Cullen Roche interview

[moda0306]

No. The government can infinitely deficit spend even if the Fed doesn't buy any bonds via QE.

Everyone knows this already. The QE makes it easier because the government doesn't have to do the printing itself (unpopular and obvious inflation), tax everyone (unpopular), or pay interest (causing bigger deficits and ecnomic problems, crashing the housing markets, stocks, etc.)

So, again, this is just a complaint about Congressional (fiscal) deficit spending.

All of our conversations up until this point were about whether QE itself causes inflation. Now that we have shown that QE itself doesn't cause inflation, you seem to have changed the conversation to Congressional spending.

Most people would agree that Congressional (fiscal) deficit spending is inflationary.

So Gumby, maybe Kshartle has something of a point here...

If 1) QE (or what we probably mean as open market operations) is part of a machine that removes a spending restraint, and

2) that spending can be inflationary, then

--- Open Market Operations is inflationary.


Now this can be true in general, but I think what I am trying to say (not sure about you or Tom), is that people essentially view t-bills as money and money as something that bears interest.  It literally has just changed we view the whole system, so the fed can simply say things and the market moves to those expectations.

So the actual ACT of OME's, in their instance, doesn't do anything... because the market views all this stuff as one big circle-jerk anyway.

But deficit spending that is NOT expected WOULD induce inflation (unless a financial crisis that was unexpected happened right before it... kind of a counteract).  But only some.  And only in the context of the economy around it.

[Kshartle]

But why is it a big surprise to anyone if "the fed prints money and gets it to the gubmit," if this system was laid out before hand?

And, further, you don't know that the private sector wouldn't be lending to the government at low rates to begin with... you just throw out that assumption based on what seems like very shaky evidence.

The government taking on "more and more debt" only makes it less credit-worthy if people didn't rush to them to begin with.  In a recession where people want safe savings and the private sector is not going to invest due to a demand deficiency, people LIKE lending to governments... at least if they think they'll be around in a few years.

I don't think anyone is surprised. I'm not sure what you mean by that.

Of course we know that the market price would be higher if the entity that is buying 90% of the bonds completely stopped. They might flood in inititally as the stock market crashed and they jumped out of the frying pan and into the fire. But as it becomes more obvious that the government can't pay back and other cheaper investments become more attractive........the buyers will turn to sellers and prices will collapse.

As to the last point.....the belief that the government is solvent or can repay does not change the ultimate reality that it can't. It allows the game to go on longer but it only delays the inevitable and makes the eventual crash worse.

[moda0306]

I'll concede that but for this circle-jerk of banking that involves Open Market Operations (what we usually see to mean when we say QE) is going to result in more inflation than a gold-based system or barter system... does that sound like something CLOSE to what you want to hear?

Well......it's a step in the right direction if you agree that QE is inflationary (expansive of the money supply - no reference to prices).

A big step.

Now all we need to do is come an agreement on the effects of inflation and what will happen to the economy if the rate of inflation (monetary expansion) stops growing or ceases altogether.

Then we can move onto the likelihood of these events, and how it's impossible to make a real return in long-term bonds in the long-run.

What are you doing with the rest of the year?

QE is actually a specific program to buy LONG_TERM bonds and MBS's.

What we're usually debating is the idea of Open Market Operations in general.


And I'm conceding that OME (and QE I suppose) are part of an overall "inflationary" monetary system, but in a context that won't result in inflation at point of swap, because people understand that their T-bills are practically cash...

... or more specifically, BANKS know that cash vs T-bills on their balance sheet doesn't really affect their ability to lend.

[Kshartle]

But deficit spending that is NOT expected WOULD induce inflation (unless a financial crisis that was unexpected happened right before it... kind of a counteract).  But only some.  And only in the context of the economy around it.

When you say inflation I take it to mean that you are referring to a rise in the general price level.

The general price level rises when the money supply expands (inflates ) at a faster rate than the goods and services available to bid on.

This is not caused by defict spending. It's caused by money printing.

[moda0306]

But deficit spending that is NOT expected WOULD induce inflation (unless a financial crisis that was unexpected happened right before it... kind of a counteract).  But only some.  And only in the context of the economy around it.

When you say inflation I take it to mean that you are referring to a rise in the general price level.

The general price level rises when the money supply expands (inflates ) at a faster rate than the goods and services available to bid on.

This is not caused by defict spending. It's caused by money printing.

Apparently you're wrong, because we've had exactly what you're talking about for the last 5 years with VERY low general rise in price level.

And that's assuming that a general rise in TODAY'S money supply is the sole (or main) driver of how people spend (or "bid up assets").  We've shown you several reasons why it is NOT... namely, the fact that if inflation kicks in, the fed has NO qualms with significantly REDUCING the base money supply.

This is why I asked you about those two scenarios about bidding up assets.

[Kshartle]

And I'm conceding that OME (and QE I suppose) are part of an overall "inflationary" monetary system, but in a context that won't result in inflation at point of swap, because people understand that their T-bills are practically cash...

... or more specifically, BANKS know that cash vs T-bills on their balance sheet doesn't really affect their ability to lend.

It doesn't matter what anyone believes or thinks they understand. A T-bill is not money. It is not used to bid up prices. It is not cash. The T-bill existed before the money was created to buy it. It's the money creation that expands the money supply. The banks and market cannot sustain the level of purchases that the government needs at these prices without the Fed. The Fed is gobbling up 90% of the new issuance because it can make the money out of thin air and the treasury is on the hook to make up the losses when the prices fall.

The protection for the banks is not as strong and they can't conjure up unlimited amounts of $$$ like the Fed can.

The QE is the governement printing money and stealing purchasing power from people with dollars and holding notes payable in dollars. The complicated process enables the financial industry and the Fed owners to get a piece of the action.

[Kshartle]

My understanding/summary:

Take a look at Tom's example 8 (deficit spending) and his example 4.1 case 2 (QE with a non-bank). 

Focus on the net equity: Deficit spending results in an increase in private net sector equity.  QE does not result in a change in private sector net equity.

What does that mean with regards to the general price level?

[Kshartle]

But deficit spending that is NOT expected WOULD induce inflation (unless a financial crisis that was unexpected happened right before it... kind of a counteract).  But only some.  And only in the context of the economy around it.

When you say inflation I take it to mean that you are referring to a rise in the general price level.

The general price level rises when the money supply expands (inflates ) at a faster rate than the goods and services available to bid on.

This is not caused by defict spending. It's caused by money printing.

Apparently you're wrong, because we've had exactly what you're talking about for the last 5 years with VERY low general rise in price level.

And that's assuming that a general rise in TODAY'S money supply is the sole (or main) driver of how people spend (or "bid up assets").  We've shown you several reasons why it is NOT... namely, the fact that if inflation kicks in, the fed has NO qualms with significantly REDUCING the base money supply.

This is why I asked you about those two scenarios about bidding up assets.

I'm wrong that money printing increases the money supply?

or is that I'm wrong that an increased money supply and a static amount of goods and services available leads to a higher general price level?

I'm certainly not wrong about defict spending not being inflationary. If the government only has one dollar, but it wants to spend two dollars, it can borrow one of mine. Now it has defict spent to the tune of one whole dollar. That dollar existed already. It is not bidding up prices anymore in the hands of the gubmit than it did with me. It could only be inflationary if I created the dollar out of thin air. Its the creation that is inflation, not the deficit spending.

This is what the Fed is doing.

Have you noticed the price of stocks, houses, education, healthcare, gold, groceries etc. for the last 5 years?

[moda0306]

Wrong that increasing the money supply increases inflation... obviously .

[Gumby]

So Gumby, maybe Kshartle has something of a point here...

If 1) QE (or what we probably mean as open market operations) is part of a machine that removes a spending restraint, and

2) that spending can be inflationary, then

--- Open Market Operations is inflationary.

[...]

But deficit spending that is NOT expected WOULD induce inflation (unless a financial crisis that was unexpected happened right before it... kind of a counteract).  But only some.  And only in the context of the economy around it.

When this conversation started, KShartle believed that QE could cause hyperinflation due to a "multiplier" effect. Tom Brown explained that the multiplier never existed.

Now, we've gone from mythical multiplier to 'QE enables the government the spend'. Well, I disagree, but that's just me. Ray Dalio actually says what KShartle is saying, in his video. He claims QE enables the government to spend and that's what causes reflation.

So what?!

Ray Dalio also pointed out that all government spending pales in comparison to the size of private credit. Total private credit and the shadow banking system is roughly upwards of ~$100 trillion. No matter how you slice it, there is no way that the $680 billion net spent by the government in 2013 will create much inflation when it's beyond obvious that banks are the ones creating the overwhelming majority of the "money supply" in our society.

So, it sounds like we've convinced KShartle that QE itself isn't inflationary — which is all we set out to do. KShartle can complain about how QE supposedly enables the government to spend like crazy, but $680 billion is a very tiny amount of money when you look at the sheer magnitude of the purchasing power that already exists in the private sector. He's basically complaining about a drop in the bucket.

It sounds to me like he's grasping for straws at this point. The government's spending was barely large enough to counteract the hole in private credit that formed over the past few years — let alone cause much inflation.

[moda0306]

Kshartle,

Lots of things can bid up prices... namely, velocity of the same amount of money.

[moda0306]

Kshartle,

When talking about inflation, ALL that matters is what people believe.

"Money" is whatever people want it to be.

Expectations drive peoples purchasing decisions far more than liquidity gimmicks.  Evidence bears this out.  I don't know how much more I can say.

For someone who believes in the market so much, you seem to have a huge lack of faith in its predictive ability.  When the 1970's passed, Harry Browne realized that there was something special about treasury bonds, even though he HATED deficits.  I guess I'd move onto this...

- If the fed saw that the "general price level" rising at 7%, would the reverse their "money printing?"

- If so, then shouldn't the market take this into consideration when looking at "money supply," since it might go down, wouldn't people want to be a bit careful about how they go "bid up the price of assets?"

[Kshartle]

Wrong that increasing the money supply increases inflation... obviously .

ahahahahhah......obviously.

I suggest we all take a field trip to Zimbabwae to check out first hand if an increased money supply leads to higher prices (or at least higher than they otherwise would be since many other factors impact prices)

I'll see if we can get the plane tickets priced in Zmbabwae dollars.

[moda0306]

Kshartle,

Or take trip to the U.S. where your ilk has been wrong for 5 years.

With the corruption in Zimbabwe, hyperinflation was simply one manifestation of disaster.

It's like saying having a military means you will lose a war... there might be good correlation there.

[Kshartle]

My understanding/summary:

Take a look at Tom's example 8 (deficit spending) and his example 4.1 case 2 (QE with a non-bank). 

Focus on the net equity: Deficit spending results in an increase in private net sector equity.  QE does not result in a change in private sector net equity.

What does that mean with regards to the general price level?

I'm not interested in discussing the effect on prices right now.

I'm curious whether you agree with Tom's summary regarding the effect of deficit spending vs. that of QE on private sector net equity.

I'll agree but I must confess I didn't look at it. I don't mean to offend. I don't see the relavence.

Can you tell me the significance of whether or not defict spending or QE have different impacts on private sector net equity?

What does that mean in practice? What is the application of this understanding?

[Gumby]

Wrong that increasing the money supply increases inflation... obviously .

ahahahahhah......obviously.

I suggest we all take a field trip to Zimbabwae to check out first hand if an increased money supply leads to higher prices (or at least higher than they otherwise would be since many other factors impact prices)

I'll see if we can the plane tickets priced in Zmbabwae dollars.

You've gotta give it a rest with Zimbabwe references. We all know that Zimbabwe is not representative of US government spending.

So how about Zimbabwe? Turns out they had a tad of civil unrest that dropped their productive capacity by about 80%, but government spending stayed high and too much spending power with too few goods and services for sale drove prices through the roof. Not to mention rumors of insiders using the local currency to buy foreign currencies for personal gain (sound familiar).

Applying this to the US...replicating Zimbabwe would mean some kind of disaster that wiped out 80% of our real productive capacity and then continuing to spend federal dollars as if that never happened.

But note that it turns out these examples of hyper inflation are traced back to wildly excessive govt. deficit spending, and not actions by the Central Banks. And, in fact, from what I’ve seen those kinds of levels of deficit spending always cause inflation, no matter what the Central Bank does. For example, deficit spending and indexation of prices paid by government to various measures of inflation propagated all the great Latin American inflations of the relatively recent past, even as the Central Banks desperately hiked rates, didn’t buy securities, and, in general, did all they could to promote price stability.

China gives us an interesting contemporary data point to consider. Deficit spending in China has been running over 20% per year when you include state lending to state owned enterprises, local governments, and other entities where repayment isn’t a factor, making that lending, for all practical purposes, pretty much the same as deficit spending. The only time the US deficit spending got that high, with pretty much the same growth rates, was during World War II. And while considered high, China’s inflation seems to have peaked at about 6%, a far cry form hyper inflation, also, interestingly, much like the US during World War II. And note during World War II, the Fed was entirely accommodative, much like the the Fed is today, buying Treasury securities to keep long term rates low.

What all this tells me is that run away inflation, whatever that might mean, isn’t something hiding around every corner waiting to pounce. In fact, it takes a lot of work to get there, and not from the Fed, but from Congress. And not just what we’d call high levels of deficit spending, but ultra high levels of deficit spending.

Source: http://moslereconomics.com/2011/11/14/i ... inflation/

[Kshartle]

When this conversation started, KShartle believed that QE could cause hyperinflation due to a "multiplier" effect. Tom Brown explained that the multiplier never existed.

Now, we've gone from mythical multiplier to 'QE enables the government the spend'. Well, I disagree, but that's just me. Ray Dalio actually says what KShartle is saying, in his video. He claims QE enables the government to spend and that's what causes reflation.

No. You mentioned a multiplier effect, I did not.

I said that QE expands the base money supply. I might have said M1.

I said M2 - M3 - MZM...whatever......all the components of the total broad money supply are a function of the base money supply.

So expansion of the base money by say....85 BN per month can potentially have a much larger impact.

None of that matters though. The money supply must keep growing to stave off recession. It will have to increasingly come from an expansion of the base money supply as the economy weakens.

I don't expect hyperinflation, as I've said many times. I expect a deflationary depression. I just think it will come when people are howling about inflation...possibly 5 years down the road or longer.

Grasping at straws? Please. I would have to pry them out of your hands first. 

[Kshartle]

For someone who believes in the market so much, you seem to have a huge lack of faith in its predictive ability.  When the 1970's passed, Harry Browne realized that there was something special about treasury bonds, even though he HATED deficits. 

If the market could predict crashes and crisis we wouldn't have them. We do, which is evidence that the market can't predict them.

[Gumby]

No. You mentioned a multiplier effect, I did not.

Oh reaaally?

QE...expands M1, M2 & M3 directly, and since M2 & M3 are a function of M1 it expands them by a greater total amount than just the amount printed.

I said that QE expands the base money supply. I might have said M1.

Actually you said "M2 & M3 are a function of M1", which refers to the mythical multiplier.

I said M2 - M3 - MZM...whatever......all the components of the total broad money supply are a function of the base money supply.

It's not true. The "function" (i.e. multiplier) doesn't exist.

So expansion of the base money by say....85 BN per month can potentially have a much larger impact.

No it doesn't! We've just been over this.

Gumby is absolutely correct about there being no money multiplier. Look up the wiki article on "Money Supply" ... it explains it all pretty well there.

MB = base money = cash + Fed deposits
M1 = MB + checkable bank deposits

etc.

There's no direct relation! You can't say that M1 = 10*MB. Some countries (like Canada) have a 0% reserve requirement (which would give them an infinite multiplier, if the multiplier concept were true). I have posts on this in my blog.

Enjoy!

It's like you've already forgotten everything that Tom Brown explained to you!

[Kshartle]

Gumby.....if the base money supply dissapeared.....then what do you think would happen to the rest of it?

[Gumby]

Gumby.....if the base money supply dissapeared.....then what do you think would happen to the rest of it?

It's a nonsensical question because the Fed requires base money to make interbank transfers. The rest of private credit would just become un-transferrable between banks. Base money is mainly just used for interbank transfers.

There is no "function". It doesn't exist.

[Kshartle]

Gumby.....if the base money supply dissapeared.....then what do you think would happen to the rest of it?

It's a nonsensical question because the Fed requires base money to make interbank transfers. The rest of private credit would just become un-transferrable between banks. Base money is mainly just used for interbank transfers.

There is no "function". It doesn't exist.

If M1 shrunk  down to a fraction of what it currently is, what do you think would happen to the rest of the money supply?

[Bean]

Being the N'th time this debate has happened can everyone just admit they might be wrong and that doesn't bother you since the PP is well designed for reality and belief having little correlation?

Bunch of Keynesians in sheep's clothing here 

[Gumby]

If M1 shrunk  down to a fraction of what it currently is, what do you think would happen to the rest of the money supply?

I have no idea since it would purely depend on other factors that affect the creation/destruction of private credit and since there is no function that determines the broad money supply from M0 since banks do not lend out reserves.

See: Standard & Poors: Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves

As Standard & Poor's explains:

...The money multiplier has not collapsed because it was never there in a meaningful sense to begin with.

Standard & Poors: Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves

If you would just take the time to read these articles, you would understand this by now! We can't help you understand these concepts if you are unwilling to learn them.

I suppose a few years ago, you would have asked what tripling the monetary base would do to the broad money supply, but as we now know....not much!

[Gumby]

Being the N'th time this debate has happened can everyone just admit they might be wrong and that doesn't bother you since the PP is well designed for reality and belief having little correlation?

I'm totally happy to admit that. I love my Permanent Portfolio!