Did China Reduce Its Holdings of U.S. Treasuries?

I have been seeing stories about China (the government, that is) selling off its holdings of U.S. Treasuries.  The problem is that I have seen these stories in the past without the data supporting them.

The U.S. Treasury puts out a monthly report on the major foreign holders of U.S. Treasury securities.  China and Japan have been the top two holders for a long time, and by a wide margin.

Japan and China each hold over $1.1 trillion in U.S. government debt.  The next closest is under $300 billion.

The latest report was released on October 18, 2016.  It shows China’s holdings in August 2016 at $1.185 trillion.  This is down from the month before at $1.219 trillion.  In one month, the holdings have been reduced by about $34 billion.

This isn’t insignificant, but it isn’t earth shattering either.  It certainly isn’t a massive selloff.  The Chinese, as with anyone, can just let their debt mature and not roll it over.  You can reduce your holdings without actually selling.

October 1st marked the beginning of the Chinese yuan being included in the IMF’s basket of currencies called the Special Drawing Rights, or SDRs.  The Chinese government is trying to be a major player on the world stage.

I don’t buy the speculation that the yuan is going to replace the U.S. dollar as the world’s reserve currency.  The yuan is not even a freely floating currency, not to mention that the economy in China is very shaky.

The dollar is not going to be replaced by anything, unless it is gold.  The dollar may slowly lose its status as the reserve currency of the world, but nothing but gold is likely to take its place.

In our digital world today, there really isn’t a need for a currency to serve as a reserve currency for the world.  Countries can trade their own currencies.  If the Russians wants to buy from the Chinese, there is no need for them to use dollars as a middleman, as long as there are foreign exchange markets.  This is why it is inevitable that the yuan will eventually be freely floating and openly traded.

In terms of central bank policy right now, the Federal Reserve is better than all of the other major central banks.  The Fed has had a tight money policy (despite the low interest rates) for about two years now.  The central banks of China, Japan, and Europe are all creating money out of thin air at a rather staggering pace.

This is one of the main reasons that the dollar is strong.  It is also a reason that the dollar will not be replaced on the world stage.

I usually don’t recommend that you buy foreign currencies (for Americans) unless you really know what you are doing.  In our current environment, I wouldn’t recommend it at all unless you are looking for pure speculation in smaller regions.

The U.S. dollar will likely remain strong as long as the Fed keeps its monetary policy tight.  Of course, this could change rather quickly with a downturn in the economy.

A strong dollar will make it difficult for gold to run a lot higher.  Gold has been down in recent weeks.  I am still bullish in the long run on gold, but we shouldn’t expect a major run at this time because of the strength of the U.S. dollar.

The Final Debate – October 19, 2016

This was the third and final debate for the 2016 presidential election.  It was moderated by Chris Wallace of Fox News.  I didn’t care much for Chris Wallace, but he was probably the most fair as compared to the previous debate “moderators”, which isn’t saying much.

It started out with issues that weren’t personal.  They were actually policy issues.  It started with the Supreme Court.  I wish someone would point out that there is something wrong with our whole government when five out of nine justices are deciding policy for 325 million (or more) people.

On abortion, Trump took the proper constitutional stance that Roe v. Wade should be overturned and left to the states.  I doubt Roe v. Wade will be overturned even if Trump becomes president, but his position was essentially the correct one.  It is a position of decentralization and federalism.

When they were arguing over immigration, Hillary Clinton brought in the accusation that Russia has been hacking the U.S. government (which she nor anyone else has any proof of) and is responsible for the emails on Wikileaks.

From a non-interventionist point of view, Trump’s response was great.  He said he doesn’t know Putin, but just that he wants to get along with him.  He pointed out that there are thousands of nuclear warheads pointed at us and Hillary wants to play a game of chicken with them.

If I can find a reason to actually vote in this presidential election, it would be this.  If I thought that there would be a difference of having a major war versus not having a major war, then I would vote for Trump.

On the economy, Hillary Clinton brought out the Bernie Sanders plan of free college.  She even mentioned Sanders by name, probably trying to get and/ or keep some of his supporters.

Trump actually sounded better than in the past regarding trade.  He continues to say he doesn’t like the trade agreements, which libertarians can agree with.  But he did say he wants free trade, which is good to hear.  He continues to say that he wants tax cuts for individuals and businesses.  The major thing to criticize Trump on (and Clinton too) is that he proposes no major (if any) cuts to the federal government.

Hillary Clinton said she would not add one penny to the national debt.  The most recent annual deficit was over $600 billion.  So unless she proposes to reduce federal spending by $600 billion (and more for her free college), then it is a complete lie.  Even if she could get through tax hikes on the “rich”, it wouldn’t come anywhere close to closing the annual deficit.  It probably wouldn’t close it at all.

Overall, from a libertarian perspective, they are both bad on economics, but Trump gives a little bit of hope.

I don’t have much to say in terms of the personal stuff.  Some women have made accusations against Trump.  Maybe some of them are true.  Maybe some of them are half-truths.  Or maybe they were put out there by the Clinton campaign as Trump said, which wouldn’t be surprising.  My overall inclination is that Trump is “a player”, but he is not violent (unlike others).  This will upset a lot of people, but I think Trump is a lot like John F. Kennedy.  He may have his moral indiscretions, but I believe he means well for the country.  Let’s hope he doesn’t end up like Kennedy.

The last policy question of the debate was on entitlements.  This is a major issue in which neither candidate has an actual answer for.  The only answer will be for piecemeal defaults in the future, whether that means increasing the government retirement age and/ or fewer benefits for all.  That is just a statistical reality, but nobody wants to hear that, so they don’t answer the question.

I have no idea what will happen on November 8th.  I know Hillary Clinton is the favorite to win, but Brexit was also supposed to lose.  There are a lot of silent people out there who will vote for Trump.  Actually, it won’t be so much of a vote for Trump as it is a middle finger to the establishment.  Stay tuned for the fireworks.

Will Donald Trump Start World War 3?

I have heard countless times over the last year that if Donald Trump is elected president, he could get us into World War 3.

I don’t know if these are talking points being repeated, or if people just think that because Trump is brash and gets into political fights, and that he will start a fight with the president or prime minister of another country.

We don’t really know what Donald Trump will do if he becomes president.  He continues to be a wildcard.  He sometimes contradicts himself, although that is not uncommon amongst political candidates.

It seems when Trump really studies an issue that he really gains knowledge and tries to hash out a reasonable and logical position.  In the eyes of the establishment, this just doesn’t work.

Trump has some terrible positions on economic issues, particularly his mercantilist attitude when it comes to trade.  He is right to criticize these managed trade deals, but he is wrong on protectionism.

On foreign policy, he sometimes says things that the war hawks would love.  He will casually talk about bombing others or taking their oil.  But then when he gets specific, he makes a lot more sense.  He takes a more non-interventionist approach.

It is possible that Trump could start a world war, but that is possible with anyone who gets into power with access to nuclear weapons that could blow the planet apart many times over.

The wars in the Middle East are horrible and dangerous.  Yet they still don’t compare to the possibility of war with another major power such as China or Russia.

Russia is the enemy du jour.  It seems that almost everything is blamed on Russia.  And if something doesn’t go right on the day of the election, then Russia is all ready to be blamed again.  When it comes to hacked emails and other things, there is absolutely no evidence that Russia is involved.

On the one hand, Trump critics will say that Trump will start World War 3.  Then on the other hand, they say he is in bed with Putin, or at least way too cozy with him.

This doesn’t really make sense.  Trump has said many times that he just wants to talk to Putin and to try to be on friendly terms with him.  What is so wrong with that?

If anything, Trump is the least likely person of all of the major candidates who have been in this race to start a war with Russia, or really anybody at all.

It is Hillary Clinton that has a track record of war.  She was the lead person in the war on Libya.  She voted for war in Iraq and she continued wars while Secretary of State.  She was also in office as Secretary of State when the Obama administration began its plans to overthrow Assad in Syria, which they are still working on.

And if there is any kind of war with Russia, it will probably start in Syria, where the Russian government is attempting to defeat the rebels (some might say terrorists) trying to overthrow Assad, with the help of the United States government.

This week, we have seen escalating tensions.  Joe Biden actually said that the U.S. will be conducting cyber attacks on Russia to send them a message.  This coming from the administration of the “peace prize” winner.

There is a story that Russian officials have been told to bring relatives home in preparation for war.  Regardless of whether this is propaganda and how true it is, it is still quite scary that it has come to this.

We had decades of a Cold War after World War 2, which should have ended with the fall of the Soviet Union.  Now U.S. officials keep poking a stick at the Russians, trying to instigate something.  We do not want this to turn into a hot war.

Even though Hillary Clinton (and Obama too) is a war hawk who sides with Goldman Sachs and the military industrial complex, I don’t think she wants a major hot war with Russia.  Nobody will benefit if there is a nuclear war.

But when tensions are running high and planes are flying around each other, accidents can happen.  There are stories from the Cold War where mistakes almost led to nuclear war.

If you are voting in the 2016 election strictly to avoid a major war, then Donald Trump should get your vote.  Actually, Jill Stein would be the most reliable, but we know she will not win.  Between Trump and Clinton, Trump is far less dangerous.  Hillary Clinton already has a track record of war.  She has blood on her hands from many different countries.

Again, we can’t be certain of what a President Trump would do.  But we can be fairly certain that a President Clinton will mean continued war and probably far more war.  With Trump, at least there is a chance for more peace.

This isn’t to tell anyone that they should vote for Trump.  That is each person’s individual decision.  But Trump is the least likely person to start a major war, and it is possible that we could even get some common sense out of him.

My Lottery Dream Home

I recently watched part of a show on HGTV called My Lottery Dream Home.  I don’t do a lot of random television watching, but sometimes I enjoy the shows on HGTV.

I have written before on Tiny House Hunters and the whole tiny home phenomenon.  It is a reflection of people not wanting to be in debt and wanting to live a simpler (and less cluttered) life.

I also enjoy House Hunters, House Hunters International, and Flip or Flop.  The couple on Flip or Flop seem to be very genuine, and the show is intriguing.  I am afraid it is also symbolic of a new housing bubble, although more localized this time around.

This recent show I watched – My Lottery Dream Home – is almost an experiment in human psychology.  They find real life lottery winners who want to majorly upgrade their living quarters with their new-found money.

I have seen the winning amounts range anywhere from $1 million up to as much as $180 million in one case.  In the situation of someone winning $180 million, I can completely understand buying a house worth a million dollars or more at that point.

The episode I saw involved a couple who won $2 million.  I did not hear if this is the lump sum and if it is before or after taxes.  I am assuming it is before taxes.

This couple lived in a very small house, so it was understandable of them wanting an upgrade.  But they were looking at houses with a budget of $750,000.  This has disaster written all over it.  Why couldn’t they have upgraded to a $200,000 house instead of jumping straight to a mansion?  This wasn’t California real estate where $750,000 won’t get you much.

If that $2 million was before taxes, they may have been lucky to end up with $1.5 million.  That means that at least half of their winnings is going towards buying a house.  My guess is that they do not have high incomes based on the house they are moving out of, although you never know for sure.

When you buy a house for three-quarters of a million dollars, you also get all of the expenses that come with homeownership.  With the higher price tag comes a higher price tag for insurance and property taxes and utilities.  You can see the money flowing out the door rather quickly.

This is really a lower class attitude.  Your class isn’t dependent so much on the amount of wealth or the level of income that you have.  It is more of a mentality.  Upper class people are future oriented.  Lower class people are very present oriented.

Being future oriented does not mean that you can’t be happy today.  You can enjoy the present.  It is just that future orientation considers the future.  In fact, I would venture to say that many future oriented people are far happier in the present than are present oriented people.  Present oriented people are trying to always gain satisfaction in the present at the expense of the future, but the stimulus quickly wears off.  It is like someone addicted to drugs where he needs an ever higher dose to get high again.

When someone wins the lottery, it does not change their class.  It changes their bank account, but it doesn’t change their mentality.  If someone has a lower class mentality, they won’t know how to handle the money and they will see it squandered quickly.  This is why you see so many disaster stories of lives that are wrecked after winning the lottery.

The whole idea of playing the lottery is one of present orientation.  Still, there are middle and upper class people who do sometimes win the lottery.  They know how to handle the new-found wealth and they treat it with care.  They make it last, whether they want to quit their job or not.

If you won $1.5 million after taxes, what would you do?  Would you quit your job?  Would you buy a house worth $750,000 to live in?  How much would you spend within the first year?

In today’s world, $1.5 million won’t last all that long if you are not relatively frugal.  It would be life changing for most people, but not always in a positive way.

If you ever win the lottery or come across any new-found wealth, I hope that you have an upper class mentality, or at least an upper middle class mentality.  If you don’t, you will probably find yourself in the same situation (or worse) in 10 years as where you were right before your new-found winnings.

I fear that the lottery dream home will turn into a nightmare for some.

Is Fractional Reserve Banking Harmful?

Tom Woods recently held a debate on his podcast about whether fractional reserve banking is economically benign.  John Tamny argued that it is essentially harmless, while Jeffrey Herbener argued that it is.

First off, both men were gentlemen.  It is good to hear a civil debate where the two sides aren’t just looking to score cheap shots.  It was meant to be an intelligent debate for intelligent people.

Second, both men took the position that fractional reserve banking should be legal in a free market system, as long as the depositor has the understanding that his money may not be there upon request if a lot of other people show up before him.

I think this is the correct libertarian position.  It amazes me that there are so many anarcho-capitalists who say that fractional reserve banking should be illegal.  Who is going to make it illegal?  And who are they going to point the gun at?

If it is clear to depositors that their money will be used in this way, then it is a voluntary contract between consenting parties.  It is not fraud any more than insurance is a fraud.  Insurance companies rely on the fact that not everyone is going to make a claim at the same time, if at all.

The important thing to note is that fractional reserve lending would likely be far more limited without the existence of a central bank (the Fed) and without government deposit insurance (FDIC).  This was Mises’ view as well.

And speaking of Mises, it was funny that Tamny kept saying how much he admires Mises, yet Tamny himself basically denies the Austrian Business Cycle Theory.  This is rather peculiar given that it is one of the cornerstones of Mises’ writings on economics.

I think Jeff Herbener is one of the smartest guys in existence when it comes to economics.  The one drawback is that I am not sure that he always makes a good connection with the layperson.  If you have a group of economists at an Austrian Scholar’s conference, there is probably nobody better to listen to than Herbener.  I am just not sure he connects with people who do not specialize in economics, as sometimes he gets too technical.

Tamny made a decent analogy with leasing jets.  He also made a really bad analogy with lending money.

He compared fractional reserve banking to person A lending $3,000 to person B, and then person B lending that $3,000 to person C.  But this analogy falls flat because person A and person B cannot spend this money when it is in the hands of person C.

Compare this to fractional reserve lending, where person A deposits money in a bank, which is then loaned out to person B and person C.  All three people can spend this money at the same time.  It can be used to bid up prices.

Another issue that I don’t believe was mentioned (or at least not emphasized) is just the very existence of the Federal Reserve and how this magnifies the harm of fractional reserve lending.  If the money supply were relatively stable, then even a large degree of fractional reserve lending would have a minimal impact.

If banks have already lent out 90% of the bank deposits (assuming a 10% reserve requirement), then it is already a done deal.  If there is no monetary inflation, then there will be no more inflation from fractional reserve lending.  The problem comes in the fact that whenever the Fed increases its monetary base by buying assets, it is magnified by 10 times if the banks do not hold the new money as excess reserves.

(As a side note, this is part of the reason that price inflation has remained relatively low since 2008, despite an explosion in the adjusted monetary base.  Much of the new money went into excess reserves instead of being lent out.)

One other point in response to Tamny is in regards to his claim that demand deposits make up a small fraction of the total money that is lent out, which makes the whole issue insignificant.  I can’t verify his claims, but it still misses the point.  This money is being multiplied by as much as 10 times over, which then does make it very significant.

In conclusion, it actually doesn’t matter in terms of policy of who is right here.  The key is that we need to eliminate the FDIC, central banking, and all of the other government regulations.  We need a free market in money.  If that ever becomes a reality, then fractional reserve banking will be relatively harmless at that point, and the banks that abuse it will quickly find themselves out of business.

Libertarian Perspective of Presidential Debate – 10/9/2016

I expected fireworks in this debate and it did not disappoint.  After those tapes were released of Donald Trump making crude remarks about women, it was obvious that things were going to get ugly.

The first half hour of the debate really got down into the dirt.  It was mostly personal.  I am not even sure that they shook hands at the beginning.

I won’t go over the political issues much.  We all know that neither one of them is a libertarian or even close to it.  Hillary Clinton is the opposite of libertarianism in almost every way.  Trump is more of a wildcard.  He says a lot of bad things, but he at least shows some honesty and gives us a little hope of a less interventionist foreign policy.

I don’t understand why Clinton attacked Trump personally at the beginning (or at all).  She has most of the entire establishment media on her side doing her dirty work.  Anyone paying attention knows about the recent Trump comments from 11 years ago.  But as soon as Clinton attacks him on this, it opens her up to being attacked for her decades of criminality.

I knew Trump was not going to go down easy.  He didn’t go as far as, “Your husband is a rapist, and what happened to Vince Foster?”, but he did go after her pretty hard.  I know some people will like him even less, if that is possible, but he had to attack her.  He can be crude and brash, yet is probably honest for the most part.  She is a criminal in many aspects, both politically and personally.

In terms of foreign policy, especially with Syria, there was a lot to like from a libertarian perspective.  Syria is a disaster and much of it is due to Obama and Clinton.  They were already trying to overthrow Assad when Clinton was still Secretary of State.  It is ridiculous that they are trying to overthrow a guy who has kept relative peace and allowed religious freedom, unlike Saudi Arabia (the Clinton Foundation donors).

Trump was asked for his comments on what Mike Pence had said about Syria and Russia.  Trump said he hadn’t spoken to him and disagreed with those comments.  I know a lot of people laugh at this, but it made me like Trump a little bit more.  I knew Pence was a mistake, and it was done to appease the Republican establishment.  Pence was not a good life insurance policy for Trump.

At this point, I don’t know how the undecideds will react to this debate.  Perhaps these attacks will convince some people to not vote at all, which is just as important.  Believe it or not, there might be some people who do not know a lot about Clinton’s emails and her other lies.  I don’t know if Trump damaged her enough to convince any significant number of people to not vote for her, but I highly doubt that anything Clinton said did anything because the establishment media has already said everything bad there is to say about Trump.

Also, I thought it was smart for Trump to criticize the “moderators”, who are so obviously in bed with Clinton and out to get Trump.

This is only going to get uglier and we still don’t know if Wikileaks has anything good.

From a libertarian perspective, it is encouraging that Trump is bringing up some of these valid questions of the U.S. government’s interventionist foreign policy.

On the other hand, the fact that everything is so personal (and about personalities) is not all that positive.  It actually is something of a distraction from the big issues of war, the Federal Reserve, massive debt, massive unfunded liabilities, and big government in general.  But regardless, at least it isn’t boring.

A Libertarian Survives Hurricane Matthew

I live in Northeast Florida and just went through Hurricane Matthew.  Although the eye of the hurricane did not make a direct landfall on Florida, it was damaging nonetheless.

I know that some will say the media exaggerated the threat and hyped up the storm.  And certainly, there are some media outlets that did probably over exaggerate certain things.  Still, I would say overall that the coverage did not over exaggerate the situation.

The storm did not make a direct hit, but it was still quite devastating for some people, especially in terms of flooding.  When you have the ocean crashing against houses, it is not a good situation.

I live about 15 miles from the beach and did not have to worry about flooding.  We had friends who live right near the beach stay with us.  They were able to return to their homes rather quickly.  This is a better situation than I have heard from some cities from past storms where residents are prohibited from going back to their homes for days.

As a libertarian, I don’t like the term “mandatory evacuation”.  I understand that it is a safety issue of getting residents out of dangerous zones.  Still, couldn’t they call it a “highly recommended evacuation zone”?

Luckily I did not hear any reports of widespread looting, which can easily happen when the vast majority of residents evacuate.  The lesson from Hurricane Katrina is that the police don’t prevent crime. It is the presence of the general population that prevents it.

The thing that fascinated me the most is the economics of the situation.  In Florida, there are always warnings about so-called price gouging when a storm hits.  It doesn’t matter if the governor and attorney general and other politicians are Republicans or Democrats.

As an advocate of free markets, I hate these price gouging laws.  The politicians act as if they are being so caring, watching out for the people.  But they are an interference in the marketplace that harms individuals.

When there is a shortage of supplies, we need for the price mechanism to work more than ever.  Before and after a hurricane, there are typically shortages of many things including bottled water, gasoline, flashlights, batteries, canned food, bread, and hotel rooms.

If businesses were allowed to adjust their prices up, then consumers would conserve more when buying.  You may not buy as many bottles of water if they are double the price of what they normally sell for.  I saw this at the grocery store where all of the cheap loaves of bread were gone.  However, there were a few loaves left of high-end bread (if that is what you want to call it) that sell for almost four dollars.

In addition, when prices go up, it motivates sellers to provide more.  If the price of bottled water doubles in price, it could motivate someone from a hundred miles away to drive in a truck full of water to sell it.  He isn’t going to go to that trouble if there is no profit to be made.

In spite of the price gouging laws, it was still amazing to see the market process work.  We went out the next day and most restaurants were open and grocery stores were open, at least where power had been restored.  The grocery stores use generators to keep their refrigerated and frozen foods.  I really don’t know how the restaurants had good food, whether it was from delivery that day or from generators.

The gas stations with power were up and running again too.  They had mostly run out of gas just before the storm hit.  It didn’t take long to get replenished.

This just shows the great advantages of a high division of labor society with a large population.  Due to having a gas stove, we didn’t have a cold meal at home and we ate out about 24 hours after the height of the storm.

It is simply amazing how well off we are in our high division of labor society.  It is too bad that government at all levels inhibits our living standards as much as is the case.  We could be even better off if government spending and regulations were to shrink.

In conclusion, the hurricane showed just how much damage could be done, even without a direct hit.  But even with the damage, the marketplace is able to adjust very quickly and get people back on track to a normal life again.

Libertarian Perspective of Vice Presidential Debate – October 4, 2016

This vice presidential debate was painful to watch.  Donald Trump gets criticized often for calling other people names, and sometimes he really does sound like a 3rd grade child.  But this vice presidential debate was just completely childish.

They were both sent out as attack dogs.  Tim Kaine was there to attack Donald Trump.  Mike Pence was there to attack Hillary Clinton.  The “moderator”, Elaine Quijano, was there to attack Trump.

From a libertarian standpoint, I am not a fan of Mike Pence.  But I will get to him in a moment.

This guy Kaine though is a total hack and a total phony.  At least when Hillary Clinton lies, it could be somewhat believable if one didn’t actually investigate the facts.  But Kaine speaks to the audience as if everyone is a bunch of dumb children.  He reminded me of a male version of Debbie Wasserman Schultz at times – like a little gnat that won’t shut up.

Both candidates interrupted each other frequently, but it was especially ridiculous on Kaine’s part.  For the first 30 minutes of the debate, it seemed that Pence could not speak for 10 consecutive seconds without being interrupted.  And the so-called moderator would either allow it or actually side with Kaine and try to give him time.

Pence should have told him to shut up and to stop interrupting.  I blame him for allowing it to happen and not calling both of them out on it.  I don’t understand why Pence (and Trump in his first debate) allow these so-called moderators to be shills for the Democrats without pointing it out.  Most Americans, other than hardcore Democrats, no longer trust the establishment media, so Trump and Pence aren’t going to lose any points by politely pointing out that these people are in the tank for Hillary Clinton.

When Kaine wasn’t attacking Trump (and even sometimes when he was), he was constantly promoting the agenda of the left of ever-expanding government.  It is not a surprise, but it is just amazing that so many people can fall for this total propaganda.

Kaine is just horrible on everything from a libertarian perspective.  The few times he made sense, he was mostly lying.  He slipped in a few things about getting troops out of Iraq and about preventing Iran from getting nuclear weapons.  The best we can do here is to give Obama credit for not going to war with Iran.  He could have been even more violent than he has.  But if it is up to Hillary Clinton, she probably would go to war with Iran.  She is a bigger war hawk than Obama.

Kaine is just a total annoyance.  I don’t understand how anyone can believe the garbage coming out of his mouth.  He was talking about Trump calling women pigs, slobs, etc.  Then he said that it breaks his heart that he has to say that in front of his wife and other female family members.  Yes Tim – I’m sure your heart is just breaking for them having to hear those words.  What a complete phony.

One last thing on Kaine.  He mentioned that Trump had said Obama wasn’t born in the United States.  Then he brought it to race.  What is wrong with Trump and Pence?  Why don’t they respond to this?  They should say, “Why do you have to bring up race?  Can’t someone question where Obama was born without being a racist?  That is one of the problems in this country.  People feel like they can’t say anything anymore.  We are living in a world of political correctness.  You can’t even criticize the president without being called a racist.”

I guarantee you this won’t lose any votes.  Most people in the U.S. truly are fed up with feeling like they can’t say anything without risking being called a racist or having race brought up as an issue.  The people who wouldn’t like such a response are already in it for Hillary.

In terms of Mike Pence, I think he is a typical Republican conservative.  He sounds better than the Democrats on some economic issues.

I still think it was a mistake on Donald Trump’s part in picking him.  I wish he had picked someone who was less pro-war.  It makes it harder for Trump to defend a relatively non-interventionist foreign policy.

Pence is not similar to Trump, or at least the Trump from the Republican primaries.  Pence plays it safe.  He says the politically acceptable things.  He doesn’t leave the zone of acceptability.

Trump played that safe game in the first debate, at least for him.  He needs to get back to what won him the Republican nomination.  If he doesn’t, he may hand the election to Hillary Clinton.  I don’t think he will ultimately go down without a fight, but the fight didn’t start with Mike Pence.

I am glad there is only one vice presidential debate.  It was tough to watch.  Overall, I don’t think it is going to move a lot of people.  If anything, a few independents might move away from Hillary Clinton because Kaine was such an annoyance.

Don’t End Up Like Japan

While I am somewhat pessimistic about the U.S. economy in the short run, I consider myself to be a long-term optimist.  I think there is still something of an entrepreneurial spirit in America that does not exist to the same degree elsewhere.

It is socially acceptable to make a lot of money in the United States.  In fact, it is something that many aspire towards.  Of course there is class warfare, but it is to a much lesser extent than in many other countries throughout the globe.

There is unquestionably an economic mess in the U.S.   The national debt is approaching $20 trillion, while the unfunded liabilities are likely in excess of $200 trillion.  At some point, the U.S. government is going to default on some of its promises.

In the more short run, there is also the issue of the Fed’s massive monetary inflation from 2008 to 2014, which likely created huge malinvestments that will eventually need to correct to reflect actual consumer demand.

This will all be self-correcting to a certain extent.  The Fed can only print so much money without risking massive price inflation, or even hyperinflation.  Even with money printing, there are limits.

When price inflation finally shows up in a significant way, and interest rates go higher, then the Fed will finally be forced to keep a tight stance, as it did in the late 1970s.  Congress will essentially be forced to scale back and actually cut the budget.  I know this sounds hard to believe now because they have kept this game going for so long, but the day will come.

My biggest fear is that we will be like Japan.  I don’t think we will be, but that should be our biggest worry.

The story of Japan almost seems to practically refute all of economics, if such is possible.  They have had massive monetary inflation just in recent years, while the debt-to-GDP ratio is in the neighborhood of 250%.  Meanwhile, price inflation has actually remained low and interest rates are near zero, or even negative in some cases.  It almost doesn’t seem possible.

But if you study Austrian school economics, the most important thing to understand is that economics is really the study of human action.  And for this reason, the story of Japan doesn’t refute economics.

If anything, the story of Japan refutes Keynesianism.  The Japanese government and Bank of Japan have done exactly what the modern-day Keynesians (such as Paul Krugman) say is supposed to be done.  They have ran huge deficits and engaged in huge monetary inflation. Yet, the economy there continues to suffer dramatically.

The problem with Japan is that the people there apparently have way too much faith in their government and central bank.  They buy bonds at ultra low interest rates.  I don’t understand if they just don’t know better or if it is some kind of patriotic duty.  I guess the bond investors have been right in a sense up to this point, just as any investors in a bubble are right, as long as they aren’t still holding their investments when the bubble eventually bursts.

At some point, things are going to come crashing down in Japan.  The problem is that a correction should have happened a long time ago, and it should have been allowed to happen.  The massive government spending and debt and inflation is just making the problems worse, as resources are continued to be misallocated.

From 2008 to 2014, the Fed mostly got away with its huge monetary inflation.  Much of the new money went into bank reserves.  This, coupled with the increased demand for money, has kept consumer price inflation relatively low.

The problem is that resources are still being misallocated, as capital is diverted away from the private (voluntary) sector.  So even though there is low consumer price inflation (according to government statistics), the Fed’s inflation is still very damaging.

I don’t think it will be like Japan though.  I don’t think it could last as long.  The Fed has actually kept its monetary policy tight for two years now.  If the Fed goes through with another round of massive monetary inflation, I think Americans will be more likely to not hold their money for as long.

This will eventually happen in Japan too, but I think the population is too trusting of its government and its currency.  They are fearful, and rightfully so, but they have a high demand for money because of this.  The fear is more about the economy without consideration of the depreciating currency.  At some point, there will be fear that will include a fear of a bad currency.  That will lead to greater velocity, as money changes hands more frequently.  It will bid up prices.

I don’t want a scenario like Japan to happen in the U.S.  It just prolongs the pain.  We should hope for a correction that cleans out the bad investment.  If the Fed is going to print money (digitally speaking), we should actually hope for higher price inflation, so that at least the Fed will get blamed.

Americans should hope that their government and central bank will do the opposite of the Japanese.  But if that is not the case, then we can at least hope that Americans will not be as trusting, and that our fear will result in less desire to hold dollars in a bank account.

If the central bank is going to engage in monetary inflation, we are better off feeling the pain in terms of higher consumer prices, rather than have the misallocation of resources drag on for a long time.

Deutsche Bank: Here We Go Again

Shares of Deutsche Bank have been getting hammered, and it is spreading to the overall markets.

Stocks were down big on Thursday – including U.S. stocks – as the news for the major German bank darkened.  It has been a rough couple of weeks for the bank.

The U.S. “Justice” Department announced a couple of weeks ago that Deutsche Bank would face $14 billion in fines, although it is expected that this will be negotiated down.  If there is major financial trouble for the bank that could cause major ripple effects throughout the global economy, then we can expect that this proposed fine will be reduced quite a bit.  Otherwise, it will just be another case of the central banks bailing out a company after it pays fines.  What’s the point?

I think the more significant news just came out that some hedge funds are reducing their business exposure in terms of trading derivatives related to the bank.

This is a modern-day version of a bank run.  The bank runs of today aren’t what they used to be, where you would see a line of customers outside on the street, waiting to hopefully withdraw their deposits.

In today’s world of big banking, there is little threat of such a run.  There isn’t enough physical currency to matter that much.  The bank runs take place when other businesses withdraw their money.  They move their digits from one bank to another bank.  They move from a bank that they see as unstable to a bank that is seen as more stable.

This is essentially what happened to Lehman in 2008, which preceded the financial crisis.  Of course, this was part of the financial crisis, but people just didn’t know it yet.

If German officials or the European Central Bank is essentially forced to bail out Deutsche Bank, this isn’t going to look good.  It is also going to have a major impact on the economy.

And for all we know, maybe the Fed will help in the bailout process too.  Since the Fed basically keeps a lot of what it does hidden, we might not even know about it.

We already know that the Italian banks are shaky.  Now we are adding a behemoth German bank to the mix.  And who knows how many others could fall easily with another financial crisis.

I think the major U.S. banks are more stable at this point.  They should be, since the Fed has been bailing them out since 2008.  Not only did the Fed buy off their bad debt (mortgage-backed securities), but the Fed has been paying the banks interest on their reserves this whole time.  One would hope that the U.S. banks are more solvent today than they were 8 years ago.

Still, we know that the global economy is shaky with all of the easy money and low (sometimes negative) interest rates.  There is going to be some kind of a global correction at some point.  Perhaps the word correction is too light.

All it takes is one thing to tip the first domino over.  In a healthy economy, the story of Deutsche Bank wouldn’t matter as much.  But we can be rather certain that this trouble isn’t just confined to Deutsche Bank.

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