Cullen Roche

Bonds, dividend investing, etf investing, currencies
Cullen Roche
Bonds, dividend investing, ETF investing, currencies
Contributor since: 2008
Company: Orcam financial group, llc
Here is what Nobel Laureate Friedman said about this concept:
"The use of quantity of money as a target has not been a success. ...I'm not sure I would as of today push it as hard as I once did."
In other words, he was wrong about how MV = PY impacts the economy primarily because his definition of M was wrong. If you can't define M properly (as Monetarism can't, or doesn't) then the V part is useless.
Anyhow, thanks for listening to me rant on about these matters. Have a nice weekend.
The whole point of Keynesian countercyclical spending is to put IDLE RESOURCES to work. Again, I don't know what version of "Keynesian" economics you're referring to, but it's not the one that JM Keynes established.
Money velocity is just a tautology. It tells us nothing about the economy. It's just part of the old MV = PY myth that has been confusing people for decades. I discussed that here:
http://bit.ly/1nSuc0L
Lastly, "Keynesian" is not synonymous with perpetual stimulation of the economy. Keynes, as I quoted before, was not in favor of perpetual stimulation. He was in favor of countercyclical policy.
The irony of this all is that we're arguing about the efficacy of government based stimulation on a system of communication (the internet) that was created by (drum roll please) the government.....
:-)
Hi DWD,
It's really quite strange. I suspect that Paul Krugman's blog has created much of the confusion. He calls his economics "New Keynesian", but it could just as well be called "New Monetarism" as many economists have noted. In fact, many of its core principles like the natural rate of interest, liquidity trap models, is-lm, etc. are things that Keynes rejected. If Paul Krugman is using a true Keynesian model then it's really rather crude.
But people read New Keynesian and see "Conscience of a Liberal" (the title of his blog) and say "Keynesian socialist". If you read the General Theory and much of the rest of his work you realize that Keynes really didn't like socialism at all. He was an ardent capitalist. So much so that he once said:
“I can be influenced by what seems to me to be justice and good sense; but the class war will find me on the side of the educated bourgeoisie.”
And:
“How can I adopt a creed [referring to Marxism] which, preferring the mud to the fish, exalts the boorish proletariat above bourgeois and the intelligentsia who, whatever their faults, are the quality in life and surely carry the seeds of all human advancement?”
Calling Keynes a socialist is like calling Donald Trump a Mexican. :-)
Sorry about the name typo.
Interest expense is a line item in the budget deficit. For instance, let's say the private sector spends resulting in $100 in aggregate income. If the private sector decides to save $1 in period 2 then only $99 will be spent. If, however, the govt runs a deficit and spends $1 into the economy then we've saved that $1 AND we've spent $100. Deficit spending, by definition, increases income spent and earned in the private sector. Whether this spending is productive or necessarily beneficial is a whole different debate, but he accounting is very clear here.
I don't think you're using the term "Keynesian" correctly. Keynesian economics promotes deficits during weak economic times and surpluses during strong economic times. Keynes was quite clear about this:
“In economic downturns the automatic variation in the collection of social security contributions might result in a deficit in that fund. However, in prosperous times, the fund should automatically run a surplus. No other type of deficit should be incurred in the current budget. It is possible, however, to reduce contributions to the sinking fund for repayment of outstanding nonproductive debt in periods of economic downturn”
http://bit.ly/1R8s7Jb
The "Keynesian" economics you're referring to is something that doesn't really exist except in the mainstream media where people use the term pejoratively as a synonym to socialism. Keynes was an avid capitalist. He hated socialism. How the term has come to be synonymous with socialism is a true mystery....
RH,
One of the key points I made was that rising interest rates need not be a "burden". First, increased interest on the federal debt means more income to the private sector. I don't see how that's a problem. Second, if the govt were concerned about its ability to pay this interest (which obviously isn't a problem) then they can reduce the maturity on debts down to the point where the interest is minimized.
Also, Keynes would have never said this is a liquidity trap. He was quite clear that a liquidity trap is an environment where the Central Bank loses control of interest rates. The "liquidity trap" Paul Krugman speaks of is his own made up model of the world. And his model is far more Monetarist than it is Keynesian....And yes, we have the Monetarists to thank for our current predicament far more than any Keynesian policies. After all, all of the modern day economics we implement today is influenced primarily by Monetarism. The real Keynesians lost the policy battle decades ago....
I hope that clarifies where I am coming from.
Yes, that is certainly true. But I doubt that will happen any time soon given the fact that the USA is still the leading producer of high quality goods and services in this world....
I think of T-Bonds as a very cheap form of insurance. You always want to own it, but you wouldn't want it to be an excessive portion of your financial assets.
I think the Fed is hesitant to unwind their balance sheet by selling assets because it could send the message that they are no longer supporting the market. It would be a reverse psychological impact from the portfolio rebalancing effect. The worry is that it will cause bond yields to rise AND hurt stocks.
I don't know how much merit there really is to that thinking, but that's my guess as to why they're unlikely to unwind the portfolio.
I'm an advocate of building diversified, tax efficient and low fee portfolios. I advocate buying this diversified portfolio at tops and bottoms. You should always be contributing to a well diversified portfolio regardless of what the permabulls and permabears say about what's coming.
Trying to time exact tops and bottoms is for suckers. The empirical data shows this time and time again. Focus less on market prognostications and the media's soothsayers and more on building an appropriate allocation that you can feel comfortable contributing to in good times and bad.
Sorry if you've misinterpreted my approach as anything other than that....
That's very fair. A financial planner earns their 1%+ in most cases, but honestly, I do a good amount of planning for many of my clients and I wouldn't charge that much for what I do. And I have found over the course of my career that the amount of planning that most clients actually require is fairly minimal.
The average person needs a general plan outline, balance sheet and income sheet organization, insurance planning, tax help (which is usually outsourced to an accountant), estate planning (which is usually outsourced to attorneys), college planning, etc. Most of that stuff is super easy for an advisor to take care of and doesn't require loads of consistent work....
Is it worth 1%? I don't know. I'm perfectly happy to do most of that for much less than 1% because I think that 1% is an outrageous price in many cases.....Frankly, I think the tide has turned here. People are able to get high quality advice and planning for much less than 1%. The high fee structure is antiquated....
I guess my point is that there wouldn't be many people who cared about Hubble's work were it not for people like Sagan. Just like Steve Wozniak's technological genius would have ever come into the public sphere were it not for a visionary like Steve Jobs. Jobs had no coding or technological genius. He was an "idea guy" and a communicator. Much like Sagan. These visionaries inspire entire generations to think about things that seem unimaginable. I think that's pretty important....
Perhaps "most influential" is a better description. Sagan was a Steve Jobs type. He didn't actually build and invent the things that the world loved him for. Instead, he had grand ideas and communicated how they could be utilized. I think Sagan was very similar. But yes, "greatest" might be a poor description....
That's a vast generalization. For instance, if Argentina printed money to pay people to dig holes tomorrow they'd likely just exacerbate their hyperinflation.
We have to be more specific when we talk about govt stimulus. There is no black and white generalization that can be made about whether it is "good" or "bad". It very much depends on the circumstances...
But yes, I agree in the case of the USA - we should be employing idle resources and govt spending could go a long way right now in achieving that. Those resources should be put to productive use, however....
Bankers can't sell loans or securitize those loans without end demand. Anyone who understands banking knows that credit is demand driven and that means that a credit boom is a function of excessive demand.
Blaming bankers for the credit crisis is like blaming an all you can eat buffet for your obesity....
The fact that a country with a printing press doesn't default on itself in court does not mean it makes money "for free". There could be seriously negative ramifications from building that bridge....
http://bit.ly/1Zo1Icm
There's really very little that is "natural" about the monetary system. It is a human construct with very little that is "natural" within it....
Guys, we were in college. No one drank IPAs when I was in college!
That was the beer of choice for my old broke college self!
David, let me clarify.
I didn't intend to imply that Central Banks "try" to invert the yield curve. I think they unwillingly do so by overestimating economic strength during a tightening and subsequent flattening at the long end....
David,
This isn't correct. You're confusing the natural rate of interest in the overnight market for Fed Funds.
The overnight rate is controlled by the Central Bank since they are the monopoly supplier of reserves. Long rates are controlled by the market, but the natural state of the yield curve is for it to be positive because the existence of reserves puts downward pressure on the overnight rate thereby forcing the Central Bank to ALWAYS manipulate rates UP from 0%. The only way the yield curve can invert is for the Central Bank to invert it by raising the overnight rate. Otherwise, long bonds will always trade at a premium to short-term loans.
Hi, nice to meet you. Do we even know one another? Where in the world did you come up with this stuff about "my" world views? I never said govt violence should compel note creation. I never said humans weren't the most important resource on the planet. In fact, I wrote an entire book emphasizing the fact that private production is, by far, the most important component of the economy! You have created this pure fiction about what I "am" and what I believe....
What I am even more tired of is this Austrian Economics nonsense. You are promoting beliefs based on a school of economics that is pure nonsense. It has been thoroughly debunked. It is nothing more than political propaganda. How does anyone in the world still believe the stuff being promoted by Peter Schiff and friends?
Sigh...
I can see that I am wasting my time. You literally didn't even come close to understanding the point I was making. Google "endogenous money" or read this post I wrote 5 years ago:
http://bit.ly/1OTiNsq
This Bank of England paper also goes into this in some detail:
http://bit.ly/1c17TQb
I am happy to help if you're interested in understanding these concepts. But if you just want to insult me with the usual Austrian economics claptrap then let's both save our time....
jhooper,
Your problem is that you think of the monetary system as you versus everyone else. As if it's this big competition and anyone or anything that impedes your personal progress is infringing on your personal well-being. You've whittled the whole system down to protecting your personal property and nothing else. Well, I hate to be the bearer of bad news, but the monetary system exists for purposes other than just maximizing your personal property.
If your argument against government comes down to little more than an excuse for you to be selfish then don't even bother. You've lost the fight before you even open your mouth. This psuedo Austrian economics BS has lost. It's been game, set, match on you guys for a decade now. Update your views!
You guys read too many fear mongering websites. Anyhow, I've got a flight to catch. Didn't mean to give you the impression that I am in favor of unfettered govt spending. But I think this talk about "collapse" is way overdone....
Take care.
You're accusing me of being "uninformed" when you write comments on this website like:
"My understanding is that all the cash from QE is still sitting at the PDs. Apparently this cash isn't being converted to loans."
This is such a basic misunderstanding of banking that I don't even know where to start. This money multiplier type thinking has been thoroughly debunked in the last 5 years by myself, the Bank of England, the Fed, etc. And if you don't understand how banks work then you can barely even begin to understand how the financial system works....
If you want to defend the "truth" then perhaps start by learning the most very basic facts about how the monetary system works....I've written about all of this extensively. It's all on the internet for free if you want to have an open-mind and try to absorb a view that is something other than "government bad, free market good"....
jhooper,
Your last statement about "printing" and production is very consistent with my description of the process of disaggregation of credit. When credit is used for unproductive purposes (like speculating on a housing bubble) it can be harmful. When credit is used for productive purposes (like building a new factory for output) it can be helpful.
Of course, the govt often plays a different role when they create financial assets. They are often serving public purpose and this doesn't always increase our production directly. For instance, building bombs and killing people is just about as unproductive as spending can get. But I'd say that it's productive in that it helps to avoid potential destruction. WW1 or WW2 are great examples. There are numerous charitable and research examples that are similar. The US govt spends huge amounts on scientific and medical research and while these endeavors often end up being wasteful they also end up being huge advancements in innovation at times. Measuring our economic well-being based purely on GDP or how much "stuff" we create is not a sign that we are necessarily prospering as a society....
I think we have to be careful painting with such a broad brush here....
jhooper,
Your counterfactual argument is the straw man. It is a mythical world. We can neither prove nor disprove your point because your counterfactual doesn't exist in modern times. Fortunately, it has existed in the USA in the past.
In the late 1800's and early 1900's the USA was about as close to raw capitalism as we have ever seen. The means of production were almost entirely owned by private industry. During this period income inequality was at record highs. The poverty rate was astronomical. Between 1850 and 1925 we experienced 5 banking panics and depressions. Is this the world you long for? A world where 5 men basically own all of US industry?
Look, I am not in favor of uncontrolled govt spending or anything like that. But we shouldn't just go out and assume that the world is worse off because govt debt as a % of GDP is high. That's not consistent with the historical record by any means. The truth is somewhere in the middle and we can probably agree that some govt is okay, but that we should be wary of autocratic regimes. And though some people seem to disagree, the USA is far from being autocratic or on the brink of collapse due to govt intervention....I know it makes for good political talking points to say "govt bad, free markets good", but the world is a lot more complex than that....
You discuss aggregates, but global aggregate debt has exploded in the last 75 years. Yet global poverty is lower than it has ever been, global inequality is declining, we lift more people out poverty every year than ever in human history, we produced more in the last 25 years than we did in the entire previous 1,000 years.
You have tried to portray the world as being worse off than it was 75 years ago. That's a preposterously misleading argument!
I've also never argued that autocratic regimes grow more than democratic regimes. Where did you even get that? I am a huge free market proponent. The difference between me and some people commenting here is that I am not totally against some government intervention in the markets. I am a capitalist through and through. Have been self employed my entire adult life. I've never asked the govt for a dime. You'd be hard pressed to find someone who is more capitalist than I am!
LT,
Every society except....the USA? We had an even higher debt:GDP ratio after WW2. People like you were saying the exact same thing in the 1950s about how this crushing debt burden was going to steal from our children and bankrupt the country. You know what happened next? We had one of the most productive and prosperous 50 years in the history of human life. Some "burden" you were forced to endure there....
Why is the borrowing capacity of the next generation reduced? You didn't explain this at all. The prediction that the USA is on the verge of collapse is quite a bold comment. Would you like to back that up with something other than politically charged rhetoric?
I've spent almost a decade writing articles debunking thinking like yours. So far all of you have been wrong about the impending doom of the USA due to high spending and debt. How long do you get to be wrong before people start seriously questioning your understanding of the financial system????
LT,
Americans aren't born with debt that they have to pay back. Were you born with a tag that says "must pay $30,000 before expiration"? Of course not. The national debt doesn't get paid back. Ever. It grows with the public's various needs. If it's wasteful then it causes economic problems. If it's productive then it contributes to overall growth. But we aren't born with some debt tag that has to be paid off before our deaths. That misrepresents the dynamics here.
Cullen
I wrote an entire book on the financial system and in that book I am very specific that govt spending is not always good. I've probably written the same thing in Seeking Alpha posts 100 times over the last 7 years....If you've missed that point then that's your misinterpretation. But I certainly NEVER implied that govt spending is always good.
@ Logical Thought - The whole point of this post is to show that the govt cannot actually print money in the manner being discussed. The US Treasury cannot do it and I stated that I don't think it would happen because the political climate wouldn't allow it....