Google Fined by EU: A Libertarian View

The European Union (EU) recently fined Google about $2.7 billion based on claims that the company broke antitrust rules.  The decision from the European Commission stated that Google used its search engine to drive traffic to its own shopping platform.

In other words, Google used its own website to promote its own products.  How dare they do such a crazy thing?

In a touch of irony, Google is one of the few companies in this world – and probably the only big one – in which its prime function is to drive people away from its website.  When I do a search on Google, I am often shown links to Wikipedia, to Amazon, to other news sites, to blogs, and anything else that is out there.

I know that some libertarians will complain about Google because the company executives are a little too cozy with big government.  It is perhaps a legitimate complaint, but we should not forget that the success of Google is due to its great value that it has brought to its customers.  There are hundreds of millions (maybe billions) of people who use Google as their search engine.  Plus, there are many businesses and entrepreneurs who rely on Google for advertising.

If Google had gotten as big as it is because of government favors, then we would have a lot more to complain about.  But it doesn’t depend on government subsidies like solar energy or electric cars.  Google’s coziness with government came after it became big.  And apparently it is not cozy enough with the bureaucrats in the EU.

This whole thing reminds me of what happened to Microsoft in the late 1990s/ early 2000s when the Clinton administration went after it for being monopolistic.  Again, there is much to complain about Bill Gates and Microsoft from a libertarian point of view (especially in its use of patents and copyrights), but the whole thing was mostly just a case of extortion.  After that incident, Bill Gates became more political.  We are worse off for it, but Microsoft is probably better off for it because playing the political game can keep the government off your back.

The whole European Union is an extortionist organization.  Of course, there was nothing like a trial that happened.  The socialist/ fascist bureaucrats are just trying to suck more money from wherever they can.  They are also going after the other major companies such as Apple, Facebook, and Amazon.

Google, of course, disagreed with the decision and plans to appeal it. I know that the Google executives don’t want to shoot themselves in the collective feet, but I really wish they would take a harder stand.  Instead of arguing that they really didn’t break any antitrust rules, they should argue that these rules are illegitimate.  I also wish they would call out the EU bureaucrats and point out that they are a bunch of thieves.  I wish the Google executives would point out the total failures of the EU and the bureaucrats.  One can always hope.

I know that the Google executives are supposed to be looking out for the shareholders.  But if they sit back and take it, they are going to be continually abused, and they are going to find that their business is not very profitable in Europe.  It is hard to be profitable in an area that fines you $2.7 billion.

The ultimate revenge would be something out of Atlas Shrugged.  Google could release a statement that says it refuses to pay the fine, and if the EU continues to insist on fining the company, then Google will no longer offer its services in their jurisdiction.  Since the UK voted for Brexit, Google could still offer its services in Britain.  Of course, it can still offer its services everywhere else in the world that is not issuing billion dollar fines.

These antitrust laws are nothing but an excuse for the politicians and bureaucrats to extort money out of big companies.  If a company is not receiving government subsidies or using government to prevent competition, then a company will only be profitable by meeting consumer demands.  If it has a large share of the market, it is because it is doing a good job of meeting consumer demands.  But nothing is ever permanent.  Microsoft now has major competition from Apple.  For search engines, there were other companies that dominated the sector before Google.  In a decade from now, it could still be Google, or it could be some other company that we have never even heard of.

The only monopoly we should worry about is the monopoly over the use of legal violence.  That is held by governments (states) around the world.  The bigger and more powerful these monopoly governments get, the worse it is for human liberty and prosperity.

We Need Illinois Bankruptcy, Along with Others

The state of Illinois is on the verge of bankruptcy.  It was quite evident that things were not going well a couple of years ago when lottery winners were not receiving their money.  Still, as we know, things have a tendency to last longer than we think possible.

State and local governments are different than the national government in Washington DC.  The politicians in DC have the benefit of a central bank that can create money out of thin air.  This makes it possible to run huge deficits at relatively low rates.  When a government doesn’t have the ability to print money, or receive money from an entity that can print money (such as Greece from the European Union), then the government is far more limited in its ability to issue debt.

The state of Illinois can’t create money out of thin air like the Fed.  If it wants to borrow more money, and its fiscal soundness is in question, then lenders can ask for higher interest rates.  It puts a severe limit on the state government’s ability to borrow endlessly.

There are many good reasons that Illinois should go bankrupt.  This should be repeated by many state governments and local governments.  There will be winners and losers.

In a bankruptcy of a state government, the losers become apparent rather quickly.  They are people who previously were benefitting from the plunder of the population.  They are the politicians, the lobbyists, the government workers, the government retirees receiving large pensions, and really most anyone connected to government funding.

Yes, this includes retired teachers and firefighters if their pensions are cut.  But should the rest of the population suffer to pay for the lavish retirement of these people?  It is just plain ridiculous in many of these places when a teacher or firefighter can work for 20 or 30 years and then receive half their salary (or much more in many cases) for the rest of their lives.  There are not very many so-called private sector jobs that offer these kinds of benefits any longer.  In addition, they usually get some kind of great health insurance package that is not available to most other normal people.

When a middle class family is working hard and struggling to pay their bills, it isn’t fair that some retired teacher is raking in a portion of this family’s money and living the good life.

In a state bankruptcy, the winners will be the population at large that isn’t losing out on any great benefit.  Even some people who are seeming losers for no longer receiving some benefit may actually end up making out better in the end.

The bottom line is that there is a bubble in government spending.  This is true of the federal government.  It is true of state and local governments.  With state and local governments, some are obviously far worse than others.

After the fall of 2008, state and local governments were somewhat forced to cut back, or at least temporarily stop the expansion of government.  This was not true of the federal government.

Illinois is typical of the blue state mindset where there are few limits to taxation and spending and regulation.  But now they are finding out there are limits.  At some point, the people will not put up with paying more taxes when they are already struggling to such a high degree.  Even the excuse of it being “for the children” may no longer work for the politicians.

Just as with any bubble, it needs to pop.  While the popping is painful for those who benefitted from the excesses, the correction needs to happen.  There is a reason it is called a correction.  It is a reallocation of some resources away from government and towards actual consumer demand.  For most, it will ultimately mean a higher standard of living.

I hope that Illinois goes completely bankrupt.  I also hope that the people there realize that they are far better off with a much smaller government, despite the whining of the bureaucrats.  The timing of this seems to work well, as I don’t think the politicians in DC will try to get away with a major bailout of the state.  There are too many Republican politicians who would lose their job if they supported such a measure.

Does the Money Supply Have to Grow with Production?

One of the arguments used against having gold serve as a form of money is that the money supply has to grow.  While new gold is mined from the earth, it may not be enough to keep up with production, argue the gold critics.  Even some who are otherwise sympathetic to the free market will use this as an argument against gold.

If production increases at a faster pace than the gold supply (or any form of money), it is argued by some that this will not accommodate the demand for money.  Small amounts of gold already carry a high value, and this will only be exacerbated with increased production.

As I write this, gold is valued at about $1,250 per ounce.  Of course, if gold were used as a medium of exchange, we wouldn’t worry about the dollar value of gold.  We would worry about the weight of gold.  If the dollar were fully backed by gold, then the dollar/ gold price should stay the same.

Let’s say, for simplicity, that gold is valued at $1,000 per ounce.  That means that for a one dollar item, you would need to pay with 0.1% ounces of gold, or 1/1,000th of an ounce.  If capital investment and technology increase production at a strong pace (which is more likely under a free market monetary system), then that $1 item will likely gradually decrease in price.  This happens today with electronics, in spite of the existence of monetary inflation.

If that same item eventually went down to 10 cents, then you would need 0.01% ounces of gold, or 1/10,000th of an ounce.  It gets to be hard to pay with this amount of gold.  You would have to start using gold dust.

The market may turn to another metal (such as silver), or some other commodity, that has a lower value per unit.  But with today’s technology, there are many other options.

You could still use dollars (backed by gold) or some other type of certificate that represents gold.  A gold warehouse could issue 10,000 certificates that each represent 1/10,000th of an ounce of gold. The gold warehouse stores the gold, and the certificates are redeemable in gold.  The warehouse could put limitations on redemption, such that someone could not walk in with one certificate and redeem a tiny speck of gold.

With today’s technology, it is also not hard to imagine electronic digits that are backed by gold.  You could have a bank checking account with a certain amount of money that is backed by gold.  You could buy an item for 10 cents or 1/10,000th of an ounce of gold using a credit card, or a debit card, or your smartphone.  It might be something similar to Bitcoin, except the currency would actually be backed by gold.

The point is, the free market would figure this out.  It doesn’t have to be centrally planned.  With today’s technology, it would be rather easy for competing businesses to figure out efficient methods for using money.

And if things get continually cheaper simply because of increased production, this should be celebrated.  Price deflation that is a result of increased production means that we can purchase more with our money.  It ultimately means a higher standard of living.

Hey Bernie, Socialism is Violence

After the shooting in Alexandria, Virginia, it was discovered that the shooter was a Bernie Sanders supporter.  Bernie Sanders was quick to repudiate the act of violence.  And to be clear, just because the guy was a Sanders supporter, it in no way makes Sanders guilty of anything.  Bernie Sanders, or anyone else, is not responsible for the actions of others, unless maybe you are talking about young children.

My issue here is that Bernie Sanders, in condemning the violence, was contradicting everything he stands for.  Sanders has been better than the average politician on foreign policy, but even here he had no problem supporting the war hawk Hillary Clinton when it came time.  But even more to the point, Sanders is a self-avowed socialist.  Since he is using the state to employ his socialist means, he is endorsing violence.

In Sanders’ statement about the shooting, he stated the following: “Violence of any kind is unacceptable in our society and I condemn this action in the strongest possible terms.  Real change can only come about through nonviolent action, and anything else runs against our most deeply held American values.”

But the socialism that Sanders advocates is violence.  There are many different definitions of socialism.  There is the definition where it means the state has ownership over the means of production.  In Sanders’ case, he is basically representing some form of more extreme Keynesianism and welfare.  He believes in a massive government welfare system where the rich are forced to further subsidize the poor.

Regardless of what Sanders means when he refers to himself as a socialist, he wants to use the state to enforce his agenda.  He is not advocating a socialist system that is voluntary.  If a bunch of people want to get together and have their own socialist system that does not force anyone to take part, then there should be no objection, including from libertarians.  Whether or not it is smart makes no difference, as long as it is voluntary.

But when you use the power of the state, as Sanders wants to do on an even bigger scale, you are using the threat of violence, and ultimately violence.

It is no coincidence that every hardcore socialist society ends up as a tyrannical society.  This is where you see mass murder, massive injustice, violence, and political repression.  The reason is because this is ultimately what socialism comes down to.

If you are trying to enforce state socialism, not everyone is going to go along, especially when living standards are low or declining.  At some point, the socialists in charge have a decision to make.  They either have to give up on their idea of socialism (or at least back off on the most extreme parts), or they have to employ severe violence.

Virtually every state action is backed up by violence or the threat of violence.  But when state socialism is carried out, this violence becomes far more severe, and far more apparent.

When you point out Venezuela, or China under Mao, or the Soviet Union, the socialists will say that these are not examples of what they want.  They will say that these socialist systems were not properly implemented, or were not true socialist societies.  But these examples are socialism brought to the ultimate conclusion of mass murder and tyranny.  This is what happens when socialism is enforced to the fullest.

When Sanders says that violence of any kinds is unacceptable, he really means that violence not committed by the state is unacceptable.  In his view, it is perfectly acceptable for the state to use violence, or else there would be no way for him to implement his socialist vision, whatever that entails.

If Sanders really wants to condemn violence, he should start by abandoning his socialist views.

FOMC Statement and CPI Report Collide

Whoever planned the Federal Open Market Committee (FOMC) calendar gave us a real treat and put the Fed in a rather difficult position.

The FOMC wrapped up its latest meeting on Wednesday, July 14, 2017 and released its statement on monetary policy.  This was followed by a press conference by Janet Yellen.

It was widely expected that the Fed would raise its federal funds target rate by one-quarter percent, which it did.  The rate is now between 1% and 1.25%.  The Fed will now pay banks 1.25% on their reserves.

The problem for the Fed is that the statement on monetary policy was released after the CPI report had come out earlier in the day.  The consumer price index numbers were lower than expected.

For May, the CPI actually came in at -0.1%.  The year-over-year decreased to 1.9% after being above 2% for several months before.  Even the usually-steady median CPI went lower.  The year-over-year median CPI dropped to 2.3%.  It was 2.5% back in March.  This may not seem like much of a deceleration, but the median CPI has barely moved for a long while now.

If consumer prices are increasing at a slower pace, or even decreasing, it is not likely due to massive productivity gains.  Although this would be likely in a true free market environment, it is hard to believe that there are major productivity gains right now that are driving down consumer prices.  In the electronics industry, this has been happening for decades, despite the continual inflation.

A deceleration in consumer prices is mostly due to an increase in the demand for money.  Put another way, velocity is slowing.  Money is changing hands less frequently.  It indicates a likely softening in the overall economy.  This is in spite of the fact that the stock indexes are hitting all-time nominal highs.

The FOMC was expected to hike its target rate in June.  If it had failed to do so, I think people (especially investors) would have mostly reacted negatively.  They would have seen it as a sign that Fed officials see a weak and vulnerable economy.

On the other hand, the CPI numbers are indicating a possible softening of the economy.  So the Fed had to hike its target rate in the face of a softening economy.  Is this the beginning of the end for this phase of the bubble?

In addition, the Fed is now addressing its bloated balance sheet, which approximately quintupled between 2008 and 2014.  How is the Fed going to drain off assets of trillions of dollars?  This is especially difficult with mortgage-backed securities, some of which are now virtually worthless.

You can read the Fed’s plan here, if you want to call it that.  It “anticipates” that it will reduce Treasury holdings by $6 billion per month, and then increase its reduction in increments of $6 billion at three-month intervals until it reaches $30 billion per month.

For mortgage-backed securities, it will reduce its holdings by $4 billion per month initially, and then increase it in $4 billion increments every three months until it reaches $20 billion per month.

In other words, the Fed – if it follows through – will eventually be reducing its overall balance sheet by $50 billion per month.  This will be monetary deflation.  It will do this by not reinvesting the principal payments on maturing securities.  It will technically not be selling off assets.  It just won’t roll over as much each month.

I don’t think anybody thinks the Fed will reduce its balance sheet to anywhere near the level that it was prior to the fall of 2008.  The Fed’s statement itself says this.  But I have bigger doubts than just the size of the reduction in the balance sheet.  If the latest CPI numbers are indicating a softening economy, what happens to the Fed’s plan if we hit a recession?  Imagine that stocks go into a massive downturn.  Is the Fed really going to engage in monetary deflation while this happens?

I hope the Fed does follow through, but you can see that I remain extremely skeptical.  If we hit a big enough recession, not only do I think there will be no monetary deflation, but I also think we may see more quantitative easing (monetary inflation).

The Fed has actually gotten off rather easy over the last several years.  It was able to engage in massive monetary inflation, yet consumer prices have been rather tame.  The massive increase in excess reserves at commercial banks accounts for much of this.

Sometimes when things just hum along, you assume that they will stay that way for a long while.  Sometimes it is true.  This bubble has lasted longer than I thought it would.  But at some point, something gives.  The Fed has already kept the monetary base stable for the last 2 and a half years.  If it goes into monetary deflation mode now, I don’t know what is going to support the stock markets.  Stocks seem to be the biggest of the bubbles in this economy.

If stocks hold up for a while longer, then maybe we will get to this phase of monetary deflation.  If stocks give out, I don’t expect the FOMC’s plan to come to fruition.  It will be back to its Keynesian ways of creating money out of thin air.

We need a good correction for the benefit of consumers.  We need a reallocation of capital that is in accordance with consumer demand.  Unfortunately, if and when we get such a correction, I don’t think the Fed will do nothing.

Would Stocks Rise Without Inflation?

I recently wrote a post saying that investors should not expect an 8% return on a long-term basis by investing in the broad stock market.  This is particularly true if you account for inflation.  If the economy cannot even grow at an annual rate of 3% – even according to the government’s own statistics – why should we expect an easy 8% return that is sustainable?

It is easy right now to think that an 8% return is a reasonable assumption, given that stocks are hitting all-time nominal highs, while the government’s reported consumer price inflation is relatively low.  The problem is that we go through bubbles and busts, and we don’t know when the next bust is going to hit, or how hard it is going to hit.

While the government’s CPI numbers are showing price inflation to be around 2% per year, this likely understates the impact of the Fed’s monetary policy.  True inflation is the increase in the money supply.  The rising prices are one effect of this.  If productivity is still increasing, or the demand for money is increasing, then the price inflation numbers may not be telling us the full impact of the Fed’s previous loose monetary policy (2008 to 2014).

Therefore, even if we do get an average of an 8% return on stocks, actual inflation could be higher than the reported price inflation of approximately 2%.  If actual inflation is, let’s say, 4%, then your 8% return is really just 4%.

I cannot predict what nominal returns on stocks will be over the coming years.  It could be negative.  It could be flat.  It could be 100% over the next decade.

Here is the problem.  If consumer prices double over the next decade along with stocks, then your 100% return is actually nothing.  Actually, it is worse than nothing because you will owe taxes on your 100% “gain”.

In a world without any monetary inflation, the broad stock market index would not likely see wild swings.  Over time, it would not go up or down a lot.  Individual stocks would certainly go up or down depending on their profitability and their future outlook for profitability.  But the broad market would not likely see significant capital gains.

This does not mean it would not be beneficial to own stocks.  You are owning a piece of a company.  The company can pay dividends.  In a free market, a company likely would pay dividends if it is profitable.

You would also be gaining purchasing power.  If you own a stock that pays an annual dividend of 3%, and you sell it 5 years later for the same amount you paid for it, then in a free market setting without monetary inflation, you would likely have gained purchasing power.  It would have been the same as holding it in cash.  But by taking the risk of investing it, you got an annual return of 3%, plus the gain in purchasing power.

I am not saying we should live in a world with no monetary inflation, but I am saying that it would overall be beneficial as compared to what we have now.  In a true free market, it would be up to the market to decide what to use for money.  Historically, this has been gold and silver.  Even with gold and silver, there is some inflation due to more of the metals being mined from the ground.  But this requires extensive capital and labor in most cases, and it is not a political event.

My main point here is that stocks have been highly politicized with government regulations, taxes, and the Fed’s monetary policy.  In a true free market, we would be looking at more dividends and less in the way of capital gains.  The only reason the broad stock market goes up is because of monetary inflation.  And what the Fed giveth, the Fed taketh away.

In other words, you can’t have the bubbles without the busts.  It is a highly distorted market.  But it doesn’t just go one way.  Unless the Fed goes towards hyperinflation (which I don’t think it will), then you can’t expect for stocks to always go up, even in nominal terms.

I think there is a place for stocks in a well-diversified portfolio.  In the permanent portfolio, the recommendation is to hold 25% in stocks.  But I think it is a bad idea to think you are going to get anywhere close to an 8% return by investing in stocks, particularly if you take inflation into account.

Should You Assume an 8% Return on Your Investments?

I am a huge fan of compounding interest.  It is a very powerful concept, and it is a concept that can serve you well if you learn it early enough in life.

If you make a 10% annual return on an investment of $100, then you will make $10 for the first year.  But if you reinvest your return ($10), then you will earn interest on that the following year, in addition to your initial investment of $100.  Therefore, you will earn $11 in the second year (10% of $110).

You don’t have to wait 10 years to double your money, earning $10 of a return each year.  According to the Rule of 72, you only have to wait just over 7 years to double your money.

I used that 10% assumed return as an example.  But I don’t suggest that you will get a 10% return.  Unfortunately, many in the community of financial advisors like to assume high returns.  I hear the 8% assumption quoted often.

The people using this assumption will correctly admit that nobody is going to get a return of exactly 8% every year.  You can’t find a bond or annuity that will pay that high, at least for a relatively safe investment.  This 8% assumption is supposed to be an average because supposedly that is the return you should expect from U.S. stocks.

You will hear something to the effect of: If you can put aside $100,000 by the time you are 30 years old, then you will have over $1,000,000 by the time you retire at 60, assuming an 8% return on your investments.

It is quite an assumption.  I could say: If you can practice shooting and dribbling a basketball a couple of hours per day, you too could be like LeBron James, assuming that you are 6 feet 8 inches tall and have lots of natural talent.

This 8% assumption isn’t just a little optimistic.  It seems flat-out ridiculous for any serious retirement or financial independence planning.  I think a more reasonable number is around 3% above inflation, but that may even be pushing it.

There are a few select individuals who will earn an average return of 8% per year.  They will be business owners.  They will be real estate investors.  Most of them won’t be stock market investors.

I know the standard Warren Buffett advice that you should stick your money in a low-cost index fund.  We all know that U.S. stocks always go up in the long run (said somewhat sarcastically).

I am always quick to remind people of the Japanese stock market.  It hit its all-time high in 1989 (reaching almost 39,000) and has come nowhere close to that number since.  Today it is around 20,000.  How has the buy and hold strategy been working out for the Japanese investor who put his money in the market in 1989?  It has almost been 3 decades.  Is he supposed to wait for 4 decades?  He still needs a return of almost 100% just to get back to his initial investment.

I understand I am using a bubble market at its peak for my illustration.  But it still makes the overall point.  I am not saying that U.S. stocks will be like Japanese stocks.  I am not making any predictions.  I am just suggesting the possibilities.

Since the 2008 financial crisis, the U.S. economy has not seen one year of 3% GDP growth.  While the GDP may not be the best statistic, it is useful enough in this case.

If an economy has had less than 3% annual growth for a decade, why should the average investor expect annual returns of 8%?

Again, I emphasize the word “average”.  There will be a select few who do earn these returns.  But can anyone just stick his money in an S&P 500 index fund and expect an average of 8% annually when the economy can’t even grow at 3%?

It is easy to make these assumptions now when stocks are in a bull market despite a rather lackluster economy.  But what happens when we hit a period of stagnation?  What happens when price inflation eats up your returns?

And that brings us to a very important topic related to all of this.  Does this 8% annual return assumption account for inflation?  In nominal terms, a return of 8% might easily be possible in the future.  But if price inflation is 8%, then you are actually losing purchasing power because you will be taxed on your 8% earnings at some point.

In any scenario of retirement or financial independence, you have to account for inflation.  It is probably the hardest factor to plan for.  You can’t make plans based on an assumption of 8% returns if price inflation is going to eat up your purchasing power.  Even with the Federal Reserve’s target of 2% price inflation, that still lowers the return quite a bit.

This is just one of the reasons I like the permanent portfolio.  It has an inflation bias.  You are more likely to get higher nominal returns during periods of higher price inflation.  This makes up for the lost purchasing power of your money.

I don’t think this 8% assumption takes into account overall economic growth.  If the overall economy is growing slowly, then you should not expect an easy 8% return over the long run.

Imagine if someone had taken one hundred dollars and invested it when Jesus was born over 2,000 years ago. (I know that U.S. dollars did not exist at this time and that $100 at that time would have been a lot of money, but just go with this example.)  If that person’s initial wealth, with reinvested returns, had been passed on down the family through the years, how much would that family have today having earned just 1% compounding?

After 2,017 years, with an initial investment of $100 at 1% annual return, it would now be worth over $50 billion.  If that person and his heirs had been able to earn anything close to 8% interest annually, then the family today would have more money than what exists in the world.  In other words, the 8% return was impossible.

If you don’t like the example in dollars, do the calculation in gold ounces.  If someone had invested one ounce of gold and it returned 1% interest (.01 ounces of gold) annually compounded, then the family would have over 500,000,000 ounces of gold 2,017 years later.  This is with a return of just 1%.  At an 8% return, it would be far more gold than what exists on the planet.  In other words, it wouldn’t have been possible.

Now, a family today with an inheritance would be thousands of times richer than the ancestors of 2,000 years ago simply because of the purchasing power and the choices available today.  There was no air conditioning, or televisions, or smartphones, or air travel, or cars, or refrigerators back then.

My overall point though is that this 8% assumption as an average annual return is a very dangerous assumption that is going to hurt a lot of people who currently think they are on the path to financial independence.  One major economic recession can ruin a lot of hopes and dreams quickly.  Unless we get great economic growth in the years to come, there is no reason to expect anything close to a consistent 8% annual return.

You should save some of your money and let it work for you.  This is being future oriented.  It is the mentality of the upper class.

What you should not do is delude yourself into thinking you are going to consistently get a return of 8% above price inflation on your investments.  If you are a great entrepreneur investing in your own business or businesses, then maybe you can make this assumption.  But for stock investors, you are chasing after a dream that will turn into more of a nightmare.

If economic growth stays anemic at below 3%, you should not expect 8% returns or anything close to it over the longer term.  It is better to be conservative with your estimates and have too much money than to overestimate your returns and wind up with too little.

A Slightly Flattening Yield Curve Signals Caution

While the stock market continues to boom, interest rates on U.S. government debt are sending a mild signal of caution.  The yield curve has been flattening.

An inverted yield curve – where long-term rates are lower than short-term rates – is a signal of recession.  Investors are locking in longer-term rates, while borrowers are going after shorter-term loans.

On January 3, 2017, the 3-month rate on U.S. Treasuries was 0.53%. The 10-year yield was 2.45%.

On June 2, 2017 (5 months into the calendar year), the 3-month yield stood at 0.98%.  The 10-year yield was at 2.15%.

In other words, shorter-term rates have risen, while longer-term rates have fallen.  The change is not dramatic, but it is not insignificant either.  The yield curve is flattening.

We’ll see if this trend holds.  There have not been any really major movements during this time.  It has been mostly gradual.

One question is: Why are longer-term rates falling when the Fed is essentially promising hikes to its target federal funds rate?

Another question is: Why are longer-term rates falling when stocks have been booming and hitting all-time nominal highs?

There is a disconnect between long-term rates and stocks.  Stock investors are telling us to let the good times roll.  Meanwhile, bond investors are telling us to throw up the caution flag.  Which one is right?

I think stock investors have more influence in the short term.  We all know that bubbles can last far longer than it seems possible.

With that said, the bond investors tend to get the last laugh.  I tend to put my money on the bond investors over the stock investors in the longer run.

Is a College Education Worth It?

This question gets harder to answer with each passing year.  It may start to get easier to answer if tuitions keep rising at the same pace.

Price inflation has been relatively low since the early 1980s, but especially low in the last decade.  Of course, I use the term “relatively”.  We get ripped off by the central bank through the depreciating currency.  But compared to the 1970s, or compared to most third-world (or even some first-world) countries today, price inflation is relatively low for the holders of U.S. dollars.

However, college tuition keeps rising at a faster pace than the reported price inflation.  Even if you think the price inflation numbers put out by the government are significantly understated, there is little doubt that the cost of college is rising faster than most consumer goods.  The one major exception to this is medical care costs, or insurance premiums in particular.

We talk about stock bubbles or real estate bubbles, but we don’t hear much about a college bubble.  It is certainly a different animal, but I do think there is something of a college bubble.  I don’t think the trend is sustainable.  At some point, it becomes just like housing in the mid 2000s.  Middle class people just can’t afford it anymore, even with creative loans.

I have no idea when this college bubble will pop.  I don’t know if it will be gradual or rather sudden.  It isn’t going to be as sudden as stocks, or even real estate.  I assume that college tuitions are not constantly changing throughout the year.

There is value in a college degree for employment.  Whether you think college in itself is valuable is almost irrelevant.  The fact of the matter is that it is used as a screening device by many employers.  I don’t know whether they want to find someone who can tolerate four years of boredom, or whether they actually think it makes you smarter.  Or maybe the college degree just shows that you are capable of finishing what you started.

I know there are statistics quoted about college graduates making a million dollars more during a lifetime than non-graduates (or whatever the statistic is now).  This presents one of the common mistakes people make in economics.  It is confusing correlation and causation.

Are college graduates making more money because of the skills they learned in college?  To a certain extent, they may be making more money because they have the degree that gets them past a certain screening point with the employer.

My bet is that these college graduates would have made more than average even if they hadn’t gone to college.  Unfortunately, this is impossible to prove either way.

To answer the original question (Is a college education worth it?), I think it is an individual question.  It depends on each individual’s circumstances and goals.

If you really just want to learn, I would suggest doing research on the Internet and reading books.  You will probably learn more this way.  If there is something specific you want to learn, you can always take a specific class.

If you want to be a doctor or lawyer, you pretty much have to go to college because of the government’s certification requirements.  The same goes for a few other professions.

If you just want to make more money in your life, I think it is important to narrow down what you want to do and how much a degree with benefit you.

Of course, the biggest factor is the cost of the degree.  I wouldn’t recommend spending six figures for a four-year degree no matter what school it is or what degree you are getting.  If you can go to a cheap local school for a few thousand dollars per year, then it makes the decision easier.

Another option is that high school students can often take classes to get college credits, or they can take exams to test out of certain college classes.  If you can gain a significant number of credit hours before actually setting foot on a college campus, it could reduce your costs considerably.

I don’t think parents necessarily owe a college education to their children.  It is nice if you can help out, but you shouldn’t feel obligated, particularly in today’s economy.  You can let them live at home (rent free) while they attend classes.

If you have young children, I wouldn’t stress out about saving for a college education.  If the college bubble pops, it may solve your problem.  I think competition, coupled with the Internet, will help reduce costs in the long term.  I also think more companies will realize that a college degree doesn’t mean as much as it did in the past.  It is better to find a good employee that is able to adapt and learn new skills quickly.

I don’t recommend 529 plans at all.  If you want to save, just save in a traditional taxable account (or in a Roth IRA where you can still withdraw the principle without penalty).  You can decide later if you want to use some of the money to help your kids.  When the time comes, maybe you would rather spend money to help them buy a starter house or start a side business.

The best gift you can give your children is to prepare them for life.  This doesn’t have to include a college education.  It would be better if your child learns entrepreneurial skills that can be used at any time.  It is better not to be dependent on an employer.

A college education is only worth it if it will further your life goals without burdening you with the costs.  You can always choose to work for an employer and slowly get your degree.  Maybe the employer will pay for it.

In conclusion, it is best to focus on what you want to do and whether a college degree is necessary to achieve that.  If you do need or want a college degree, find ways to reduce the costs.  You don’t want to be burdened with debt when you are just starting out.

Fail-Safe Investing with Harry Browne

For anyone who has read any of my investment advice, you probably know that I advocate setting up a permanent portfolio similar to what is described by Harry Browne in the book Fail-Safe Investing.

Harry Browne passed away in 2006.  I was lucky enough to meet him in person before he left us.  He was very influential for me in both political (libertarian) philosophy and investment philosophy.

While the best part of his book Fail-Safe Investing is the description of the permanent portfolio, I would like to emphasize that there are other key basic points in this book that should not be overlooked.  Some of them are seemingly obvious, yet it is surprising how many people violate these simple things.

He breaks the book into 2 parts.  The first part is “The 17 Simple Rules of Financial Safety”.  The second part is “More about the Rules”, in which he goes more into depth.

Here are just a few of the rules, although they are all important in some way.

  • Rule #1: Build Your Wealth upon Your Career
  • Rule #3: Recognize the Difference between Investing and Speculating
  • Rule #4: Beware of Fortune Tellers
  • Rule #9: Do Only What You Understand
  • Rule #17: Whenever You’re in Doubt, Err on the Side of Safety

His most important, of course, is Rule #11: Build a Bulletproof Portfolio for Protection.  This is where he describes the permanent portfolio and the importance of diversification to protect your investments in any economic environment.

Browne stresses throughout the book that you should not invest in anything that you don’t understand, and that you should only speculate with money you can afford to lose.  He also makes the point – which most investors don’t want to hear – that most of your wealth will be gained from your career.  You probably aren’t going to get rich by investing.

In Rule #4: Beware of Fortune Tellers, Browne is essentially invoking Austrian economics, even though he doesn’t call it this.  He is recognizing that economics is based on human action.  Human action will determine which investments go up and down.  It is the decisions of millions of people every day that drive the markets.

As Browne states in his book, “The beginning of investment wisdom is the realization that we live in an uncertain world – and that no one can eliminate the uncertainty for you.”

This is particularly interesting because Browne first gained notoriety by correctly predicting the devaluation of the dollar in the early 1970s.  While he said that he basically got lucky in this prediction, I think he did have a good understanding of central banking and the financial markets, and his prediction was nothing more than a good prediction of human action – in this case, that politicians would continue to spend money and run up deficits.  There was no way the U.S. could continue to keep the dollar on an international gold standard.

While Harry Browne was an optimist in general – he said that human nature was on the side of liberty – he perhaps underestimated the powerful arguments to be made against central banking.  He did not think that talking about the Federal Reserve to non-libertarians was a good way to persuade them towards a more libertarian position.  Ron Paul showed otherwise in 2007 when his opposition to the Fed was one of his main positions that he emphasized (probably second to foreign policy).  Ron Paul ended up going to rallies with chants of “End the Fed.”

When Harry Browne made his predictions against the U.S. dollar, he wrote a book titled How You Can Profit From the Coming Devaluation. The second half of the book may not be timely, but it is still an interesting read.  The first 70 pages are just as relevant today as they were then.  It is a great explanation of money.  If only these 70 pages were read by high school students.

Browne went on to write several investment books, as well as a couple of libertarian books, and a self-help book.  In terms of investment books, I would still start with Fail-Safe Investing.  They are simple but important rules, and it describes the permanent portfolio that I believe is so important for wealth preservation.

Combining Free Market Economics with Investing