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Holiday Weekend Q&A

I haven’t opened up the comments section in a long while so I figured I’d take this holiday weekend to let readers ask some questions. So have at it. Or, if you just have something general you’d like to share please have at it. If you just want to express your dislike for me that is welcome as well.  You’ll have to scroll down to the bottom to see the comment box….I haven’t used this thing in a while.

I hope everyone enjoys their 4 of July weekend!  Here’s to being smarter about money in the second half of 2015! I hope to help along the way as best I can.

NB – Comments have been closed.  

  1. Samantha Watts

    Hi Cullen,

    Nice to see the comments open again! I had a question about your last post.

    Why couldn’t interest rates just be left at 0% forever? Would that be a bad idea or do you think it’s something that could be done to remove the Fed from tinkering with the markets so much?

    Thanks and have a great weekend.

  2. John Daschbach

    1.) How much (or when) do you think monetary policy impacts the economy? i.e. if you had to assign weights to fiscal policy and monetary policy what would they be?

    2.) What would your wish list for monetary and fiscal policy be for the long term health of the US economy?

  3. Dennis

    The situation in Puerto Rico bothers me a lot. It’s Greece with greenbacks instead of euros. Is Uncle Sam the root cause of their depression? When they invest in their own country, they need to borrow greenbacks and pay back with interest. When Uncle Sam invests in USA, he can deficit spend. The only issue, as you have pointed out, is inflation.

    However, inflation is caused by too much credit chasing overpriced assets. Further, that investment in our own USA adds value to our country and its infrastructure. We do we need the private banking system for this activity?

    So as long as this is not overdone — why can’t Uncle Sam invest in Puerto Rico via deficit spending, instead of reliance on the private banks?

    I know—it’s against the law! Otherwise, we could do this if Monetary Realism (as you call it), were the correct understanding, RIGHT?

  4. Lucas

    Why would we want to leave the interest rates at 0% forever? 30 years ago, passbook savings were 5.75% for a very long time, and averaged less than inflation. Mortgage rates were like 8-9%. It was great for buyers because median house prices were actually 2-3 times median wages at that time. Seems like a win-win for everyone. Who is winning now besides lenders? Not savers, not homebuyers.

  5. Mike G

    Hi, Cullen

    I’ve been reading your work on the GFAP and find it quite interesting. Do you plan to write regular or semi-regular updates on it?

    Keep up the great work! Your stuff is great!

  6. Bobby

    Cullen- A lot of back patting right now in financial media about the “long-term” staying power and historical performance of markets. Current equity valuations are clearly a function of Central Bank asset purchases. Millenials are being asked to buy-in to real estate (sub 5% yield), equities (20x earnings), and fixed income at zero rates. I don’t see how this ends well for them. Seems like small upside and huge downside tail risk. This global financial experiment is just that. An experiment to avert/delay the worst financial crisis since the Great Depression. I don’t care what historical averages look like. It seems like this is an extremely dangerous situation to which historical wisdom does not apply. Please help me understand what I am missing here. Happy Holiday!

  7. ecyor

    “the US Treasury can always rely on the Federal Reserve to supply the funds necessary to fund its spending.”
    Need help understanding the “mechanics’ of this. Is the US Treasury allowed to overdraft it’s account?

  8. Gary

    Hello Cullen.
    I’m guessing you think the dollar world is fine and dandy?
    Do you see the global recession that is looming or not?
    I expect equities to lose c. 50% in the next few years, and gold to hit c.$3,000.
    Then the long term bubble in government bonds bursts, and the path to yen, sterling and dollar collapse will be a one-way street.
    What do you see ahead in the medium to long term?

  9. Joel

    Since the 1980’s there’s been a steady decline in interest rates. In Europe, we recently saw negative interest rates on 2yr bonds and variable mortgages.

    One of the other comments asks why you’d want 0% US interest rates forever.

    The current bias is that rates will go up, eventually and “normalize”. What’s preventing the opposite bias – that rates will keep going down even further, continuing the bond bear market we’ve had since the 80’s?

    Is there any reason why US rates could not go negative for long periods of time, where investors know when they invest that they will end up with less money after 5-10 years?

  10. The Other Matt

    Just read another post by researches explaining how banks don’t intermediate deposits into loans, but rather create bank money out of thin air. Looks like the message is getting out.

    Wouldn’t the Eurodollar market be the largest creator of money out of thin air? Rarely do I see this talked or written about.

  11. Blake

    Happy 4th weekend, Cullen!

    As a young but former PM I find your operational views on market functions extraordinarily helpful and refreshing. What I would really like to know is how you began your endeavor to understand how money really flows.. Because aside from you there are not many outlets that give the, dare I say it, pragmatic view. after reading your work and books, I am very interested in knowing what/who got you thinking about markets like this and where you may have went wrong in thinking about markets while you may have been learning these skills.

    All the best,

  12. Steve W

    Most of us who have been reading Pragcap for a while understand the basics of how fiat currencies like ours and Japan’s work. Thinking back to your paper on Hyperinflations since 1900, wherein you pointed out that in each case, it was not high government spending or debt alone that caused hyperinflation — I still wonder about our system, not that many decades out, due to projected demands from Social Security and Medicare (or health care in general). Have you done any modeling (so-to-speak) to try to determine how much deficit spending will be required and what our federal debt-to-GDP ratio might look like? Assuming we don’t lose a war or have some other exogenous event, I wonder if our spending and debt/deficit numbers (relative to GDP and productive capacity) will end up far, far higher than any other economy in modern times. I realize it really comes down to living standards — and we don’t know how technology will change our lives 50 years from now (when I’ll likely be dead) — but I can’t seem to let go of that “feeling” that at some point (not soon), our system will be so out of balance that harmful inflation will be unavoidable.

  13. José

    Hi Cullen, just to wish you a happy 4th, and to let you know that I sent in a question (to the orcamgroup.com address) on a historical question re: WW2 US “war stimulus” deficit spending and whether it can be considered to have helped in the recovery of the US economy at the time. Maybe you can point me to an MMR perspective on that.

    Thanks for helping combat all of the nonsense out there,


  14. Missy

    I would also be interested in Cullen’s views on annuities not only in general, but especially a 40-year-old whole life insurance policy which appears to convert to an annuity when the insured turns 65. There are several payout options, but no guidance on which option is best under which conditions.
    1). Interest Accumulation at guaranteed at least 3.5% (but could be higher). Interest paid either on demand, or on a schedule. Any proceeds still remaining on death of insured paid lump sum to insured’s estate.
    2). Elected Income same interest rate conditions. Equal monthly, quarterly, semi-annual or annual payments made for elected period of years or for an elected amount, until the proceeds are depleted. If death occurs before depletion, the estate receives the present value of remaining payments in a lump sum. However, the present value is always less that the sum of the remaining payments.
    3). Life Income–Equal monthly income paid to insured during lifetime of the insured for a guaranteed number of years as elected (5, 10, 15, or 20 years)even if insured dies sooner (to a beneficiary or estate?), or a guaranteed total amount even after the insured dies (to a beneficiary or estate?), or during the joint lifetime of two payees, the insured and survivor for a guaranteed period of 10 years, even if both payees die sooner (to beneficiary or estate?).

    How do we evaluate these options?

  15. Anon

    I recently read about Northern Rock on wikipedia, the description of what happened seems to directly contradict any useful analysis I’ve seen from this site on banking:

    “Northern Rock had a business plan which involved borrowing heavily in the UK and international money markets, extending mortgages to customers based on this funding, and then re-selling these mortgages on international capital markets, a process known as securitisation. In August 2007, when the global demand from investors for securitised mortgages was falling away, the lack of money raised by this means that Northern Rock became unable to repay loans from the money market. This problem had been anticipated by the financial markets, which drew greater attention to it. On 14 September 2007, the bank sought and received a liquidity support facility from the Bank of England, to replace funds it was unable to raise from the money market. This led to panic among individual depositors, who feared that their savings might not be available should Northern Rock go into receivership. The result was a bank run – the UK’s first in 150 years – where depositors lined up outside the bank to withdraw all of their savings as quickly as possible, particularly since everyone else was doing the same.[2]”

    So here we see that Northern Rock didn’t just create loans without worrying about funding, it needed to secure funding from the UK and international money markets. How can you square this with your analysis of banking, which holds that banks do not need to find funds when making loans? And why was there a bank run, if reserves are always given on demand? Everything I’ve read on here about banks suggests this situation is impossible.

  16. John

    Hey Cullen, I have another one for you.. if you were using an HSA investment account as a retirement account (not going to use funds for medical payments, pay cash instead) 1)what investment provider would you recommend? 2)what investment allocation for those funds would you recommend? Thanks.. Happy 4th!

  17. Cullen Roche

    Just as a reminder – I cannot answer specific investment questions. Personal investment advice has to be customized and I would generally be careful taking advice from anyone on the internet who doesn’t know very specific details about your personal situation….

  18. Lucas

    I read (i think here) that bank do not need customers’ deposits. If so, why bother trying to attract deposits from customers. I just came across a promotion from a credit union offering a 12-month CD, max $5000, for 5% interest. Why bother?

  19. Chet

    Thanks for your efforts producing this blog. Some points are still over my head but your blog is written in a short easy to understand method that informs and educates. I especially like that it can be read without having skim through multiple excessive paragraphs to try and understand the major point.

  20. Dennis Kleid

    Northern Rock is a UK building society. “A building society is a financial institution owned by its members as a mutual organisation. Building societies offer banking and related financial services, especially savings and mortgage lending.” I think this is kind of similar to our “Savings and Loans”. Many of these in the USA went under as well because their loans went south. Credit Unions have also have a membership quality. We’ll have to look at the laws that allowed these to be set up. But, our normal Federal Reserved backed banks technically can lend funds and then go to the Federal Reserve to make sure they pass the “stress tests” that we have in place since 2009. Our entire banking system went south in 2008. They were technically all in the red (they became known as zombie banks for awhile), but they were saved by the fact that the Fed had all the mooolah they needed to keep going. So in my mind, Cullen’s explanation is correct. The banks do not depend on deposits to loan. When they pass out a loan that “promise to pay it back with interest” becomes an asset on their books. So, if you want to create some money in the USA, dilute our currency a bit, take out a loan.

  21. Schrat

    Thanks for keeping this blog alive!

    My question is: How will export-heavy, developed economies be able to compete with China in the near future? Do you expect the Chinese will allow a floating exchange rate or more protectionism in Europe?

  22. Anon

    “So in my mind, Cullen’s explanation is correct. The banks do not depend on deposits to loan.”


    I certainly don’t think banks need prior deposits before making loans. But this is a different story from opposing the idea of ‘loanable funds’ completely which Cullen also does. If the concept of loanable funds is false, then there is no reason as far as I can tell for Northern Rock to seek funds from money markets before extending loans to customers.

  23. Sam Taylor


    I have read and enjoyed your book and site. However, I’m an avowed pessimist about many subjects, especially regarding the long long term. How much, if at all, do you think you might be subject to optimism bias, given that it seems endemic amongst humans?

  24. Ray

    Cullen, Have you looked through history at the points at which government debt to GDP peaks and private scetor debt to gdp bottoms peaks seems to the point at which 10yr government bonds rate hit there long cycle low this seems to make sense from a post keynesian model perpspective? I am trying to work out the key factors to watch for a bottom in long term interest rates? Any thoughts?

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