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  • Indexing Really Is The Future Of Investing [View article]
    Hi Alan,

    Yes, it's all a bit confusing for no good reason. We think of an "index" as something that's permanent, but it's all a moving target to some degree. I don't think the Dow has a single company in it from 30 years ago....

    It's better to think of ETFs and mutual funds as customized indexes. The important point to understand is how well diversified these various funds are, what their exposure represents, fees, tax efficiency, etc.

    What you'll find with most stock picking mutual funds is that they're highly tax and fee inefficient. Index mutual funds that track a static portfolio like the S&P 500 tend to be much more efficient. Many ETFs are also more efficient for various reasons, but it depends specifically on the funds. See the Vanguard links I embedded in the article for more detail on comparing index funds and ETFs and understanding the costs of various funds.


    Apr 24, 2015. 03:13 AM | Likes Like |Link to Comment
  • Indexing Really Is The Future Of Investing [View article]
    Hi Alan,

    The word "index" is pretty confusing. People tend to think of an index as an aggregate, but they're generally slices of much broader aggregates.

    ETFs and "index funds" are actually actively selected sets of various securities. The S&P 500, for instance, is comprised of 500 stocks that are selected by the S&P selection committee based on their criteria. It is far from an all encompassing "index" of stocks. And it doesn't even replicate the return of all US stocks. An "index fund" is just an index mutual fund. An ETF is just a different product structure. But it's still comprised of some set of specific assets that could replicate what we think of as an "index" like the S&P 500.

    In essence, they can be the same thing though structured through a different product. Both have advantages depending on the fund, but they're extremely similar for the most part.

    I hope that helps clarify.
    Apr 23, 2015. 03:13 PM | Likes Like |Link to Comment
  • Indexing Really Is The Future Of Investing [View article]
    Hi Mark,

    Here's how I view it. A truly "passive" approach should reduce discretionary intervention as much as possible. At a strict level this would mean taking what the market gives you rather than trying to constantly predict what the market can give you. If one were to adhere to this view then they would buy the global market cap allocation because that's the weighting that the market has determined is "right". So you would buy the GFAP and just let it ride and maybe rebalance it once in a while. But once you start deviating from that portfolio you are essentially saying that "the market" is wrong. You are intervening in a discretionary manner and allocating your assets in a manner which is supposedly going to generate a better return for you.

    I am being pretty strict in my definition there, but I think it's helpful to think of asset allocation in terms of its degrees of activity as opposed to "active vs passive". Once you understand that all asset allocation is active then it really comes down to how appropriate certain degrees of activity are for certain investors. At that point it becomes all about reducing fees, reducing taxes and choosing the assets that are appropriate for your risk profile.

    I don't shun discretionary intervention because I think it can be done in an intelligent, low fee and tax efficient manner. More importantly, I think we all have to be discretionary at times whether we want to or not. Am I "passive"? I would say no. And I would also say that John Bogle isn't being passive when he tells investors to avoid international stocks. We're both active investors. We just allocate assets in different ways, but we're both tax and fee efficient....He'd call me active and I'd call him active. And we're both right! :-)

    I hope that clarifies.
    Apr 23, 2015. 03:01 PM | Likes Like |Link to Comment
  • Finding Religion On 'Crowding Out' [View article]
    "the only reason any of this matters is to make optimal policy choices"

    This is where we differ. It's all politics in MMT. That's the sole purpose of MMT - to construct a model view of the world that supports their policy ideas. I get that. And it's fine if your only purpose is political econ. But there's more to economics and finance than policy. I am trying to understand the world for what it is. I am trying not only to understand the best policies that might work, but why the economy operates in certain ways and how that might impact the financial markets in certain ways.

    When you take my operational view (as opposed to a political view) you arrive at a much more objective view of the deficit and govt spending. In the MMT model of the world the govt is the center of the financial system. It drives demand for the currency and the economy can be steered via discretionary spending decisions. I know the govt can print money. I know the deficit matters. But so what? If you don't place this in the right perspective then you go off on some ideological tangent about the efficacy of all this stuff and you start predicting economic decline like Mosler did in 2012 just because the deficit is shrinking. The reason why I was right about no recession in 2012, 13, 14 was precisely because I rejected the MMT views and took a more objective view of the deficit and the economy....

    I find the MMT view to be extremely unbalanced. That's why I don't like it. It places unnecessary and misleading emphasis on the powers of the govt. I am here trying to provide balanced econ and finance commentary. I am not trying to promote some agenda about Job Guarantees and govt spending....If people are looking for that view then they're reading the wrong guy. Sorry.
    Apr 23, 2015. 01:25 PM | Likes Like |Link to Comment
  • Finding Religion On 'Crowding Out' [View article]
    "taxation does not destroy the government's own federal reserve liabilities, it destroys commercial bank demand deposits in the amount taxed, then creates a demand deposit balance upon crediting reserves to a recipient bank."

    If this is accurate then we could say that every single interbank payment "destroys" and "creates" money. From a flow of funds accounting perspective we know that this is totally wrong because the funds to credit a reserve account come from a debit at the bank. The same is true of govt spending and in fact, is mandated by law. The govt cannot obtain a credit without a debit first....

    Further, this focus on the reserve system is all wrong. The reserve system is just a payment processing system. Saying that the reserve system is where taxes are paid is like saying that the reserve system is where I pay for my dinner if the restaurant doesn't use my bank. In reality, the restaurant does not want reserves nor can it obtain reserves. Saying that the payment was made in reserves, just because it gets processed there, totally ignores the actual economy we live in!
    Apr 23, 2015. 11:47 AM | Likes Like |Link to Comment
  • Finding Religion On 'Crowding Out' [View article]
    Your analogy doesn't make sense in the context I am discussing because there is no "destruction". There is only a flow of funds. When a bank makes a loan this creates a loan and a deposit. The bank has an asset (the loan) and a liability (the deposit). The borrower has an asset (the deposit) and a liability (the loan). If the govt taxes the deposit it CANNOT be destroyed by a non-issuer. It can only be redistributed back through the system in a flow of funds. The deposit cannot be destroyed until it is returned to its issuer. The govt does not tax and spend reserves. It taxes and spends deposits. And it is not the issuer of these liabilities. The whole concept of "destruction" within the MMT framework is based on misconstruing the purpose of the reserve system.

    I think you'd do yourself a big service to drop the MMT framework. It is extremely misleading and will inevitably lead you to many inaccurate conclusions as mentioned above.
    Apr 23, 2015. 01:29 AM | Likes Like |Link to Comment
  • Finding Religion On 'Crowding Out' [View article]
    The idea that taxation destroys purchasing power is not backed by a single ounce of evidence. Yes, if the govt taxed and didn't spend its funds then this could reduce aggregate demand. But that is not the purpose of taxation. The purpose of taxation is to spend. Saying that taxes destroy purchasing power is like saying that any income destroys purchasing power. This is true if the income goes unspent, but that is obviously not the case with a govt that taxes.

    This sort of thinking is what led Warren Mosler to become so bearish in recent years. He thought higher taxes and a lower deficit would necessarily lead to economic contraction. This was colossally wrong and is the direct result of misinterpreting these operational facts....
    Apr 22, 2015. 11:28 PM | Likes Like |Link to Comment
  • Finding Religion On 'Crowding Out' [View article]
    "taxes can only be paid in FRNs, because only FRNs are legal tender. "

    This statement is factually incorrect. You cannot pay your taxes in reserves. You cannot even obtain reserve balances. Regarding notes - call your local tax office and ask them if you can pay in cash. They will tell you no. I know this because I've tried it. They will tell you to pay your tax bill in bank deposits. Therefore, the govt cannot be paid in reserves. The fact that interbank payments settle in reserves is immaterial when one understands that the interbank system only exists precisely because the govt is not the primary issuer of money.

    This is one of the reasons MMTers have made so many bad predictions in the last few years. Because they view everything through the lens of the govt and the deficit they incorrectly interpret the impact of a rising and falling deficit. Warren Mosler has been bearish about the US economy since 2012. Few people have been more wrong....And it's a direct result of operational misunderstandings.
    Apr 22, 2015. 10:56 PM | Likes Like |Link to Comment
  • Finding Religion On 'Crowding Out' [View article]
    You guys do not have this correct. You are muddling the reserve system. The reserve system is just an interbank payment system. The ONLY reason it exists in the first place is because we have a monetary system dominated by inside bank money which requires a central clearing system.

    I can prove that the tax system doesn't "destroy money". Just remove the interbank system and envision a one bank system with JP Morgan as the banker to the US Treasury. In this system the US Treasury has a bank account with JPM and uses its deposits. When it taxes it obtains deposits and when it spends it redistributes those deposits. Adding the reserve system back into this is a simple process that simply involves multiple banks. THAT IS ALL. It doesn't change anything operationally and it certainly doesn't mean that the govt is now creating all of the money. The govt isn't destroying its own liabilities at all. MMT doesn't properly describe the reserve system. In fact, it totally misconstrues why it even exists....
    Apr 22, 2015. 08:58 PM | Likes Like |Link to Comment
  • Finding Religion On 'Crowding Out' [View article]
    "Not physically, insofar as a dollar can be thought of as a thing. But logically, no entity can own its own liabilities, so taxation necessarily "destroys" money"

    When the govt taxes you they are obtaining liabilities of the US banking system and redistributing them. Unless we're misconstruing reserves as that which is taxed (which is impossible since most taxpayers cannot even hold reserves) then it is absolutely wrong to say that the US govt obtains its own liabilities when it taxes the private sector. And this doesn't even touch on the debate about whether reserves are liabilities of the US Govt....

    Or are you saying that the US banking system and all of its liabilities are liabilities of the US govt? Because that is even more wrong than how MMT misconstrues the reserve system....No matter how you slice it, it is operationally incorrect to say that taxes "destroy" money....
    Apr 22, 2015. 06:46 PM | 1 Like Like |Link to Comment
  • Finding Religion On 'Crowding Out' [View article]
    taxes absolutely do not "destroy" money. When the govt taxes you they are financing future spending. This results in the redistribution of money. Taxes come in as deposits and go out as spending back into the banking system as deposits. Saying that "taxes destroy money" is like saying that every single interbank payment "destroys" and "creates" money simply because the accounting tables change between banks. This is not correct.
    Apr 22, 2015. 03:17 PM | Likes Like |Link to Comment
  • Finding Religion On 'Crowding Out' [View article]

    The money the govt spends is redistributed from the banking sector. When the govt borrows funds it is taking deposits from the lender and redistributing them to someone else. It is not "destroying" and "creating" new funds as MMT asserts. The US Treasury is a user of the US banking system just like other banks are. MMT misconstrues the reserve system as though it's where all of the "money" is created and destroyed. But this is operationally wrong. The govt does not "create" money when it spends. It redistributes money.

    You should look at all of this from the perspective of a one bank system. If there was only one bank in the system there would be no need for the reserve system because there would be no interbank system. And if that were the case then it would be obvious that the govt just redistributes bank inside money.

    MMT gets this description wrong by misconstruing the purpose of the reserve system.
    Apr 22, 2015. 03:14 PM | Likes Like |Link to Comment
  • Finding Religion On 'Crowding Out' [View article]

    The point is that deficits can have a huge impact on the economy. The govt is a huge spender and its decisions on how it allocates this spending will most certainly impact the economy. But the US govt isn't going to run out of its ability to "finance" the deficit in financial terms. It could, however, cause very high inflation or a currency crisis through its deficit decisions. This means deficits matter, but they don't matter like most people seem to think.

    I hope that clarifies.

    Apr 22, 2015. 03:08 PM | 1 Like Like |Link to Comment
  • Finding Religion On 'Crowding Out' [View article]
    Apr 21, 2015. 09:17 PM | 1 Like Like |Link to Comment
  • Finding Religion On 'Crowding Out' [View article]

    I think it helps to make a distinction here. The traditional crowding out argument says that the government's deficit will compete with a scarce supply of funds which will drive up the cost of money. This is obviously false in an endogenous money system because the supply of money is not some fixed quantity.

    This does not mean, however, that the govt does not compete with the private sector or that they don't compete for scarce resources. The distinction is important in my opinion.

    I hope that helps.
    Apr 21, 2015. 05:39 PM | 1 Like Like |Link to Comment