It’s been too long since I did a Q&A and open forum here so feel free to use the comments to let me know what’s on your mind and if I can help with any questions then feel free to ask away. Poetry and love making questions have priority as always. But since I know little about both topics you will get what you deserve in the answer.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
Frederick
I was wondering if you had any thoughts on Russia potentially defaulting and whether that goes against your thinking on sovereigns defaulting? Thanks.
DrRR
Seriously, how did you become so awesome? Your logic and avoidance of the trivial and “popular” is inspiring!!
Dinero
In blog posts you have said that the 10 year treasury interest rate is
controlled by the Fed working with the primary dealers and potentially buying bonds, but you have
also said that the bond buying of QE probably didn’t effect the rate so considering both obsevations what is your considered view overall .
Geoff
Merry Christmas!
Scott Weigle
Any initial thoughts on the economic impact over the next several years of thawing relations with Cuba?
Ram
A few weeks ago you were disssing Tony Robins/Ray Dalio asset allocation saying that it was great for the past 20 years but will not work for the next 20 years. What do you have to offer to replace or tweak this asset allocation?
Gregory Monte
Cullen
The idea of the fed supposedly printing money or monetizing the debt is a concept which you have discussed before. Intelligent people disagree on the use of these terms. Could you explain how the following situation is not an example of this so called money printing?
Say the Treasury has an auction and Citibank buys a 1 million dollar bond using cash they have on hand. The treasury then spends it on bills they have to pay. Now the Fed buys the 1million dollar bond from Citibank. The Fed you would agree created this 1 million out of thin air as the saying goes. Now say Citibank spends this newly created Fed cash of 1 million.
So the Treasury spent 1 million and so did Citi. So 2 million dollars was spent on the basis of a 1 million dollar bond. If 30 years later the Treasury pays back the Fed to cancel out the bond this does not cancel out the 1 million that Citi spent with the money created by the Fed.
What am I missing here? This seems like money printing. And if Citi actually used the 1 million that it got from the Fed to buy more bonds from the Treasury and then sold them to the Fed in a continuous repeating loop wouldn’t this be essentially debt monitization?
Maybe my example is not really how the system really works? Is it too simplistic?
jt
Hi Cullen, do you think the US economy can weather the global turmoil while interest rates are already at 0%? Have a good Christmas!
jt
Also, I was thinking recently about how Buffett never buys technology companies. You’ve also said before that commodities is not a great long term investment. With the recent history of the Fed, I’m wondering if we should add banks to that list since monetary policy effectively pumps up assets for jobs which is eventually reversed, and (net worth)/GDP has been trading in a range for the the past 2 decades, after slowly increasing for 100 years. Are banks the new airlines?
John
Do you agree that Treasuries still look somewhat cheap compared to the rest of the sovereign world?
Vincent Cate
Mish, Kyle Bass, Peter Schiff and I expect hyperinflation in Japan. I think they have reached the point where nobody is buying their bonds and the central bank is forced to monetize. They have to do this because otherwise the government can’t pay for the bonds coming due or the spending that is twice taxes. Governments never default on debt in a currency they can print, they just print. But even defaulting would not solve the problem since they are spending twice what they get in taxes. So they no longer have a choice, they must print like crazy. So high inflation is coming soon to Japan. I think in the next year. Do you think I am right this time? 🙂
Geoff
No
Vincent Cate
Why not? Do you think they could stop printing Yen if they want to? How would they pay off bonds coming due? How would they spend twice taxes? Please explain.
andrew
Hi Cullen: Love the site, particularly articles like Would u rather be right or would you rather make money…spot on…Just wondering if you have a rational , unemotional view of the macro in 2015, and how it affects your asset allocation going forward….
pliu412
Is it net capital outflow or inflow when we have trading surplus (+)? It is called net lending (+) or net borrowing (-) in NIPA/FOF account. Intuitively, it seems like net capital inflow (?) when we have more exports and get more income from the rest of world.
Geoff
Haha, what’s up, Vince? I don’t think Cullen would appreciate us hijacking his Q&A, especially to rehash a debate that we’ve had a hundred times before. However, maybe a quick reply would be alright for old time’s sake. 🙂
“Do you think they could stop printing Yen if they want to?”
They aren’t really printing Yen, at least not in the way you think. The BOJ is mainly just swapping assets. If they really WERE printing Yen, there certainly would be inflation. But after all this time, there is still no significant inflation, which should cause you to re-evaluate your theories. I think it’s clear by now that the Quantity theory of Money and the Equation of Exchange are not very meaningful. If we replaced the money supply “M” with equity “E”, then we’d be talking! What do you think? Should I trademark the equation EV = PQ?
“How would they pay off bonds coming due?”
Same way they always have done.
“How would they spend twice taxes?”
Maybe they need to spend 4X taxes to get inflation going. 🙂
Vincent Cate
They really are “printing Yen” in the way that I and all regular folks mean. They make new Yen and buy bonds. How else do you think they buy the bonds? Yes, you can call it “just an asset swap” when they trade the new Yen for the bonds but that does not change the fact that those Yen did not exist before.
The Yen seems to be on a fast down trend now. Paying 0.03% on 5 year bonds is just not enough to get people to buy them when the currency is dropping around 1% per week. The central bank is the only buyer and they are using “new Yen” that did not exist before. You are about to be surprised by rapidly rising prices in Japan.
Currently in Argentina, Venezuela, Eukrane, and Russia the central bank is also “just swapping new currency for government bonds” and in these case not only is the currency dropping fast on the forex markets, as is the Yen, but prices are also going up fast. What is different about the Japanese case that makes you think prices won’t start going up like they did in the other cases?
Geoff
Foreign currency debt.