Q&A…The Answers, Part 1
Looks like you all wanted to make it personal this week. That’s fine. But don’t complain when you end up hating me after this is all said and done. I’m big on personal responsibility and I will fully blame you for asking the personal questions.
I was only able to get through half of the questions this time. I’ll do part 2 tomorrow.
CCV - What’s your current opinion on bonds? I haven’t seen you offer an outlook in a while. Thanks.
CR – Depends on your time frame here. I’ve long been warning about the exaggerated claims about the “bond bubble”. So I’ve been a long-term bull for a pretty long time. But I think you have to be careful trading the market at these extremes. Long T-bonds are up 35% on a year over year basis. That’s a gigantic move. I’m a near-term bear on bonds, but that doesn’t mean you have to worry about yields surging over 4% on the 10 year any time soon. As I’ve explained before, the end of the bond bull likely won’t come until Bernanke signals rate increases and he’s been pretty clear about his “extended period” language. So, near-term bear, longer-term bull.
Bond Vigilante - Question: How many people from the US and from abroad believe in MMT and/or MMR ? Seems to me that the majority (if not all) of the MMT and MMR believers seem to be from the US.
My personal opinion is that folks visiting this blog believe we’re in deflation but use MMT/MMR to deny some of the more petulent/nasty sides of deflation.
C.R. has said that he sees more webtraffic when he posts negative news. That’s precisely the confirmation the US and other countries are in deflation. (See Robert Prechter’s “”socionomics””)
CR – BV, you know I don’t follow the MMT framework any more so I am not sure what MMT has to do with any of this. Our debates and dissension from MMT were very public and based on what many of us believed were operational misunderstandings in the MMT framework. We’ve done a huge amount of work to try to clarify the differences between MMT and Monetary Realism so I would recommend readers hunker down and dive into the details a bit more if they’re really interested in understanding our position on all of this. My quest has always been to offer readers the most precise operational understanding of the way the modern monetary system works. MMT is good here, but incomplete in my opinion. I am not going to twist anyone’s arms into following our positions and understandings on this, but I would highly encourage readers take a look at the MR material.
Bernie - I understand the basics of the concept that The US government is not going to “run out of money”.
I understand the basics of the concept that the true constraint is always inflation. However, a lot of contracts and laws are written with automatic increases based on inflation. Examples are the Government (federal, state and local) pensions, government employees pay, people covered under public employee union contracts, social security, PPACA subsidy amounts and eligibility levels. If the government cannot go bankrupt, then there is no mechanism to change these contracts since the government always has the ability to pay.
Is there a danger that this will cause inflation will rapidly rise uncontrollably? Where instead of reducing buying power and making the country more competitive, the automatic increases cause a positive feedback loop?
CR – Good question Bernie. I am not sure I have a great answer for you. I doubt that these automatic increases amount to such a substantial part of overall spending that it would actually result in the positive feedback loop that you mention. But I can’t be certain. Maybe you have some more details here?
Ville - What kind of music do you like and which are your favorite bands?
CR – I love most music. If you looked at my music library (which is now on Google Music and not Itunes!) you’d find classical, country, hip-hop, alternative, reggae, etc). These southern California beach towns tend to veer you towards the alternative/reggae style music so I’ve probably veered in that direction over the years as I fight the urge to become a lazy beach bum. But it all depends on my mood/activity.
Conventional Wisdumb - How about your favorite books as well?
CR – Tough one. I am embarrassed to say that I haven’t read a fiction book in 10 years. I read a lot, but I guess I just don’t spend my free time reading fiction. The best book I’ve read in the last few months was probably Meditations by Marcus Aurelius. I’ve always had a secret love affair with the classics since my days as a latin student and Aurelius was one of the master philosophers/leaders of his time. I’m big on self improvement related stuff and since I view myself as a work in progress I love these sorts of views from people who have “been there, done that”. Aurelius has been there, done that. He was a huge thinker and though I wouldn’t say I approve of all his positions I do think the book is important in helping offer perspective and guidance to anyone and everyone.
JK - might as well throw in movies too.
CR – Tough one here as well. I don’t have a sexy answer here. I think it’s really hard to beat Forrest Gump and Shawshank Redemption.
Mercator - Are we likely to get big down side surprises from Q2 earnings? By surprises, I mean no earnings warnings, just surprise misses that global companies didn’t see coming because of how rapidly conditions are deteriorating?
CR – I think guidance is going to be the key here and it’s going to be weak. Companies are likely to report another decent set of figures because the estimates have been slashed so much in recent weeks, but the guidance is going to be very tepid given the uncertainty out into the end of the year. No CEO wants to put his neck on the line by being overly optimistic so expect a lot of under promising.
Bob Barker - Cullen: What is your view on Obamacare in general and specifically now that the Supreme Court has construed that it is indeed a tax (to the dismay of Obama and his multitude of lies) given your view on implementing taxes during a balance sheet recession?
CR – Really putting me on the hot seat here, huh? What a fascinating ruling. The way Roberts phrased his decision was interesting. I don’t think he was being as political as many have accused him of being. Rather, I think he was playing this one by the book. If the government expropriates funds from citizens that they might not have otherwise been required to part with, then the government is taxing them. That’s potentially what this bill does. But here’s where I don’t have the answer for you and maybe someone out there does. I think you’d have to run a cost benefit analysis on all of this and find out what the real cost of not having national healthcare is? How many people essentially free load off the current system and end up increasing costs for the rest of the country in the end no matter what. And does a nationalized health system actually reduce that burden? I don’t know. I am inclined to believe that even if the government can save us a few bucks by making the system “more fair” then it still won’t result in large tax cuts in the future. Instead, they’ll find some other way to spend the revenue or they’ll convince us they need the revenue because we’re going bankrupt. So either way it’s likely to be a tax in the end. But honestly, I haven’t followed all of this closely enough to give you a good enough answer. I probably should be following it more closely….
freemarketeer - 1) What is your favorite Arnold movie?
2) Do you like the idea of tax cuts because they are faster to push and don’t allow for political direction? In a BSR, is it more important to push deleveraging or “growth”?
Generally speaking, I believe we should be using stimulus to fix infrastructure that is direly neglected, and also funding innovation. Tax rates anchor expectations (like dividend increases vs. share buybacks). The current tax structure matters more than the ideal tax structure. Money returned to the poor is also used much differently from the rich, and I think that complicates the tax cut effect.
CR – These are great questions! So many good Arnold movies. It’s hard to choose between Predator, T-2, and many others. I’ll go with Predator. Any movie that combines Mr Universe, Apollo Creed and a former Navy Seal/Congressman in an alien film that actually works, is hard to beat.
I prefer the tax cut because it doesn’t involve bureaucrats deciding to allocate funds on silly things like cash for clunkers, bank bailouts or home buyers tax credits. Given the BSR and consumer credit woes, I think it’s better to let people keep more of their income and use it how they prefer. I do wish there was a bigger spending push on some initiatives, but this government hasn’t proven itself capable of making very competent decisions so the stalemate on spending isn’t surprising.
Calvin - Cullen I am also a devoted saltwater fisherman, especially bottom fishing using bait like surf clams and squid. There is just something about lowering your bait to the bottom of the ocean, wait for the strike and then respond ferociously. What type of bait do you use? Do you like bottom fishing more than say trolling or using lures like pencil poppers?
CR – I’m a rookie here so you’re talking to the wrong guy. I’ve only been fishing out here for a few years. But I like using a double dropper loop rigged with a weight and live bait. The halibuts and lingcods are more likely to go after the live stuff. Here in San Diego the water is quite cold most of the year so bottom fishing is the only game in town since the pelagics just aren’t around when the water’s cold. I’m hoping for warm water this summer and it looks like we might just get it. If so, that changes the whole game to a surface fishing and a totally different approach as you know. I’ll have to learn how to do that when and if it happens.
Me - Long time listener first time caller. Most overlooked topic in the world, high cost of dating.
CR – Here’s some advice. Don’t take your date to an expensive restaurant the first time around. This accomplishes two things. It avoids spending a lot of money on someone you probably won’t end up with. And it will also tell you more about their personality. If you can’t go to a mediocre restaurant and have a great time with someone then you’re wasting your time to begin with. Better yet, think outside the box and don’t go out to dinner. Do something that normal boring people do. After all, that’s what you’ll spend most of your time doing with this person anyhow.
Steve W - Cullen, You mentioned last week that you and Warren Mosler don’t quite see eye-to-eye on “demand leakage”. Would you expand on that a bit, or point me to one of your previous posts or scholarly papers on the subject?
CR – I could be misinterpreting his position on this, but I don’t see how global saving is a bad thing if he thinks current account deficits are a good thing. But this disagreement is much deeper than just that. I take the Wynne Godley position on current account deficits. I just think MMT has this flat out wrong. And they basically need to have it wrong otherwise their argument for perpetual budget deficits starts to weaken. And in the end, MMT is really just a progressive policy approach towards their Job Guarantee. So supporting current account surpluses and claiming that current account deficits are bad thing would be inconsistent. But enough about that. I shouldn’t be talking bad about MMT since I think it’s a better framework than most of mainstream economics.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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22 Comments
New look around here. This is going to take some getting used to.
Yeah, the old one was really bogging down. This is cleaner. Needs tweaks though. Working on it.
Hi Cullen,
What’s your MBTI (Myers-Briggs Type Indicator)?
(My guess would be INTJ.. scoring low on TJ, high on IN.)
Never taken the test. Sorry.
Surprising, given your focus on self-improvement books.
Give it a shot, I found it tremendously helpful in terms of self-awareness and a greater understanding of my weaknesses and strenghths.
So, your dating advice would be to take her to Ikea? That would be the ultimate test
NO! Are you trying to get yourself killed?
Cullen, I have questions, not answers on the things you write about. If you want to know how to operate a nuclear power plant, then I have answers.
I am retired military so I understand how that system works. It’s the same adjustment as SS, basically the change in the 3rd quarter last year to 3rd quarter this year CPI-W determines the yearly increase. reference here:
http://www.ssa.gov/oact/cola/colasummary.html
Federal employee COLA is annual CPI up to 3%, or CPI-1% above that. I don’t know which CPI or when the year starts for them. Reference here:
http://www.opm.gov/retire/faq/post/faq18.asp
NY state is 50% of the annual inflation with a minimum of 1% and a maximum of 3% of the pension. Reference here:
http://www.osc.state.ny.us/retire/publications/vo1863.htm
According to the following link pensions are 16% of total government spending (federal, state, and local). I believe the other categories like welfare have have automatic adjustments also. Reference here:
http://www.usgovernmentspending.com/united_states_total_spending_pie_chart
As I said in the beginning, I don’t know how much if any this matters, it was something I’ve been wondering about and I figured I’d ask. I do appreciate you giving honest answers and you don’t just make stuff up if you don’t know. Thank you.
Hi Bernie,
You’re probably smarter than I am so maybe the wrong guy is asking the questions here?
Sounds like the built-in components could be substantial. Thing is, they’ll only adjust if we get higher inflation, right? So, aren’t these reactive measures? My guess is they’re implemented with some lag also so they probably lag the biz cycle substantially making them more counter-cyclical than self reinforcing. But again, we’d need a lot more data to know for sure.
I’m definitely not smarter, but reading this site helped me seem that way, see in 2009 some of the guys at work were predicting hyperinflation, I used some of your arguments and predictions and it’s worked out well so far.
Regarding the tax portion of The Affordable Health Care Act, that is a tax that occurs when there is noncompliance (very small to begin with and never rising to more than a certain level), rather than a tax established to fund the act.
And keep in mind, there is a lot of spending involved, very directed spending… the additions to Medicaid, for example; and there are a lot of tax credits involved.
Anyway, as someone who just had her life saved via an operation I would never have been able to afford on my own, and as I cannot afford insurance within the system as it was, for I cannot afford private insurance (and not because I was lazy, by the way), The Affordable Health Care Act came along just in time for me.
I had gotten started on it in January as a person with a pre-existing condition, as a part of the early phase of the Act. I was paying a rate that I could afford, and I went to a primary care physician for the first time in years, happy to get set up and start periodic wellness exams and preventive care, as I was too afraid to do beforehand, afraid of what might come in the event that something did show up. Even simple lab tests can cost hundreds. Finally, I wasn’t afraid anymore, at least of the potential costs. But sure enough, something was found.
Bottom line: I would be dead without The Affordable Health Care Act (so-called “Obamacare”). So just sayin’, this isn’t just a concept to be discussed, it has a real effect now.
No, it isn’t ideal – there are other ways to work towards universal health care, as is exemplified in several other countries. Obama worked with what could be passed at this time. It was also meant to include a form of personal responsibility for one’s health care, in that everyone who could afford to do so would begin to pay a reasonable rate for insurance, one shared by all, and, therefore, in turn, bringing the costs of insurance down for all.
Thanks for this comment, Linda.
Except for ideological blinders, I find it hard to understand how pro-business and ‘fiscal’ conservatives can be so opposed to basic universal health coverage. No other single measure could do more to remove an onerous disadvantage for American business, combat excessive health care costs, and increase the productivity of the workforce, if done properly (a pretty broad array of approaches implemented by other developed countries provides support for this assertion.)
However, you may be right that the current plan was the best that could be done at the time.
Good luck,
Colin
Thanks, Colin.
And I just want to make clear to my fellow pragcap readers that I’m not here as a “drive-by” for “Obamacare,”
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I’ve been reading from pragcap for about 2 years now, often daily. I’ve contributed to comments just a few times, but I am a regular reader. MMT and later MR and focusing on the operational realities, whatever one’s prescriptive ideas stemming from those, have quite literally “turned my world upside down” as few other things have. And so I very much appreciate the articles here and the discussion that often follows. I don’t feel fluent enough in these things to add to the discussion, for the most part, but I read a great many of them, nonetheless.
What I wrote above was truly my own experience.
Thanks for being so honest about your experience Linda and I hope you’re doing fine now. I think my main point was to express that I don’t have all the details so stories like yours help make us all better informed. So thanks.
It was Bob Barker and his snide remark – “Obama and his multitude of lies” – along with what I imagine to be an honest misunderstanding of his about what makes for the tax associated with the Act that got to me.
For a little while there, when it looked like the Act would be overturned, I can’t tell you how surreal it was to think I had somehow fallen into a “pocket of time” in which that surgery was covered. It was terrifying to think that a short time before or a short time after, and I would have been out of luck. And then I think of so many others that wouldn’t have been so lucky.
Anyway, it’s not just a political football to me. And it drives when people can be so snide about it.
A good way to look at health care is to define the markets it operates under. There are three kinds of markets: 1)Elastic, 2)In-elastic and 3) Mixed.
Elastic is when you can substitute and item. For example, if Bayer aspirin is out on the shelf, some other brand can be bought. In elastic markets, the competitive market mechanism need little oversight to work.
In-elastic is when choice is not readily available. For exampe, if power goes out in Texas due to an ice storm, Texans cannot go down to the store to buy some. In -elastic needs to be heavily regulated or government owned.
Mixed is when you have both market mechansims working simultaneoulsy, or there is overlap.
Medical care is a mixed market, where it has elastic and inelastic mechanisms working. For example, if you are in a car wreck and are unconscious, you will not be shopping for medical care.
Unfortunately, government health care assumes that the market is inelastic. While, private health care acts as if the market is elastic. This is where the conflict begins. Each group makes arguments from their point of view.
It would be good if we could have a system that defines the problem and works toward a solution from the best definition. I don’t see the government nor the private insurance companies doing that. They each have their own agenda it seems.
Note: ‘Universal’, or even ‘single payer’ coverage does not mean government health care. (MediCare is not ‘government health care’. I also see a role for private insurance for those who want more than very basic coverage.)
Economic thinkers often see a problem with a ‘fee for service’ based system (incentive to perform more services, rather than to keep people from needing more services).
Being from the UK and understanding government healthcare as a participant, what is happening in America is not government healthcare by any stretch of the imagination.
The insurance company is still between you and the doctor. That is how it has been and that is the way it is going to be. The insurance companies call the tune.
When I first encountered this fact about the American health system, I was speechless. Why do people put up with something so barbaric. Lesson one of how America views human life.
What was wrong with volunteer hospitals in the past? Doctors worked there for free, and got tax benefits. Churches and other volunteer groups would do fund drives, and companies could donate for tax breaks. For a doctor in a high tax bracket, volunteer time makes good economic sense for him/her. I agree with Linda in that we need a safety net for the people who fall through the cracks. But, that safety net should not be a entry point for political statism. Obamacare seems like a camel nudging his nose in the tent, especially the encroachments into the elastic free choice.
Here’s a wild guess….trial lawyers screwed up the volunteer hospital scheme for all of us. Fast forward to the future, and the “lack of coverage” is used as an excuse to “tax” the population. The former way of “untaxing” Doctors makes a lot more sense to me.
Please also consider the three market mechanisms. Any system design should take those into consideration. I have yet to see acknowledgment of these market modes in any health care debate.
For example, if there is single payer then the elastic part of the market automatically becomes less efficient and less creative.
For elastic care, people should pay cash or use a medical savings account. This cuts out tons of bureaucratic costs currently in our system. For inelastic needs people can use catastrophic insurance. (Or, go to the volunteer hospital.)
In other inelastic markets, such as electric power, they are either heavily regulated or government owned.
So, government has a role, especially regulatory oversight on the inelastic portion. But, government should stay in its box and not overstep its definitions.
Giving any company a guaranteed part of an economy is fascism.
I would favor moderate copays (waivable in cases of need) for routine care, to prevent overuse. If these are too high, people may forego such care, leading to much greater expense and poorer outcomes later (we have already seen this in overuse of expensive emergency room facilities).
‘Universal coverage’ should not include optional services (eg most cosmetic surgery). Some tough choices might be needed to rein in costs. For extreme and high cost/benefit or controversial procedures, such as some organ transplants, voluntary/nonprofit providers, such as you describe, might be the way to go.
It might make sense to consider your market categories, but economists generally agree health care is like no other. Among other things, what may originally seem to fall into the ‘elastic category’ (shall I cough up the money for that routine exam, or put it off a while longer?) may in hindsight turn into an ‘inelastic one’ – as in Linda’s case.
Given the US’ size and diversity compared to other developed countries, it might even make sense to let states choose from among the many successful models (cf ‘RomneyCare’), subsidized by the federal currency issuing/taxing power.
I am not sure how your last statement would apply to any of the above; it would seem to describe ‘inelastic’ services (eg utilities) which you say should be “heavily regulated or government owned”. Even our current health care system is relatively highly regulated. Any system of services, whether provided by government or private entities, that is ultimately supported by government funding, would require regulation.
Insurance companies that have guaranteed income by way of “taxing” the population, would be fascism. That is, a company is entrenched into the economy permanently by way of a legal arrangement with government.
With regards to inelastic mechanisms, such as electric power. The government does not force users to pay and then vector that money to favored companies.
The argument can be extended to absurdity with an example: The government insists that all people pay a certain amount each month for electricity. That money then is vectored to favored power supply companies. That is fascism in the same way that Obamacare is.
The middle mixed area of the market is where the definitions go awry. For example, you may want elective surgery. This surgey means you won’t be an invalid; yet at the moment you are ambulatory. This would be the mixed zone in the middle of the market.
I would favor some sort of legal negotiation for that space. For example, a third party works as your advocate to make a deal between inelastic (insurance) and elastic (MSA or Cash).
The mixed area is where people get mixed up. But, we cannot avoid the fact that medical is a market any more than we can avoid that there is air. We should have solutions that work in parallel with the underlying mechanisms.
My comments were not in defense of the current law. I did not favor pressuring people to buy insurance from private companies, and would have preferred the government act as single payer for basic coverage.
This would eliminate the actuarial costs, as well as reducing billing costs. Moreover, since with widespread coverage, healthy people are bound to subsidize costs for the leas healthy, reflecting factors like genetic inheritance and lifestyle, the fairest way to do this is to have society as a whole bear the overall cost.