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 groupthink phenomenon, responsible for their 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 professed 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 ignores the inevitable appreciation of purchasing power among these mature emerging-market powerhouses, whose burgeoning marketshare of the global economy lags per-capita income and domestic standards of living. 

As indicated but clearly 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, the Chinese have expressed their apprehensions about further U.S. debt purchases, 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. economy 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 inadequate 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 on the nature and definition of inflation, the United States of America experienced falling prices for most of its history prior to 1913. 

In fact, the American Industrial Revolution not only occurred amid such an environment, but it accelerated this phenomenon by discovering inexpensive and more efficient modes of production to purge prior government-induced malinvestments, public subsidies, and government-created 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 most often, but not always, followed by a general increase in prices. The distinction here is crucial. Inflation is often a cause of the general increase in prices, but it is not the only cause. Furthermore, inflation can occur without an attending 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 superlative gauge of inflation, never paying attention to money supply, which can often predict the future course of consumer prices, production costs, 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 maintain untenable deficits to their overseas trading partners who have continued to export their goods for American debt, otherwise termed inflation. Furthermore, in the face of artificially low interest rates and the Federal Reserve's burgeoning balance sheet, along with loose lending standards, government-backed accounts, and government-subsidized grants and loans, the American economy has been artificially propped up on various asset classes, such as stocks, bonds, and real estate; concomitantly, other beneficiaries have been higher education, consumer credit, and the automobile industry. All the while, as these prices skyrocket and general prices continue to climb higher, disproportionately to wages, the average American is told that the economy is chugging along. Meanwhile, the federal government insists on obscuring the truth as consumer prices are falsely reported by the government's Bureau of Labor Statistics.   

Today's commonly-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 afford to it by the merits of their production. 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 official end of the gold standard in 1971, the United States Federal Reserve has embarked upon a reckless monetary policy based on the neoclassical economic sophistries 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 that Roche accepts as fact his fantastical assertion that an autonomous currency issuer can never technically suffer absolute insolvency. Of course, Roche makes this assertion without any specific regard for the nature of money and the fundamentals which ultimately maintain its value: namely the growth and productivity of its producers, the attending stability of its purchasing power, and the maintenance of producer, creditor, and consumer confidence. At the macro level, in the case of debt, this necessitates the satisfaction of creditors in maintaining their expectation of future return. 

Roche fails to recognize that, without savings, there can be no consumption or deferment of consumption; the latter of which goes entirely forgotten in his work Pragmatic Capitalism. The value of any money, historically contained in the relative scarcity of intrinsically-valuable or productive assets, is tenable only through the maintenance of reliable returns: in the case of fiat currency, unlike any tangible good with useful properties unto itself, this is found in its consistent enabling of the exchange of goods and services. 

Roche remarkably recognizes that the systemic enabling of couch potatoes will invariably reduce the overall standard of living, but he fails to extrapolate this idea into the related dynamics of supply and savings. Somehow, Roche claims, savings follows from the glorious self-sustaining streams of spending and indiscriminate investment. This is, of course, false. 

Supply and production enable savings, which enable investment; and the economy governed by savings and production will properly appraise the risks of investment, relative to the opportunity for savings, and that appraisal of risk duly encourages sound investment, not just investment for its own sake. The consequent production of goods and services, chasing real returns in their own right, forms the basis upon which any medium of exchange maintains its monetary value. These are the fundamentals upon which money is truly predicated as a reliable medium, as the demand for that money (or currency) increases in order to secure, either now or in the future, the goods and services offered in that market; in the alternative case, demand for that money (or currency) declines in favor of some other mechanism by which to reliably enjoy the same. 

Absent returns in the form of real goods and services, those monetary values, as expressed, are mere cotton-paper composites or digital creations on a screen. Before anyone can tap into the value of any exchange medium, one must provide something which promises a return approximately equivalent to or greater than the opportunity of savings; and, on the other side of that transaction, there must be another party who values that quantity of money (or currency) more than he values that possession, and he must maintain confidence in that unit of account to reliably return that value. Contrary to the illusions of academic economists who believe they can sprinkle more currency upon the economy like seeds upon the soil, the note isn't born with this value; and, continuing with the analogy, the metaphorical soil, its composition and the climate eventually adapt to the change. Ultimately, people must first create value to support the money, and they must maintain sufficient confidence, by the merits of that medium, to continue nourishing those seeds with their property and the product of their labor.