BOJ Turns Negative

On Friday, the big financial news was the Bank of Japan (BOJ) announcing an interest rate cut into negative territory.  The news sent stocks soaring higher, including in the United States.

The announcement also drove down the Japanese yen and drove up the U.S. dollar.  The gold price was also up slightly.  It would have been up much more if it hadn’t been for the big gain in the U.S. dollar.

It is easy to read the headlines and say that Japan now has negative interest rates.  One might wonder if people will be lending money in order to receive less back in the future.  But let’s dig into this and find out the specifics.

The BOJ specifically cut the interest rate on excess reserves.  The rate will now be -0.1%.  In other words, it is just barely below zero.

This negative interest rate only applies to excess reserves.  For required reserves, the banks will not be charged anything.  Here is an article explaining the details.

So what does this mean?

It means that any money held by banks beyond their required reserves will get charged a fee.  It is a small fee, but the BOJ could always decide to make it bigger.

The purpose of this is to get the banks to lend out their excess reserves.  At some point, it becomes costly for banks to hold these excess reserves and it makes more sense to lend out the money, even if they are risky loans.

At some price, you can get people to borrow, at least on the margin.  If the banks start giving out loans at zero percent interest, I’m sure  a lot of people would be happy to borrow money at no cost.  If the rate were to go further negative, it is not inconceivable that banks could lend out money at a zero percent interest.  If the administrative fees are low and the risks are not deemed high, then it would be less costly than to hold the money as excess reserves.

This is interesting because some speculate that it will mean global currency wars.  Will other major central banks follow?  Actually, Japan is following the lead of other central banks in introducing a negative interest rate.  Different variations of negative interest rates have already been attempted by the ECB, Switzerland, and Sweden.

The BOJ’s announcement is going in the opposite direction from the Federal Reserve.  The Fed announced a hike to the federal funds rate back in December.  The only way it could achieve this hike was by hiking the rate it pays on bank reserves.  So while Japanese banks will get charged a 0.1% fee for excess reserves, U.S. banks are collecting 0.5% on their reserves.

This move by the BOJ is a rather desperate one.  It is supposed to be an attempt to get banks to lend, which means fractional reserve lending.  This policy is inflationary.  On the margin, it will be inflationary, but we don’t know if it will be significant.

In our Keynesian-dominated world, the central bankers think we need positive price inflation.  They can’t stand the idea of price deflation.  So they create money out of thin air, but it doesn’t always drive prices higher, as we have seen in Japan.

One of the main reasons is that the demand for money is high, which is partly because of the weak economy itself.  When people try to hold money for security, it slows down velocity and has an equivalent effect of reducing the money supply.  Money is changing hands less frequently.  The BOJ is trying to increase velocity by this move, and it is trying to increase the money supply through fractional reserve lending.

The Japanese economy is already a mess due to massive spending, massive debt, and years of money creation and interest rate tampering.  Resources have been misallocated everywhere, although not as bad as China.  The Japanese government debt is outrageous, making Greece look fiscally conservative by comparison.  But for some reason – national pride or something – the Japanese people keep buying government debt at low rates.

I don’t know if it will be this year or ten years from now, but eventually this whole thing is going to blow up.  Interest rates will spike and the debt will quickly become unmanageable.  It isn’t going to end well.

The problems are similar in the U.S., but I think to a lesser degree.  At least for right now, the Fed is not pumping in more money.

There is going to be a global recession.  The only thing is, when central banks make these moves, sometimes it enables them to kick the can down the road.  It ultimately makes the situation worse, but it can delay the inevitable.

The BOJ is in desperation mode.  Let’s see if the Fed turns to the same desperation at some point, if the economy gets bad enough.  In the U.S., there is a large pile of excess reserves in the banks.  If they come pouring out via bank loans, then we could see massive price inflation very quickly.  At this point though, there is no sign of that happening.

Republican Debate on 1/28/2016 and Ron Paul

I have suffered through another presidential debate in order to offer my libertarian commentary. The big story for me is the absence of Donald Trump and the presence of Rand Paul. This will be most of my commentary.

As far as Donald Trump skipping the debate, we’ll see if it ultimately helps him or hurts him or neither. I doubt it is going to hurt him.

In the first Fox News debate, Megyn Kelly was sent out there as an attack dog. Trump turned the tables on her quickly. His poll numbers went up. That might be one argument of why he should have participated in the debate.   If he were attacked again, Fox News would look bad and he would probably go up more in the polls.

Ironically, Ted Cruz ended up getting into a debate with Chris Wallace (one of the moderators) about the debate rules. Actually, it was more Wallace just telling him off. It would not surprise me if Trump uses this as an example of why he skipped and that maybe Cruz should have done the same.

I don’t have a lot to say about Kasich, Christie, Bush, and Carson. They probably aren’t going anywhere but down in the polls. Despite the things I don’t like about Trump, I will forever be thankful for his presence in this process for squashing Jeb Bush like a little bug.

Chris Christie was asked a question about what spending he would specifically cut. Christie has actually been the only candidate who has pointed out the significance of the unfunded liabilities of the so-called entitlement programs. But for this question, Christie answered that he would cut Planned Parenthood. This was absolutely lame and pretty much tells you everything you need to know about him. I only wish the same question had been asked to all of the candidates.

Marco Rubio was a rather smooth talker as usual. I still suspect that the Republican establishment will coalesce around him. They will go with Cruz if they have to, but they would rather have Rubio. At this point, it is anybody but Trump.

Iowa will be important for Cruz and Rubio because the anti-Trump people may start to coalesce around whichever candidate they think has the best chance at beating Trump. After Iowa and New Hampshire, I expect several candidates will drop out.

At this point, I don’t see any path for anyone other than Trump, Cruz, and Rubio. Maybe someone will surprise us in the next couple of weeks, but I don’t see it right now.

Lastly, I want to talk about Rand Paul. His presence in the debate certainly made it more interesting.

I don’t usually like questions about polling and strategy, as I prefer questions about how they will use and abuse the force of government. But the first question to Rand Paul was interesting to me personally. He was asked about essentially shunning his father and it was pointed out that some Ron Paul supporters are even going for Ted Cruz.

Rand gave about as good of an answer as he could have, but let’s face the fact that this sums up his whole disastrous campaign. He was elected to the Senate with the last name of Paul. Ron was incredibly successful in 2007/ 2008 and again in 2011/ 2012. He was successful in introducing millions of Americans (and even foreigners) to the idea of libertarianism. The couple of millions of votes he received in 2012 is just a side effect of his success.

But Rand will not likely get anywhere near the vote total that his father did. And at this point, he still may not understand why.

Libertarians just don’t get enthusiastic for Rand Paul. When Rand answered a question about foreign policy, he quickly showed once again why almost nobody is excited about his campaign. He said we shouldn’t topple Assad and arm the allies of ISIS. But he still believe in intervention. He did not give a simple answer as his father would have given, which is that the U.S. should simply go home and stop intervening.

The other day, I was thinking back to late 2007. At the time, my daughter was a baby. Just down the street from where I lived, a group of Ron Paul supporters would get together about twice a week. I would head over there after work and do additional “work” for a couple of hours. But it wasn’t really work.

On an average night, we would probably have about 20 to 25 people there. We would make banners. We would occasionally call people. We would stuff envelopes with mailings. I really don’t know if any of it worked, but with the high volume, it must have made some kind of difference.

This was in a small office building. The owner of the business was a Ron Paul supporter. He generously allowed the use of his office space, as well as his office supplies. On many nights, we would all sit at a big conference table and stuff envelopes with thousands of letters and brochures. We would talk politics and libertarianism. When I look back, it was a really great time.

I was already a libertarian before Ron Paul’s 2007 campaign. It was surreal at the time, and it still is when I look back. All of a sudden, libertarians were coming out of the woodwork. When I drove around, I would see Ron Paul signs everywhere. I would see at least a few Ron Paul bumper stickers on cars every week. It was just a really exciting time to be a libertarian.

I remember the money bombs that were so exciting and I remember some people flying a blimp with Ron Paul’s name on it.

I hope to look back one day and see 2007 as the year that the world turned.

Back to Rand Paul, there is no excitement. There is nothing comparable to what we saw with his father. I don’t hear any stories of college students spending their winter breaks to go door to door campaigning.

If libertarians can learn one thing from this presidential cycle, it is that moderating your message is not going to get you anywhere. If anything, it will just turn people off. We have to be strong and have conviction. We have to stick to our principles. At least people will respect you for it. Rand has not learned this lesson, or more probable, he simply doesn’t have those principles.

Will the Yuan Become the Next World Reserve Currency?

With the Chinese yuan recently getting on the world stage as part of the IMF’s basket of currencies, there continues to be talk about the yuan one day taking over the U.S. dollar as the world’s reserve currency.

I have been clear in the past that I don’t think this is going to happen. You can never be certain of what might happen 20 years from now, but even then I doubt it.

The dollar will eventually lose its status as the world’s reserve currency, but there isn’t going to be another currency to take its place.  The only thing that might work is gold.

Countries are realizing that they no longer have to use the U.S. dollar as a middleman, especially in today’s digital world.  They can deal in their own currencies.

There will still be some countries that are completely backwards that will have to use another currency because their home currency is so bad.  But even here, they have choices other than the dollar.

The dollar has been strong over the last few years, but that is really the result of the other major currencies just being that bad.

In addition, there is a lot of trouble brewing in Saudi Arabia, which uses the so-called petrodollar.  If the House of Saud goes down, then it would not be surprising to see the dollar’s dominance in the oil trade to also go down.

With all of that said, the Chinese yuan is not going to take the dollar’s place on the world stage.  It still isn’t a freely floating currency.

The Chinese have enough problems to deal with right now and shouldn’t be worried about getting their currency on center stage.  They should be more concerned about feeding 1.3 billion people as its first modern-day recession hits.  The biggest bubble in the world is bursting as we speak.

We have also seen the authoritarian nature of the Chinese government with the tanking markets there.  China has come a long way over the last 3 decades in liberalizing markets.  But the last year has been a good test and we have seen that free markets do not exist there.

I keep seeing stories on the internet about how the Chinese are dumping U.S. Treasuries in preparation of becoming a reserve currency.  But if the Chinese are dumping Treasuries, it is probably because they need the money right now.

More important, it seems the claims are simply not true.  According to the U.S. government’s numbers, Chinese holdings are holding steady.  The latest report shows that China held $1.2645 trillion as of November 2015.  This is actually a slight increase from one year ago.

If any country is dumping U.S. Treasuries, it is Japan, which has reduced holdings by nearly $100 billion over the last year.  Japan still holds $1.1449 trillion.

The bottom line is that the Chinese officials are a bunch of mercantilists.  They believe in keeping the yuan weak in order to boost exports.  Meanwhile, the Chinese people are stuck paying higher prices.

In conclusion, the Chinese yuan will not be the next reserve currency of the world.  China will be lucky to have any economic growth at all over the next few years.  Things are going to get worse there before they get better.

Banks are Less Insolvent

For the last many years, I have been harping on the fact that the Federal Reserve is doing great damage with its monetary inflation.  From 2008 to 2014, the Fed approximately quintupled the adjusted monetary base.

Much of this newly created money went into bank reserves.  The banks did not lend out this money, which means the money did not multiply through the fractional reserve lending process.  This, coupled with the fact that Americans have been more fearful of the economy, has served to keep price inflation in check.

Still, the Fed’s easy money policy that lasted for about 6 years (until QE3 ended in October 2014) has done great damage, even if it is not right in front of our face.  There has been asset price inflation when you look at stocks and certain areas with regards to real estate.

The Fed has also enabled Congress to run far bigger deficits at low rates than would have been possible without the Fed’s easy money and purchasing of government debt.  This increased government spending has been wasteful and destructive, as it misallocates resources.  Wealth goes to things that it wouldn’t have gone to in a free market to meet consumer wants and needs.

The Fed also manipulates interest rates.  We can’t say for sure if rates are artificially low right now, but there is little question that the Fed has distorted savings.  Since savings and investment are the cornerstone of productivity and economic growth, the Fed has obviously hurt our living standards in this respect too.

I remain optimistic for the long-term future.  I believe human nature is generally on our side in terms of seeking more liberty.  I believe that with the advances in technology, the free-flowing and inexpensive communication in today’s world will get the truth out there.  And the truth is on our side.

Still, in the short run, I am bearish.  There is a recession coming at some point.  It is mostly a question of when and how bad.  The Fed has simply done too much damage.  There has to be a correction.

On top of this, the fiscal situation is far worse today than when the financial crisis hit in 2008.  The national debt has nearly doubled.  The unfunded liabilities only continue to grow.  There is going to be some kind of default, even if that default is in the form of reduced payments (in real inflation-adjusted terms) to seniors, or significantly raising the government’s retirement age.

The next recession could be even more painful than 2008.  It is hard to say for sure, but the amount of easy money and the amount of debt far exceed what we were dealing with before the fall of 2008.

However, there is one area in particular where we may be better off. That is the banking system.  Without the backing of the FDIC and the Fed, most banks would likely implode in a short amount of time.  In this sense, you could say that virtually the whole banking system is insolvent.

But overall, the banks are far better off today than they were in 2008.  Much of this is because of bailouts, but it is still the case.

The banks were directly bailed out in 2008/ 2009, and the public was really mad about it.  They weren’t mad enough to call for an end to the Fed or to send the majority of Congress packing in the next election, but they were mad.

The Fed figured out how to deal with this.  They proceeded to bail out the banks in two different ways, but in a much more devious and less obvious way.

First, as part of the Fed’s quantitative easing (QE) programs, it purchased mortgage-backed securities.  Prior to 2008, the Fed only purchased government debt directly.  Now it included these mortgage-backed securities, much of which were junk.  Many of these mortgages were in default.  The Fed bought these at their original value (instead of market value) from the banks, thus relieving the banks from much of their bad debt holdings.

Second, the Fed instituted another new policy since the fall of 2008. It started paying interest on bank reserves.  It paid the banks 0.25% on reserves up until December 2015.  Since last month, it has been paying the banks 0.5% on reserves.  This was the big announcement of the Fed “raising rates”.  The Fed is just bailing out the banks with a higher interest payment.

Regardless of what you think of these policies, the big banks are better off today than they were about 8 years ago.  They probably can’t be considered solvent, but they are definitely less insolvent, if that makes any sense.

While the heavy interference and backing from the government and central bank are unfortunate, along with the essentially free money going to the bankers, I suppose it is positive that at least the banks are better off than last time.

If there is a deep recession, the banks will be in trouble again.  There will be auto loans in default.  There will be mortgages in default, especially coming from bubble areas such as San Francisco.  But there is not a housing bubble to the same degree as there was in the last decade.

The banks have been conservative in lending new money, instead choosing to collect a small interest payment from the Fed for reserves.  They are overall in better shape.  This means that if we have another deep recession, the banks should not have to be bailed out to the same extent as they were the last time.  There may be a bailout, but it will likely be more indirect and not as huge.

I know that most American were mad with the bank bailouts in 2008.  But they would have been more mad if the banks had been allowed to fail and their checking accounts were wiped out.  This was the unfortunate position from decades of government interference and central banking in the banking industry.

I still don’t know what the solution should have been from a libertarian perspective in 2008.  The problem is that all of these non-libertarian institutions were in place and messed everything up.

There is going to be a big correction due to the high debt levels and the massive malinvestment created by the Fed.  We just don’t know when it will happen and how fast things will fall.  But on the positive side, the banks should not require as much of a massive bailout this time.  They have already been bailed out over and over again for the last 7 years.

Low CPI Makes QE More Likely

The latest CPI numbers are out.  The CPI for December was -0.1% from the prior month.  That is a negative sign, perhaps literally and figuratively.

However, the year over year CPI came in at 0.7%.  This may be a somewhat misleading number due to the drop in energy prices in late 2014.

I like to look at the median CPI.  Year over year, the median CPI was up 2.4%.  It had been coming in at 2.5% for September, October, and November of 2015.

Generally speaking, the numbers are coming in low.  Of course, if we had a stable money supply, we would likely have slightly deflationary prices due to increases in technology and productivity.  We should wish for price deflation as a result of an increase in living standards and not central bank booms and busts.

I don’t really trust the CPI, as there is really no accurate measure for price inflation.  Each individual is impacted differently because we spend different amounts of money on different things.  Someone who doesn’t drive a lot may be less impacted by changes in energy prices.

I think the CPI is understated overall, if anything.  Health insurance, which everyone is now forced to buy (or pay a fine), is probably underweighted a great deal.  It is also likely understated a great deal as the health plans cover less and less.

With that said, the CPI still gives us a good idea of the trend.  In addition, the central bankers look at this number.  Despite the Fed’s massive monetary inflation since 2008, price inflation has stayed relatively tame.  The Fed has been given something of a free lunch.

The problem is that the general public just doesn’t understand the extent of the damage that the Fed is doing because of somewhat tame price inflation.  But the Fed has allowed the government to run massive deficits at low interest rates.  It has served to misallocate resources on a grand scale, which is why the economy continues to struggle and will likely get worse.

All of the talk about the Fed, for at least the last year, is about raising interest rates.  But that is not really the big story.  The Fed raised its key rate by a quarter percent in December by increasing the rate it pays banks on their reserves.  The Fed has not had to reduce the monetary base by selling off assets from its balance sheet.

Not coincidentally, since the Fed “raised rates”, market rates have actually been falling.  The 10-year yield briefly fell below 2%.  Investors are seeking safety in government bonds due to the falling stock market.

At this point, with stocks tanking, it looks like there won’t be another Fed rate hike in a while.  But more importantly, I think the chances of another round of so-called quantitative easing – which is money creation by the Fed – are increasing.

With the stock market falling and the economy likely headed into recession, the Fed is not going to be held back because of price inflation.  There has been asset inflation, as we see with the deflating stock market, but the CPI shows price inflation as relatively low.  Therefore, Janet Yellen and the Fed will see little risk in starting QE4, or whatever it will be called.

The Fed could start QE4 without reducing the federal funds rate.  They are controlling the federal funds rate by the interest paid on reserves, so the two policies (money supply and interest rates) are somewhat independent right now.  This will likely stay the case as long as the banks keep their massive piles of excess reserves.

If and when the Fed starts QE4, it will be a time to shift investment strategies.  It will mean we should start investing for higher asset prices in commodities.

We should hope that the next round of QE will bring significantly higher prices.  It isn’t because I want to see higher prices.  I just don’t want the Fed to keep destroying the economy and getting away with it.  At least if prices are going up a lot, then the Fed is more likely to get blamed.  It might also be less likely to create money out of thin air with every future crisis.

We need something of a shakeout like the late 1970s and early 1980s under Paul Volcker.  We need for the Fed to keep the monetary base stable, even in the face of recession.  I think the only way we are going to get this is through higher price inflation.

How Do We Raise Wages?

As the American middle class continues to struggle, the question of wages comes up more often now.  Wages have gone just about nowhere over the last several decades.

When we talk about stagnant wages, we are talking about real wages.  It does little good to talk about nominal wages.  If you are getting a 3% raise at your job every year, you aren’t coming out any further ahead if the price inflation rate is also at 3%.

The scary thing is that price inflation is likely understated.  I don’t follow someone like John Williams who is almost always claiming that actual price inflation is around 10% or more.  That is rather ridiculous.  That would mean prices are doubling every 7 years, which just isn’t the case.

It is the case with health insurance, but that is just one consumer good.  It is likely weighted far too low in the government’s statistics, but there is no way that most food prices have doubled in the last 7 years.  Car prices certainly haven’t doubled in that time.

Of course, the huge rate increases in health insurance is not just a phenomenon of monetary inflation.  It is also due to government interference in the marketplace.  Still, it is an expense for most households, especially since it is now essentially mandatory.

The CPI should likely be higher than it is reported, but it really is impossible to measure.  But really, I don’t even need any government statistics to tell me that real wages are stagnant, or probably going down.  The American middle class is struggling.

So why are real wages stagnant or declining?

The reasons mostly lie with the government and the central bank and its monetary policy.  The federal government alone spends about 25% of GDP.  Most analysts will look at tax collections, but it is better to look at spending.  For all of the money spent through debt, it is still taking resources out of the voluntary marketplace and misallocating them.

When you add in state and local government spending, government at all levels is consuming over 40% of our productivity.  This doesn’t even account for the massive regulatory burdens and red tape faced by individuals and businesses.

Since the government is consuming and misallocating so much in terms of real wealth, it leaves a lot less for savings and investment.  And it is important to be clear on this point that savings and investment are what ultimately raise wages and improve living standards.

Henry Ford supposedly raised wages for his employees so that they could buy his cars.  But that would be a stupid reason for anyone to raise their employees’ wages.  The reason he raised wages was to keep his employees, and he was only able to do so because of prior savings and investment.

With savings and investment, business owners can invest in machinery and tools to be more productive.  This makes their employees more productive, which means they can be paid more.

The only reason that average wages in the U.S. are so much higher than in China or India is because there has been far higher rates of saving and investment in the U.S. economy, at least in the past.  This is due to government – or more precisely – less government.  It is due to stronger property rights.

Unfortunately, not only do the U.S. government and the Federal Reserve consume our wealth, but the Fed also discourages saving through its policies of easy money and artificially low interest rates.

Most economists make the mistake of saying that savings is not good for the economy.  Even many free market economists make this mistake.  They will say that savings is only good because it means that the money gets invested.

But if someone takes their money and puts it under a mattress, this is deflationary (in a good way) for prices.  The person produced something of value for society and then took the money and hid it away.  In other words, the person gave something away to society without redeeming anything.  This means lower prices for everyone else and is in no way harmful to the economy.

Politicians and others can talk all they want about minimum wage laws, labor unions, education, and other labor laws, but the only thing that is going to raise overall wages for a society is savings and investment that increase productivity.

America needs a raise.  It has been a while.  It needs to start with a drastic reduction in government spending.  And if we can’t abolish the Fed right away, we at least need it to maintain a more neutral monetary stance.  Until that happens, I’m afraid that real wages aren’t going to go up any time soon.

Oregon Ranchers and Jury Nullification

A standoff continues in Oregon where protesters have seized control of a federal building in protest of two Oregon ranchers being sent to prison.  If the goal of the protesters is to draw attention to the story, then perhaps their method has worked.

I am not necessarily endorsing the methods of the protesters, especially as it could lead to violence.  Of course, the violence would really be coming from the federal government agents, but taking control of a federal building is definitely asking for trouble.

But let’s just discuss the actual case at hand here, and let’s ignore whether or not the protesters are correct in their strategy for now.

If you want to read a decent account of the story from a somewhat libertarian perspective, you can check out this lengthy article.

There are many legal issues that are a major problem here.  There are issues of double jeopardy, minimum sentencing laws, federal ownership of land, terrorism laws, and federalism in general.

There is no question that this is a problem of the federal government.  The federal government “owns” vast amounts of land, particularly in the west.  So many of the problems in our society exist on so-called public lands and public property.  It is not that disputes can’t happen with privately owned property, but it is less frequent and the resolutions tend to be more peaceful and just.

From a constitutional standpoint, the federal government obviously does far more than is authorized.  Most crime should be handled by the state and local levels.  The only three crimes mentioned in the U.S. Constitution are piracy, counterfeiting, and treason.  Of course, it is the politicians and central bankers who specialize in these crimes now.

The two ranchers are going back to jail after already having served time.  After getting out of jail, they were essentially re-sentenced to prison due to mandatory sentencing of 5 years for their “crime”.  To me, this amounts to double jeopardy.  There wasn’t another trial, but there was another sentencing, which was likely done for purely political reasons.

They had been convicted for arson and they were convicted under an anti-terrorism law.  These two ranchers are not arsonists because they did not start the fires with any intention of harming anyone or anyone’s property.  Perhaps they damaged a small amount of federal property (although they likely actually saved it), but either way, there was no intent to do harm.

As for this terrorism statute, it just shows what a joke the whole idea of terrorism has become in our country.  You can pretty much label anyone a terrorist now for any little reason.  And this case also points to what a joke minimum sentencing laws are.  The original judge really shouldn’t have given them any prison time, but at least realized the ridiculousness of locking them up for 5 years.

This case also illustrates the absurdness of our so-called justice system.  Even if the ranchers had damaged property belonging to others, whether the federal government or privately-owned property, the answer here is restitution.  Since there was no intent to do harm, it is far more productive for everyone involved if they just pay for the damages instead of costing taxpayers more money as they sit in prison.

The last important point here is that we will continue to have significant problems in our society until a greater percentage of the populace is educated on liberty.  I’m sorry I have to say this, but these jurors were a bunch of fools that convicted them.  It never should have been up to a judge to sentence these ranchers.

Maybe it was an unfair trial.  Maybe there was bias against the defense in not being able to present certain evidence.  But if I were sitting on a jury and heard the charge of terrorism, it would have been an automatic “not guilty” because there was no intent to harm anyone.

It doesn’t matter if you think they are little bit guilty of something else.  For that charge, there should have been no conviction.  I have no idea what was going through the jurors’ heads.  I have no idea if any of them regret finding them guilty.  But let’s face; they were completely ignorant.  And that means there are tens of millions or hundreds of millions of Americans just like them.

This is where education comes in.  Let’s hope that is the goal of the protesters now, although I am not so sure.  These ranchers would never have gone to jail if the jury had done the right thing and found them not guilty.

So we can blame the federal government all we want (and we should), but this ultimately lies at the feet of the American people and the jury that convicted, which is probably symbolic of what most Americans would have done.

The ranchers should be freed for the sake of justice.  More importantly, more Americans need to step out of their zone of ignorance in these matters and stop assuming that what prosecutors and federal bureaucrats are telling them is true.

Republican Debate – January 14, 2016

As I write this, the Republican debate on Fox Business Network is wrapping up. It is a couple of hours out of my life that I will never get back, but at least I was smart enough to do some multi-tasking.

The debate started off with a question to Ted Cruz about jobs. Cruz starts off talking about how 10 U.S. soldiers were on their knees in Iran and how Obama didn’t really do or say much about it. Cruz said that when he is commander in chief, that no U.S. soldiers will be on their knees.

Now I am not one to hesitate in criticizing Obama, but this is one subject where Obama’s reaction to the event was proper. There was no escalation. Iran released the soldiers who had “drifted” into Iranian waters. I put that in quotes because it is highly doubtful that it was a mistake. And if it was, it certainly wasn’t a mistake that they were near Iranian waters in the first place.

If Obama should be criticized at all for this event, it is just the fact that the U.S. military is over in that region at all. The event never should have happened because the U.S. military shouldn’t be there patrolling waters.

Despite Cruz being somewhat decent on economics, at least compared to the rest of the field, there is no way I could ever think about supporting him even a little bit. He is pro war and pro intervention. He wants to build the U.S. empire even bigger, if that is even possible.

Imagine if Iranian sailors “drifted” into the Gulf of Mexico and ended up just off the beaches of Florida or Texas. What would the reaction be from Americans? What would the reaction be from Ted Cruz?

If anything, this whole incident just proves that Cruz and all of the other war hawks are completely wrong in their assessment of Iran. The Iranians quickly returned the captured sailors and seemed to treat them well. Whether it was done because they are kind or because they are afraid of the blowback from the U.S., it doesn’t even matter that much. The point is that they acted rationally. They are not a bunch of maniacs as portrayed by the media and the likes of Ted Cruz, or at least not any more crazy than U.S. politicians.

I found most of the rest of the debate boring, but maybe it is just a result of seeing too much. I can’t imagine how boring it would be without Donald Trump in there.

The exchange between Trump and Cruz on the issue of whether Cruz qualifies as a naturalized citizen was the most entertaining part of the night. It is interesting that this is just coming up now. I questioned Cruz’s status about a year ago, wondering how he could qualify to run for president if he was born in Canada.

Also, if Cruz is allowed to run because his mother is American, doesn’t that mean that the birther issue with Obama is a non-issue and has been all along? Obama’s mother was an American.

As for Trump, he continues to not back down on much. That is his main appeal. I did notice he said that we should “repeal and replace” Obamacare. He inherited that talking point from the Republican establishment. We still don’t know what “replace” means.

Trump also said that the police are the most mistreated people in America. I don’t know whether to laugh or cry over that comment. In some cases, it is true that the police have a really tough job in some aspects, especially when dealing with inner cities. On the other hand, has Donald Trump ignored all of the stories that happen daily of innocent people being mistreated by the police?

In terms of economics, I was surprised there was not more, but the end of the debate did have some good discussion about taxes. Rubio completely ignored a question on “entitlement” spending, which really is the major economic issue facing this country. Christie did a good job of pointing out that Rubio did not answer the question.

Still, the debate between Rubio and Cruz was decent. Rubio criticized Cruz’s plan for a VAT tax. He also pointed out that Cruz can’t get rid of the IRS, or else he will just rename it. As long as the government is collecting any forced taxes, then there has to be an agency to enforce it. I actually thought both candidates had good criticisms of the others and their plans.

To look at this situation objectively, and not just from a libertarian point of view (not that you can’t be objective from a libertarian point of view), I will run down how I see the Republican nomination taking shape.

First, there is no question that Trump is the person to beat right now. The longer that people stay in the race, the better it is for Trump. It dilutes all of the anti-Trump people. He can easily win the nomination then with 40% support. The worst case scenario for Trump, aside from having the establishment literally destroy him, is if most of the candidates drop out after Iowa and New Hampshire. If it is just Trump and, say, two other candidates left in the race going into the big primaries, then one of the other candidates may have a chance.

Rubio and Cruz are the two likely main challengers at this point. Since Bush and Walker (remember him?) haven’t worked out too well for the establishment, they are backing Rubio. They don’t really want Cruz, but they will take him over Trump.

Kasich is done. Christie is probably done, but I can’t completely count him out because he is polling ok in New Hampshire. Jeb Bush is a total dud. He is done unless the establishment really oversteps and rigs the whole thing in plain sight.

Ben Carson was barely awake again during the debate. He even made a comment about waking him up when it was his turn to talk. Unless the other major candidates completely implode, Carson is likely done.

My last word is on Rand Paul, who was excluded from the debate. He is throwing a temper tantrum over the exclusion, but he really has no one to blame but himself. It is a sad situation. His whole campaign has been a disaster. He is not his father and I think most libertarians recognize that. That is why most libertarians don’t really support him. And for the ones who do support him, they don’t do so enthusiastically.

Rand Paul is now just digging a deeper hole for himself. He is showing a lack of class, which I can’t believe I am saying because Ron Paul is nothing but class. Rand may not even get reelected to the senate because he has looked so bad.

Even though I am anti political, I am still something of a political junkie. For those like me, we can look forward to the Iowa caucuses, even knowing that it probably won’t matter much who is elected. Still, it is nice to see the candidates who are not favored by the establishment beating the establishment candidates. We have to start somewhere.

Forget Austrian Economics, Talk to Your Neighbor

I keep returning to this theme of the struggling American middle class.  Of course, the lower class is struggling too, but that is really nothing new.

You could say that the upper class is struggling as well, but it is hard to feel sorry for people who have millions of dollars in the bank.  It all depends on how you define upper class.

But even what many would consider to be an upper middle class income is not going too far these days.  For example, a family of four earning $150,000 per year in an average big city (not New York or San Francisco) is not really that well off any more.  They are probably not stressing about money too much and I’m sure they take an occasional nice vacation and live in a decent place.  But my guess is that most families in this situation are not saving a lot of money.

I am a strong proponent of the free market.  A more voluntary society with limited state interference will produce great prosperity.  It is actually amazing how much prosperity we have in the U.S. despite government at all levels spending about 40% (or more) of the national income.

I am also a believer in the Austrian Business Cycle Theory.  Austrian followers can quibble over some details, but most will generally agree that artificially low interest rates and monetary inflation will misallocate resources and cause artificial booms.  I focus a little more on the monetary inflation side than the interest rate side.  Interest rates may not be artificially low right now in the sense that many people are scared of economic conditions and have voluntarily chosen to restrict borrowing and to buy bonds.

The Austrian Business Cycle Theory tells us that we may be in for some trouble in the near future.  The Fed nearly quintupled the adjusted monetary base from 2008 to the end of October 2014.  That is when QE3 ended.

While the monetary inflation has not translated into massive price inflation (much of it due to the huge excess reserves piled up by banks), there has still been asset price inflation.  We can see this in stocks and even in real estate in some areas.

Austrian economics tells us that when the loose money slows down or stops, it is going to lead to a popping of the bubble activity.  Of course, the tricky part is the timing.

It has been over a year since QE3 ended and it should not surprise us that the economy is appearing weaker.  The stock market’s poor performance for the first week of 2016 is starting to worry people.

Sometimes observation can be just as accurate as any theory though.  I don’t really need the Austrian Business Cycle Theory to tell me that something isn’t right in the world.  Just talk to your neighbor or your friend and you can get a decent picture.  For a good sample size, it might help to talk to at least 5 different people.

I was talking to a chiropractor the other day and he made the comment that kids are really expensive.  He was speaking from experience.  We discussed how expensive life is and how we can’t understand how somebody making $30,000 per year can possibly get by.

I get a general sense that people are just not happy, especially in their jobs.  While some people just don’t like their jobs, I think one of the frustrations is that they work hard and they don’t really have much to show for it.  I think that is why there is so much talk about playing the lottery.  It is an extreme long shot, but for some people, it is the only shot.

It is crazy that a family can earn close to a six-figure income and still feel like they are struggling.  Sure, we all have our cell phones and tablets, but shouldn’t we be able to have something today that our parents didn’t have?  It is sad to say, but people in the 1950s actually had it easier in terms of paying for basic needs.  Don’t get me wrong here; we are far better off in terms of choices because of technology.  But to pay for food, shelter, medical, etc., I think it is more expensive today.

Go out and talk to a few people and get their opinion.  I think you will find a similar story.  Tell them that you are feeling the pinch too.  Tell them that you think life is just really expensive right now.  Say this in order to get them to open up.  I think a lot of people are not open about it until they hear someone else.

This tells me that there is going to be a major correction.  The government is just taking too much of our resources.  Our wages are going up slightly (nominally speaking), but all of it and more gets eaten up just from health insurance premiums.

We need a correction.  It will be painful, but it is necessary in the long run.  That correction has to lead to something of a downsizing of government.

Things can always be worse, but I just get a general sense that there is a silent majority out there who are struggling in a major way.  Things seem to unsustainable.  We are going to see a correction.  Fear will spread quickly.

You don’t need Austrian economics to tell you this.  Just talk to a few neighbors.

Is the End Near for the House of Saud?

The House of Saud – the ruling family over Saudi Arabia – is in some serious trouble.  In fact, you could almost say there is something of a perfect storm brewing for their fall.

First, there is some (more than usual) condemnation of the rather high frequency of beheadings taking place by the state.  After 157 were executed in 2015, another 47 were executed on January 2, 2016, supposedly for terrorism.

While some executions are for murderers (we won’t get into the arguments here over whether a death penalty is still appropriate), the death penalty can also apply to “crimes” such as drug smuggling, or even adultery.

Maybe more Americans will start to take note that this group of thugs is supposedly a great ally of the U.S. government.  Of course, some might be willing to say that some U.S. politicians are thugs themselves.

Overall, it is positive that the world is looking on and applying social pressure.  It is hard to say if people internally are recognizing the tyrannical state that they live in, but it would be hard to imagine that there isn’t at least some talk in secret amongst the populace.

The House of Saud has likely only been able to hold onto power over the last couple of decades due to the support (financially and militarily) of the U.S. government.

Aside from the social and political issues going on, you can throw economic turmoil into the mix.  Or really, you just need the last three letters of “turmoil” to describe the situation.

Saudi Arabia was the main player that decided to keep oil production running high, despite falling oil prices.  Some speculated that they did it to hurt Russia (on behalf of the U.S.?), and some speculated that they did it to hurt the U.S. shale industry.

While lower oil prices have certainly hit the U.S. shale industry hard, it is nothing compared to how much it is hitting Saudi Arabia.  Saudi Arabia is not in the same position as a place such as Dubai where the tourist industry and financial industry thrive.  Much of the Saudi wealth depends on oil.  And when the price is low, oil revenue is low, and there is a lot less wealth going in.

To top it off, the Saudis are building what is supposed to be the tallest building in the world, which will measure 1 kilometer high.

Mark Thornton recently wrote an article on the skyscraper curse, and how building tall buildings – especially those that set new records – is indicative of an economic bust.  To be sure, building skyscrapers doesn’t cause recessions or pop bubbles, but it can be a symptom of the debt and loose money that goes along with artificial booms and bubbles.

When you also throw in the geo-political turmoil and Saudi Arabia’s fighting with groups in Yemen, along with many strained relationships in much of the Middle East, there is a situation ripe for some kind of downfall for the oligarchy.

It is easy to imagine a scenario where Donald Trump is elected president and he decides for the U.S. government to stop lending political support to the House of Saud.  In fact, it doesn’t even take a president.  Public opinion may just end up being strong enough that U.S. politicians feel political pressure to step up criticisms of the regime, or worse, stop support.

Even if a downfall occurs peacefully, or there is some kind of relatively peaceful coup, it would be hard to imagine that it would not cause some havoc in the oil markets.  That is one reason I am not convinced that oil prices are going to stay down in the long run.

I still believe there is a looming economic downturn.  The oil industry was actually the first major bust after the Fed (and the rest of the major central banks) started the unprecedented money creation in the wake of the fall of 2008.  If we are in for a recession, oil could fall further still.

If the price goes down even further, then this just exacerbates the problems for the House of Saud.  There will be competing forces pulling the oil price in opposite directions.

The oil industry will likely be a good investment at some point, but we should expect higher volatility.  Meanwhile, we won’t shed a tear if the House of Saud falls.  Let’s just hope that the tyranny there doesn’t turn into chaos, as we have seen in places like Iraq and Libya.