only confuse you on these matters.
http://pragcap.com/understand-the-modern-monetary-system/understanding-modern-monetary-system
Anon, forgot to add that the USSR not only was it on a GOLD-STANDARD but it had no banking industry that funded enterprises, projects, etc.. instead, it’s central bank was limited by it’s gold reserves & had conservative limited funding of technology, limited funding to production, startups, businesses
the strength of the Western/Eastern capitalist world is that it’s banking industry & banks fund startups, businesses, expansions of production/business, etc
Almost all businesses use loans/credit to startup & fund expansions, build factories,… about 80% of businesses cease to exist after 5 years but the ones that do survive give rise to great products, etc…
great inventions, etc –all of them need funding to reseach, develop, market, etc.. it either has to come from a fiat generous gov bank or agency like FDR’s REA or private banks or venture capital –of which the USSR’s gov bank wasn’t & had nothing else
Hey Cullen,
I’m sure you’ve written about TBTF in the past. Can you link me to your thoughts on it? Are you broadly in favor of a return to the Volker rule? Glass-Steagall, that sort of thing? As a general principle, are you in favor of regulators looking at the micro, or broad, basic rules of the game? Also, do you think FDIC creates a degree of moral hazard by its very existence? I realize that’s about 6 questions – feel free to answer the general theme rather than specifics. Cheers.
Thanks for resolving the beach issue (somebody needed to throw you a lob),
Cullen,
In your opinion will the EMU need to get to full blown crisis mode before leaders decide either to Eurobond or dissolve the experiment?
re:NGDP targeting
I think the other Sumner assertion is that massive QE (and removal of IOR) will create inflation and help deleverage, but that’s a big if. It requires a chain of events for that to happen, and other chain of events could actually exacerbate the BS and debt service issue. In some sense, although it is never publicly articulated, the Fed are actually pursuing this tactic: I think they’re hoping for 0% interest rate, 2% inflation and hoping that this doesn’t affect consumer or business behaviour and we just crawl our way out of this BS/malinvestment mess 2% at a time. Indirectly, the CAFE restrictions and falling NG prices would also help by keeping non-core CPI tighter with core CPI.
Coincidentally, Sumner writes about this today: http://www.themoneyillusion.com/?p=14577
How ya feeling about that long equity position now, Cullen? Is the market still a buy down here?
Yay, I made the blog. That’s gonna help me with the ladies.
Thanks Cullen
I’m confused. How does one reconcile these two statements?
“But the govt doesn’t need the Fed to fund its spending. That implies that without the Fed’s help the Treasury couldn’t obtain funding in its account. That’s simply not accurate.”
“The govt really does need to obtain funds to spend (the Treasury is technically a currency user while the Fed is technically the currency issuer)”
I should be clearer. The govt can always harness the banks as its fiscal agents. That is, they don’t need the lender of last resort to supply funds, although they could do so if for some weird reason the PD’s decided to forego their mandated responsibility of showing up at Tsy auctions….
The point is, the govt won’t “run out of money” because it is always able to harness either the banks or the Fed as its fiscal agent. This relationship makes the US govt an autonomous currency issuer. So, regarding QE, many have implied that the Fed had to step in because there were not enough buyers of US t-bonds. That’s just not true. If someone can convince me that demand for t-bonds is low with 10 year yields at 1.5% and prices bid up like crazy then I am all ears….
Hello Cullen,
Just a quick follow up to your response to Frenchy´s question on Japan. If I am following your logic correctly, you argue since Japan is a currency issuer; has strong corporations; and significant size and diversity of their economy they should not face a bout of hyperinflation. I have a question on this point. At what point does a country face significant threat to their economy? 400%, 500%, a 1000%.
I understand your argument, but it seems that it some point the weight of debt must have a bearing on the international “faith” in a certain currency issuer. It seems to me according to your argument that debt to GDP really plays no role in your mind in the sustainability of a monetary system. Am I missing something?
Japan has a CA surplus (but shrinking), and the Yen has been strengthening (until recently) which indicates that there is stronger demand for their products/exports over critical imports (oil, LNG, food). As well, the yen support indicates the importance of repatriation of overseas assets (which were overseas investments to keep the Yen from rising in the past) and their past “economic success”. I would be worried for Japan when they start runnning significant CA deficits, their external investment position declines sharply, and the yen is falling.
The question of how much debt is too much is a question often asked on pragcap. There has been some discussion in the past that the size of the national debt doesn’t matter because it is money owed to its own citizens. It should not matter only if the benefits of that debt exceed the debt burden left to the next generation. Japan is shrinking, so the subsequent generations will be smaller. Japan has implicitly stated that immigration cannot be the answer, and they want to rely on robots to boost the productivity of the next generation as well as minimize the burden of the elderly. In this case one would expect GDP to start growing faster than debt at some point in the future. Personally, I don’t feel too comfortable with this explanation since it’s somewhat circular; high debt is not a problem if debt/GDP is declining, but you got high debt from having an increasing debt/GDP!
One more question on U.S. monetary system.
I read the following from an article from Anatal E Fekete expressing the possiblity of simultaneous deflation and inflation in the U.S. Can you give your feedback on this phenomenon within MMR?
“It is possible for the tectonic plate of hand-to-hand money, the FR notes to deflate, while that of electronic dollars to go into hyperinflation. The decoupling has frightening consequences for the financial and economic future of the world.”
Full text here..
http://www.safehaven.com/article/8507/can-we-have-inflation-and-deflation-all-at-the-same-time
So I was wondering after reading the poems you created…
If the debt boomed by about $9T since 2008, yet demand is low still because of the BSR, does that mean when the BSR comes to an end or fades off, the economy should come back much, much stronger because of all the money now in existence?
California certainly *can* go bankrupt. Correct me if I’m wrong, but I don’t believe the Fed has ever stepped in to buy muni funds from a failing issuer. Also, it’s doubtful the Fed would start picking up the tab for Califorinia’s looming entitlements crisis, just as Congress won’t step in, either, to fund those expenses.
The city of Detroit has run out of money and won’t be getting state or federal help, nor should it.
The states are constrained by their ability to either raise taxes (primary source of spending) and by their municipalities ability to go out and borrow money.
The states will have to live within their means. The ones that do so will attract citizens, while California will continue to lose people, most especially productive, tax-payers.
Right, but I am saying that CA would never be allowed to go BK. Letting the 8th largest economy in the world go bankrupt would be self defeating for the USA. If we’ll save banks, but we won’t save a state then lord help this “union”.
You really think there would be the political support in the rest of the country to cover California’s $16 billion shortfall, knowing that if they did it this year it will only increase next year?
Would that be a good idea? Wouldn’t it be better for the state to learn to allocate its resources more efficiently?
…
The flaw in MMR is that once you accept that the federal government ‘can never run out of money’, with the only restriction being the threat of inflation (which you then rule out as a consequence of money printing) then all sorts of things logically follow from that assumption. Ergo: California runs out of money … print money to cover the shortfall.
Whether you like it or not, the Federal govt is perpetually bailing out the states by filling their coffers to the tune of 20% of their annual budgets every year. States are still required to meet their balanced budget amendments, but they do so with a lot of fiscal aid from the Federal govt.
And the idea that corrupt people will take advantage of the powers of govt is not a flaw in MMR. It is a flaw in the elected officials running our country.
which is why any govt that truly understood the monetary system from top to bottom would have the type of corruption that makes India and Russia look like schoolboys. Look at the insider jobs done at the local, state, level now – just imagine a scenario where there is ‘unlimited funding to the point it causes inflation’ on a country wide basis.
johnny evers writes “detroit …nor should it”
cullen retorts its different if its California since its the 8th largest country. so we have a TBTF problem in the MMr framework as well within our political reality. Where is the line? Is it Houston? Detroit? Chicago? Miami? New York?
Once could argue in a balance sheet recession no govt, even a local municipality of 25k people should be allowed to “go bankrupt” because then it restricts stimulus that could otherwise help the national economy. But of course having no restriction (other than national inflation) would open up a genie bottle of epic proportion. If LA or NYC IS TBTF why would city officials not give their city workers incredible benefits. They know they wont be allowed to “go bankrupt” because they are TBTF. Same for CA at the state level or Fl or TX or even WA or UT.
Once the genie is out of the bottle and the ‘free rider’ (except and until there is national inflation at an uneasy level) is recognized, you will have Wild wild West spending and a country full of politicians who are “supposed” to take away said stimuli at the right time (as inflation becomes a problem). A fanciful world.
@ Curvo
Read below- I would add to this 180 flexiblity the following story.
We received work that had us bullish on GDX-gold miners. We really like them. WE moved quickly and went 5% long then added another 5%. I posted that on this site. We then drilled further into this and found some information that showed further weakness could be ahead. That lined up with our bearish view on the markets also. I don’t see Gold as a safe haven..nor do I see how the Minors decouple from a sell off.Why would they? Why would CCI deflationary sell off avoid the minors…right? So, we sold the minors with a 4% gain on the 5% and 2.8% gain on the second 5%. in 2-3 days? Since then GDX is down as our work suggests it should. This is flexibility. WE like them. Like them alot..but the price action tells us to wait.
What is the missing component to almost every trade I’ve done since 1997? Knowing when and where to go long and short. The price action is all that matters. It tells you everything. Thus for me I can be bearish but if the price action starts to move in a bullish manor I MUST put down my views. Immediately. Regardless of what my macro view is. Unless the price action ratifies my view I”M 100% wrong. My view from October 4 2011-February 2012 is a case in point.
The price action should have had me in in November. MY stubborness of the work we did had me out. I could have been bearish but taken a long positions in November around 1190-1200 and watched it go to 1419…then sold some at 1370 and the rest at 1363.
Putting down my view to make money. Then when the price ratified my earlier call it would have been back in play. It is not ok to be out of the market in 1999 because the SPX is overvalued.
My best guess is the SPX declines Quickly sub 1200 the first week of June. But heres the thing..if some monetary gimmick comes along from ECB/Fed..do I care that I just posted on prag cap it should go sub 1200? NO..I don’t care. I care about making money. I have learned not to judge Central Bankers actions as right or wrong..but to understand what they can do for me.
Their is the possiblity that some monetary gimmick is started and the market does not respond upward. We have not seen this yet. The CBankers are 3 for 3. Why would I outthink something that works.
VII, did you say “sub 1200 on SP500″? Do you mean “sub 1300″? Because that would mean more than 130pt drop in just over a week.
@ Calvin
Yes . The dye is cast. The fat lady is getting ready to sing. Only the fed can stop what is a out to happen.
All states are, by definition, too big to fail. You don’t start a currency union and a United States of America and then start throwing states under the bus unless you want secession or defection or whatever. It’s like getting married. You don’t get married just so you can mess up something and divorced. The states are absolutely too big too fail. That’s the whole point of being united. That doesn’t mean they don’t have to follow the rules though….
I’ll riff off Cullen’s “married” comment to reply to Curvo’s “which is why any govt that truly understood the monetary system from top to bottom would have the type of corruption that….” comment. You see, a female friend married a “great guy”. She made good money, he claimed he did too. He secretly ran up debts and credit cards and when the s*** finally hit the fan, well, he had his fun gambling and golfing, hid some money, and he made a big scene about her being the problem and then agreed to a divorce and is no doubt pulling the same stunt on the next victim.
So what’s the point of my story and now it related to politics and monetary realism… for one, you need an unwitting victim – an in-the-dark public. Second, you need an evil crook, or at least a greedy low morale politician (husband). All this nonsense about the Gov can’t do anything right partly comes from the belief that all people are low morale greedy, lazy and/or crooks at heart if left to their own devices. But that is bull pucky. Lots of people enter professions, including politics, because they want to do good. And lots of people go crazy if they aren’t being productive. Sure, corruption can lead to more corruption (with the if-you-can’t-beat-em-join-em syndrome), but again, you need BOTH the dumb voter and the corrupt politician for it to continue on unabated. Eventually in your scenario of crony politicians giving every cousin and uncle a cushy job, the public will kick the cretins out…. or the cretins will create a police state to enforce their continued largesse in which case the entire country will eventually collapse.
Either way, how knowledge of MMR might lead to abuse doens’t change the “realism” of it. “If only they knew the truth, they’d abuse it” vs. what we have now which is “abusers are getting away with abusing thanks to everyone else not knowing the truth”
@ CURVO
I was just reading this and came across Curvos question.
I’m not sure what the question was. Let me add some color.
If you look at many of the things one should be looking at and put some historical context around what else has occured when X and Y have shown up you can draw similarities and conclusions.
In this instance we are seeing multiple negative outcomes from the data set. This is not Dr. J Hussman stuff. I don’t think we look at the same things. WE are seeing mostley technical, macro global and more so in the Price Action of various things pointing to a small sample of outcomes. Outcomes that occur or have occured prior to waterfall sell-offs. Oddly..in this sense I do feel like Dr. Hussman because they are close but not moving far enough away to have us change our view.
Now let me be clear about my Long position. I don’t want to sound too technical here but that was taken based on a hunch/gut feeling. Having read so much out there I was sensing that sentiment was bearish and the seasonals of the end of the month…low volume..HFT/Algo Syntheticness to the action as well as the data around Memorial Day..I thought that if they were going to low volume holiday grind up..I didn’t want to be frustrated watching them jamm up the shorts I wanted to be on the right side of this Algo nonsensical ramp up. The one that drives Zero Hedge crazy because it just looks like only George Orwell knows why the SPX is moving higher. There was absolutely nothing I could if the SPX declined 5% justify as too why I took that long. It was the Anti-Dr. Hussman long. The idea that you don’t take risk solely because of QE. WEll I took a risk solely on the idea that the dicks running the computers would ramp this up into the end of the month. Tryting to STEAL THE ROUND and get the shorts to cover.
I hated that trade the moment I did it. I closed it out and it was a pure gamble. There was no disipline to it. Sometimes getting lucky is better than being smart. Every time I do that kind of BullSh%% Trading it’s not worth the stress.
But yes..take solace in the fact that I’m flexible. 180 degrees flexible. However if you don’t know by now if were in a secular Bull or Bear you should stay in cash.
Cullen you respond to Johnny Ever above,
“And the idea that corrupt people will take advantage of the powers of govt is not a flaw in MMR. It is a flaw in the elected officials running our country.”
You also wrote in a recent publication
“The reason why any society forms in the first place is because we have a collective understanding that we can achieve a better overall living standard if we leverage one another’s strengths and abilities.”
Isn´t the real debate, above, over the legitamacy of the central government (currency issuer) in this arrangement? I agree with Johhny Evers and Curvo above on this point. It seems that the currency issuer, in this case, has acted again and again through moral hazard, bailouts, revolving doors, mis allocation of capital etc etc as an impediment to the basic concept of allowing the society to leverage one anothers strengths and abilities.
The answer to this issue is the same as ever: an informed and engaged citizenry (with a basic understanding of how the monetary system works – what Cullen and others are trying to provide them) bears the ultimate responsibility for seeing that government does not misuse its powers.
Federal/Central government has to exercise its currency issuing/taxing power to maintain a stable monetary system and essential balances, such as limiting the concentration of wealth and supporting full employment. It can use this power to transfer funds to states, localities, and individuals, along with wide discretion in their use. However, it is up to a vigilant citizenry to ensure that this is done on the basis of fairness and need, rather than indiscriminately/irresponsibly.
Biggest historical factor behind centralization/expansion of federal government: growth of military/-spending/-industrial-security complex, in response to real threats of totalitarian fascism/communism, as well as ‘hubris’. and
‘Red Scare’ and ‘terrorist’ hysterias (not social welfare spending – so-called “socialism”). Now that those are gone/waning, maybe a balance of federalism can be restored in the US and developed elsewhere (and real and potential dangers of economic imbalances, resource competition, and environmental risks can be addressed).
(E.J. Dionne and Ross Douthat discussion on radio today: agreeing that ‘communitarianism’ is as essential and ‘Amer4can’ as ‘individualism’; disagreeing on the size/role of government; gave me some hope we may finally be progressing beyond sterile ‘thesis’ vs ‘antithesis’ to productive synthesis.)
We have $15 trillion in debt, and MMR proponents would advocate even *more* deficit spending, so the danger is not the *corrupt* officials will print recklessly, but that sincere, well-meaning government officials who subscribe to MMR would print beyond the point of no return.
Dear Cullen,
A few months ago I mailed a response in some thread, and you gave me a nice reply.
This now encourages me to ask a question.
I apologize for the fact that this question is unrelated to the ongoing debate in this thread (I did not even check).
The question is as follows.
I believe I understand vertical money creation and destruction. The currency issuer simply spends and taxes. The integral from minus infinity to the present of both flows is the “deficit” of the issuer and this is equal to the amount in circulation in the economy (the private sector).
Horizontal money “nets to zero”, the money created by lending must be repaid by the borrower at some later date. (Forgetting about interest for this question).
Now assuming a steady flow of loans and later repayments this would add another amount of currency (money) to the economy, which might be easily calculated given the volume of loans, repayments and some assumed, or measured, average repayment time.
No problem still.
Now add defaults, say a certain percentage, to this horizontal, circular flow.
Question: given such defaults from minus infinity to the present, does this amount not add to the money in the economy?
Put differently: where does the money go for the “debts that can’t be repaid and won’t be repaid”. I assmume the debtor has spent this money to others and as such it cannot be retrieved. But it has not disappeared, has it?
Is there some inverse of defaulting that will do the trick?
Sincerely,
Frank Lansdorp
Cullen,
In your response to Quaternion it seems that you implied that the deficit (the roughly $9 trillion) drove the stock market profits. Are you saying that the $9 trillion now resides in corporate America?
A lot of it does!
I have a query:
$9 trillion spread across U.S. citizenry would be about $30,000 for each man, woman and child. Corporate America is apparently just sitting on this money and not using it. Citizens WOULD put this money into circulation out of life’s necessities.
Since we don’t have inflation (I’m assuming because corporations aren’t putting this money to use), would we possibly be having inflation if the PUBLIC had received this money and used it for day to day expenses?
Possibly? Or would they be paying down debt where the money goes to sit back in corporate America?
Cullen,
Since the EU seems to be slowly heading towards the fiscal union you have suggested as the most plausible scenario, Goolsbee wrote an interesting editorial in the WSJ today on why an fiscal union won’t work in Europe citing labor mobility as the primary cause. Does this change your thinking at all?
I don’t really buy these arguments. The EMU was growing just fine before the currency crisis. Eliminate the currency crisis and that’s basically what we’ll have.
Can you please send me thne fish taco recipe! Thanks!
Cullen, is there a way to group-link all of your Q&A sessions? Sometimes I don’t have time to read your most recent one and would like to go back to previous ones later. They also make great sharing material. Thanks a lot for your grand effort!
speck
Hi Speck,
I’ve listed them all under the “how to” tab so you can always access them from the front page. http://pragcap.com/category/how-to
Hope that helps,
Cullen