Cullen Roche interview

[Gumby]

An interesting question from Cullen's favorite MMist (David Beckworth):

Has The Natural Interest Rate Has Been Negative for the Past Five Years?

http://macromarketmusings.blogspot.com/ ... -been.html

Interesting read...

Population growth matters because it too affects the expected return to capital. More people means more workers and output per unit of capital. For example, the opening up of China and India's labor supply to the global economy, meant a higher expected return to the global stock of capital over the past decade. That should put upward pressure on interest rates and vice versa.

Source: http://macromarketmusings.blogspot.com/ ... -been.html

I've often thought about this. Many people often worry that the US is printing too much money and therefore will risk losing its role as a global reserve currency. But, a global reserve currency is created by foreign demand for that currency. And in order to meet that demand, there needs to be enough liquidity to supply that currency to the entire world — which would imply that a lot of printing is probably necessary to meet that demand.

What are the various thoughts on that in the community you're tuned into?

[Tom Brown]

Hi Gumby. Re: thoughts in the world I'm tuned into: I don't know! That's a great question. It may have been discussed and I just missed it. Your thoughts are the best (and only) I've seen on the subect.

[Gumby]

Hi Gumby. Re: thoughts in the world I'm tuned into: I don't know! That's a great question. It may have been discussed and I just missed it. Your thoughts are the best (and only) I've seen on the subect.

Well, I got the idea from the Triffin dilemma and also Warren Mosler's analysis on the subject, so I don't take much credit for it!

http://en.wikipedia.org/wiki/Triffin_dilemma

A few years ago, Mosler was asked about what would happen if we lost our reserve currency status and he responded by saying...

I need to know what you mean by ‘no longer the world’s reserve currency’ to respond to that. Do you mean the rest of world decided not to hold dollar financial assets and instead buy things in the US with their funds?

Those are their only two choices, at the macro level.

Source: http://moslereconomics.com/2011/06/06/c ... ment-54705

In another post (can't find it right now) Mosler points out that exporting countries need a foreign currency to support their exporting economies. So, basically, we support those exporting economies with our printing. Of course, he also points out that imports are a benefit and exports are a cost for any country.

[moda0306]

Gumby,

While I love the "flow" models that help explain our trade deficit and reserve currency status, aren't there other options out there?

If we ran big trade surpluses, but decided to divest ourselves of US dollars to diversify, wouldn't that be one way for our dollars to end up on foreign balance-sheets?

Does it have to be because we bought a shirt from Singapore or shoes from China?  What if we just traded a Japanese dude for his 30 year bond?  What if we decided to buy some GLITS (or whatever the hell they're called)?

[Gumby]

Gumby,

While I love the "flow" models that help explain our trade deficit and reserve currency status, aren't there other options out there?

If we ran big trade surpluses, but decided to divest ourselves of US dollars to diversify, wouldn't that be one way for our dollars to end up on foreign balance-sheets?

Does it have to be because we bought a shirt from Singapore or shoes from China?  What if we just traded a Japanese dude for his 30 year bond?  What if we decided to buy some GLITS (or whatever the hell they're called)?

It's true that there are other ways to get your currency into other people's hands, but most people want to hold their domestic currency (since they can buy things with it). So, the shirt exporter in Singapore doesn't really want to hold US dollar financial assets. Instead, he trades those US dollars with people who have Singapore dollars — and on a macro level an exporting nation would probably have a policy in place to print up extra currency and trade it for US dollars so that they could maintain a foreign reserve balance to justify their printing and keep their currency on par with the US dollar, thus supporting their exporting economy.

So, the exporting government tends to create the demand for US dollars by providing an easy way to obtain domestic currency in exchange for US dollars.

In your description, while certainly true, I suspect that the demand for foreign citizens to naturally put their savings into US dollars or other foreign currencies isn't really that high. If they are worried about their domestic currency, they can just buy gold and I suppose at times they will hold US dollars in those cases as well, but it would likely need to be paper dollars (unless they had a foreign US account).

[moda0306]

Gumby,

While I love the "flow" models that help explain our trade deficit and reserve currency status, aren't there other options out there?

If we ran big trade surpluses, but decided to divest ourselves of US dollars to diversify, wouldn't that be one way for our dollars to end up on foreign balance-sheets?

Does it have to be because we bought a shirt from Singapore or shoes from China?  What if we just traded a Japanese dude for his 30 year bond?  What if we decided to buy some GLITS (or whatever the hell they're called)?

It's true that there are other ways to get your currency into other people's hands, but most people want to hold their domestic currency (since they can buy things with it). So, the shirt exporter in Singapore doesn't really want to hold US dollar financial assets. Instead, he trades those US dollars with people who have Singapore dollars — and on a macro level an exporting nation would probably have a policy in place to print up extra currency and trade it for US dollars so that they could maintain a foreign reserve balance to justify their printing and keep their currency on par with the US dollar, thus supporting their exporting economy.

So, the exporting government tends to create the demand for US dollars by providing an easy way to obtain domestic currency in exchange for US dollars.

In your description, while certainly true, I suspect that the demand for foreign citizens to put their savings into US dollars or other foreign currencies isn't really that high.

You're telling me that most Chinese citizens aren't rich enough yet to have a portfolio worth diversifying?


If you think about it, and if you really believe in the efficiency of markets (if you carry that into expectations of manipulation by central banks), we really live in a wonderful time of currency diversification.  Central banks can manipulate interest rates (though not below zero  ), but they can't force the markets to value their currency a certain way against gold or other currencies.  They can't force people from engaging in commerce, "bidding up the price of assets."  They can't even really control interest rates on a micro scale.  I can loan money to whoever I want for whatever I want (given negotiation, and barring certain loan shark laws, obviously).  We aren't nearly as victimized as some feel we are. We have pretty abundant options.

[Kshartle]

Guys,

From Wikipedia, the USD as a percentage of the world's currency reserves:

USD
1999 71.0%
2000 70.5%
2001 70.7%
2002 66.5%
2003 65.8%
2004 66.0%
2005 66.4%
2006 65.7%
2007 64.1%
2008 64.1%
2009 62.1%
2010 61.8%
2011 62.3%
2012 61.1%
2013 Q3 61.4%

The trend is clear enough. What do you think is causing this? Is it tight monetary policy, loose monetary policy, other factors?

Are you more inclined to hold USD when the US expands the money supply or are you less?

How do countries with a trade surplus to the US maintain the exchange rate? What effect does this action have on the people in that country?

[moda0306]

K,

It doesn't surprise me that after the euro was launched, the US Dollar would see a decrease in the percentage of foreign holdings.  Let's not forget, though, that if the rest of the world is growing, especially if it's faster than the U.S., your 60% of a larger number is actually going to be potentially lager than 70% of a smaller number.

When I hold the US dollar within my more robust investment/savings plan (rather than the amount I keep just in my checking account for monthly spending), I don't focus on immediate money supply in a vacuum... in fact, being that I'm a PP'er, my gold and stocks properly hedge any fed actions that yield undo inflation, but I digress... the things I focus on are:

- Interest rates vs earnings yield of equities
- Likelihood of competition for reserve currency
- Capacity utilization.
- Fundamentals of cash-flows within current economy.
- Unemployment numbers.
- Inflation projections.

The actual monetary base doesn't matter much to me, unless the fed is obviously actively CURRENTLY ignoring the "price stability" aspect of their mandate.  Right now they're more actively ignoring the "full employment" aspect of it.

[Kshartle]

The actual monetary base doesn't matter much to me, unless the fed is obviously actively CURRENTLY ignoring the "price stability" aspect of their mandate.  Right now they're more actively ignoring the "full employment" aspect of it.

Price stability is no longer their mandate or goal. Inflation and price increases are the goal.

They failed miserably at price stability for 90+ years, prices have gone up decade after decade. What do you think is likely now that inflation is the official goal?

As for the Euro being the cause of the dollar declining as a percentage of the world's reserves (the percentage is what's relavent, not total dollars because the latter doesn't take dollar depreciation or actual purchasing power into account),the percentage of Euro's as foreign reserves is identical to where it was in 2002.

In '95 the German Mark and French Franc were 18.2% of all foreign reserves. The Euro is currently 24.2%. Think of all the other currencies that have switched to the Euro and you'll see that's not where the decrease in the dollar has come from. At least that's not how it looks to me.

[moda0306]

"Price Stability" is not a complete lack of inflation... it's a steady rise of low inflation.  They've had an inflation target for a long time.  This isn't inconsistent with "price stability." In fact, considering how difficult it is for the fed to generate price stability once we've hit overt deflation (pushing on a string), it's pretty vital that they shoot a couple points above 0% inflation, as they don't leave themselves enough cushion if they have a 0% inflation target.

A stable, low-ish, long-term inflation rate can be planned around... rampant increases/decreases in the price level that net to 0% inflation after half of a century make things a lot more difficult.  That's what the fed means by price stability.

You might be right about the Euro thing, though I'd say that the REAL growth in dollar demand IS relevant, not just a percentage of current dollar reserves.  But this is splitting hairs a bit.  There's still massive demand for the dollar as a savings mechanism by foreign governments (for the reasons Gumby mentions).

It's the fact that we're buying foreign stuff in U.S. dollars that drives that demand, as well as to help control the value/interest-rates of their currencies.

This could reverse, but it's important to realize what that means for the direction of balance of trade, foreign currencies, etc.

[Kshartle]

"Price Stability" is not a complete lack of inflation... it's a steady rise of low inflation. 

Since when is an increase considered stability?

Would a steady decrease in prices also qualify as stability?

[Kshartle]

It's the fact that we're buying foreign stuff in U.S. dollars that drives that demand, as well as to help control the value/interest-rates of their currencies.

The fact that we're buying stuff is indicative for demand of the stuff, not the sellars demand for dollars. This is evident when they exchange the dollars for the home currency or something else. They don't want dollars. The central banks have to buy them up by printing the home currency and causing inflation locally. Why do the central banks want dollars? Is it a rainy day fund? Do you think they ever intend on using them? Are they just being "accomdating losers" and holding them for political reasons? What good does stockpiling dollars do for them, apart from getting leverage on the US gubmit? How much leverage do they need before it doesn't suit their interest to trade real value (goods and services) for slips of paper (USD)?

Gumby and others have pointed out that the US is winning when we run a trade deficit. We get real stuff and get to consume beyond our production and all we had to do was print slips of paper. Well.....doesn't that imply that the other side of the trade is losing? If I've miss-stated the belief here please let me know.

What happens to governments that try to deal internationally outside of the dollar for the majority of their exports? They are labled the axis of evil and are bombed and the target of the CIA for destabilization and ovethrowing. The ability of the US to apply this type of pressure internationaly to Russia and Asian countries is waining it appears to me and the likelihood of them allowing their currencies to rise against the dollar seems invevitable. Of course "seems" and "certain" are not identical.

[moda0306]

K,

It is stability because it is understood by both parties in a private transaction that simply want some stable long-term expectation about general price levels.

A steady deflation could be stable, but when you have a real rate of return on a risk-free asset, the market is prone to self-fulfilling deflationary bouts out of the feds control (or much more difficult for them to get us out of, anyway).

So, in a vacuum, steady deflation is ok, but given how the fed controls the money supply (asset swaps to control rates for private lending), rather than helicopter drops, it makes deflation especially difficult to stop from becoming self-fulfillingly bad for some period.

There is nothing horribly oppressive about you or me negotiating our terms with a 2% inflation expectation.  We both adjust for it (both lender and borrower... or supplier and buyer).  However, it's difficult to negotiate if you don't know if you'll have 0% deflation, or 10% deflation because the fed, in trying to stop it, was pushing on a string.

[moda0306]

It's the fact that we're buying foreign stuff in U.S. dollars that drives that demand, as well as to help control the value/interest-rates of their currencies.

The fact that we're buying stuff is indicative for demand of the stuff, not the sellars demand for dollars. This is evident when they exchange the dollars for the home currency or something else. They don't want dollars. The central banks have to buy them up by printing the home currency and causing inflation locally. Why do the central banks want dollars? Is it a rainy day fund? Do you think they ever intend on using them? Are they just being "accomdating losers" and holding them for political reasons? What good does stockpiling dollars do for them, apart from getting leverage on the US gubmit? How much leverage do they need before it doesn't suit their interest to trade real value (goods and services) for slips of paper (USD)?

Gumby and others have pointed out that the US is winning when we run a trade deficit. We get real stuff and get to consume beyond our production and all we had to do was print slips of paper. Well.....doesn't that imply that the other side of the trade is losing? If I've miss-stated the belief here please let me know.

What happens to governments that try to deal internationally outside of the dollar for the majority of their exports? They are labled the axis of evil and are bombed and the target of the CIA for destabilization and ovethrowing. The ability of the US to apply this type of pressure internationaly to Russia and Asian countries is waining it appears to me and the likelihood of them allowing their currencies to rise against the dollar seems invevitable. Of course "seems" and "certain" are not identical.

Kshartle,

How can you say that someone who FREELY trades with the U.S. doesn't even want what they're being paid in?  Sometimes I wonder if you even believe in capitalism !

Eventually, someone has to "want" our currency, otherwise they wouldn't send us REAL goods for it.

Gumby's example WOULD imply that others are losing... and in a way they are.  They are getting a currency we control, and we are getting a REAL good in return, which we now control.  So we control both the good we bought, and the value of the currency we just gave them.

I totally agree that our military presence overseas contributes to the "value" of our dollar, but I wouldn't put it quite like that (I think there's huge non-dollar reasons that we pick out certain aggressors and pressure them).

However, seller of goods to the U.S. still "want" U.S. dollars.  It can be no other way, right?  Austrian econ 101?

[systemskeptic]

Cullen & Schiff on the same show:

http://pragcap.com/me-peter-schiff-jim- ... -same-show

Have those quoting Cullen watched him in live interviews such as this one?  Comes across as someone who doesn't understand reality, only theory that has no practical application...

Prediction: MMT/MMR will be thoroughly discredited/laughed upon 20 years from now.

[Kshartle]

How can you say that someone who FREELY trades with the U.S. doesn't even want what they're being paid in?  Sometimes I wonder if you even believe in capitalism !

Eventually, someone has to "want" our currency, otherwise they wouldn't send us REAL goods for it.
However, seller of goods to the U.S. still "want" U.S. dollars.  It can be no other way, right?  Austrian econ 101?

Did you read what I wrote?

If the sellers wanted dollars then why would the central bank end up with them as reserves?

Are your questions sarcastic or serious? Central Bank currency interventions have nothing to do with capitalism.

Would you accept Euros as payment for something you sell online? Would you accept Brazillian Reals? Is that evidence that you want Euros and Real? How about Indian Rupees?

[Kshartle]

Cullen & Schiff on the same show:

http://pragcap.com/me-peter-schiff-jim- ... -same-show

Have those quoting Cullen watched him in live interviews such as this one?  Comes across as someone who doesn't understand reality, only theory that has no practical application...

Prediction: MMT/MMR will be thoroughly discredited/laughed upon 20 years from now.

Yes. Stating that nations can't run out of money because they have a printing press and that the government can continue increasing it's debt because the currency is borrowed into existance......this is not insightful. Yes it represents a better understanding than the vast majority of the population but what is the aplication of this very basic economic knowledge?

That being said this is the only time I've heard Cullen speak so there might be a lot of insights I've not seen. I just think repeating for several minutes that the government has a printing press without exploring the limitations and consequences of using it......well what the heck good is that?

Admittedly the questions she asked him were real softballs and he might be a long-winded guy (so am I)....no time for digression into anything substantial.

MMT/MMR just looks like re-packaged Keynsianism to me.

[moda0306]

Cullen & Schiff on the same show:

http://pragcap.com/me-peter-schiff-jim- ... -same-show

Have those quoting Cullen watched him in live interviews such as this one?  Comes across as someone who doesn't understand reality, only theory that has no practical application...

Prediction: MMT/MMR will be thoroughly discredited/laughed upon 20 years from now.

So we'll be laughing at them instead of Austrians complete misunderstanding reality, but instead only theories that  have no practical application?

[moda0306]

How can you say that someone who FREELY trades with the U.S. doesn't even want what they're being paid in?  Sometimes I wonder if you even believe in capitalism !

Eventually, someone has to "want" our currency, otherwise they wouldn't send us REAL goods for it.
However, seller of goods to the U.S. still "want" U.S. dollars.  It can be no other way, right?  Austrian econ 101?

Did you read what I wrote?

If the sellers wanted dollars then why would the central bank end up with them as reserves?

Are your questions sarcastic or serious? Central Bank currency interventions have nothing to do with capitalism.

Would you accept Euros as payment for something you sell online? Would you accept Brazillian Reals? Is that evidence that you want Euros and Real? How about Indian Rupees?

They want the money, even if indirectly as a result of central bank demand.  Otherwise they wouldn't take it as payment.  Eventually there has to be demand there.

[moda0306]

Cullen had to keep things extremely basic for a TV audience.  He has more knowledge of the banking system than most of us put together.  JKH even more-so (seriously I challenge anyone to go over to monetaryrealism.com and try to debate him).

And MR is simply describing the system as it is, so I don't see how it can possibly have "no practical application." 

- Understand that banks aren't NEARLY as limited by reserve-ratios is extremely useful when looking at what QE will do.

- Understanding that the fed pays .25% IoR and what effect that will have on the aforementioned "fractional-reserve" system is extremely useful.

- Understanding how people truly are motivated to "bid up" prices of assets based on what they hold, and what they view as "money," is vital to understanding the likelihood of inflation.

- Understanding that the economy is under productive capacity, and that drives "natural" rates of interest lower, and limits the likelihood or possibility of hyperinflation, is extremely useful to understanding our predicament.

- Understanding the causes of previous hyperinflation is vital to understanding the true risks to fiat currencies.

How much have you guys even scoured the MR website?  Have you truly dug in?

[systemskeptic]

(Seriously I challenge anyone to go over to monetaryrealism.com and try to debate him).

And MR is simply describing the system as it is, so I don't see how it can possibly have "no practical application." 

There is nothing tangible to gain from debating theory with no practical application IMHO.

What actionable information do you gain from "understanding the system as it is"?  You and Kshartle (for example) have polar opposite views yet you seemingly have similar allocations if you are both on a PP forum?  So what difference does it make whether MMT is true or not?  What changes?

[Kshartle]

How can you say that someone who FREELY trades with the U.S. doesn't even want what they're being paid in?  Sometimes I wonder if you even believe in capitalism !

Eventually, someone has to "want" our currency, otherwise they wouldn't send us REAL goods for it.
However, seller of goods to the U.S. still "want" U.S. dollars.  It can be no other way, right?  Austrian econ 101?

Did you read what I wrote?

If the sellers wanted dollars then why would the central bank end up with them as reserves?

Are your questions sarcastic or serious? Central Bank currency interventions have nothing to do with capitalism.

Would you accept Euros as payment for something you sell online? Would you accept Brazillian Reals? Is that evidence that you want Euros and Real? How about Indian Rupees?

They want the money, even if indirectly as a result of central bank demand.  Otherwise they wouldn't take it as payment.  Eventually there has to be demand there.

The demand is artifical. It is coming from an entity that prints money and cannot take losses in a real sense. The entity that artificially creating demand for the dollars is not trading anything of real value for them, it's printing out of thin air and stealing purchasing power from the citizens of the country to support special interest groups.

If the artificial demand was removed and only the real demand was left in it's place the result would be an exchange rate that moved further and further in favor of the non-usd currency. This would be the result of the sellers getting rid of the excess dollars. Prices for imports to americans would rise and the trade deficit would be forced into balance as Americans could not afford to import as much as before.

The artificial demand has gone on for a long time, and will go on for much longer, no doubt. My point is it looks like it will continue to shrink as it's been doing and the percentage of the world's reserves in dollars as well as the exchange rate with non-USD currencies in general will fall also.

Of course there will be bull moves in this bear market and they will be significant (2008 was a big one).

[Kshartle]

How much have you guys even scoured the MR website?  Have you truly dug in?

I have never visited it and I tried to qualify my statments and throw him a bone. Her questions were silly or at least not insightful. He might just be a long-winded guy who can burn up a lot of time going over the same point (I do the same).

[Kshartle]

(Seriously I challenge anyone to go over to monetaryrealism.com and try to debate him).

And MR is simply describing the system as it is, so I don't see how it can possibly have "no practical application." 

There is nothing tangible to gain from debating theory with no practical application IMHO.

What actionable information do you gain from "understanding the system as it is"?  You and Kshartle (for example) have polar opposite views yet you seemingly have similar allocations if you are both on a PP forum?  So what difference does it make whether MMT is true or not?  What changes?

Our allocations have nothing in common.

I have about 45% in global stocks, 20% in gold and silver and 35% in gold mining stocks currently.

I only keep about 5k in the bank and have zero bonds.

[moda0306]

(Seriously I challenge anyone to go over to monetaryrealism.com and try to debate him).

And MR is simply describing the system as it is, so I don't see how it can possibly have "no practical application." 

There is nothing tangible to gain from debating theory with no practical application IMHO.

What actionable information do you gain from "understanding the system as it is"?  You and Kshartle (for example) have polar opposite views yet you seemingly have similar allocations if you are both on a PP forum?  So what difference does it make whether MMT is true or not?  What changes?

Belief in MR vs Austrianism would have some serious affects on your investment allocation depending on how agnostic you wanted to be about your predictions.

Surely, though, HB's portfolio depends on T-bills and bonds being used as an "interest-rate floor setting mechanism," rather than true, default-risk debt, otherwise he never would have set such rigid non-diversification in 50% of the portfolio.

Gold could theoretically help any portfolio in a default-disaster within the U.S., but it the portfolio works much, much better as a way to manage a currency-issuer like the U.S.  If you think we will default on our debt, or let rates rise sharply in the face of a depression, then it surely weakens the case for the PP vs a fed that will create negative real rates in the face of a depression (or try to).