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Joseph Stuber  

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  • Anatomy Of A Market Bubble [View article]

    Not entirely true as it relates to only the Fed can create money from nothing. That privilege actually lies with the fractional reserve banks when they make a loan. Let's say they bank credits bank cash to make a loan. Their cash went down and their loans account went up. Then the second part of the entry is to deposit that money in a checking account that increases the deposits account - a credit balance on the banks books and increases the banks cash account. Leaves the banks cash account just where it was but now they have a new asset - the interest bearing loan and they have a new liability - the customers deposit. At the conclusion of the cycle the bank has the same cash balance (bank reserves) that they had at the start but M2 went up as did the banks total assets.

    However, when the Fed buys bonds from banks they are effectively making that bond a non-liability to the government, and therefore the taxpayer, in the sense that all the interest that accrues to the Fed on those bonds gets paid back to the Treasury.

    What we see happening today is similar to what we would see if money were created without debt - in other words the government is allowed to print money at will and as needed. Technically only about 1/2 of the new debt we have created ended up being an obligation of the government in that the government gets back the interest cost they pay out on those bonds held by the Fed.

    There is nothing I am aware of that would prevent the government from printing all the money they desired through the issuance of new debt and it would have no consequence on taxpayers if the Fed bought it all.

    That is a great strategy by the way for injecting money into the economy to stimulate GDP growth, and therefore jobs growth. Where the whole process breaks down is when the newly created money flows through to corporations that choose to invest it in risk assets instead of the economy.

    We won't fix this problem until we do something to swing the pendulum back toward the working class. When those profits generated by fiscal stimulus are hoarded or moved into risk assets we are left with a variation of the Keynesian liquidity trap. Not enough money churning in the economy and driving demand for goods and services.

    Sep 21, 2014. 12:11 PM | 2 Likes Like |Link to Comment
  • Anatomy Of A Market Bubble [View article]

    You said:

    "First, bank reserves have not increased by the amount you signal, and if they had, it wouldn't be "missing."

    It isn't the amount I signal. I didn't make the M2 number up nor did I make up the amount of new public and private debt that has been created. And you are right- the money isn't missing. The banks have it.

    Then you said:

    ". . . there is absolutely no evidence to suggest that primary dealers have been using reserves to buy stocks and that corporations have been buying their stocks from primary dealers.."

    That statement is patently absurd. What do you think primary dealer banks use to buy stocks with? And the second part of that statement is even more absurd. Do you really think large public companies don't buy stocks from primary dealer banks? Please.

    Then you said:

    "Third, there are many potential explanations for the "missing money," the simplest being that -- and you can find this in many academic papers . . there has been a breakdown since the mid 80s in the relationships of measures of money and measures of credit."

    To be credible you need to do a little more than make reference to " many academic papers". Perhaps you can direct us to some of these "many" papers.

    Then to your real question:

    "Why is the 'missing money' money even relevant".

    As you stated, it isn't missing - it went to the primary dealer banks. And it is relevant in that it establishes malinvestment when corporations choose to buy stock - their own and others - in lieu of all other investments they could make. Corporations don't normally act as hedge funds after all. But when demand for the goods and services they produce isn't sufficiently high enough to justify hiring or making capital expenditures it is hard to see how buying their own stock or the stock of other companies - who are also suffering the same plight - is anything but malinvestment.

    Sorry you didn't understand the points made in the article but it is a little esoteric I suppose for many readers. That said, all I can do is attempt to present the information in a way that readers can understand. Obviously I missed the mark in your case but a lot of my readers seemed to get it so it wasn't a complete exercise in futility.


    Sep 20, 2014. 10:53 PM | 2 Likes Like |Link to Comment
  • Anatomy Of A Market Bubble [View article]

    In my opinion the conditions leading up to the '29 crash best describe where we are today. And it is my view that when this bubble does burst that we will have a very prolonged recession - call it a depression if you like - much like the 30's. In many ways we are already there. U6 unemployment is already at depression era levels if we wouldn't continue to play with the Labor Participation Rate. Wealth disparity is closer to the pre-29 crash period than anytime since the 20's/30's. Tax rates at the upper end of the scale are at the lowest levels we've seen since the 20's. Most important though is the fact that we've run out of ways to create new money - money that is needed to support economic growth.

    Sep 20, 2014. 12:59 PM | 4 Likes Like |Link to Comment
  • Anatomy Of A Market Bubble [View article]

    I did spend a lot of time on this article - mostly for my own edification. I cleaned it up and submitted it on the outside chance SA would publish it. I didn't know if they would due to its length.

    Took about a month on and off to collect the data. To fully validate a major part of the thesis would require a lot more in-depth research on corporate balance sheets. I began that process but realized that I was already well past the norm - even for me - in terms of length.

    Sep 20, 2014. 12:22 PM | 30 Likes Like |Link to Comment
  • Anatomy Of A Market Bubble [View article]

    "They remind me of this character from Winnie the Pooh and their theme seems to be that stocks are always over valued."

    They weren't overvalued in 1934, 2002 and 2009.

    Sep 20, 2014. 08:55 AM | 20 Likes Like |Link to Comment
  • The Fallacy Of Central Bank Stimulus [View article]

    I never miss your articles and am always entertained, if not enlightened. "Counterfactual speculation" - I love that and intend to use it frequently from now on although counterfactual wasn't in my online dictionary. I added it though.

    And this one:

    "What the EU needs most of all is a much weaker euro - like about 25% lower for a start - and it won't get it without undergoing collapse first. Think about it. You're betting that someone else will buy your tulip."

    I read all your articles but only comment on the really good ones and this one is a really good one.

    Sep 5, 2014. 05:21 PM | Likes Like |Link to Comment
  • How Can This Market Capitalization Be Justified? [View article]

    Great analysis and great advice. My compliments.

    Jul 31, 2014. 10:26 AM | 1 Like Like |Link to Comment
  • Why This Is The Most Hated Bull Market Of All Time - Understanding The Folly Of Financial Engineering [View article]
    T Rail

    I think the point I am trying to make is getting lost in the stereotypes. I am not advocating raising taxes on the rich so the government can have more money to spend. To the contrary, I am advocating raising taxes on the rich as a means if incentivizing them to spend it to avoid giving it to the government in the form of taxes. And that doesn't mean CAPEX spending. That is what China did and look what that got them - ghost cities.

    Got to pay the profits through to those who will spend them. Individual companies won't do that on their own. It has to be by government mandate and tax policy seems to be at least one tool that would accomplish that.

    Frustrates me that readers are missing the message. It is not to the long term advantage of capitalists to destroy those who feed them and that is what we are seeing today. We've simply got to create an equitable balance between the capitalists and those who work for them or Marx will end up being correct.

    Jul 29, 2014. 06:21 PM | Likes Like |Link to Comment
  • Why This Is The Most Hated Bull Market Of All Time - Understanding The Folly Of Financial Engineering [View article]

    You do see the distinction between buying "stuff" that increases demand and investing in a company that does virtually nothing to increase demand for "stuff" don't you? When the money is used to buy goods and services we are driving demand which means more jobs and more more money to buy more "stuff" - a virtuous circle of growth and prosperity.

    When we see more and more of our money supply flowing into stocks we see stock price inflation and when that inflated stock price is unsupported by demand for what the company sells you end up with a bubble.

    Jul 27, 2014. 10:21 AM | 1 Like Like |Link to Comment
  • Why This Is The Most Hated Bull Market Of All Time - Understanding The Folly Of Financial Engineering [View article]

    I've been asked that by more than a few people. The truth is I haven't had a lot to say that I haven't already said. I worked for about two weeks on this piece as I felt it was worth publishing. It seemed particularly important in light of the negative GDP print in the 1st quarter.

    Jul 27, 2014. 08:23 AM | 1 Like Like |Link to Comment
  • Why This Is The Most Hated Bull Market Of All Time - Understanding The Folly Of Financial Engineering [View article]

    I do agree that comments should stay focused on the subject of the article and not used as a forum for readers to express their own - often ill informed and narrowly focused - views of what is right and wrong with the world.

    A lot of readers do like to write their own mini essays on unrelated subjects in the comments section of articles.

    Jul 27, 2014. 08:15 AM | 1 Like Like |Link to Comment
  • Why This Is The Most Hated Bull Market Of All Time - Understanding The Folly Of Financial Engineering [View article]

    I agree with the idea that $100,000, $200,000, or $500,000 income levels should not be taxed excessively. Those income levels are still in the realm where a high percentage of the income will be spent.

    My issue is with those individuals and corporations who receive so much money that they simply can't spend a significant percentage of it driving GDP growth.

    The objective is not to fill the coffers of the Treasury - it is to keep as much of the money we create churning in the economy and driving GDP growth. When the money flowing to the upper end income earners can't be spent in significant proportion on goods and services it is invested in risk assets instead. That takes that money out of circulation in the economy and puts it to work pushing risk assets higher. That is what we saw with MBS's when housing starts began to fall. The new debt being created did nothing to drive GDP or jobs, it just pushed housing prices higher as it churned around in the real estate market with more and more money chasing the same number of houses.

    Jul 27, 2014. 08:11 AM | 2 Likes Like |Link to Comment
  • Why This Is The Most Hated Bull Market Of All Time - Understanding The Folly Of Financial Engineering [View article]

    Krugman is right on one thing - if we don't keep up the fiscal stimulus at ever increasing levels we will see GDP go negative. The problem is the idea that fiscal stimulus is needed at ever increasing rates to keep us out of a recession and it is not a sustainable policy. As deficit spending is now slowing so is GDP.

    Take a close look at the nominal GDP chart:

    Going back over 35 years, the only time we've seen nominal GDP actually fall is during the Great Recession (4 quarters) and the 1st quarter of 2014.

    Krugman doesn't really make predictions so much as advocate policy. That is the reason I asked the question.

    Jul 27, 2014. 07:56 AM | Likes Like |Link to Comment
  • Why This Is The Most Hated Bull Market Of All Time - Understanding The Folly Of Financial Engineering [View article]

    The tax holiday is nonsense. Read the link below to an article - Offshore Corporate Profits - The Only Thing Trapped is Tax Revenue:

    Here is one excerpt:

    "There is no trillion-dollar pot of gold at the end of the offshore profits rainbow. There is no free stimulus to be had by “bringing the money home”—the money is already here. Corporations are already depositing these funds in American banks, investing them in American bonds and equities, and leveraging them for domestic activities and payments to shareholders. What corporations are not doing is paying taxes on these profits. That is the problem that policymakers should focus on."

    Here is another excerpt:

    "Proponents sold the tax giveaway as a means to increase employment and investment in the U.S. economy, but economic researchers have found that the holiday had no effect on employment or investment. In the end, corporations that repatriated profits just used that money for dividends and other payouts to investors. This is not surprising given that, as explained above, repatriation of profits that are offshore for tax purposes should not be expected to spur economic growth."

    The fact is that corporations won't do anything to add employees or invest in ways that ramp up production levels until the demand is their to support it. It is a really ridiculous "cart before the horse" argument that is utter nonsense.

    Jul 27, 2014. 07:36 AM | Likes Like |Link to Comment
  • Why This Is The Most Hated Bull Market Of All Time - Understanding The Folly Of Financial Engineering [View article]

    Stuber does not call the value of Zuckerberg's stock money. Dammit I hate when someone who decides to attack a thesis elects to misstate the thesis or infer things not said. Where exactly do I suggest that Zuckerberg's stock is money?

    What I said is that if Zuckerberg earned 2% on his net worth he would make roughly $600 million in income. Whether he does make that or not I don't know but it serves to make a point. And the point is he isn't likely to spend much of that money buying goods and services.

    The thesis presented here is when the income disparity becomes so extreme that those in the upper brackets simply use it to buy risk assets instead of goods and services we are in trouble. There is no other viable explanation that I can think of for why M2 velocity is so low. As I noted above, if we were at the same levels on M2 velocity today that we were prior to the recession we would see GDP at about $5 trillion more than it is now. How many many more jobs would we see if that were the case? A rough guess would be 30 to 40 million more based on $17 trillion in GDP supporting roughly 140 million jobs.

    It is indeed frustrating to me that you can't see that. Do you have an explanation other than the one I offered for why M2 velocity is in the tank or why 6 or 7 trillion dollars in new money created since the recession hasn't had a greater impact on GDP growth or job creation? I have an answer and presented it in this article. I will wait for yours if different than mine.

    Jul 27, 2014. 12:28 AM | 2 Likes Like |Link to Comment