The Fiscal Cliff, Monetary Theory and the Problem with Modern Economics

I was on Capital Account earlier today with Lauren Lyster discussing Monetary Realism, the fiscal cliff and the biggest problem in economics today.  You can watch the full interview here.   The audio wasn’t great, but I’ll bullet point the discussion for you:

  • The fiscal cliff turned out to be far less significant than many presumed.  The total economic impact will not be nothing, but at the end of the day this could have been much worse.
  • The total 2013 deficit isn’t likely to decline by a significant margin as a result of this policy.
  • Economics is dominated by two schools.  The fresh water and the salt water schools.  If you’re not in this club you might as well not even voice your opinion.
  • I think the institution of economics needs to be totally disrupted.  Preferably by non-economists and/or economists who have real-world experience.
  • We need to get back to a Da Vinci Methodology.  We need to understand the world of money, finance, the monetary system and its design as it exists BEFORE we can design policy agendas.
  • Most of mainstream econ does the opposite.  It conforms an understanding of the system to an ideology.
See the full interview here.



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.

More Posts - Website

Follow Me:

  • Cowpoke

    Cullen, WTH (what the heck) were you in a fish bowel? use a dang land line next time.

  • LVG

    Bummer. I was looking forward to this, but the audio is really bad. Time to get you on CNBC or someone with a real budget for this stuff.

  • Cowpoke

    Productive and Unproductive Use of CREDIT…
    Cullen, where’s the thread on this concept? I like it, good.. great concept that has not been given much side talk.

  • Cowpoke

    LVG, Agree, Knowing Cullen, he is either on an Mac 2 grand laptop with a camera and speaker. and what is a joke is that it sounds like shit and the company is worth hundreds of billions and they can’t even mimic a dang phone voice that was perfected in the 50’s.
    Crazy man just crazy.

  • MG


    A suggestion….if they ask you to write a financial times op-ed in the future…make it about the DEBT CEILING…since I’m sure we are going to endlessly hear about it in the next few months…


  • Cowpoke

    MG, good point. DEBT CEILING war drums are all we will hear now for the next few months.
    We have devolved from a nation of Bible Thumpers to Chart Pumpers..WOL

  • Tom Hickey

    Good points. Cuts to the heart of it.

  • Luke

    Nice interview. Keep up the good work.

  • Cullen Roche

    I know. I went out and invested in a new camera and mic recently and it’s junk. We did it via Skype which might have been the issue. I will be buying a mic for these in the future. Sorry!

  • Cullen Roche

    No, I’m running a super heavy duty Dell desktop in the office because of the monitor arrangement (got 5 going on it so I needed the extra video card storage), but it’s the external mic on the new camera that was bad. I should have bought a clip-on mic a long time ago….

  • Cullen Roche

    I stole it from Werner who I’ve been reading lately. He has come up with this very cool idea about disaggregation of credit. I’ll write about it shortly….It blends beautifully with MR.

  • stone

    I totally agree about unproductive uses of credit. I just wrote something about how a zero interest rate policy can actually INCREASE the financial overhead under our current system. I think replacing our current taxes with a tax on gross assets might avoid counterproductive credit formation.

  • DAC

    Australia is a great example of the rise in unproductive credit.

    Since Q4-1976, private sector debt has risen from a touch over 40 per cent of nominal GDP. It peaked with the onset of the Great Recession at around 155 per cent and is currently a touch over 140 per cent.

    In the late 1970s an extra dollar in private debt delivered around $1.80 in GDP growth in Australia. In the period immediately prior to the Great Recession, an extra dollar in debt was returning around 40 cents more in GDP.

    Debt was increasingly being used to finance non-productive housing asset acquisition. Business as a proportion of aggregate credit shrunk, while housing grew.

  • Geoff

    You should have gone to their studio. Lauren seems worth meeting in person :)

  • InvestorX

    Cullen, thank you for you clarification on inside / outside money financing UST bond issuance:

    “And yes, of course there are secondary ways. There’s Treasury Direct, there’s pvt banks buys and holds, there’s pvt bank buys sells, there’s broker dealers, central bank secondary market purchases, etc. There’s even theoretical stuff like the trillion dollar coin or just letting the central bank buy on the primary market. But I focus on the primary one because it represents 80%+ of the transactions.”

    Here some additional questions on that:

    1. Is there any empirical evidence to prove the 80%+?
    2. Assuming the 80%+ is correct, wouldn’t that imply that the Treasury is not so secure in finding financing for UST issuance. If the PDs would not hold the securities, but resell them 80%+ of time , then the UST will be much more dependent on the free market for funding and thus exposed to credit risk (unless the QE reduces the inventory from the PDs)

  • Pierce Inverarity

    not trying to be the grammar police in pointing this out, but fish bowel is really funny. probably would have sounded a bit differently…

  • Cowpoke

    haha, good “Catch” and funny point. misspellings is just another one of my many faults :)

  • Tom Brown

    Cullen, I only had time to listen to the first half of the interview, but I thought it was great! Nice job! I hope you get invited back many times. I’m a fan of Capital Account, but some of the guests they have on there are NOT the greatest.

    I’ll catch the second half of the interview later.

  • Cullen Roche

    Yes, the data on how much of the inventory is held by the banks is public info. The banks on-sell over 80% of their inventory. Your second point is right. I always like to say that there’s that 1% of the time where the US banks won’t want to buy the bonds in the first place because they won’t want to be saddled with the losses that would occur in an environment like hyperinflation. So the central bank would have to come in and buy all the inventory.

  • Rich R

    I totally agree the field of economics has to go through some sort of intellectual renaissance (enlightenment). But, how do you do this…? Right, now this field has more in common with religion than those practicing probably realize. Dogma and idealogy dictate policy prescriptions, which are not based on reality, but on some sort of utopian/dystopian world view.

    The MSM is completely useless, propogating the existing catachism…and seeing anything outside the existing edifice as heresy.

    It’s a disgrace so much needless pain and suffering is inflicted on people solely based on ignorance and/or stupidity.

  • Pierce Inverarity

    Can we get a link to that paper again? I can’t remember what thread it was in. Thanks.

  • Cullen Roche

    Check this out. It’s actually better.

  • Tom Brown

    I heard the 2nd part now… I wish they’d given you a bit more time on that. She seemed to cut you off just as it was getting interesting, but you did get a decent block of time altogether. I’d like to see a LOT more of you on there (and Steve Keen and Barry Ritholtz too), and a lot less of people like Peter Schiff and Jim Rogers. If they’re going to have regular segments with Austrian type thinkers I wish they’d concentrate more on Mish Shedlock and David Stockman types… I don’t agree with those two much of the time, but at least they seem to have a better grasp of how our system actually works. Schiff and Rogers are more in the category of shameless self promoters… doom and gloomers, who will never let you forget when they FINALLY get it right (which they eventually will have to do, given they predict gloom and doom ALL the time). As Keen said diplomatically when pressed on why he believed Schiff was wrong on his non-stop predictions of hyperinflation “Peter doesn’t understand how money is created.”

  • Tom Brown

    Oh, and Chris Whalen too… he’s another Austrian-esque thinker that at least has some really detailed and interesting knowledge of how the system actually works, especially the banking system.

  • JimG

    Nice Cullen. Good job. I’m glad to see MR getting some air time. I’m never quite sure how much Lauren Lyster understands about the monetary system so I wish she had quizzed you about the US “going broke” and the so-called harm of deficit spending. MMTer Mike Norman can’t seem to get through to her that the US is not revenue constrained. Anyway, hope to see you on air again soon.

  • The Undergrad

    Thank you.

  • Tom Brown

    I often wonder how much Lauren understands as well. I’ve come to the conclusion that she’s not a dummy, but that she’s perhaps undecided on exactly who’s right… which actually makes her a good host in some respects. But I often think the Austrians get a bit too much air time on her show (Shedlock, Schiff, Rogers, Whalen, Stockman, etc.). Some of these guys have valuable opinions, and interesting knowledge to relate… but I hope she does a bit better job of balancing their essentially libertarian, anti-government, “sound money” views with people like Cullen… and even some post-Keynsians like Keen or MMTers like Norman… and a few mainstream neo-classicals and Market Monetarists too. I think Cullen’s interview went great… and if he can improve his sound system… perhaps he’ll become a regular on her show!

  • JimG

    Lauren seems to love Steve Keen, even if she doesn’t get what he’s saying. But I hope you’re right Tom about Cullen becoming a regular.

  • Tom Brown

    I think she appreciates Cullen’s “balanced” approach. There’s only so much hyper-ventilating from someone like Schiff I (and hopefully she) can take. It’s soooooo nice to hear a level headed approach like Cullen or John Bogle once in a while. … of course I’m partial to a little hyperventilating once in a while to, but I think Mike Norman or Michael Hudson can fill the bill there just as well as Schiff or Rogers… and can add a little variety from the 24/7 austerity and anti-government mantra that those two always advocate.

  • The Dork of Cork.

    Great interview Cullen – despite the sound quality.

  • InvestorX

    Thanks for the answer.