In recent weeks some hyperinflationists have succumbed to the reality that QE2 isn’t really adding net new financial assets to the private sector – it is indeed just an asset swap.  But this hasn’t stopped them from claiming that QE2 directly results in an exploding money supply.  This convoluted thinking claims that QE is directly funding government spending (as if the US government would have stopped spending money and folded up shop without QE2).  So now the theory is that QE is really resulting in excess of $1.5T in new money in the form of deficit spending. This is flawed for reasons I have previously explained, but let’s not theorize about the money supply – let’s allow the facts to speak for themselves.

Over the years many have been quick to cite the monetary base as the direct transmission mechanism that would lead to the great hyperinflation.  We all know the story – the Fed’s balance sheet explodes, the monetary base shoots higher and money starts flowing out of bank vaults like a volcanic overflow.  But regular readers are all too aware that the monetary base has no correlation with the broader money supply.  The reasoning is simple – the money multiplier is a myth.  So, it doesn’t matter how many apples (reserves) the Fed puts on the shelves.  It doesn’t result in more apple sales (loans).  Banks are never reserve constrained.  The explosion in reserves and continuing decline in loans makes this crystal clear.  The Fed can continue to stuff banks with reserves and unless we see a substantive increase in lending the expansion of the monetary base will continue to be insignificant.

But what about M2?  Isn’t it also exploding higher now?  Not really.  In a recent article Erwan Mahe, an asset allocation and options strategist with OTCexgroup, posted this excellent chart comparing M2 growth across the big three economies.  He said:

“As you can see in this graph, China literally allowed its money supply to skyrocket, compared to that of the U.S. or the eurozone, with annual growth averaging +17.4% between 1996 and 2008, which compares to +7.1% in the eurozone and +6.3% in the United States.

Above all, since the beginning of 2009, this divergence has actually widened, despite the Fed’s QEs and 0% interest rates, since Chinese M2 has been growing at 26.6% per annum (!), versus +3.5% in the U.S. and +2.3% in the eurozone.

So, I wonder, is Bernanke truly responsible for the hike in world commodity prices and the ensuing popular upheavals?”

The story here couldn’t be more self explanatory.  The US M2 money supply is simply not expanding anywhere close to its historical rate.  The only country where the M2 money supply is seeing any sort of substantive growth is in China.  And so it’s not surprising to see the combination of commodity hungry China and enormous money supply growth result in higher commodity prices.  While I don’t think it’s incorrect to blame some speculative aspect of this rally on the Fed it is entirely incorrect to blame the Fed for the commodity rally due to their “money printing”.  The fact is, the USA is not expanding the money supply at an alarming rate.  China controls their own money supply.  If they desire to print money in order to maintain their flawed currency peg then that’s a policy only they can control.  Blaming the Fed for China’s flawed monetary policy is not even remotely fair.

Although the USA stopped issuing M3 we can still measure M3 through various independent sources.  Hyperinflationists are often quick to point out Shadow Stats when anyone cites the CPI.  Ironically, according to their data the M3 money supply is still shrinking at an annualized rate:

So yes, the US government is running a massive $1.5T deficit, however, by any metric of money supply we can see that this is barely offsetting the continued de-leveraging that is occurring across the US economy.  We are certain to see higher rates of inflation in 2011 (especially if oil prices surge higher), however, it is not an accurate portrayal of reality to conclude that the USA is “printing money” uncontrollably and flooding the world with dollars that will lead to hyperinflation. That is simply not the case and the data speaks for itself.  At best, we are barely printing enough to offset the destruction of de-leveraging….


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

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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  • Helix12

    Cullen, are you saying that when the asset swap takes place the banks absolutely don’t buy shares or speculate on commodities with the QE money? If there is lttle or no fractional reserve lending surely they wouldn’t be satisfied just earning interest on the increased reserve balance. It was canvassed last week from your “Mystery Buyer” article comments that QE11 may have something to do with attempts to move the fth utures market higher while everyone slept. Is it happening again before Mar 8th, 2011 session??

  • Cullen Roche

    Banks aren’t doing anything that they couldn’t have done before QE. If they are more eager to bid up risk assets now then that’s their choice. I’ve never denied the fact that Fed policy makes investors act in irrational ways. But QE isn’t giving them any “firepower” to do anything that they couldn’t have done before QE….

  • FDO15

    How long do the hyperinflationists have to be wrong before they just shut up and go away?

  • Cullen Roche

    The problem with most hyperinflationists is that they are blinded by politics. They ignore facts because they are blinded by their dogmatic view that govt is always ruining their lives. So, they will conjure stories about the Fed at any cost. It makes for better politics if you can convince everyone that the Fed is funding the spending and therefore printing money and causing all this horrid inflation everywhere. And this is all coming from a guy who hates the Fed more than just about anyone….Trust me, I’d love to be able to blame everything on the Fed. But facts are facts.

    The anti govt story doesn’t sound nearly as great when you uncover the actual facts and recognize that the US govt isn’t actually flooding the world with money and that China is the real cause here….

    Plus, as long as gold and commodities rally (mainly due to China) they will continue to have an argument to fall back on….Correlation and causation. Oh well. It would be nice if people could at least eliminate their politics from this all….

  • Frank

    Thanks Cullen. Another “hyperinflation myth” well explained. China’s money supply growth is indeed scary. But China’s empty buildings, unsold real estate projects, underpaid and exploited workers, enourmous private project debt levels, asset speculations, … are even more scarier. Some common sense tells me that this can not possibly end well. Economist Andie Xie is rather optimistic and tells us China has indeed some problems to face but immediatly adds that they are temporarly and small to the great potentials for growth in China. I have a hard time believing this will just end as a small bump in the road for China. What are your thoughts?

  • Johan

    As usual, will there is a productivity collapse? Will te demand for their goods produced will collapse? will the poors become even poorer? Is there not enough people to fill those empty houses? Is the government strong enough to “fill” those building by force? Is the enormous private debt not easier paid with inflation?…

  • alex

    Great “story of the day”, as always!

    What has caused the explosion of China’s money supply over the past 10-15 years? Leveraging to invest, the currency peg, or deficit spending? Or combination of these three and other elements?

    And for that matter, how does the currency peg actually work?

    Correct me if I am wrong here (I probably am), but I believe Walmart pays its suppliers in USD. Since those suppliers must pay expenses in Yuan, the suppliers demand Yuan and are willing to supply USD, pushing the Yuan/USD up. Since a constant exchange rate is desired, the Chinese central bank sets the price, and lets the quantity of USD it buys determine itself. Is this correct?

  • Greshams-law

    Very good Cullen. Typically, these hyperinflationists have come a long way intellectually and have great resources at their fingertips; so it astounds me that they get it soo wrong! I think that they’re right to have misgivings about the Fed, but to fear hyperinflation is to give up the good way of thinking that got them skeptical in the first place..

  • Coscorra

    I quite agree with your analysis on QE2. It will not create inflation until the net credit (private/public) starts growing again. But we should not forget rising comodities prices which basically come from investors trying to protect their money. Those rising prices will surely create inflation if not reversed soon. Of course is a type of inflations that can not be fought with monetary tools, but inflatios after all.

  • Zarathustra

    The reason for commodities prices increase has little to do with money supply. Rather it is the expectation that the Fed will have to keep monetary policy loose for an extended period of time, so any improvement of economic outlook and rising in inflation expectation drive stocks, oil, food, and others, because no people in their right mind will think that the Fed will raise interest rates in the near future.

    How Does Ben Bernanke Screw Up The World?

  • goodfriend

    From a bank perspective (and many institutional investor), having cash or TBill is practically the same. Either they use cash, either they used t bill as collateral (with very low to null haircut) to borrow cash.

  • Max

    Good article. I think the point can be hammered home by citing one other fact. The Fed is paying a higher rate of interest on reserves (0.25%) than the going rate on t-bills. In other words, it costs more for the government to “print” money than it does to borrow it! So how can Fed “printing” be funding anything?

  • Greshams-law

    I explain the difference between money printing during the German hyperinflation and today’s ‘money printing’ here:

  • stpepper

    This a 1000x. If you believe in a hyper inflationary collapse in the US, you gotta believe that will happen in China, Vietnam or Japan first, considering their policies. It just drives me nuts the amount of people that say that take the US money supply and say this is proof that the US is about to go Zimbabwe, and then totally ignore the Chinese money supply growth and say that China will be the next superpower of the world.

  • Lance Paddock

    Variations on this question always amuse me, since we are often discussing the fact that banks are holding massive reserves. If they were using them to buy speculative assetys the reserves wouldn’t be there.

  • eludog

    Cullen, thanks for the M2 graph. I had no idea Chinese M2 expanded that much over the years. Makes you really wonder where things are headed over there.

    We have over the last 50 years enjoyed setting prices for the rest of the world in many commodities and other goods. I keep thinking that we are going through a massive transition where we begin to import inflation from the growing EMs. This is something we are not used to at all and I think most people in our country assume prices will drop back down since demand is stagnate here.

    One aspect I continue to think about is the continued deterioration of the middle class balance sheet and how higher raw materials will eat away at disposable income. This seems like a majoy story this year. I’m not sure how to correct this, but something has to change. People cannot contiue to see their bills explode higher with stagnate wages.

  • Boston_AL

    Dear Sir,

    As the saying goes, “a watched pot never boils”.

    As for inflation, just because the pump is primed (with money) doesn’t mean that inflation will strike instantly. …and stock market bubbles always extend for far longer than anticipated.

    Yet in both situations, the results do occur.

    Let’s chat again about this topic in 24 months, okay?

    Then we may be in a better position to which of us is more likely to be correct about the inflationary impact of The Fed’s QE program.

  • yo

    “The problem with most hyperinflationists is that they are blinded by politics. They ignore facts because they are blinded by their dogmatic view that govt is always ruining their lives.”

    And then there are the deflationists who tell us that the issuance of bonds by the federal gov’t is a LIQUIDITY DRAIN, but when the fed takes out the bonds they tell us that NOTHING HAS HAPPENED.

    Maybe they’re just blinded by politics.

  • Misthos

    Picking on the hyperinflationists is easy. I agree, it unlikely to happen – just as a default is unlikely to happen.

    But why not mention the Dollar carry trade’s effect on China? Both China and the US are currency manipulators no? Isn’t that what central banking is all about?

  • Anonymous

    Yes, and mark my word it will be rationalized some how with a new name that Bernanke and is alchemist will create.

  • Scott Fullwiler

    Wrong. The only asset purchase that can drain reserves is to purchase Tsy’s or something off the Fed’s balance sheet. Otherwise, any purchase just moves reserves from one bank to another, and doesn’t change the total.

  • yo

    Inflation is more money. But that is not how the gov’t tells it. They tell us that if more money is created and it goes into bonds, that’s deflation. But if more money is created and it goes into hard assets, that’s inflation.

    Well, more money has been created and, simultaneously, the fed has taken the bonds off the market and replaced them with liquidity that pays less than the rate of inflation. Hence, the money flows into hard assets and out of bonds and it creates inflation. Thus, the fed is DIRECTLY RESPONSIBLE for the increase in prices of hard assets, which is known as inflation.

    Mithos. Aren’t you the guy on elitetrader that has never heard a conspiracy theory about George Bush that you didn’t buy into lock stock and barrel?

  • First

    Sorry that was First. Cleaners do clean cookies.

  • Misthos

    Hey yo,

    Yes, I visit e-trader, which conspiracy theory is that one? That’s giving GWB a lot of credit, you know?


    I’m a political and economic agnostic. Both parties are pointless. I guess I should step up my Obama criticisms to sound more balanced. But I gave up on both parties after watching Obama’s Hope and Change Campaign Promises fizzle…

  • Brick

    The velocity of money counts as well as the money supply.It appears to me that although the velocity of money in the economy is declining it is increasing in certain markets.James Hamilton’s rather good article on the Velocity of Federal Reserve deposits would appear to knock holes in that theory but its only part of the story.

    We know that equity turnover is down, flows in mutual funds are down, the amount of short cover is down, whilst in contrast flows in emerging markets and commodities is up. This suggests to me a reduction in velocity in one part of the market and an increase in another. The reason for this would appear to be comovment of global equities, the search for yield, the size of certain markets and ultimately QE2 through keeping interest rates low and driving the search for yield.The bank of Japan in their financial market report has a good discussion on some of the drivers.

    The change in velocity of money in different parts of the market has different multiplier affects on inflation in my view.Its not hyperinflationary or an expansion of money supply, just an imbalance which could create the right conditions for hyperinflation (namely currency volatility) in the future.

  • Cullen Roche

    I made lots of these bets about QE….24 months ago…. :-)

  • dis737

    Can you help me understand this:

    “China controls their own money supply. If they desire to print money in order to maintain their flawed currency peg then that’s a policy only they can control”

    My understanding is that China maintains its peg essentially by fiat (makes it illegal to trade at any other rate) rather than by buying and selling its own currency.

    That being the case, how does maintaining 25% money supply growth help them maintain the peg?

    I strongly agree that commodity inflation and indirectly dollar weakness has been more a product of China’s monetary and fiscal policies than ours. I equate China’s fiscal stimulus as an indirect means of flooding the world with dollars because of their ability to maintain the peg.

  • Oroboros

    Just forwarding this, don’t kill the messenger …

    “No Way Out” of Debt Trap, Gross Says: U.S. Living Standards Doomed to Fall“no-way-out”-of-debt-trap-gross-says-u.s.-living-standards-doomed-to-fall-536001.html

  • Mike J

    “The problem with most hyperinflationists is that they are blinded by politics. They ignore facts because they are blinded by their dogmatic view that govt is always ruining their lives.”

    I don’t think “most” hyperinflationists are blinded by politics. Geogrge Soros is not know to be a right wing ideologue but he has cautioned about the fact that future inflation is likely.

    Just as we can’t accurately forecast exactly when and how much the consumer will spend or when he will stop spending, we can’t exactly forecast when and by how much households will borrow. For both forecasts we can use history, culture and rational analysis to build an estimate but is has been a long time since we have gone through such a sustained deleveraging period.

    When households end deleveraging, the money supply will start to grow again. It will start quicker then central policy makers are able to react. They will need to guess the start time but may guess too soon or too late. They will also have to drain a HUGH amount of liquidity in order to reign in money supply growth. The resulting recession may be just a painful as our original economic collapse but the Federal government will have a much more debt owed to the public.

    Personally, I think household deleveraging is unlikely to end as long as real estate prices continue to fall.

    The commodity prices increases are a result of the Asian dollar peg. China has implied they are addicted to the peg and risk social unrest if they unwind it. They also need an 8 – 10% annual growth just to maintain stability. Their economic model will be put to the test with higher oil prices on top of already high inflation.

  • Rick

    Good article! Another myth exposed. If we add to the deleveraging effect the high unemployment and also the fact that 10% of the population controls 80% of the wealth, inflation is not even a remote possibility.

    Could you respond to this Bill Gross type who is screaming everyday that the end of the world is coming? What is his problem?

  • LZ

    “How long do the hyperinflationists have to be wrong before they just shut up and go away?”

    No, the question is, does it even matter?

    Bottom line: US money base tripled in 10 years while dollar is trading record low against most currencies. and you know how much you need to fill the tank.

    Either an ivory tower economist or random internet junkie can post an article on internet to judge who is right and who is wrong. But again, does it matter? who cares? even you are right how do you make money out of it? I have a buddy turned 10s of thousands to millions by doing nothing but shorting dollar. But I haven’t seen anyone who can make a living betting against currency depreciation.

  • krb


    Everyone who makes your argument focuses on the entire monetized amount, and I agree with you about the asset swap argument that limits its impact. But I’ve never read anyone addressing the play money on the edges…….the inflated profit on the treasury round trips, the commissions generated on the monotization round trips, the gifted interest on the reserves held back at the fed, and likely more I’m unaware of.

    If you sum up this gifted money, together with the very clear wink and nod from the fed that we will not allow you to fail, wouldn’t this amount aggressively supporting the bid be impactful?

    The fed itself said it plans to inflate assets to prices the fundamentals don’t warrant. And we know they can’t control where all their gifted cash flows to….they want it in equities but it can certainly also flow to commodities as well… can you state so confidently the commodity ramps aren’t substantially due to the fed? Thanks, krb

  • Tlrs

    Cullen would offer that Bill Gross – the dominant bond investor of our time – does not understand that bonds don’t fund the u.S. government.

  • Cullen Roche

    Right. The good thing about Bill Gross is that he gives us all hope. With a little timing, above average intelligence and a little luck we can all become billionaires!!!!

  • Peter D

    Issuance of bonds is an interest rate operation, not a liquidity drain.

  • http://PragmaticCapitalist LibertyIn2010

    In this posting you are purposefully arguing the wrong thing in an attempt to distract or mislead your readers from the real source of the problem. See the truth here –
    It’s not about “how many apples the Fed puts on the shelf.” It’s about the Too Big Too Fail banksters borrowing money at 0% interest to buy Treasuries and then sell them to the Fed just a few weeks later at a profit. THIS IS THE REAL STORY: We are creating massive debt that is being forced onto current and future generations, while the banksters are getting rich off of us.
    This is the opposite of a bank robbery. What we have going on is the banksters are the ones who are taking from the people and leaving them with a huge debt burden that will have to be repaid in the future.
    And, this is just the beginning. You see, this purposeful destruction of the American economy has been engineered for decades by the globalists who seek a one world government. Because, once the economies of the world crash for real this time they will be waiting in the wings with a proposed solution…one they’ve had ready for many years. They will attempt to usher in global governance and a global banker who will offer solutions to this nightmare. And, in exchange they only ask that nation’s give up their sovereinty and right to self-rule (see Greece, Ireland, Portugal and soon Spain, Italy, etc.) And, they will usher in a new global currency that will better allow them to rule over the world.
    Here’s another wonderful website that helps tell you what’s really going on in our world –
    Welcome to life as a debt slave…thanks to the global banks.

  • Peter D

    Inflation is more money.

    Only in Austrian minds.

  • Cullen Roche

    Poke your head around the site and you’ll quickly find that I am more pissed off about the banks and their actions than just about anyone. That doesn’t mean I am going to start fabricating lies about monetary policy just so I can back up a political agenda….

  • krb

    Ok, we’re not far apart. I just think (purely anecdotal on my part I know) that with trade volumes drying up, these small amounts of money, “small” by economy standards but not by low-volume market standards, in institutional hands ARE able to move markets…..I’m not talking moving economies, I’m talking about moving markets. The fed itself has said asset prices don’t reflect the economy……they want the MSM to report and the sheep to believe it reflects the economy, but their stated strategy is that prices will be higher than the economic fundamentals warrant. Thanks, krb

  • Cullen Roche

    Well, banks can always move markets. If JPM wants the Dow to go up 1,000 points tomorrow I am sure they could do it. On the whole, QE is doing little if anything to contribute any new “fuel” to the banks. My argument with regards to QE has always been about the real economy. I’ve never said that Fed policy doesn’t highly influence markets. In fact, I’ve always said the opposite.

    The point I am trying to get across is that QE is not our economic savior. It might help boost nominal asset prices (higher than they otherwise would be), but that’s about all it does. If that translates into some sort of huge confidence boost and “virtuous cycle” then we’ve found a new path to economic prosperity – ever higher nominal prices! Surely that can’t come back to haunt us can it? Oh wait, I forgot about 1999 and 2008. And Hong Kong 2008. And the South Sea bubble. And the tulip bulb mania. And the Nikkei. The list goes on. Nominal wealth creation is not self perpetuating….In fact, you could argue that there is nothing more destructive than nominal wealth distortions….

  • chris


    great post by hamilton that you referred to. also great money velocity chart.

    my question is what happens to treasury rates when the fed tries to drain the trillions in excess reserves and reverses qe by becoming a net seller of treasuries. i’m thinking that long term rates will increase. perhaps markedly as the treasury continues to sell a boatload of debt to finance the deficit and finds that not only is the fed not buying, it is now selling. china has recently been a net seller of treasuries.

    of course the fed could bump up the .25% rate it pays on reserves, but if long term rates increase, banks may prefer the risk/reward of lending long as opposed to investing short with the fed. then you will see the money velocity graph reverse. the fed may have to chase after itself to keep reserves on the shelf.

    either way, i see both long term and short term rates trending higher in the 6-24 month period.

  • krb

    Agreed. Unfortunately, I believe this artificial market levitation is their entire strategy. The amount of interest rate sensitive derivative exposure still outstanding at the banks would still bury them. They have to state that their strategy is “sustainable economic growth and employment”, but they have access to the derivative exposure numbers. Short of dissolving all the large money center banks, they know the best they can do is try to just buy themselves more and more time to continue chipping away at the interest rate derivative exposure.

    This also links to my point from yesterday that we shouldn’t accept the “well it would have been worse if we hadn’t done it” argument. First, that argument conveniently is completely unprovable, and second, while it might have been worse for wall street, it is quite arguable whether or not it would have been worse for the other 90% of America. What is the price to the other 90% of a decade or more of this malaise, while we pursue our strategy of artificial bank and market levitation? Thanks, krb

  • MC

    I strongly recommend anyone who really wants to understand the effect of QE2, Reserves, etc. on inflation and asset/commodity prices to read what Hussman has been writing.


  • BillBillBillBill

    The author of this article says, “We are certain to see higher rates of inflation in 2011 (especially if oil prices surge higher)”

    But aren’t oil prices surging higher be a symptom–not a cause–of inflation?

    I thought inflation results from an increase in the money supply.

    And that a rise in the price of a commodity from a growing scarcity of that commodity, is not inflation.

    Does the author understand what he is talking about–or am I misinformed?

  • ICH

    The article is correct, but totally revellent to nothing. In 3- years, we will have hyperinflation, but not because of the reasons discussed in the article. Inflation will begin when our government debt exceeds GDP. And will be out of control in 3-5 years. There is no known answer to our deficit spending. If you balance the budget, you will put 100s of thousands of people out of work. A good start would be to change the constitution and abolish the Unted Sates House of Representatives.

  • Cullen Roche

    The recent oil price surge is a supply side issue….not a rising money supply issue….

  • Cullen Roche

    I made lots of these bets with people who said the same things following the Fed’s balance sheet expansion in 2008. Why is it different this time? Please explain to us all why QE2 will result in hyperinflation when QE1 did not?

  • First

    Money supply yes its still low, but “If we add to the deleveraging effect the high unemployment and also the fact that 10% of the population controls 80% of the wealth,” No

    Venezuela as all those characteristics and a inflation rate of 29.3%

  • Peter D

    Somebody read too much Rogoff and Reinhart… Good thing the Japanese haven’t heard of them. And good thing they were not alive when the industrial revolution happened, since the Brits had debt-to-GDP above 150%.

  • El Viejo
  • El Viejo
  • Cullen Roche

    Mr. Rahn says he’d like to balance the budget. So, he’d like to run at most a 0% deficit in essence. Does he have any idea what that would do to pvt sector savings? It would crush it. It would cause consumers to re-leverage, result in more pvt sector debt and drive us into certain recession. This man has no idea how a modern monetary system functions. He is oblivious to reserve accounting and sectoral balances.

    It’s embarrassing to even write such things in such a prominent newspaper. The sad thing is, most people read his political bull shit and eat it up as if it is gospel. They know nothing about the things they discuss….

  • Cullen Roche

    Plus, I think we around here prefer Minskian. It’s more appropriate. Thanks.

  • Anonymous

    If balancing the budget would be so detrimental to our economic future, what does that tell you about about our economic present?
    Don Levit

  • El Viejo

    Ha! Someone push your button??

    Too much Debt? Is a trillion too little, a dozen too much? As a controls engineer, I have had to strike a happy medium many times, and I don’t mean punch a drunken palm reader. What is the right amount of debt??

  • Peter D

    Absolute numbers don’t matter. What matters is the economic realities. You know it’s too little when you have 20% un- and under-employment. You know it’s too much when you have 0 unemployment and demand-pull inflation.

  • Peter D

    Don, nice to see you here. Looks like you cannot give up on MMT, huh?
    The only one that needs to balance the budget is the private sector. The govt balancing the budget would necessarily – as a matter of accounting identity – drive the private sector into debt, at least as long as we have trade deficit. Just as a bowling alley needs to “deficit-spend” points in order for you to be able to score a strike.

  • El Viejo

    Right on! That’s what I crave (a feedback indicator) I wonder what Dr. Bernanke has been looking for? There are rumors that he will possibly hold off on QE3 for a short while. Maybe he’s getting pressure from China, but with a 1.5 to 3 yr Lag Time (also a control engineering term) Inflation should continue up for another 1.5 to 3 years.

  • El Viejo

    Sorry Peter D,

    clicked on wrong post above El Viejo meant for your reply immediately above.

  • First

    Unfortunately thats the way it presently works, the money of the private sector comes via the deficit not the fed. The Fed is a tool. Its like saying even if you don’t let us to spend and grow more than we take or produce you really have no choice since the economy will be cut of the oxygen it needs to function.

    There are limitations to such a systems and that is what history will most likely teach us.

  • Peter D

    No problem.
    Yes, feedback indicator. In facts, MMT seeks to even make that automatic. If you have enough automatic stabilizers in place, then the deficits will grow and shrink on their own depending on the “road conditions”. It already happens to some extent – thanks to transfer payments we have a minimal level of budget deficit to support aggregate demand.

  • El Viejo

    Now you see why my attraction to MMT. It feels right, and yes I still doubt, but like I said on my post on mentioned in my reply to @First (several posts above) wrestling “manual” control away from politicians seems almost hopeless especially when you add in the demands of the ignorant masses for a balanced budget. I think most reasonable people expect some debt though. To me it’s just common sense diversity of operation. (firing on all cylinders or using all tools) However, right now I wonder about the possiblity of false numbers of Federal employees (and a big govt handicap) I’ve been told the numbers of contractors working for the govt is huge and not represented well in factual figures.

  • Peter D

    This is first of all a political problem, not so much an economic one
    The Real U.S. Government.

  • El Viejo

    Interesting site. Just the right amount of (justified) paranoia. Like I said in my reply to @First several posts above. The biggest chunk of change in the arsenal is the tax base, so whatever affects it would seem to have the biggest affect on the economy. I really didn’t mean to imply that we should bring back the 90% tax bracket in its entirety, but some adjustment is called for. I think just like Long Term Capital Mgmt in the 90’s was having an affect on world markets too much money in play now through 401k’s and the billions of the rich and famous are causing problems. I think we are headed for a second dip just like 1929.

  • Zebra

    TPC thanks for the article.
    so why is USD so trashed compared to other currency right now? all due to speculation? your opinion is highly appreciated.

  • The Banker

    Peter is absolutely correct. Thanks for shining the light of knowledge into the darkness of the uninformed.

  • http://deleted Don Levit

    Peter D:
    The trade deficit affecting the private sector – is that more of a political
    problem than an economic one?
    Are you saying the private sector should be supported by the amount of the trade deficit?
    What about the debts of the private sector itself?
    Is there a role for government to play there?
    Would the debts that states are accumulating have another, albeit different, role for the federal government?
    According to popular belief, the states are not supposed to run deficits.
    Is that a bunch of propaganda, according to MMT?
    Don Levit

  • Cullen Roche

    The main driver is relative weakness due to int rate policy. Keep in mind that Europe is now very seriously talking about rate increases. The Fed is nowhere close to that stage. So, it’s driving the USD down on a relative basis.

  • Peter D

    Don, to save time, I suggest you read the following introductory posts:
    In short, the definition of govt deficit is the accounting offset of non-government sector’s surplus and trade deficit. As long as you have both of the latter positive, you just have to have the govt deficit.
    To unwind debt in the private sector you’d have to have either write it down or allow the sector to de-leverage in an orderly manner by stepping in and filling the output gap, so, yes, by running an even bigger deficit in the short term (hopefully, since once the economy returns to full employment the deficit will automatically shrink.)
    US States are currency users and as such they should really be counted among non-government sector in the sectoral balances identity. So, yes, they need to run balanced budgets, although they can still act countercyclically to some extent by increasing their deficits and issuing bonds.
    The trade deficit is affecting the private sector, but it is not really a result of government spending, despite the “twin deficits” hypothesis. In other words, even if not a single dollar was spent on Social Security, Medicare, defense, unemployment benefits, salaries of congressmen etc, the fact that we import more than we export makes the foreigners holders of US dollars.

  • Cullen Roche

    Yes, Mr. Rahn pushes my buttons when he clouds economics with political pandering. It’s BS and it’s ruining this country. So yes, it pisses me off and I am getting tired of people who mix their politics with economics. There’s no place for it.

  • Cullen Roche

    This is more comprehensive and easier to understand, but I am clearly biased since I wrote it :-)

  • Don Martin

    Excellent post, thank you for articulating what I had been thinking that China has over-expanded with excessive money supply growth, which could lead to a crash after a boom.
    The dollar has declined by 30% since 1973. However it has moved around in various trendlines and could move back to the higher part of it’s trading range if other nations try a competitive devaluation or if fears of a Euro crash or China crash or an OPEC country revolution come true.
    The 30% drop in the dollar is only 0.8% a year, less than the long run rate of inflation.

  • Peter D

    TCP, of course!

  • FDO15

    Peter & TPC,

    Great answers. Thanks. What is the cause of the trade deficit? Can it be fixed? Should it be fixed?

  • Peter D

    I will defer to TCP as my knowledge here is very limited. But from what I know the main reason for the trade deficit as large as it is is the reserve currency status of $US. In other words, the foreigners are really keen on holding $US and are willing to trade their real output for it. The trade deficit has its costs such as jobs moving overseas (although one may counter that we’re now in the stages of development where we don’t really want that kind of jobs. (Another cost is the fuel to deficit terrorists and people who cannot sleep at night thinking that Chinese will stop giving us $US :) ) But overall we’re getting something for nothing, so to speak, so, looks like a benefit to us, unless we get too addicted and stop producing anything. Everything is good in moderation, I guess.

  • First

    The dollar is down 30% as oppose to what ? Other currencies that have lost buying power.

    At the end of the day money can only be a claim on goods and on that basis its down 82% since 1970.

  • Peter D

    But how much do you need to work to get the same dollar? Do you really believe we’re 82% poorer than in 1970? We might not live on the same planet then.
    check this out

  • Peter D
  • Cullen Roche

    Complex question with many moving parts. Yes, foreign desire to net save in USD’s is the main driver. The corollary is that there is low savings in the USA.

  • jt26

    True M2 hasn’t been exploding, but the eur+us+china M2 growth has not slowed down at all, about the same as before. Ben is just flooding the rest of the dollar zone.

  • http://deleted Don Levit

    One question that is off the point, but on the web site, a recent blog showed CBO projections of the total debt to be about 350% of GDP, according to current projections, in 2086.
    I know a lot can change in 75 years, but if that did come to fruition, would MMT say that is sustainable or unsustainable?
    The CBO says is is unsustainable, but does not explain why.
    Don Levit

  • Gary_UK

    Nonsense. They are swapping ‘dead money’ T-bills for cold hard cash. So, of course they can speculate with the cash, whereas they couldn’t with the T-bills.

  • Cullen Roche

    It’s hard to take such projections seriously. If I weigh 600 pounds in 10 year what will happen to me? I don’t know and I can’t really tell you because it will never happen.

  • Cullen Roche

    Dead money? What was stopping the bank from selling the bond before and buying anything it wanted to? That’s right. Nothing. They might be more inclined to replace the lost income from the t-bill, but the bank doesn’t have some new fuel that they didn’t have before. What this is saying is a lot like saying that when you buy stocks you have lost your ability to make purchases. Of course that’s not true. Not only can you use your stocks as collateral to buy other assets, but you can easily sell these stocks and purchase anything you want. In markets as liquid as the UST market that’s never a problem….

  • First

    But how much do you need to work to get the same 18 cents dollar?

    Of course productivity and wages has compensated for the increase.
    Compensate = Advantages in exchange for a disadvantage.

    If you have 20 pounds on your back but you get is such good shape that you can run even faster do you think the the 20 pounds are as been benefit to you ?

  • First

    You will need smoke sardines.

  • Cullen Roche

    In most case we are far more productive. I like the washing machine example. Yeah, a washing machine costs a hell of a lot more than it costs to walk down to the river and clean my clothes, but think of all he stuff we get done while the washing machine cleans our clothes for us! You can’t put a price tag on all that time saved….

    Same goes for hedonic adjustments. Many people have huge issues with hedonic adjustments, but why would you ever compare a computer in 1990 to a computer in 2011? The current computer is faster, more efficient, has better programming, etc. In short, it’s more efficient and allows us to be more productive. This idea that the USD has lost 90% of its value implies that our standard of living is collapsing. That is simply not true.

  • Cullen Roche

    Have plenty thank you very much!

  • Anonymous

    Don’t bother – you are arging with someone that started shorting the SPX at 1050 and hasn’t stopped shorting since. I’m sure that “Gary_UK” is just broke and pissed-off

  • Zebra

    i see. Thank you.

  • Ncdirtdigger

    From your blog – ” Professional economists & government officials did not think that a fall in the mark had anything to do with increasing the national debt (printing paper marks). Furthermore, they deemed increasing the national debt as an absolute necessity. These things together created the vicious cycle that you mention: Printing money caused a fall in the external value of the mark, which was deemed to necessitate further printing of money. They had to give up that idea in order to restore a functioning currency (and hence economy).”

    Is this not what the Fed is enabling the US government to do when the Fed buys up the Treasuries from the Primary Dealers? It would seem that the Fed, in buying Treasuries barely weeks after their issue, is enabling the government to issue ever increasing amounts of debt at artificially low interests rates. It seems to me that the only thing preventing the rapid fall in value of the dollar is the never ending printing of currency and debt by all other nations. Ours just might be the prettiest horse at the glue factory, but it is still going to end up as glue.

  • Peter D

    My feeling is that anybody telling you what debt-to-GDP will in 20, not 75, years, is not worth even talking to. All these projections are based on questionable assumptions, faulty models and extrapolations which are likely not to hold.
    But regardless, suppose indeed debt-to-GDP is 350%. What is the problem with that? Is it interest you pay on debt? As long as this interest is less than the real rate of growth of your economy, it is sustainable. When the opposite is the case, one would need to run primary surpluses (meaning, one could still run deficits if the deficit part is only coming from debt service), but interest rate is a policy choice in MMT paradigm. See Scott Fullwiler’s paper “Interest Rates and Fiscal Sustainability” for discussion.
    Even then, one needs to explain why there is even a situation where our debt-to-GDP grows so much. If it is healthcare costs, then I really don’t believe we’ll continue paying as much as their projections show. Something will have to give. As James Galbraith quipped:

    … if health care does get that expensive, and we’re paying 30 percent of GDP while everyone else is paying 12 percent, we could buy Paris and all the doctors and just move our elderly there.

  • JReality

    Whether or not we have hyperinflation, clearly we do have substantial amounts of inflation and it is never going away. As someone above aluded to, who cares if it technically is hyperinflation or if it is merely a disturbing amount of regular inflation. The purchasing power of the dollar is declining. Today, Fed policy forced people to speculate on commods and stocks just to attempt to preserve their purchasing power. In the not so distant past, it was easy to get 5% simply from putting money in a relatively short term bank CD, and now, even if you went out 5 years you might not even get more than 2.5%. That isn’t keeping up with inflation. The Fed just wants to blow bubbles and prop up insolvent banks. Inflation is happening and it isn’t going away.

  • Cullen Roche

    Do we though? Do we really have high inflation?

  • First

    You can’t do that with food can you ?
    Washing machine are part of the technologies that compensate for inflation. That does not justify or make inflation good.
    With out inflation your W machine would cost you even less.

    Thank God those washing machine are made in China or Mexico some may have to walk down to the river and clean there clothe.

  • Cullen Roche

    Let me ask you a different question then – if food is getting so expensive in America then why does this country have an obesity epidemic? The truth is, Americans are so wealthy that they over eat. Based on your inflation theory we’d all be running out of money to buy food. But the exact opposite is happening here. So where’s the disconnect in your logic?

  • Mediocritas

    Thanks for that link Peter, I plan to paste it gratuitously.

  • JReality

    Does that chart factor in the cost of medical insurance, medical care, food and fuel prices?

  • Cullen Roche

    Among other things….

  • Peter D

    The way I see it, you need moderate inflation because you need a buffer above 0 inflation lest you cross into deflation. Deflation is more pernicious than inflation since once it kicks in, the lack of demand sends the economy straight into a recession. Probably wouldn’t be a big deal if the government automatically stepped in and filled the gap, but with the amount of ignorance out there it is hard politically.
    So, to not accidentally cross into the negative territory it is good to operate at modest levels of inflation.
    And I really want to know who really suffers from moderate inflation.

  • Mediocritas

    One point that I’d like to add to Cullen’s (and Erwan’s) work here is that we must also take into account GDP growth.

    If an economy is experiencing real GDP growth, then money supply must grow accordingly. As I have previously discussed, mild currency depreciation (inflation) is essential to maintain velocity. Taken together, money supply must grow more than GDP growth in an expanding economy.

    Given that China’s economy has been experiencing rapid growth as it develops, compared to the more matured European and American economies, it follows that it makes sense for Chinese M2 to be growing faster than American and Europen M2. However, what needs to be done is to compare the relative growth of US and Chinese GDP against money supply (looking at M2 here). For example:

    What matters here is the spread (in 2009 the gap was > 10%). Now let’s assume that both nations want to maintain a similar rate of inflation, aiming for a band between 2-4%. Accepting that assumption means that the effect of inflation can be factored out of the relative M2 graphs. Said another way, the spread in the M2 plots can be directly compared to the spread in real GDP growth with any difference being indicative of an inability (one way or the other) of a central bank to hit its inflation target (high or low).

    Prior to 2009 we were looking at a difference of about 11% in M2 growth. Contrasting this against relative GDP growth, it’s apparent that China has been running too hot relative to America during several extended time periods. Perhaps this was justifiable when future growth estimates were themselves growing (accelerating GDP growth), however, post 2009, the M2 spread has now blown out to > 20%. A number that, given the “roads to nowhere” projects being constructed in China, is even harder to justify.

    Chinese money supply has grown far too much, not only relative to its own GDP growth, but relative to the US and Europe. By maintaining this harmful currency peg, the Chinese government has backed itself into a corner and caused commodity price inflation. To eliminate the peg now would likely cause a major economic correction within the Chinese economy, manifesting as falling GDP growth. This would exacerbate the local effects of an overly expanded money supply leading to a major Chinese economic crisis. (It’s hard to say whether the RMB would rise or fall). Meanwhile, maintenance of the peg forces Chinese hot money to blow up bubbles particularly in equities and real estate. Attempts by the Chinese government to dampen stock market and real estate speculation merely pushes that money elsewhere (as we have seen, into commodities).

    Nobody forced China to maintain that peg. It was a political decision that, for a while, benefitted China greatly as it imported industrial activity from the rest of the world (particularly America). Although the peg has been relaxed slightly, revaluation has occurred far too slowly due to politically sourced fear of triggering an economic correction. As Bernanke has correctly inferred in repeated statements, maintenance of that peg is a primary source of global instability.

    Finally, as with all things, it always pays to take a look at the big picture to keep things in perspective.

    While China is a major (in my opinion *the* major) contributor to commodity inflation, there are also other actors on the stage. Note that the current scenario has entered a new phase as political instability in Middle East and Northern Africa changes everything. When oil prices are effected, a crisis has legs of its own.

  • Chris

    Second that Mediocritas.

    Thank you, Peter.

  • Chris

    When are these people who see single commodity/product/sector inflationary bubbles going to realize that that’s not an indicator of the ENTIRE economy? Its getting beyond frustrating. When is the “my gas/food/clothing” (not that those aren’t important personal budgetary points) price going up = inflation argument going to realize its without credit when confronted with real data?

    I make $40K a year, before taxes and my contributions to benefits. I see escalating prices in some things I have to buy, THAT DOES NOT EQUAL NET INFLATION ACROSS THE ECONOMY.

    It means the middle class is getting squeezed. Trust me I feel it too, but it does not equal a good counter argument to what TPC is saying. Keep reading him, friends.

  • JReality

    Even if inflation were really below 3% (which I doubt) isn’t it funny how the Fed acts like theft of 3% of ones purchasing power every year is a good thing? Monetary inflation is legalized theft. Let’s call it what it really is: stealing. There is no reason my property taxes have to go up every year other than the theft of inflation. Am I getting added value by paying more in property taxes every single year? No. Am I getting added value by paying more for food, clothing and medical costs every year? No. My purchasing power is simply being stolen by monetary inflation.

  • Peter D

    The alternative is worse. In the fiat currency regime you have to either tax or have inflation, unless you have lack of AD. So, choose your poison.
    And pegged currency regimes are much worse. See this to understand why:
    And if your wages grow in line with inflation, then little harm is done.

  • Cullen Roche

    That really depends. Has your standard of living declined in the last 30 years? Would you rather live in the 70s or 80s? Personally, I think it’s an awesome time to be alive. I wouldn’t trade today for the 1800’s for anything. But the people hyperventilating about inflation will have you believe that we are worse off today than we were in the 1800’s because of the “money printing”. They say inflation is always bad and that it’s always theft of our standard of living. The truth is, we’ve progressed faster than any society ever in the history of mankind. Yet we all sit around and bitch about how we don’t have it as good as we should. There are big problems in this country. Don’t get me wrong. But we’re not in the hole that many would have you believe and a little inflation on an annual basis isn’t destroying our lives.

    Is govt policy poor? Yes. Do they spend on useless stuff? Yes. Do they overtax us? Yes. So in that sense I entirely agree, but we have to be careful about painting this inflation story with such a broad brush. A small amount of inflation is going to occur in any economy. The key for us going forward is recognizing this and getting our govt to focus its efforts more efficiently so as to avoid overtaxing us all.

  • Mediocritas

    Hear hear.

    I’ll add that mild inflation is *necessary* if we want to encourage a healthy economy. A currency that holds value or worse, appreciates, actively impedes trade and promotes economic instability (as people hoard the currency).

    Stable, mild inflation is a healthy sign for a sound economy. Of course, for pointing this fact out I am regularly accused of being a victim of Stockholm Syndrome, enthralled by the bankster elites who want to rob us all via inflation.

    Personally, I’m quite happy to take a small hit to my purchasing power, caused by mild inflation, given that it helps to facilitate exchange leading to the development of a whole lot more, higher quality goods and services to purchase that, when compared by attributes to what I could acquire in the past, are vastly superior thereby actually IMPROVING my purchasing power.

  • Misthos

    I think many economists take credit for technological advances and this is unwarranted.

    Yes, there is overlap, but we also need to separate the two. Standard of living when viewed without technological advances has gone down. Two income families just getting by is the norm, whereas 50 years ago, it wasn’t. Thank you inflation.

    Incomes, adjusted for inflation, have barely risen for many, many people.

    I think many people look at history in a static, sterile way. They don’t recognize the macro trends. They just look at today, and confuse the causality on how we got here.

    The trend is not good. Inflation, and an easily expandable monetary supply that benefits those that get it first – the FIRE economy, creates a parasitic class, freed of the darwinistic element of capitalism, that feeds on the productive economy. And then this class of people have the gumption to take credit for technological advances and tell us, “see, you’re better off!”

    This chapter of our history in monetary experimentation is far from over. It will end badly. The trend is the destruction of the middle class in the western world. The trend involves a new feudal system. Yes, the new slaves may have ipods… but they are once again working harder than ever to keep from financially drowning.

    And the global debt and trade imbalances caused by this funny money will come crashing down one day. Not just in economic terms, but this correction will manifest itself in military conflict as well. We are witnessing a replay of the 1930s when currency manipulation was rampant.

    The world globalized overnight because we have a monetary system that can mushroom overnight, and take advantage of eastern slave labor to shift inflation from goods to assets. This created the FIRE economy that needs unsustainable debt to prosper. It was an illusory wealth gain.

    Cullen – the story has yet to end. The jury is still out.

  • Cullen Roche

    That family has its kids in pvt schools, lives in a McMansion, drives two cars, etc. Both parents work because they are trying to provide a life for their children that was entirely unattainable 50 years ago.

    I agree with you that the Fed and FIRE industry are doing great harm to the nation. Ironically, however, their growth is due to economists and theorists who celebrate the deregulated free market approach. It’s the influence of austrian and monetarist economics that directly led to the growth of the FIRE industry and the importance of the Fed. By liberalizing these industries we directly gave them the power they never should have been able to obtain. Ironically, these same theorists now try to have it both ways by criticizing the Fed and banks while also saying that free market capitalism is the only path forward….The hypocrisies in the austrian, supply side, and monetarist schools are near sickening once you fully comprehend the monetary system….These are dogmatic approaches that get filtered thru politics first and economics second. As a result, their answers are always the same political bent….And that’s coming from a guy who really hates having the govt in my life….

    Have you taken the time to study the sectoral balances approach that I’ve discussed on many occasions? I think once you understand this you will rid yourself of this belief that all govt spending is bad. In fact, you’ll begin to understand that govt spending is in fact necessary….

  • Greshams-law

    Ah, you got that from the comments; I encourage you to read the article to understand the context (if you haven’t already).

    The rapidity and dynamism witnessed during the inflation in the Weimar Republic was the product of a dogmatic idea: that a fall in the external value of the mark necessitated further discounting of treasury bills at the Reichsbank (at above market prices!). So – insofar as this idea remained legitimate – ‘money printing’ necessitated more ‘money printing’ almost immediately; for market participants would consistently try to find a profit-motive in owning the paper mark, while the government fought that with dogmatic ferocity.

    The Fed buys existing debt of the US Government, but it is true that the US Government might not be able to issue great quantities without the Fed. If the intentions for the supplementary financing account were to change slightly, then we could have a structure more comparable to the Weimar Republic.

    However, the important point to note is that today’s exercises in balance sheet expansions lack the dynamism of the Weimar Republic. Furthermore, the ‘money printing’ idea lacks the widespread legitimacy that its German counterpart had (e.g. think about the uproar against the Fed? How many people are worried about inflation?). Today’s balance sheet expansions are designed to alter the composition and structure of the dollar so that socially systemic institutions will survive. This – in itself – does not immediately necessitate further money printing (as the printing of paper marks did). Rather it is an outright redistribution of capital that allows certain institutions to survive. This is why I reject the prospect of hyperinflation..

  • Misthos

    We shouldn’t paint with a broad brush. Many Americans didn’t do the McMansion thing and are still struggling – badly. But I also believe that the better life for my children goal (at least materialistically) is a failed paradigm. I mean, taken to its absurd logical exponential conclusion, children a 100 years from now should be buying homes that are 20,000 SF! Why? Because in theory, if one generation buys a house that is merely one square foot smaller than their parent’s house they are a failure! That’s the sick twist of the better off than my parents paradigm!

    I’m not against gov’t spending and I understand double entry book keeping as it relates to domestic gov’t spending and international trade balances. I get it.

    You’re wrongfully pegging me as some sort of tea party/Teutonic Austerian. I’m neither. I just find it is easier to criticize everything, especially the existing monetary regime than to suggest some sort of solution. Why? Because 1) I’m being honest and 2) I don’t believe a real solution can be implemented. History shows us that on the macro and global level, transitions to sustainable balanced systems – whether they be environmental or monetary, are rarely implemented due to the high costs and the sacrifice required of existing competing vested interests.

    And so, ultimately systems break down, especially after all costly “solutions” at maintaining the unsustainable status quo are exhausted. And keep in mind, just the maintenance alone of the status quo in an existing lopsided, imbalanced system ultimately produces a more spectacular collapse later on.

    Whenever I bring up gold – it is to compare it to the existing system. Otherwise, there is nothing else to compare the existing system with to show its flaws. I’m not suggesting we go to a gold standard, though I’m not against it either. But that would involve a lot of belt tightening and people would blame the new standard on their loss of (illusory) wealth.

    What I am saying is that the current system will break down, and that some sort of gold standard will be begrudgingly implemented amidst the chaos and distrust that will ensue from that breakdown. Debt and fiat relies on the goodwill of their creators, right? When that system of responsible stewardship and goodwill evaporates, something will be needed to fill that vacuum.

    So gold by default, not by design.

    I’m viewing this crisis taking a macro/historical/geopolitical/human systems approach. I can’t say what the market will do six months from now. I’m looking at history as a guide and saying what will likely result years from now; the endgame.

  • GF

    Cullen you seem like a very intelligent person, your timing, judging by your algos results seems excellent…so where are you billions? Are you just unlucky? ;)

  • me

    The difference between M1 and M3 is purchasing power being accumulated in the FED corporation (his banks). They created a boom, then dried the market of capital, creating a bust. Meanwhile prices run down, they will be enabled to buy anything for cheap.

    but to maximize profits, they need that the market do not react increasing prices meanwhile they buy. So they need a large depression.

    It was exactly the same dynamics of the Great Depression. They caused it, they grabbed control of anything, and got lots of concessions from governments all around the world, like ownership of central banks and the money printing privilege, at no risk.

    They are planning a large depression, buy lots of world wealth -houses, assets, companies-, and then blame government overspending and asking transference of more governments powers all around the world.

    The great depression ended on the second World War, after the corporation owning the FED financed the recovery of Germany, and profited from financing war on both sides, like they did over and over again many times on the history.

    Who is the new Germany? China?

  • First

    A) It is cumulative.
    B) 2.5%t 5 years, minus taxes, minus inflation = Negative rates.

  • Anonymous


    I fully embrace your point that if there were a depression it would have been brief, thus the bailouts were wrong. The prudent and savers could have invested in assets at really attractive prices w/o the need of leverage.

    But Cullen has a blockade in his mind to see it this way.


  • pater tenebrarum

    No, it is NOT ‘just an asset swap’. You should perhaps familiarize yourself with some non-chartalist and non-Keynesian monetary theory. The true US money supply has exploded by well over 30% since August of 2008 – it has been one of the biggest money supply inflations of the post WW2 era so far.
    The measures of money supply you are presenting are not depicting money, which is solely the medium of exchange. They are conflating money and credit instruments, a crucial error. Once you realize that there is a difference between money and credit you will perhaps revise your opinion. As an aside, since you are trying to prove your thesis by means of empirical data, why ignore that the effects of the inflationary policy – sharply rising commodity prices and sharply rising prices in titles to capital (stocks) are all around us? Do you really think these prices would rise without a preceding inflation of the money supply?
    The difference between money and credit explained:

  • Anonymous

    @ Peter

    This deflation fear is Bernanke’s dogma and complete BS. Inflation is all about a hidden tax, incone redistribution or redistribution of society’s productivity gains. With higher productivity products should get cheaper, but this means the mass consumer gets to share the benefit of productivity. By inflating the prices more of the productivity gains flow to the producer. That is all.

    By your deflation logic PC producers must be all broke and nobody would buy the next iShit because it is always cheaper in a few months.


  • AWF

    This is not a valid indicator of Inflation

    It is used by the Govrnment to control Entitlement cost (Social Security and other cost of living increse.

    Link below is from the Dallas Fed

    Note: Number of Falling-Price Components Declines Again, Significantly
    Finally, January saw a third straight decline in the number of PCE components registering price declines: 54 of the 178 components that potentially go into the trimmed mean fell in price, or about 30 percent of the basket.

    The point:

    The govrnment uses ” Aggregate Pricing” for the Inflation indicator
    when somebody say my cost are going up food/gas etc they are using “Standard of Living Pricing”

    The validity of your argument is that Central Banks across the globe are printing money which is leading to commodity inflation

    It does not matter whether “Bubbly Ben” is leading the pack.

  • Something Clever

    Thank you for the post. I have recently discovered your website and your observations on how the American economy operates. Obviously, it is quite different than convential economic wisdom, and to what I learned in school.

    Under your theory (i.e. that a government with a monopoly supply of currency in a floating exchange rate system has no solvency risk), wouldn’t the model society be:

    -extremely high marginal tax rates (creates the required “demand” for the currency and thus avoids debasing it),
    -perpetually high level of government spending, including large deficit-spending, (creates more currency and gets it into the hands of the citizenry)

    Also, if all currency is spent into existence and must be “credited” to the private sector prior to it being collected via taxes, wouldn’t it be impossible to run a government surplus for any extended period of time w/o throwing the economy into a deflationary spiral?

    Does your theory hold that government spending crowds out private sector investment? If so, then it indicates that a balance must be struck between government spending too much and crowding out productive capacity and government cutting back and risking a deflationary event. The third choice: decreasing spending and greatly decreasing taxes risks devaluing the currency. How does the government determine how to strike the correct balance in this system. I apologize if this has all been answered elsewhere. I am simply trying to wrap my mind around this concept. Thanks again.

  • Peter D

    The products are getting cheaper. You work less time for the same amount of real consumption. Looking only at prices misses the point

    “By your deflation logic PC producers must be all broke and nobody would buy the next iShit because it is always cheaper in a few months.”

    I did not follow that.

  • Anonymous

    “If an economy is experiencing real GDP growth, then money supply must grow accordingly. As I have previously discussed, mild currency depreciation (inflation) is essential to maintain velocity. Taken together, money supply must grow more than GDP growth in an expanding economy.”

    This is complete dogma. Where do you get that from?

    In the 1800s there were long periods of deflation with great GDP growth and innovation.


  • Boston_AL

    Dir Sir,

    Just because we are sitting in the bottom of the economic trough doesn’t prove you are correct. The effects of The Fed’s QE policy will not be felt until the economy truly begins to rebound. I believe we are only now beginning to see the start of an economic rebound.

    I have also spoken to several economists who feel that once the economy turns upwards in earnest, The Fed will be faced with a very serious situation due to the loose money policy (QE & QE2) it has created. One economist likened The Fed’s future soft-landing challenge to: “Landing a 747 on an Aircraft Carrier”. One only needs to look at the charts on this to see the cliff in front of the USA.

    “Chart of The US Money Supply 1917-2009″

  • Cullen Roche

    Just young :-) I think most readers likely believe I am much older than I am….

  • Anonymous


    are you claiming that your standard of living has improved because of inflation or is it in spite of inflation? Or is it irrelevant, just be happy that you are better off than 100 yrs ago?


  • Cullen Roche

    I’ve never denied this…

  • Anonymous


    you are hypocritical to criticize the Austrians on their deregulation claims. They never said banks must be deregulated but bailed out. If deregulated, they must not be insured by the society. So you never had “true” deregulation, you had only regulatory capture.


  • Cullen Roche

    Too bad the money multiplier is a myth. Your whole thesis breaks down because there has been no borrowing in recent years….

  • First

    What does this have to do with inflation ?

    We could have said the same in the 1800. Where people better of in the 1800 than in the 1600. Where candle better than the electric light bulb? How about the telephone, photography, the radio, distributing power, Celluloid, etc etc,

    It is correct to say that it takes less time to earn the equivalent that even an hold dollar’s could have purchased 20 or 30 years ago. That is as long as you can spend it in the present or invest it at a rate higher than the devaluation of that dollar.

    Its as if the hold dollar where not earned based on the understanding that is was a also a claim on goods against labor or goods we traded. If the currency devalues every year this agreement is no longer reliable in the future.

    If you invest this dollar at 2.5% interest for 5 years you will presently get an after inflation and after tax return of (negative return). That is not a rational transaction.

    If you are part of the population that can transform your dollars for nondepreciating or valuable assets over time that is fine but if not you the average Joe you are being screwed.

    Inflation does benefits the so called businessman that borrow in dollars using tremendous leverage creating no value other than benefiting from the assets they have against other peoples almost free and depreciating money.

    Thats not growth it sucks money off main street to the Casinos on Wall Street.

  • Cullen Roche

    So, I’ll ask you the usual question. Incomes and CPI have a near 1:1 correlation. Are you telling me that the govt is telling us we’re poor so they can lie about inflation? That’s their great conspiracy to keep us all happy? Because that makes ZERO sense. There’s an an obvious flaw in this conspiracy that the govt lies about CPI….It’s not perfect, but it’s irresponsible to call it a fraud.

  • Cullen Roche

    It’s a matter of accounting that surpluses result in economic downturn.

    Govt spending can always be inefficient and result in negative impacts on the pvt sector. It’s about striking the right balance.

    I cover all of this here:

  • Cullen Roche

    The 1800’s had a banking crisis, depression or panic every 20 years. Where do people get this insane notion that the 1800’s were some period of great prosperity? There were FIVE depressions in the 1800’s….1819, 1837, 1857, 1873, 1893….Do you really want to live thru that gain?

  • Cullen Roche

    My talents have increased multi-fold so I have created my own version of sticky wages. People pay a hell of a lot more for my advice today than they did 10 years ago…and guess what? They’ll pay more in 10 years because I will know more, have more experience and command higher wages (this same thing is happening in different forms all over the economy as we make advancements). Therefore, my standard of living should increase because of progress. Unless the govt starts printing money in excess of my productivity then I should outpace inflation. But some level of inflation is going to occur if we continue to progress. It’s impossible to avoid. Unless, that is, you’re okay with becoming more talented and making the same amount of money very year…..I doubt you are….

  • Anonymous

    I said it above – inflation is all about income redistribution. So if Cullen criticizes the Fed for this, he should see that inflation is the same. Fed’s only purpose of existence is inflation or supporting the parasitic functions (that coexist next to the productive functions) within banks.


  • Cullen Roche

    Pardon me. So, the austrians want to let the banks get as large as possible and then allow them to crash the whole system when their self correcting mechanism causes a depression. That’s so irresponsible I can’t even take the notion seriously. Sorry, but this lax approach to regulation created this crisis or at least significantly contributed.

    What you’re saying is a lot like saying that it doesn’t matter what you eat so long as you let the body have a heart attack when it gets obese….That’s just insane….

  • Peter D

    Also, if all currency is spent into existence and must be “credited” to the private sector prior to it being collected via taxes, wouldn’t it be impossible to run a government surplus for any extended period of time w/o throwing the economy into a deflationary spiral?

    Absolutely correct. In fact, every period of surpluses in US history was promptly followed by a recession. Clinton’s surpluses were not really and exception since the recession that started was promptly nipped in the bud by Bush’s tax cuts (without him even realizing it at the time.)

    Does your theory hold that government spending crowds out private sector investment?

    It depends what is the mechanism of crowding out. The government takes resources from the private sector and is able to do so by imposing a tax liability, which allows it to buy anything in the economy with its currency. It is of course possible to divert resources from the private sector to the govt sector to the detriment of the economy. But this is a political issue first of all. “For any given size of government there is a level of taxation that is consistent with full employment” (Warren Mosler). Spending itself does not cause it. MMT sees government spending as a necessary condition for the non-govt sector to save net financial assets (NFAs). If the govt injects more NFAs than the non-govt sector desires to save then you get inflation. Not enough – you get recessions.

  • Cullen Roche

    I’ve never said I approve of the Fed’s actions and yes, this transfer of wealth to bankers is not good for America. But that just proves the set-up of our system is bad. It doesn’t mean the whole system is bad….

  • Anonymous

    Cullen, you are mixing thingtotally here. By “you” I mean the average citizen. As I said before, there were periods in 1800s hwere there was deflation for LONG periods of time with GDP growth and innovation going on.

    Now you have developed personally so it is hard to say to what extent your pay is higher due to your improvement and how much due to inflation.

    And yes I do not mind receiving the same pay if I can buy more with it. What I care is for purchasing power, not some nominal number.

    So I say – inflation is not necessary for progress. So your argument that people are so better off is useless. “You” are probably better off than 100 years ago IN SPITE of inflation (although in your specific case, inflation is obviously beneficial for your job in the financial industry)


  • wh10

    Cullen, is there any story worthwhile in Bill Gross dumping all govt debt?

    Thoughts on ?

    People are using this as an example of the govt having trouble issuing treasuries going forward due to lack of buyers. Did Gross sell to someone else in the economy or to the Fed? I still don’t understand well the dynamic b/w the Fed/Treasury and Primary Dealers, why there are always willing buyers, what influences buyers decision to buy debt at what price, how the Fed maintains control over the interest rates on govt debt despite it being an auction, etc.

  • Cullen Roche

    That’s not realistic. It’s not how people think. We don’t think in real terms. We think in nominal terms. We say, “I’ve worked here for 2 years and have no raise. I think it’s time I deserve to make more money”. That same person doesn’t go, “this is great, I make the same amount of money every year, but since the price of cars dropped last year I am better off!!!”. No, we go to our employers and say “Boss man, pay me. We both know you need me more today than you did yesterday.” It’s that simple.

  • Peter D

    Income redistribution happens anytime and in every system. Taxation is income redistribution. Inflation is a back-door taxation – a penalty for not taxing enough. Saving should come with its own costs since saving removes money from economy and starves it of its fuel. Economy exists because of consumption. If everybody decided to save there would not be any economy at all.

  • Anonymous

    All I am saying is that these were not and are still not “free markets”. Whether regulating banks makes sense or not is another question.

    But if you insure banks, then you have to REALLY and EFFECTIVELY regulate them.

    So you cannot blame Austrians on banking deregulation, if it was done only halfway (the promise of bailout remained).


  • Anonymous

    It is like this because people have been conditioned this way. I am sure it will change easily, as people are quite adaptive to new realities. So this is not an argument either.

    Plus all my other arguments remain, you have addressed only one of them.


  • Cullen Roche

    The most extreme example is a pro athlete. Look at the pay scale. The rookie minimum in the NFL is what – $400K or something? If that rookie makes the pro bowl next year he is going to come back to his boss and say “pay me”. It’s progress. And people deserve to be paid for what they produce. It might not be reasonable (pro athlete wages certainly aren’t), but people don’t sit around and say, “well, I made the pro bowl last year, but since house prices are down 30% since 2008 I am cool with making the same amount of money”. No, that athlete says, I produced more this year so pay me.

    Is it uneven across the economy? ABSOLUTELY. I’ve never denied that there is a growing income gap and that the poor have been disproportionately harmed by inflation. Much of this is due to the actions of the FIRE industry and as you know, I think this industry requires some serious reforms….

  • Cullen Roche

    No, the problem is not that they are insured. The problem is that they commingle their risk taking arm with their deposit taking arm. Deposit insurance is all psychological. It’s just there to give people the peace of mind that they shouldn’t take their money out of a safe bank during a crisis. And it works. What scares people though is when they know that your local bank might be buying a boatload of derivatives that could blow the bank up. And that’s what almost happened in 2008. The de-regulation led directly to the collapse of the economy.

  • Anonymous

    Now on the question of regulation – I am not a fun of it. I think you have to make sure that the penalty for overleveraging a crashing the system is high enough. Banking regulation is a bit like regulating that airplanes do not fly into buildings before 9/11. But I am in favor of prohibiting TBTF by anti-monopoly laws. Everything else will be circumvented. Of course, if you promise bail-outs, then as I said before, regulation must be VERY strict.


  • Cullen Roche

    I sure as hell won’t change just because the prices drop. Did people see the price of their largest asset decline and suddenly say, “gee, this is incredible. In real terms I am rich since I can afford more house”. Of course not. People always compare their nominal wage to what they produce. If they produce more they will expect a nominal wage increase. You’re assuming that the average person has this super complex inflation clock in their head and that they don’t just look at their paycheck and cash it….

    Hate to break it to you, but the average person has no clue what the rate of inflation really is….They only see extreme changes and extrapolate out….

  • Anonymous

    I am not talking about deposit insurance only, I am talking about the bailouts as we saw it, starting with the LatAm crisis, later LTCM, then BSC and GS, BoA, Citis etc, where the Fed acts as a lender of last resort, additional to the deposit insurance. These bailouts were relied upon. The co-mingling of IB and CB only made the case stronger.


  • Anonymous


    sorry but you continue to mess things up. Your house is going down and you have a real loss, because you put your money in it. It is not comparable to a flat income, that actually gains in PP.

    And a flexible trader like you will not change? Hard to believe it. If you were talking about some drunken sailor I could maybe think of considering it…


  • Cullen Roche

    First, I wasn’t a proponent of the bailouts. I thought we should have put more banks down quietly. But we never would have gotten to this point if there had been some simple rules in place. I always use the 20% down rule. There is no way you can convince me that we would have had a crisis of this magnitude if every homeowner in this country had to put 20% down. Now, I know the standard Austrian response – “oh my god, that is socialism!!! The govt can’t dictate how much money a bank makes!!!” BS. You want a huge loan. Post some collateral. It’s the prudent regulation. Same should go for OTC derivatives. These maniacs don’t even have to post collateral. So, you get AIGs. It’s totally insane. I don’t see how more people don’t understand this basic premise….

  • Cullen Roche

    So, are you telling me that if the govt stopped ever printing money, prices would drop? Or would they stay the same? And your talents would progress? And you’d be happy making the same amount of money? You are not thinking this thru in a realistic manner….

  • Anonymous

    Look, you are mixing things up. The athlete deserves a higher pay because he has become better. He deserves not only a nominal raise, but a real one. Some other athlete that disappointed will get an even lower pay.


  • Cullen Roche

    Because that’s exactly what would happen. The govt stops spending money. So, the currency level in the economy is roughly the same every year. But we are all progressing. So, most likely, prices stay relatively flat, but we’re all more talented so we’re producing more and prices are staying the same every year. How are we better off in this environment? I produce more, get paid the same, and buy the same. That doesn’t sound like progress to me.

  • Cullen Roche

    So, you’re trying to convince me that Americans on the whole are not progressing? We are not more productive than we were 20 years ago? We don’t deserve real wages increases? Sure, there are lots of people out there who are freeloaders, but on the whole, most of us wake up in the morning and say “I want to be better than I was yesterday”. And they get paid for it when they do it.

  • Anonymous

    Peter, you just killed capitalism. FYI capital comes from saving.


  • Anonymous

    No I am trying to convince you that inflation has nothing to do with GDP growth or progress or being better off, consuming more or whatever.


  • First


    On this (and most things) you are absolutely correct.Over all in the US if a person was imaginative and ambitious it was by far the best place to live. It was also one the least bureaucratic and pro business country.People that immigrated to the US all had one thing in common they did come knowing there was risk and no guaranties. That created the most resourceful,inventive and dynamic society in the world’s history.

    Lets hope that the real unique entrepreneurial spirit of America is not replace by a new so called progressive spirit of equality and dependency. There are risk in living and that include failures. If risk are no longer risk and failure are to continue to be bailed out in coming years it would be nothing less than utopia to think it can go on this way. Commonsense rules need to benefit people not be in relation to political contributions and lobbying.

  • Cullen Roche

    Okay, now we’re finding some middle ground. I don’t disagree that we have veered off course. Especially with the actions of the Fed and the banks. But that doesn’t mean I have lost hope or believe the system is broken. As you said, this system worked great for a long time. Is it broken down right now? Sure. But that doesn’t mean we can’t get it back on track.

    I think too many people are quick to paint this with a broad brush. The answer is not “big govt is always bad” or “small govt is always bad”. It depends. And in the case of the banks small govt has helped ruin a great country. That doesn’t mean big govt is the answer or that govt spending is the answer. Not even close. But there is a middle ground, no? Can we not implement rational safeguards that keep us all from the brink of disaster while also allowing for growth?

  • Peter D

    Investment precedes saving. You can envision a system where every $ either goes into consumption or is invested each period with no saving. You cannot envision a system where every $ is saved.

  • First

    I think that unless you are a farmer you would still need to eat and that takes money.

    I also think that when I save money and place in a GMAC note they lend out this money to someone buying a car.

    Saving does not stave the economy. We are not in a Bartering Economy.

  • Anonymous

    I do not understand your fear of depressions – is it better that failed things do not change, that there is no Schumpeterian destruction? The latter is what keeps capitalism going.

    Plus nowadays depressions are merely called recessions.


  • First

    “there is a middle ground, no?”

    Yes,of course Cullen after all, it is called “Pragmatic” Capitalist.

  • Cullen Roche

    I don’t see the need for depressions (recessions and some level of business cycle is necessary). If you implement the proper safeguards they shouldn’t happen in the first place. Depressions occur when people are allowed to get out of control. It’s like eating well and working out. If you don’t do it your body will suffer serious trauma over the years. It’s not necessary.

    I’m going back to the 20% down rule. If that law had been in place we never would have had this crisis. We might have shaved a few points off of GDP on the way, but you know what? We’d have millions more jobs than we do today. I’ll take 3% steady growth over 5% volatile growth any day. It’s a lot like running a portfolio. Risk adjusted returns really do matter because it’s the riskiest portfolios that cause the most trauma to people….

  • OTS


    If you “save” and place money in a GMAC note you are not “saving. You are investing right?

  • Peter D

    OTS, agreed, I also think of it as investment. Saving – putting your money to non-productive purposes – is really depriving somebody of income. A good analogy and discussion here:

  • Adam

    It is against the law in China for a person, business or bank to hold US dollars. All US dollars in China eventually are handed over to the Chinese Central Bank in exchaneg for Yuan. Because the central bank refuses to do anything with its US Dollars other then to sit on them (buy US treasuries) the only way they can keep trading Yuan for Dollars is to print more Yuan. As long as that is there policy they can’t control their money supply – its dictated to them by the peg and flow of dollars.

  • Adam

    OR not enough net spending by the government to support higher domestic private savings.

  • Cullen Roche

    Right. Said another way – we are taxed excessively.

  • Adam

    It’s amazing how many people see deflation as this harmless thing and inflation as so evil. The problem with deflation is that outside of some theoretical explosion in productivity it’s caused by falling or flagging demand. This leads to rising unemployment and falling wages. Because our debts are fixed in nominal amounts falling wages means falling disposable income which further cuts into demand and you get a self reinforcing contraction in the economy.

    Between the end of WWII and the early 1970’s we saw multiple decades of positive inflation and growing real wages. The redistribution of wealth that has occurred since the 1980’s has been in the years following the Reagan Revolution and governments abandoning their commitment to full employment after poor policy responses to inflation driven by a supply shock in the 1970’s.

  • Ncdirtdigger

    I did indeed read the article and found it interesting. After having read ‘When Money Dies” I came to the conclusion that it is precisely because of the ready availability of information in today’s world that hyperinflation is more, not less likely, to hit the US. The speed at which information travels makes it far more likely that hyperinflation can hit with speed that would dwarf that which hit Germany in the 20’s. I believe we have more than enough dollars around the globe to cause the US to experience hyperinflation should confidence in the dollar collapse worldwide and all those dollars find their way home. My $.02. Good day to you and yours.

  • Cullen Roche

    It’s a political argument. People filter their economic thinking thru their political filer first. The result is that we get all sorts of backwards theoretical approaches that are not based on sound economics, but meant to drive a political theory. In the case of inflation it is always reported as govt theft. Naturally, that works well within a Republican, supply side, austrian perspective. I’m a Republican. But I never filter economics thru my political filter. I hate big govt, but I also understand economics well enough to know that you can’t eliminate govt. And I certainly don’t create arguments that help me arrive at a political destination. This is the error most people make….

  • Peter D

    In the current political environment, for a conscientious person to identify either as a Republican or as a Democrat becomes pretty much untenable. I guess you could still identify as a liberal or conservative.

  • William Merrick


    Some “hyperinflationists” are indeed critical of the Chinese credit expansion.

  • Mr. P


    I enjoy your site and find it informative.

    My question for you is: If the Fed continues QE2 with a QE3, will you begin to change your view on potential future inflation? Why or why not?


  • Cullen Roche

    Thanks William. I think it’s important to take the Chinese expansion into account before blaming the Fed entirely.

  • Mr. P

    Given your position, are you buying US 30 yr Bonds?

    If not, what are your recommendations for investments given the current economic environment?

  • Boston_AL

    Correction… The economist likened The Fed’s soft-landing challenge to:

    “Landing a 747 from 60,000 feet onto an Aircraft Carrier flight deck.”

  • Boston_AL

    The rise in price is two-fold. Part of it is due to supply and demand and part of it is due to inflation (the debasement of the value of the US Dollar).

    However, the original meaning of term “inflation” was defined as the later; namely – when the government increased the money supply to pay for things it did not have hard currency (real value) to cover.

    Inflation is always the evil temptation of governments that want to buy more things than they can afford from taxation or real value creation. When the US Dollar was fixed (pegged) to gold (the “gold standard”) the government could not expand the money supply unless it had an equivalent backing of gold in Fort Knox to back up the paper it was putting out into the economy.

    If you ever looked at a “gold certificate” or “silver certificate” paper dollar it had written on it “redeemable for (gold or silver)”. This provided confidence in the early paper currency with the country’s citizens and with foreign trade partners.

    Historically, it was when war came along that the government would vote to remove itself from the “gold standard” in order to pay for the weapons of war. Once off the gold standard, the government was free to “inflate” the currency unhindered.

    Inflating the currency without increasing the “real value of the economy” to an equal level equates to the government stealing some of the value of every man and women’s currency holdings to pay for things the government cannot afford. It is an evil and hidden taxation on the citizens of this nation. Most people do not realize this is actually what is happening.

  • AWF

    TPC You are jumping to conclusions:

    I’m saying the calculations for cpi are flawed and understate Inflation

    From 1980 to the present adjustments to the CPI calculations have been made–that is a fact! Kudlow had a couple of economist on the other night both agreed the cpi understated Inflation==both agreed the calculations were wonky

    I’m asking you to read the info from the Dallas Fed as to calculation of the ” trimmed mean PCE,items counted and not counted and weights by item –this data is provided.

    The Dallas Fed economist is aware of a change in prices and the change in categories with increasing prices—

    But to your point:
    The “wealth of a nation” is measured against poverty

    In the USA in 2007 we had 26 million people on Food Stamps
    In the USA in 2010 we have 46 million people on Food Stamps

    So are we richer or poorer as a nation?

  • indigo

    Cullen, in a nutshell…how do we create jobs?

  • Jeff65

    The long term inflation resulting from policy that is decried as “theft” through loss of “purchasing power” in some comments here is vital to a functioning economy. It is the only way to value current productivity over past productivity. There is no other way to get this necessary effect.

  • First

    Peter. yes I am talking of investment savings it you mean “putting your money to non-productive purposes” That sounds like buying gold. Most of it is Goes in storage until eternity.

    I agree if saving is not invested it obviously takes that money off the economy but that would be kind of masochistic since money has no underlying value of its own (and it should not)one would almost be sure to lose in a any inflationary context.

  • Mediocritas

    “Peter, you just killed capitalism. FYI capital comes from saving.”

    No he didn’t and no it doesn’t. For you to say capital comes from saving is the same as saying “saving creates capital”. It doesn’t.

    Saving merely hoards capital that already exists, preventing it from being applied to the creation of further capital elsewhere. Hoarding is what kills an economy, particularly when the entity being hoarded is the entity most required to lubricate trade: its currency. That’s because trade underpins resource flows and without resource flows, economic development is constrained. The Austrian “dream” is a nightmare, leading to reduced liquidity, an appreciating currency (deflation), a collapsing economy and severe economic repression all the way down to the bottom. Why spend money chasing gains in a collapsing, high risk, economy when money is gaining value just sitting idle? “Hey, I’ve got my stash, let the economy burn baby! (and all the people in it) They should have saved like me!”.

    This, alone, is enough of a reason to maintain a positive rate of inflation at all times because once an economy sinks into deflation, it can be very difficult to recover in a timely manner without severe political and social consequences.

    So Peter is quite correct when he says that investment precedes saving because investment precedes capital formation and without capital formation, there is nothing to save!

    Austrians argue that capital must precede investment, that to allow credit to precede investment leads inevitably to catastrophic collapse. GARBAGE! As Cullen said above, with appropriate regulation, credit-fueled investment does not
    *have* to lead to collapse. Proper credit extension promotes optimal economic development. There is absolutely no way that we could have experienced the explosion in trade that underpinned rapid technological development and economic growth that we’ve had without credit/debt.

    What is needed is a return to the kind of appropriate regulation we saw following the Great Depression, that laid the foundation for robust economic growth. Austrian-School calls to eliminate credit and eliminate government activity in markets (meaning eliminating regulation) are exactly the opposite of what is required. This way leads to “liquidationism”, the kind of thinking that put the “Great” in the Great Depression.

  • Mpath

    Hi Cullen.

    I guess my question would be if the Fed’s qe program isn’t doing anything that the banks couldn’t have done without it..the money from the qe programs aren’t flooding the markets and causing any type of inflation…what excatly is the purpose of the qe program? Thanks in advance and I agree with you 5000%-we would be a much better world without the Fed. G-

  • Cullen Roche

    They think an equity market wealth effect from portfolio rebalancing will lead to self sustaining boom….

  • Cullen Roche

    Reduce taxes, refocus govt spending on Main St, forget the banks, stop the Fed from financializing our economy, etc.

  • Tony T

    Must be dreaming the rising prices then. I could have sworn I was paying about 30% more for stuff than I used to a couple of years ago. I’ll just have to pinch myself whenever I recoil in horror at the checkout.

  • DavePage

    By outlining the non-equivalence of QE with the money supply, refuting hyperinflation thereby, the author of this piece is engaging in verbal sleight of hand. Yes, the ‘money-multiplier myth’ may be just that, but this piece purposely ignores the link between monetization and currency devaluation and its inflationary consequences. This is not simply a point of discussion, but something observed to happen in both the US and UK. For instance, as soon as the Bank of England turned on the printing presses two years ago, Sterling lost 33% of its value against a basket of currencies. Since, and like the US, most every essential that the UK purchases is imported (energy, food), the price of those imports rose by the same degree that the £ we paid for them with fell. Would the author like to bet with me that the inflation that we are experiencing as a consequence is somehow unrelated to paying for things with QE-debased currencies, or that hyperinflation is simply a matter of degree down this endless QE road?

  • TC

    “Even if inflation were really below 3% (which I doubt) isn’t it funny how the Fed acts like theft of 3% of ones purchasing power every year is a good thing? ”

    First, inflation is below 3% with nearly 100% confidence. If inflation is above 3% this means that people are paying the U.S. government 2.85% just for the security of holding 6 month bills. I find the idea that people are paying to hold cash and T-Bills real money totally crazy. Go here to see current Treasury Yields.

    If inflation is anything above 1% I’d be completely shocked.

    Then as to the “theft” of 3% through inflation. Why in the hell should money retain value over time? Do you think you can bottle a kiss and have it not depreciate in value? How about a sunset, or a car, or a house, or a factory, or a dog, or a street? In the real world, things with useful value decay. Things that get used get worn out. Why should anyone be able to trade a real world good with real world use for something that retains value for all eternity? This is a perpetual motion machine, or immortality, channeled through money, and it disgusts me.

    Money is first and foremost a medium of exchange, a tool to exchange real world goods, and cannot be a way to extract usefulness out of real world objects and put it in a jar to save. We need it to be somewhat of a store of value so it can be used as a medium of exchange, but why in the hell should it be a better store of usefulness than real world goods?

    Shovels are much less useful than they were 100 years ago. Should the money that people use to purchase shovels be a better store of value than a shovel?

  • TC

    How much do you pay for milk? I am paying less today than I did 5 years ago. I joined costco – 2.09 for a gallon of milk.

    If you are paying more, it is by choice, not because prices are going up.

  • DavePage

    Come on Cullen, let’s have your response then (a non-opaque one please)…

  • Larry

    I could be wrong, but it seems to me that both sides of this debate are correct, there is incipient hyperinflation being driven by the Fed and there is next to no inflation and a contraction of money supply. Thanks to globalization loose money supplied by the Fed is igniting hyperinflation OUTSIDE of the US. Why is money supply increasing in China? Yes, Chinese authorities might be responsible for some (a lot?) of this, but so too is foreign money. How is it that Chinese authorities are putting on the brakes and yet money supply is expanding? Perhaps because a lot of the money is coming from elsewhere. Where? Perhaps the world’s largest economy where money is cheap and most investments are bad bets. A similar dynamic went on in Spain. The Spaniards were not entirely irresponsible in the way they ran their banks but they were overwhelmed by foreign money driving a housing boom.

    Now is this a bad thing? Not necessarily, the Chinese government’s foreign exchange policy helps to make investment in China a good bet. If the Chinese government won’t make moves to correct the trade imbalances then it might be reasonable for the Fed to inflate away the Chinese advantage.

  • DavePage

    Too bad Cullen has nothing to say in response; here’s something from the less-blinkered Marketoracle (

    “…interestingly, the only country in the world that currently fits the bill for hyperinflation is the United Kingdom, where 100 percent of the budget deficit was monetized by the central bank. Unsurprisingly, ever since, inflation in the United Kingdom has consistently overshot the Bank of England’s own forecasts. Apparently, they don’t see a connection”.


  • Cullen Roche

    I’ve explained why Mr. Mauldin’s analysis is incorrect. He has consistently used the Euro crisis as an apples to apples comparison with the USA or Japan. Once you read that you know the author does not understand what he’s talking about. You don’t even need to keep reading as you can be quite certain that most of his conclusions are incorrect. It’s that simple.

  • DavePage

    Thanks for your reply Cullen, although was actually seeking a reply to my comment of 03/10/2011 at 11:39, viz:

    “…By outlining the non-equivalence of QE with the money supply, refuting hyperinflation thereby, the author of this piece engages in verbal sleight of hand. Yes, the ‘money-multiplier myth’ may be just that, but this piece purposely ignores the link between monetization, currency devaluation and their inflationary consequences. This is not simply a point of discussion, but something observed to happen in both the US and UK. For instance, as soon as the Bank of England turned on the printing presses two years ago, Sterling lost 33% of its value against a basket of currencies. Since, and like the US, most every essential that the UK purchases is imported (energy, food), the price of those imports rose by the same degree that the £ we paid for them with fell. Would the author like to bet with me that the inflation that we are experiencing as a consequence is somehow unrelated to paying for things with QE-debased currencies, or that hyperinflation is simply a matter of degree down this endless QE road?…”

  • Cullen Roche

    We can’t discuss monetization and “money printing unless you understand my perspective. Perhaps this helps;