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Cullen Roche's Not So "Pragmatic Capitalism"

In his riveting new work Pragmatic Capitalism, Cullen Roche, founder of Orcam Financial Group, a San Diego-based financial firm, sets out to correct the mainstream schools of economic thought, focusing on Keynesians, Monetarists, and Austrians alike. This new macroeconomic perspective claims to reveal What Every Investor Needs to Know About Money and Finance. Indeed, Roche introduces the layman to various elementary principles of economics and financial markets, revealing in early chapters the failed state of the average hedge fund and mutual fund operators -- who are better car salesmen than financial pundits, Roche writes --  who have fallen victim to the group think phenomenon, spawning the nearly perfect positive correlation to the major indexes, and thus, accounting for tax, inflation, and service adjustments, holistically wiping out any value added by their supposed market insight. 

Roche also references popular studies, such as the MckInsey Global Institute's report which shows that "emerging markets will account for 239 companies, 120 of which from China alone, in the Fortune 500 by 2025." Similar reports, such as those from The Economist, estimate that China's economy will produce more than $9 trillion in value in 2014. This research is revealing of a powerful macroeconomic trend, but even here largely neglects the inevitable appreciation of purchasing power in these mature emerging-market powerhouses, whose blossoming market share remains inconsistent with per capita income and standards of living. 

As indicated but commonly misunderstood by Roche and the mainstream media, Chinese holdings of U.S. debt have recently surpassed $1.3 trillion. However, as reported this week by Breitbart News and earlier this year by Bloomberg and others, Chinese reluctance to purchase further U.S. debt has become evident, as announced last November at a China Economists 50 Forum at Tsinghua University. Yi Gang, a deputy governor at the central bank, declared, "It's no longer in China's favor to accumulate foreign-exchange reserves." This move signals a China wary of the risks inherent within the U.S. bond market and, more broadly, the U.S. markets and the dollar.                

While investigating Roche's many proclaimed myths, the reader must first better understand the history of money and banking. A primer is available here. In his 227 pages, including an ill-equipped glossary of terms, Roche clearly fails to understand even the basic causes of the wealth of nations, however frequently he seems to wish to, out of context, reference Adam Smith's treatise. Counter to his claims upon the nature and definition of inflation, the United States of America experienced falling prices for most of its existence prior to 1913. 

In fact, the American Industrial Revolution not only occurred amid such an environment, but it further developed this phenomenon by discovering inexpensive and more efficient modes of production to replace prior government-created malinvestments, subsidies, and monopolies which effectively stifled competition and crowded out investment. In short, inflation is not a general increase in prices, as Roche and most mainstream economists suggest. Inflation, as it was originally defined, is the expansion in the supply of money, which is often, but not always, followed by a general increase in prices. The distinction here is crucial. Inflation is often a cause of increased prices, but it is not the only cause. Furthermore, inflation can occur without a rise in prices. Today's so-called pundits, along with the modern Keynesian economists and the talking heads on CNBC, CNN, and MSNBC, reference only the headline or core consumer price index (CPI) as the great indicator of inflation, never paying attention to money supply, which can often reveal the future course of consumer prices, costs of production, and purchasing power. With the ocean of debt separating the United States from its creditors abroad, inflation is easily masked by its failure to appear in American markets, as American exports sustain large deficits to these overseas markets which have continued to export their goods for American debt, otherwise known as inflation.  Furthermore, loose lending standards, government-backed accounts, and government-subsidized grants and loans have disproportionately propped up various asset classes, such as real estate, education, and the major stock indexes, while consumer prices are falsely reported by the government's Bureau of Labor Statistics.   

Today's popularly-accepted form of money is fiat currency. It is easily manipulated by operators of the printing press and it carries only as much value as the producers are able to supply to it. The United States dollar, the most ubiquitous fiat currency in the history of the world, currently enjoys its unique status as the world's reserve currency, which has been largely enabled by its history of creditworthiness stemming from the international post-WWII Bretton Woods system which predicated global exchange rates upon the gold-backed U.S. dollar. Ever since the end of the gold standard in 1971, the United States Federal Reserve has embarked upon a reckless monetary policy based on the neoclassical economic "truisms" of John Maynard Keynes, whose famous words may finally find relevance today: "In the long run we are all dead."           

Referring back to Pragmatic Capitalism, it's almost comical how Roche accepts as fact his fantastical assertion that an autonomous currency issuer can never effectively reach absolute insolvency, without any specific regard for the nature of money and that which truly ascribes value to it: purchasing power; producer, creditor, and consumer confidence; and the local and macro economies of scale which enable measured demand for the concurrent supply of goods and services provided upon that scale, and which service the creditors and satisfy their future expectation of return. Roche fails to recognize that without savings, there can be no consumption or deferment of consumption, the latter of which is entirely forgotten in his work Pragmatic Capitalism. The value of any money, historically harnessed in relatively rare or scarce intrinsically valuable or productive assets, is only as valuable as these natural or underlying characteristics: in the case of fiat currency, this is found in its requisite supply of goods and services exchanged on this platform. 

Roche remarkably recognizes that a systemic funding of couch potatoes will invariably reduce the overall standard of living, but he fails to extrapolate this idea into the relatable dynamics of supply and savings. Somehow, Roche claims, savings follows the mystic and glorious self-creating streams of investment. This is, of course, false. Supply and production enable savings, which enable investment. The creation of goods and services is the premise upon which money gains value, upon which money is truly corroborated, as the demand for that money increases in order to chase those goods and services offered in that market. Absent those effective and tangible forms of savings, those monetary values are mere cotton-paper composites or digital creations on a screen. Before anyone can tap into the value of an exchange medium, one must provide something which even ostensibly promises a value relatively equivalent to or greater than the value represented by the promissory note. The note isn't born with this value. People must first create it.      

Comments

  1. "the United States of America experienced falling prices for most of its existence prior to 1913"

    That is completely false.

    http://upload.wikimedia.org/wikipedia/commons/thumb/2/20/US_Historical_Inflation_Ancient.svg/1280px-US_Historical_Inflation_Ancient.svg.png

    ReplyDelete
  2. 19th century US inflation and deflation in more detail:

    http://socialdemocracy21stcentury.blogspot.co.uk/2013/02/19th-century-deflation-and-recession-in.html

    ReplyDelete
  3. "Inflation, as it was originally defined, is the expansion in the supply of money, which is often, but not always, followed by a general increase in prices."

    Inflation was never defined in that way. Even Ludwig von Mises didn't actually define it in that way.

    Mises:

    “In theoretical investigation there is only one meaning that can rationally be attached to the expression Inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange-value of money must occur. Again, Deflation (or Restriction, or Contraction) signifies: a diminution of the quantity of money (in the broader sense) which is not offset by a corresponding diminution of the demand for money (in the broader sense), so that an increase in the objective exchange-value of money must occur." (Mises, The Theory of Money and Credit).


    Inflation has never been defined as simply 'an expansion in the money supply'. The term has been used to refer to 'excessive' increases in the money supply which lead to a fall in the purchasing power of money, however.

    ReplyDelete
  4. Death by Inflation http://t.co/nRucbSjAOu

    ReplyDelete
  5. "Roche fails to recognize that without savings, there can be no consumption or deferment of consumption"

    LOL. Of course you can have consumption without savings. And deferment of consumption is a form of saving.

    "Supply and production enable savings, which enable investment"

    LOL. Production is simultaneously investment and saving. Investment creates savings, both in real terms and in financial terms, because investment IS saving.

    Yes, you can't have real investment (production of real things) without real savings (real resources). However, you do not need to accumulate or save pre-existing amounts of money before you can commence real investment. All you need is people and available real resources; money can be (and is) created out of thin air.

    ReplyDelete

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