Cullen Roche interview

[Gumby]

So... want to take a crack at the question?

If nobody has any additional "equity" after a QE transaction how can they possibly feel like spending more to create price inflation?

[Kshartle]

For some reason you chose to jump down my throat when I use "wealth" in a sentence. Not cool.

This is what you said, it was a direct question to me:

"maybe you can explain how hyperinflation (of price levels) can take place if nobody in the private sector is any wealthier and nobody feels any richer or has more "equity"?"

Is it jumping down your throat if I point out what I think is blisteringly obvious, that weath and the feeling of being wealthy has nothing do with hyperinflation and never has? In fact....it's the exact opposite. Hyperinflation makes everyone poor and feeling destitute.

[Kshartle]

So... want to take a crack at the question?

If nobody has any additional "equity" after a QE transaction how can they possibly feel like spending more to create price inflation?

More dollars + Same amount of goods and services = price increase

[moda0306]

So... want to take a crack at the question?

If nobody has any additional "equity" after a QE transaction how can they possibly feel like spending more to create price inflation?

More dollars + Same amount of goods and services = price increase

Probably not if there was a reduction in equal amounts of a financial asset that banks and markets view as near-equivalents to dollars.

[Kshartle]

The government has more equity afterwards. They have dollars to spend they did not previously.

The bank has the same amount of dollars as it did at the start and the government has more.

You're focusing on only one piece (the FEDs transaction with the bank).

The bank is just the middle man.....the broker....the real transaction has taken place between the FED and the government. The government has recieved an interest free loan that it will likely never repay.

It's ultimately the same as if the government had just printed the money except in this case it can pretend like it will pay it back at some point and extinguish the additional money. It temporarily can have it's cake and eat it to. It gets to spend and the market doesn't immediately react to the inflation with prices getting bid up. It gets to spend at today's prices and it takes years for the money to work through the economy and bid up the general price level.

You should read some Harry Browne books. He explains in very plain and fun language. It's much better than I can do in this format.

[Kshartle]

So... want to take a crack at the question?

If nobody has any additional "equity" after a QE transaction how can they possibly feel like spending more to create price inflation?

More dollars + Same amount of goods and services = price increase

Probably not if there was a reduction in equal amounts of a financial asset that banks and markets view as near-equivalents to dollars.

It doesn't matter what anyone views anything as. A dollar debt is not the same as a dollar or even close.

If you write yourself a check for a million dollars you are not a millionaire.

If the government writes a check to itself for 1 trillion it is not a trillionaire.

[Tom Brown]

Kshartle, I agree QE causes the base money supply to increase. But that doesn't necessarily lead to inflation, more lending, interest rate changes, or overall increases in M1 (beyond the MB component). Saying MB increases is the same as inflation is very unorthodox and misleading.

Regarding Schiff's predictions, he may have changed them since last I paid any attention to him. You can find LOTS of videos of him claiming hyperinflation is coming within a year or two on youtube. That was his mantra for a long time.

Mish Shedlock in fact has done several hit pieces on Schiff (they're both Austrian influenced, but have very different views on hyperinflation). Schiff has retaliated. I don't pay much attention to the Austrian school, so I'm not up on what the latest "mainstream" Austrian claims are. I do read Bob Murphy (is that his name?) once is while.

Actually you can find a match up between Sumner and Schiff on youtube. It's pretty interesting. Sumner is definitely NOT in the hyperinflation camp, but they're both libertarian conservatives.

[Gumby]

The government has more equity afterwards. They have dollars to spend they did not previously.

I don't understand how you can say that, and then 10 seconds later say this...

If the government writes a check to itself for 1 trillion it is not a trillionaire.

A fiat government is never rich or poor. It makes no difference how much "equity" a fiat government thinks it has, since it's never reserve constrained and it conjures its own equity.

[moda0306]

More dollars + Same amount of goods and services = price increase

Probably not if there was a reduction in equal amounts of a financial asset that banks and markets view as near-equivalents to dollars.

It doesn't matter what anyone views anything as. A dollar debt is not the same as a dollar or even close.

It is pretty darn close in the game the government set up.  They changed the rules in the 1970's.

[Tom Brown]

Kshartle, I don't agree that the gov has more equity after QE than before. That would be very unorthodox accounting. I don't even agree that the Fed has more equity (and I don't consider the Fed a subset of the gov, it's more of a hybrid institution). Every dollar they issue has to be backed by another asset. They don't ignore that rule, so they don't accumulate negative or positive equity. When they buy a bond for $100, the $100 they spend is now backed by the bond they own.

[Kshartle]

The government has more equity afterwards. They have dollars to spend they did not previously.

I don't understand how you can say that, and then 10 seconds later say this...

If the government writes a check to itself for 1 trillion it is not a trillionaire.

Those two statements contradict each other. A fiat government is never rich or poor. It makes no difference how much "equity" a fiat government thinks it has, since it's never reserve constrained and it conjures its own equity.

How does it conjure it's own equity?

There is no contradiction in my statements. A bond is not money, regardless of it's maturity date. The government borrowing money by issuing a bond does not create money, that is stupid. The FED creating money creates money.

[moda0306]

I had said once that I really DO think the dollar represents a liability of government...

...just not a financial one...

It represents a liability for the government to continue to facilitate the creation of wealth and production in the economy.

Now you may not AGREE that a government can accomplish that, and maybe that they hinder that, but for the dollar to remain valuable, people have to 1) predict it being used in the future, and 2) predict a productive economy in the future.

If the government can't give the market that expected support, the dollar will start to collapse.

So it is a liability... just not a standard financial liability... it's a promise to do protect wealth in a certain manner that (most in the market thinks) facilitates production (which backs the value of the dollar).

[Kshartle]

Kshartle, I don't agree that the gov has more equity after QE than before. That would be very unorthodox accounting. I don't even agree that the Fed has more equity (and I don't consider the Fed a subset of the gov, it's more of a hybrid institution). Every dollar they issue has to be backed by another asset. They don't ignore that rule, so they don't accumulate negative or positive equity. When they buy a bond for $100, the $100 they spend is now backed by the bond they own.

Tom......

The bond existed before the FED created the money. So if it's backing the dollars they created, what pretell is it now not back that it was previously?

More dollars exist than before. They came out of nothing. They were created out of thin air.

Why do you think the general price level goes up over time? What causes that?

[Kshartle]

I had said once that I really DO think the dollar represents a liability of government...

...just not a financial one...

It represents a liability for the government to continue to facilitate the creation of wealth and production in the economy.

Now you may not AGREE that a government can accomplish that, and maybe that they hinder that, but for the dollar to remain valuable, people have to 1) predict it being used in the future, and 2) predict a productive economy in the future.

If the government can't give the market that expected support, the dollar will start to collapse.

So it is a liability... just not a standard financial liability... it's a promise to do protect wealth in a certain manner that (most in the market thinks) facilitates production (which backs the value of the dollar).

What's your point? How does this tie into the discussion? I mean this sincerely, not snarky.

[Gumby]

That is stupid.

Again with the derision and verbal abuse. What is your deal? I'll ask you again, kindly, to please stop. Do I need to report your posts to a moderator?

The government conjures bonds to spend money into the private sector — resulting in a net deposit of a T-Bond in the private sector. The private sector gets more equity whenever the government spends and loses equity whenever it taxes.

[Gumby]

The bond existed before the FED created the money.

The bond was a net deposit in the private sector from government fiscal spending. You are conflating fiscal spending (Treasury/Congressional spending) with monetary spending (QE/POMO transactions). Fiscal spending increases the private sector's equity position, and can potentially lead to inflation. Monetary spending doesn't have the same effect (since they are just swaps).

[moda0306]

Kshartle,

I think this might get us somewhere... one crux in our disagreement seems to be as to whether a reserve note is a "liability" of the government.

To decide whether or not it is, I present two different types of assets:

- Non-financial assets: These things are valuable, without an associate liability.  They're valuable simply because of what they are and what they can do for us.  Maybe not "intrinsically valuable," but functional as an asset without an associated cost.  Think of a knife, a house, or even a new idea for how to make a better widget.  Even gold would fall into this category, since it doesn't have a corresponding liability, even though it could be used for financial purposes in the old days.  These are truly what "wealth" is made of.

- Financial assets: These are only valuable because you are "owed" something by someone else.  There is no net value to these things.  One person's asset is another's liability.  There is no net wealth.


Technically, a US treasury bond is a promise to pay a U.S. dollar, so we know it's a financial asset, but the liability is another asset under the same government's control, so it's more useful to look at the dollar than the T-bond.  If it HAS no intrinsic value, yet we value it due to how the government has set up our financial system, by near-certainty it must have some sort of corresponding liability out there... but what does the fed "owe" us when it pays out dollars?

Basically, it owes us a promise kept on managing a stable financial system that facilitates the creation of wealth by balancing full employment with price stability.

[Kshartle]

That is stupid.

Again with the derision and verbal abuse. What is your deal? I'll ask you again, kindly, to please stop. Do I need to report your posts to a moderator?

The government conjures bonds to spend money into the private sector — resulting in a net deposit of a T-Bond in the private sector. The private sector gets more equity whenever the government spends and loses equity whenever it taxes.

Relax. I wasn't ascribing that belief to you. The idea that borrowing money creates money is obviously dumb. If we can skip to that obvious understanding then we can stop pretending that banks swapping out bonds with the FED for dollars doesn't increase the money supply. That false belief is at the heart of these discussions.

An obligation to pay money is not money. If you think otherwise how about we both write each other checks for 1 million? Then we'll both be millionaires. It makes no difference if the government does it or we do.

[Gumby]

Relax. I wasn't ascribing that belief to you. The idea that borrowing money creates money is obviously dumb.

I'm sorry, but if you go back through this thread, you will notice that you respond to Tom with decorum, and you lash out at me. It needs to stop now, because it's disrespectful and I'm not going to put up with it anymore..

It's not "obviously dumb" that borrowing money creates money. I find that characterization insulting and I doubt you would speak that way to Tom. Loans create deposits and T-Bonds are a net deposit in the private sector.

Virtually our entire money supply is debt-based. Borrowing is where our money comes from!

[Kshartle]

The government conjures bonds to spend money into the private sector — resulting in a net deposit of a T-Bond in the private sector. The private sector gets more equity whenever the government spends and loses equity whenever it taxes.

The "deposit" of the T-bond comes with the reduction in cash needed to purchase it.

It doesn't create anything that didn't exist before...anymore than me borrowing 10 bucks from you doesn't create anything (other than an obligation for me to repay you at some point and demand for $10 in scratch off tickets.)

The private sector does not get more equity when the government spends. It gets cash at the expense of something else (goods and services). The goods are actual assets and the services and labor to create the goods are what creates equity/value.

[Kshartle]

Relax. I wasn't ascribing that belief to you. The idea that borrowing money creates money is obviously dumb.

I'm sorry, but if you go back through this thread, you will notice that you respond to Tom with decorum, and you lash out at me. It needs to stop now, because it's disrespectful and I'm not going to put up with it anymore..

It's not "obviously dumb" that borrowing money creates money. I find that characterization insulting and I doubt you would speak that way to Tom. Loans create deposits and T-Bonds are a net deposit in the private sector.

If I borrow $100 from you does that create money? Is my IOU money?

[Gumby]

If I borrow $100 from you does that create money? Is my IOU money?

http://monetaryrealism.com/loans-create ... n-context/

Are you saying banks don't create money?

[Gumby]

The "deposit" of the T-bond comes with the reduction in cash needed to purchase it.

Nope. The money that pays for the T-Bond is instantly given back to the private sector (it enables government spending). The private sector winds up with the cash and the T-Bond.

[Kshartle]

If I borrow $100 from you does that create money? Is my IOU money?

http://monetaryrealism.com/loans-create ... n-context/

Are you saying banks don't create money?

We have gone over this so many times. Everyone here knows that banks create money.

The act of borrowing doesn't do it. The creation of the IOU is independant of the creation of the money.

When the government borrows money by selling a bond, the government has not created money. Pretend you are the buyer of the bond. Did you create any money? Do you have more or less than you did before?

When banks create money to buy bonds they create money right? Do you agree with that?

[Kshartle]

The "deposit" of the T-bond comes with the reduction in cash needed to purchase it.

Nope. The money that pays for the T-Bond is instantly given back to the private sector (it enables government spending). The private sector winds up with the cash and the T-Bond.

And they lose the asset that was purchased.

If I buy an apple from your fruit stand for a dollar you have one more dollar and one less apple.

If I borrow the dollar from you and give you a note, then buy the apple you end up with the same dollar you had, a note from me and one less apple.

ahahahha, you better hope I pay because you are down an apple and I'm up one!