Will the Fed Pull an Indian Currency Scheme?

On November 8, 2016, the Indian government announced the withdrawal of its two highest denomination currency notes.  The 500-rupee and the 1,000-rupee (about $7.35 and $14.70) were instantly banned with no notice.

People supposedly have until the end of the year to trade in their old currency for new currency being issued.  This has caused long lines at banks and many headaches to go along with it.

The corrupt prime minister (Modi) and the corrupt Indian government essentially banned over 86% of the currency in circulation in India.  In the name of cracking down on corruption and black market activity, the government has quickly destroyed what little economy there is in India.  Like most government programs, it is hurting the innocent people more than the guilty, if you can even call anyone guilty.

If anyone is guilty, it is the corrupt government and those who support it.  Every national government on the planet is corrupt, but some more than others.  Considering the corruptness and bureaucracy of the U.S. government, the Indian government is probably ten times worse.

There are certainly some who are speculating about something similar happening in the U.S.  What are the chances that the government and/ or Federal Reserve would pull something similar in the United States?

My guess is that there is very little chance of this happening in the U.S. anytime soon.

First, the U.S. dollar is still the world’s reserve currency, even if it has slipped a little.  The dollar is in high demand, so the Fed would not ruin this by playing these types of games.  In fact, the Indians would be wise to use the U.S. dollar as a form of currency instead of the even worse piece of junk issued by their own central bank.

Second, the U.S. government does not have as much need to crack down on black markets.  They certainly exist in the U.S., but the big money is digital in the banking system.  U.S. currency is mostly used for small transactions and for immigrants to send to relatives in their home countries.  The U.S. government already has widespread compliance with taxation.

Third, I don’t think it is politically possible to do something similar.  If the Fed were to ban 20-dollar bills and above, you might see lineups at the banks similar to what is now seen in India.  But you would see even bigger lines in Washington DC and the Congressional offices.  The people may or may not carry pitchforks.

I understand that Nixon closed what remained of the gold standard in 1971.  But this did not have an immediate impact on most Americans.  They could just continue to use their money at the store as they did before.  It was damaging long-term because it meant virtually all limits had been removed from the central bank’s ability to inflate the money supply.

If something happened in the U.S. similar to what just happened in India, there really would be a revolt.  Americans don’t like to be told what to do.  That is why Trump won the election.  There are still a lot of rebels out there.

The U.S. economy is enormous compared to India’s.  U.S. workers don’t have hours to stand around at a bank waiting to exchange their currency.  They really would revolt with such a measure.  You would quickly see the responsible parties held accountable, which could include impeachment.

While Americans have certainly enslaved themselves, it is to a much lesser degree than much of the world.  The culture in India is different.  The people enslave themselves to a great degree.  They consent to their corrupt government and all of its actions.  They just sit there and take it.  I don’t understand the mentality, but it is a different culture.

The Indian people do have a penchant for gold.  That is one positive thing I see with the culture.  It shows a hint of distrust for the government.  But overall, they act as serfs.  The more creative and free thinking people leave the country.  They go to the U.S.

Anything is possible in the future.  The U.S. economy could get hammered, and we could see desperate measures.  When things aren’t going well, many people become more accepting of things they wouldn’t have accepted before.  Still, I think we are a ways off from having anything similar happen in the U.S.

Meanwhile, the Indian economy will be an even bigger basket case than it was before.  It will mean even more poverty, if that is possible.  The Indian people will likely increase their demand for gold and for U.S. dollars, since their currency can’t be trusted at all any longer.

The higher demand for dollars is bad for U.S. gold investors.  The higher demand for gold is good for gold investors.  Overall, the Indian people are so poor that it may not have that great of an impact either way.  It is sad to see for them though.

October CPI Ticks Higher

The Consumer Price Index (CPI) rose 0.4% in October from the previous month.  The more stable median CPI stayed steady, rising at 2.5% annually.

With the slight uptick in the CPI and the election of Donald Trump, I think it makes more likely that we will see the Fed hike its target rate on December 14.  It also helps that the stock markets are hitting all-time highs.

I don’t find the CPI numbers all that reliable.  One of the main reasons that Trump was elected was because he came across as an advocate for the struggling middle class.  And the middle class has been hammered with much higher health insurance premiums, partially due to Obamacare.

If you ask most middle class families, they will probably disagree that consumer prices have risen just 1.6% over the last year.  That is the number given by the Bureau of Labor Statistics.

Any raise in wages that people see are getting quickly eaten up by higher health insurance premiums.  And that doesn’t factor in the subtle increases at the grocery store and in other facets of our lives.  Unfortunately, most things are not like the electronics industry, where prices gradually go down with higher quality, despite the monetary inflation from the Fed.

The slight uptick in the CPI is just one month, so we will see if the trend continues.  It is a significant statistic to watch though, despite its unreliability.  That is because Fed officials watch this statistic.

If consumer prices begin going up at a faster rate, it makes it more likely that the Fed will hike the federal funds rate and pay a higher rate on bank reserves.  The Fed has already kept a relatively stable monetary base since October 2014.

I am not sure how much longer the Fed can keep this policy while also keeping the economy out of recession.  I am afraid that Donald Trump is being set up to take a hard hit.  He should hope that a recession comes sooner rather than later.

Politically, it will be worse for him if it takes at least another year before there is an economic downturn.  If it happens in late 2017 or beyond, he will take a lot of the blame.  If it happens in the first half of 2017, the media will try to blame him, but most Americans will know better.

The president does not have that much of an impact on the economy, unless he plans to significantly reduce regulations and government spending.  Otherwise, it is mostly monetary policy that dictates things.

There are a lot of moving parts.  The CPI is a key statistic because if it goes much higher, the Fed will be forced to hold back on any further stimulus and likely raise its target rate further.  This will likely result in a recession.

Even if the CPI doesn’t go any higher, we could still see a recession.

The Fed is maintaining the correct policy right now in that it is not engaging in monetary inflation.  But it did quintuple the monetary base from 2008 to 2014.  We may still have significant consequences to deal with from this prior policy.

A Little Knowledge Can Hurt You

I recently read an economics article discussing Frederic Bastiat, the 19th century French economist.

I happened to read some of the comments below the article and I was struck by one particular commenter and his claims.  The commenter said that Bastiat operated under the labor theory of value.

When challenged on this, the commenter stated: “He (Bastiat) argues, for example, that products imported from places where natural conditions are more favorable would be less expensive because less labor is required to produce them, with nature doing more of the work…”

When someone responded that this still does not imply that Bastiat subscribed to the labor theory of value, the commenter responded, “When he claims that products requiring less labor have lower prices, what would you call that?”

A few of the responses were pretty good, but I would just like to point out how wrong this commenter was.

The labor theory of value argues that the economic value of a product is determined by the total amount of labor required to produce it.  The Austrian School of economics has gone to great lengths to debunk this theory.

Anyone who works in a large office setting, or really any work environment with a large number of employees, probably understands that some people do more work than others.  Some people produce far more than others.  The amount of time someone spends on a product doesn’t tell us how much that product is worth.

Even if everyone were equally skilled and motivated, it still wouldn’t make sense.  You can spend hours or days to complete a painting of the sky with clouds.  But if nobody wants to buy a painting of the sky, then your long work doesn’t mean anything to the potential consumers.  If you spend a lot of time to produce something that consumers don’t value, it does you no good.  It doesn’t mean they will all of a sudden want it just because you worked hard and long to produce it.

Ultimately, it is consumer preferences that determine the price.  It is whatever they are willing to pay.

But – and this is a big but – it doesn’t mean that the input costs don’t matter.  If people are willing to pay $10 for a particular rug (but no more) and you can’t produce such a rug for under $10, then it won’t be produced.  But if it can be produced for $5 and sold for $10, then it becomes worth it to the entrepreneur.

In addition, competition between sellers matters.  Let’s say that people are willing to pay a high price for Coke or Pepsi, but most people are willing to switch to the other if there is a large price differential.  Let’s say that the input costs for Pepsi increase substantially, while Coke does not see the same increase.  If customers can buy Coke for significantly cheaper than Pepsi, then more consumers will turn to Coke.

Let’s say the government implements a 10% tax on revenues on the seller of soda products.  Before, Coke and Pepsi were both selling the same sized bottle for $1.00.  With the added tax, it is not profitable to sell these bottles at $1.00.  Coke and Pepsi both raise their prices to $1.10 per bottle.  Many people may just continue to buy as they did before.  Maybe a few will switch to water.

The point is that input costs matter.  If a foreign country can grow vegetables with minimal labor as compared to here, then it will probably make sense to import these vegetables, assuming the shipping costs are reasonable and the vegetables can be kept fresh.  If it costs a lot to produce those same vegetables at home, then the price would have to be higher in order to be profitable.

So why I am saying all of this?

Aside from the economics lesson, this is a great example of where a little bit of knowledge can really hurt you.  The person who made these comments has obviously done a little reading on the labor theory of value, and I think he meant well.  He understood a little bit of it, but he does not grasp the whole concept.  He made assumptions that are simply wrong.

Most people have no idea what the labor theory of value is.  Most people also wouldn’t have made this basic mistake that this person did, who is mildly educated in Austrian economics.  Most people who don’t study any economics would probably understand that the price of a product would likely be cheaper coming from an area where significantly less (or cheaper) labor is required to produce it.

I see this often when it comes to investing.  I read people who have a somewhat decent grasp of some economic and financial issues.  They are very well read as compared to the general populace.  Yet, they often make errors within their analysis that completely throws off their conclusions.  They often get things completely wrong because of these errors.

Sometimes it helps to take a step back and to ask yourself if what you are reading really makes sense.  And if you don’t understand some of the analysis or points made by the writer, then you shouldn’t assume their conclusion is correct.  It doesn’t mean that the writer is necessarily smarter than you because you don’t understand everything he has written.  It more often means that the writer is confused, or else doesn’t know how to relay his message.

A little knowledge really can be a dangerous thing.  If you are going to go deep into a subject, make sure you understand it and that you don’t use it as a springboard to jump to all of the wrong conclusions.

A Cabinet Announcement That Would Get Me Excited

Donald Trump is slowly announcing nominations for his cabinet.  He just announced his nominee for Education Secretary (Betsy DeVos) and Ambassador to the United Nations (Nikki Haley).  As of this writing, it is also expected that Ben Carson will accept the nomination for Secretary of Housing and Urban Development (HUD).

I don’t want to discuss the individuals who are being announced or considered here though.  In general, I think it is better when you haven’t heard the person’s name before, because then there is a chance that the person is not too embedded in the establishment.

But from a libertarian perspective, it will be hard to get too excited over any of Trump’s picks, unless he really surprises us with a libertarian, or at least someone with heavy libertarian leanings.

Assuming this doesn’t happen, and even if it does, there is something else that would get me excited over a cabinet announcement.  This announcement would have nothing to do with any particular individual.

With the HUD Secretary and Education Secretary positions in the news, this provides a great example of why things are not headed in the right direction on the domestic front.

These departments should not exist.  They are unconstitutional.  These functions are not listed in Article I, Section 8, which spells out the enumerated powers for Congress.  The federal government should not be involved in developing housing or urban environments.  The federal government should not be involved in educating children or anyone else.

From a libertarian perspective, these departments should be abolished immediately.  I understand that is highly unlikely right now and is probably not politically feasible.

However, aside from the existence of the Federal Reserve, there are two main things that are severely hampering the economy: regulations and total government spending.

I know many will point to taxation, but the taxation goes hand-in-hand with government spending.  You can only have real tax cuts when government spending is reduced.

If Donald Trump really wants to make America great again, which would presumably include the health of the American economy, then many of these major agencies and departments need to see significant budget cuts.

So here is an announcement that would get me excited.

When Trump makes an announcement for a major nomination, he should say that he met with various candidates for the position and that he required the candidates to pledge to accept a 10% reduction in their total budget for their department for each year that they are there.  If the candidate does not accept this budget cut or does not promise not to fight the administration on these future cuts, then the candidate is automatically eliminated from contention.

Actually, Trump could have made this announcement prior to any of his nomination announcements.  He could have announced right away that if you are not willing to accept a 10% per year budget cut, that you need not apply.

This is what would get me excited.

The alphabet agencies and various departments strangle us with regulations and make life more expensive.  With reduced budgets, hopefully they would have fewer resources for enforcement.  And with the reduced government spending, it would reduce the misallocation of resources and drive more capital into wealth generating activities.

Maybe Trump could make a few exceptions for certain agencies or departments for political purposes.  But most everything really should be fair game.  The Department of Education and HUD should be easy ones to start with.

Now don’t get me wrong.  It wouldn’t be easy politically.  But if anyone knows how to take getting beat up by the media, it is Trump.  That is why voters put him there.  They expect him to fight.  Unfortunately, I am afraid they may be disappointed.

Of course, none of this is likely to happen.  If the federal budget goes down at all, it would be reason to celebrate.

Spending cuts were barely ever discussed during the campaigns and various debates.  It came up briefly in a couple of the Republican debates.  There is almost no will to cut spending.  The voters complain about the debt, but they don’t want the spending cuts.

In order to significantly improve the economy, budgets have to be cut.  Unfortunately, because there is little political will anywhere to do this, it will be forced on us through the laws of economics.  At some point, it just won’t be possible to keep running massive deficits and continually increasing spending.

Libertarian Lessons in 2016

Now that the 2016 presidential election is essentially over, it is a good time for libertarians to reflect on what can be learned. Donald Trump stole the spotlight with a surprise win, but there are other stories. Mainly, I want to focus on the Libertarian Party.

Gary Johnson was the Libertarian Party’s presidential nominee for the second time in a row. While there could still be a few votes left out there to be counted, he ended up with around 4.3 million votes nationally. This is about 3.3% of the national vote. In his home state of New Mexico where he was governor, Johnson received over 9% of the vote.

This is by far the best showing of any Libertarian Party nominee in its relatively short history. It was by far the highest vote total in any election, and the highest percentage.

So the Libertarian ticket was a relative success this year then, right?

I will present my case here that it was not only not successful, but also actually slightly harmful. And unfortunately, we can’t conclude that the country is moving in a more libertarian direction based on this outcome, although there are other reasons that we can come to this conclusion.

Every four years, we hear from both major parties that this is the most important election of our lifetime. And every election is filled with divisiveness. But this election really was unique in that both candidates were widely hated. We all know how the establishment media portrayed Trump, and many people within his own party opposed him. Meanwhile, nearly half the country thinks that Hillary Clinton belongs in jail.

There were many people who really did not like either candidate and were looking for another option. Therefore, it is no surprise that some voters sought a write-in or third-party option. In this sense, it is almost surprising that Johnson didn’t get even more votes.

The Libertarian Party really had no chance of actually winning the presidential election, no matter who was at the top of the ticket. For this reason, some Libertarians think the party should not even run a presidential candidate. I disagree with this for two reasons.

First, the presidential nominee has opportunities for speaking platforms that aren’t typically there. The nominee has many opportunities to appear on talk shows and news stations that otherwise wouldn’t be possible. It is an opportunity to explain the libertarian message and its benefits.

The second reason is that it is an opportunity to grow the party. It is a way to recruit future libertarians for future outreach and elections.

It is safe to say that Gary Johnson failed miserably on these two fronts. I don’t know if he actually had any expectations of winning when going into this, but he certainly didn’t seem to have aspirations of growing the party or explaining a libertarian message.

In terms of explaining the message, Johnson just helped in confusing people about what libertarianism actually is. If anything, this was slightly harmful to libertarians.

Johnson is not a libertarian. He has libertarian leanings on some issues, but he lacks any principles overall. When he was asked what a libertarian is, he continually replied that it is someone who is fiscally conservative and socially tolerant. And while this might describe him and some libertarians, this really isn’t a proper definition by any standard. There are many Republicans who are fiscally conservative and socially tolerant.

If he wanted to give a simple reply to this question, he could have said that a libertarian believes that you should be able to live your life as you want to live it, so long as you don’t harm others.

In terms of growing the party, it is likely that Johnson failed here too. If it did grow in any significant way, it was likely with disaffected Republicans who don’t like Trump. That would be ok if they came to realize the principles of the libertarian message, but I fear that many of these anti-Trump people aren’t quite as bothered by Romney, McCain, and Bush.

Johnson seems like a likeable guy, but you’d think he would have learned something from 2012. I am not sure what he did between November 2012 and 2016, but it sure wasn’t reading up on libertarian principles.

When Johnson was on MSNBC and asked about Aleppo, Syria, he didn’t know what Aleppo was. The media mocked him for this. He should have just responded that most Americans couldn’t find Aleppo on a map and that he doesn’t need to know either because he would pull all troops out of the Middle East. If the U.S. had a non-interventionist foreign policy, then Syria probably wouldn’t be a mess right now and nobody would care about Aleppo except for the people in Syria.

But even on foreign policy, Johnson showed weakness. He could not take a hard principled stand. If Johnson actually had somehow managed to win the presidency, I wouldn’t have trusted him any more than Donald Trump. Perhaps there is actually slightly more hope for less intervention under Trump.

In terms of carrying through a more peaceful foreign policy, for the major presidential candidates, I would rank Jill Stein first, Donald Trump second, Gary Johnson third, and Hillary Clinton fourth. If you include Darrell Castle of the Constitution Party, he would go up there with Jill Stein and bump Johnson to fourth.

Johnson and Weld actually mentioned a possible cabinet position for Mitt Romney if they won, which included the possibility of Secretary of State. In other words, Bill Weld and his establishment friends would have quickly taken over a Johnson administration.

And Bill Weld had to have been the biggest disaster out of everything for Johnson and the Libertarian Party. While the party has to nominate the vice presidential candidate, Weld was Johnson’s pick. Weld is a member of the establishment (he is a member of the Council on Foreign Relations) and has few positions that can be confused for libertarianism.

As the election got closer, Weld essentially endorsed Hillary Clinton. I really wonder how Gary Johnson felt about that. Johnson threw a little temper tantrum at the convention when people opposed his pick for running mate. I wonder if he realizes what a stooge of the establishment he really was. I wonder if the Libertarians who voted for Weld – even if hesitatingly – realize how much they were fooled.

The relatively high vote total does not mean much for Johnson now that it is over. He failed at educating people, and he failed to grow the party with actual libertarians.

There have been missed opportunities in the last 3 presidential elections. The Libertarian Party has not put up a principled candidate since Michael Badnarik in 2004. And it certainly hasn’t been the same since the late Harry Browne ran educational campaigns in 1996 and 2000.

The Libertarian Party nominated Bob Barr in 2008, and then Johnson in 2012 and 2016. In other words, there have been no significant figures to run on a libertarian platform in the last three general elections. The Constitution Party’s nominees have been more libertarian than the Libertarian Party’s nominees, but they generally receive little attention.

However, things have changed considerably since 2007 when Ron Paul ran his first presidential campaign within the Republican Party. The number of libertarians has grown by leaps and bounds within the last 10 years due to the Ron Paul campaigns and the Internet. We don’t know how many hardcore libertarians there are right now, but a lot of them didn’t vote for Johnson.

There was a chance this year for a radical libertarian and anti-establishment message. Rand Paul was supposed to be the anti-establishment candidate in the Republican Party, but Trump took that mantle from the beginning. While Rand Paul started out the first debate by complaining that Trump would not vow to support the eventual nominee, Trump immediately took the lead position as an advocate for the struggling middle class.

Rand Paul tried to play both sides of the fence and not take too hard of a stand either way. Instead of bringing together libertarian factions and establishment factions, he just turned both groups off. While this may not have been smart politics, we should not take it as a repudiation of libertarianism, since Rand Paul never adopted the libertarian message.

We have no idea what Trump will do as president. If he does stand up to the establishment, then it will be positive. But we should not expect him to be a libertarian in office, especially since he did not campaign as one. And if Trump cannot overcome the establishment for whatever reason, it should just be more assurance to libertarians that politics is not our answer to more liberty.

Either way, this makes it important to have a good libertarian candidate in 2020 who can rally support and bring a libertarian message to the general populace. It will be an opportunity to further educate people on the benefits of liberty, just as Ron Paul did in his campaigns.

Ultimately, it is not about getting the right people into office. It is about having public opinion on our side. We will only get a more libertarian society when more people understand the moral and economic benefits of libertarianism.

Is This a Trump Rally for the U.S. Dollar?

The U.S dollar index recently hit a 14-year high.  This would have been hard to believe 3 or 4 years ago in the midst of QE3 – the Fed’s unprecedented program of massive money creation.

The U.S. dollar has been a strong currency for the last several years.  In 2014, the dollar index began to surge up from around the 80 level into the 90s, as the Fed’s monetary inflation wound down.  It has now broken the 100 barrier, but we’ll have to see if it stays there.

With the recent election of Donald Trump, it seems the U.S. dollar is set for another major run.  It is hard to know how much of this is due to the election of Trump versus other factors.

Trump has been somewhat critical of Janet Yellen and the Fed.  He will get to appoint Fed members, including the chair position, in about a year from now.  While Trump has shown signs of wanting to have more “hawkish” members (more concerned about inflation), it is hard to predict if this will end up a reality.  If the economy gets bad enough, it is hard to imagine that the Fed wouldn’t respond with more of the only major thing it knows how to do – create money out of thin air.

Trump’s win might have been a catalyst for the dollar to surge higher, but I think it was inevitable anyway.  QE3 ended just over two years ago, in October 2014.  Meanwhile, the other major central banks of the world – especially the Bank of Japan and the European Central Bank – are engaging in unprecedented monetary inflation.

As I often say, it is not so much that the dollar is strong, but that it is less weak than the other major currencies.  It is not hard to beat out a currency like the euro when you look at the depressed economies of Western Europe, coupled with the reckless policies of the central bank.

This is causing a little bit of short-term pain for gold investors living in the United States.  Still, it is important to remember that gold can still go up in dollar terms even if the dollar is rising in comparison to other currencies.  If all of the central banks have a race to the bottom, gold will do well against all currencies.

As of this writing, the euro is trading at about $1.06.  It takes $1.06 to buy one euro.  I fully expect the currencies to reach par (one for one) unless something drastic happens.

Meanwhile, we’ll continue to watch the Fed.  I expect the Fed to remain neutral for now, with an occasional token increase in its target rate.  The big question is what the Fed will do when the economy hits its next major bump in the road.  Will we see QE4?

Until we see the announcement of QE4 or something similar, I would expect to see a continuation of the strong dollar, at least relative to the other major currencies.

Will Interest Rates Spike Under Trump?

Since the election of Donald Trump, in terms of the financial markets, most attention has been on stocks.  The Dow has been hitting all-time nominal highs.

The dollar price of gold has taken a big hit, but there is a sense that this won’t last.  Unless we go into a deep recession without the Fed responding with more monetary inflation, then it is hard to imagine that gold will go much lower and stay down.

But while most attention is on stocks, the bond market is really the big story.  Interest rates have been spiking higher.  The 10-year yield, as of this writing, sits just over 2.2%.  While this is still historically very low, it is higher than it has been over the last several months.  Back in July, it was below 1.5%.

What is causing this short-term spike in longer-term interest rates?  And will it continue with Trump taking the presidency?

To quote this Marketwatch article: “Trump’s promise of loosening regulations, cutting taxes and boosting spending to repair roads, highways and bridges has led to the higher moves in government bond yields, with traders seeing his proposals as supportive to higher economic growth and inflation, anathema to bond investors because inflation erodes the value of interest payments.”

We don’t really know if this is the reason for the higher yields.  Perhaps it is a contributing reason.  Still, I wonder if it is more speculation about what will happen with the Fed.

Trump is really all over the place on so many issues, and that includes monetary policy.  He has said he is a low interest rate guy, but he was probably referring to his preference as a businessman.  He has also been quite critical of the Fed and Janet Yellen.  It is unlikely Yellen would be renominated as chair.

Trump does have some relatively hard money guys in his camp.  He doesn’t exactly have Ron Paul and David Stockman on his team of advisors, but Trump is probably the closest we have seen to a hard money guy since Reagan.  This doesn’t mean anything significant will actually change, but it adds to the uncertainty.

Even Trump’s VP, Mike Pence, has spoken in favor of gold.  Despite my criticisms of Pence from a libertarian perspective, he is still better on many economic subjects than the average politician.

If Trump appoints inflation “hawks” to the FOMC, this could have an impact on policy.  It would signal that we can expect tighter money, at least relative to what we have seen (2008-2014).  Higher interest rates tend to go hand-in-hand with tighter money.

Of course, we live in bizarre economic times.  The Fed has had a tight money policy for the last two years, yet interest rates have stayed low.  The massive pile of excess reserves has helped to keep rates down with the tight money.

In addition, if we have a recession, we should expect long-term rates to go down again.  There will be a flight to safety, which includes government bonds for many investors, assuming that imminent price inflation does not seem to be a threat.

I don’t think a Trump presidency is going to matter that much, particularly in the short run.  The uncertainty can add to volatility, but it is not likely to significantly change monetary policy any time soon.

From a libertarian perspective, and a growth perspective, we should hope for higher interest rates.  This is the only thing that can ultimately impose limits on government spending.  The only other thing that can impose limits is public opinion, which doesn’t seem to care much right now.

Higher interest rates can ultimately force a reduction in spending in order to limit the new debt issues.  This means that Congress would have to raise taxes or cut spending, and raising taxes is not likely on the table right now.

The economy needs higher interest rates and lower government spending.  The higher rates will encourage more savings, which is needed for economic growth.  A reduction in government spending is needed, as virtually all government spending is a misallocation of resources, as capital is expended on things that are not of the highest priority for consumers.

It is interesting that stock markets are hitting new highs at this time, because higher rates could ultimately hurt stocks.  If there are higher rates, it attracts risk-averse investors searching for yield.  They do not need to gamble in the stock market in search for yield if yields are higher for bonds.

Trump can impact the spending side of things, but he hasn’t really proposed any significant cuts.  The only hope might be for a reduction in war operations in the Middle East.

The biggest factor for the economy in the coming years is Fed policy. Trump can have an impact based on who he appoints to the FOMC open positions.  But even if he appoints inflation hawks, it may not matter that much in the next year or so.

My biggest fear with a Trump presidency is that a major recession hits a couple of years into it.  It is possible there could be a clean sweep of Congress and the presidency by the Democrats in 2020.  This would be at a time when people might be desperate for government solutions to the economic problems.

My hope is that there will be a downturn soon.  Trump can blame Obama, even though he should be blaming Yellen and Bernanke the most.  You can also blame the Congress for allowing the huge spending.

I expect a recession sooner rather than later.  Maybe the spike in interest rates this past week is an early indicator.  I am more bearish on stocks than bonds in the near term though.

Will Trump Be Bad For Gold?

Prior to the election, I discussed the possible ramifications on the economy and the financial markets.  I said that if Trump were to win, that the markets would likely resemble what happened in the U.K. after Brexit.

I stated: “The polls suggested that the Brexit vote would fail.  When it actually passed, stocks fell, including outside of Great Britain.  But after the dust settled a bit, stocks recovered.”

I thought it would be the same with a Trump victory.  In a sense, I was correct, but I certainly underestimated the speed at which stocks would recover.

When the results started hinting at a Trump win on Tuesday night, the Dow futures were down over 800 points at one time.  By the next morning, the Dow was nearing new all-time highs.  In the period of about 14 hours, the Dow shifted direction by about 1,000 points.

Fortunately I did not short any stocks in anticipation of a Trump victory.  It could have only been profitable if I had been trading futures in the after-hours.

As fickle as the voters are, apparently investors are even more fickle.  Investors called it wrong on Trump’s victory.  Otherwise, it would have already been mostly priced into the market.  But once a Trump victory was apparent, investors didn’t know which way to go.

In a way, I don’t blame them because Trump really is a wildcard.  We don’t know what we are going to get.

Trump has been more critical of the Federal Reserve than any incoming president, at least within the last few decades.  Is Janet Yellen going to change policies at all because of the election outcome?  I really don’t know, and apparently investors have no idea either.

The 10-year yield spiked up this week, closing at about 2.15%.  But it is hard to say what exactly is driving this.  Are investors preparing for further rate hikes by the Fed that we have all been waiting for?

But bonds weren’t the only loser this week.  Gold prices were crushed.  They initially surged higher on Tuesday night, but then shifted dramatically on Wednesday.  After being over $1,300 per ounce, the price finished at about $1,227 for the week.

The only thing that did worse than gold was gold mining shares.  They were absolutely crushed, especially on Thursday and Friday.

I think it will take a little time for everyone to digest the news of a Trump presidency.  And we really don’t know what we are going to get.  Maybe his cabinet picks will give us a little better sense.

Either way, he is inheriting a mess.  The economy still has a lot of misallocations from the easy Fed policies of 2008 to 2014 when the Fed approximately quintupled the adjusted monetary base.  In addition, the government continues to spend about $4 trillion per year.

If Trump really wants to help the economy, aside from repealing Obamacare, he would find other regulations to repeal and he would cut the federal budget.  I doubt the budget will be cut, but that is really one of the big long-term answers to making things better.

For every dollar the government spends, whether it is through taxes or debt, it is misallocating wealth.  It is spending money on things that were not a top priority for consumers and investors.  It hurts the process of generating new wealth.  Government spending needs to be reduced.

While Yellen and company may be less anxious to help out Trump with a recession, they aren’t going to purposely allow things to fall apart on their watch.  In other words, if we have a deep recession, you should still expect more monetary inflation from the Fed.

Therefore, while gold prices could take a hit in the short run, the main reasons for owning gold are still in place.  Gold is a hedge against a depreciating dollar, courtesy of the Fed.

In fact, if you were looking to get into some gold or gold stocks, I think now is a good entry point.  Again, it could still fall more in the short run, but it is better to buy on the dips.  And it was a massive dip this week for gold stocks.

Unless Trump changes things drastically, it will still ultimately be the Fed that determines the course of the economy and the price of gold.  When you hear talk about QE4, then you can expect the gold price to skyrocket higher.

Post-Election Libertarian Analysis

Trump has won and shocked the political class.  He was not supposed to win, and now everybody is scrambling to figure out what it will mean.

I voted for Darrell Castle on Tuesday, although I had been tempted to vote for Trump on several occasions.  Trump is nothing close to being a libertarian, but he does offer us some hope on foreign policy. In addition, he seems to be mostly honest (a rare characteristic in politics) and the establishment hates him.  Therefore, he can’t be all bad.

Even though I hadn’t voted for Trump, I was cheering for him on Tuesday night (and Wednesday morning).  It was fun to flip through all of the different channels just to watch the media pundits squirm.

Almost all of the worst enemies of liberty were against Trump.  The establishment media, the neoconservatives, the Bushes, Paul Ryan, Mitt Romney, John McCain, Colin Powell, and most of the left.  These are the worst elements of society.  This was reason enough to cheer on Trump.

The betting sites got this completely wrong.  I had previously stated that they are now unreliable because they were essentially outlawed in the United States.  The polls were mostly wrong, but not by as much as people thought.  Clinton is likely to win the popular vote, and some polls showed that Trump had closed the gap to within one percentage point right before the election.

Some will again question the system of the Electoral College.  One argument against a nationwide popular vote comes from this election itself.  Could you imagine recounting over 120 million votes?  Could you imagine the fraud that would be taking place right now?

Of course, the Electoral College was designed when it was more of a confederation of states rather than the giant behemoth of a single nation that we see today.  It was designed as such because each state was supposed to be like an independent little country.  The Electoral College is one of the last remaining remnants of federalism.

But on this note, it was encouraging to see more states somewhat legalize marijuana, whether for recreational use or medical use.  This continues to be an act of defiance against illegitimate federal laws.

There are Clinton supporters today who are absolutely livid.  They hate Donald Trump and they can’t understand how anyone could vote for someone who they have been told is a bigot and a bully.  The people who think this way simply are out of touch with reality.  They don’t understand that half the country knows that Hillary Clinton is a criminal.

But the Trump vote wasn’t just an anti-Hillary vote.  There were plenty of enthusiastic Trump supporters.  But you have to realize that most of these people don’t love every policy proposal by Trump.

I can’t speak for all Trump supporters, but I think a majority of them see him and his movement as a protest vote.  To put it less politely, they saw a vote for Trump as a giant middle finger extended to the establishment.

Hillary Clinton was really the perfect contrast too.  She is a bloodthirsty warmonger who is in the pockets of Goldman Sachs, the Saudi government, and the military-industrial complex.  She is just the worst of the worst.

It’s been fun to see the establishment throw fits over the election results, but we don’t know what we are going to get out of Donald Trump now.

There are hysterical people who think the world is going to end or something.  Some immigrants think they are going to be deported and some women think they are going to be a second-class citizen or something.

You should not expect much change when it comes to social policies or even economic policies.  There will be marginal impacts on the courts, likely for the better (from a libertarian point of view).

In terms of the federal budget, most of it is already spoken for.  It isn’t going to change much unless Trump actually reduces military spending drastically.  And this is one area where Trump could really do some good.  If he scales down (or better yet, ends) the various wars overseas, then I think we can be satisfied.

It would be nice if he would at least audit the Federal Reserve, but again, I don’t think we should get our hopes too high.  Maybe he will surprise us, but probably not.

I think the biggest question is Obamacare, which is an issue he probably didn’t exploit enough, yet it probably put him over the edge.  The middle class is getting hammered right now, and it was his acknowledgement of this fact that drew so much support.

The Republicans have maintained a majority in the House and a slight majority in the Senate.  They can repeal Obamacare.  Do they have the will to do it?  I am doubtful, but I can still hope.

If the Republicans fully repeal Obamacare and don’t put in place some other fascist or socialist program in place, then for once I can say that maybe there is more than a dime’s worth of difference between the two parties.  Let’s see if Trump can make this happen.

For me, the two big issues over the next four years are foreign policy and Obamacare.  I don’t expect Trump to be anything close to a libertarian, but I will consider him a success if he can end the wars, not start new wars, and repeal Obamacare.

I don’t expect much else except for theatrics from all sides.

8 Reasons for Libertarians to Vote for Darrell Castle

I am a libertarian and I am not voting for Gary Johnson for president in 2016.  While he is certainly better than the two major candidates on many issues, I do not consider him to be a libertarian.  Johnson is libertarian leaning in some respects.  But even when he does take a libertarian position, he typically does not provide an intelligent defense of it.

Johnson’s choice of Bill Weld as his running mate automatically disqualifies him in my eyes.  I know the Libertarian Party ultimately chooses the VP nominee too, but Weld was Johnson’s choice.

If I vote for anyone on the presidential ballot on Tuesday not named “Write-in”, then it will be Darrell Castle of the Constitution Party.

Between Trump and Clinton, I much prefer Trump.  We already know that Clinton is a war hawk and a criminal on many levels.  She is the complete opposite of libertarianism in almost every way.  Still, while I think Trump has done a great job in trying to point out that Americans are getting the short end of the stick from their so-called leaders, I don’t think he has the right solutions in most cases.  I just can’t bring myself to vote for someone with whom I disagree with on so many issues.

With that said, here are 8 reasons to consider voting for Darrell Castle.  I am not telling you what you should or shouldn’t do, but just making a libertarian case for Castle.

  1. Castle may turn off many libertarians with his religious and conservative stances.  But his policy proposals do not necessarily reflect his personal views.  For instance, with his pro-life stance on abortion, Castle says that we should take away the Supreme Court’s jurisdiction on the matter and that he would veto any federal spending for abortion providers.  This is the proper constitutional position.
  2. Castle wants to repeal the Federal Reserve Act.  He doesn’t just want to audit the Fed or criticize its policies.  He wants to end the Fed.
  3. For federal taxation, he proposes a system of apportionment, where each state pays a proportional amount to its census.  This is the way the original federalist system was designed.  It removes power from Washington DC and back to the states.  This alone would likely reduce taxation and federal spending dramatically.
  4. On education, Castle believes it should be done at a local level.  In other words, he doesn’t see it as a responsibility of the federal government.
  5. Castle generally takes a non-interventionist stance on foreign policy.  The only other candidate on the ballot that may possibly be as good or better on this topic is Jill Stein.  But Stein is mostly a socialist on other issues.
  6. Castle says that the U.S. should immediately withdraw from the United Nations.  This is in the name of sovereignty, because he is not planning on engaging in any wars.
  7. Castle has stated that he is opposed to the federal war on drugs.  This is an issue where libertarians have not always been in agreement with the Constitution Party.  From a Constitution standpoint, any drug laws should be left to the states.  Castle takes the correct constitutional and decentralist position on this issue.
  8. As you can see, Darrell Castle really does take positions consistent with the Constitution.  Even though some libertarians do not revere the Constitution, they can still cheer on Castle’s positions because most or all of his positions are decentralist in nature.  Being a libertarian isn’t about passing laws to legalize liberty; it is about repealing all of the laws that interfere with our liberties.  It is often about taking a decentralist position.

Those are just some of my reasons on why you should consider voting for Darrell Castle for president if you feel so inclined to vote at all.  Let’s face it; your vote isn’t going to decide anything anyway, even if you live in one of the states that is close.  If it comes down to one vote, then it is going to come down to corruption and the courts.

If you are going to vote, you might as well vote for someone who you feel good about.

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