The Number One Libertarian Lesson From Harvey

Hurricane Harvey, and then Tropical Storm Harvey, did great damage to the people of Texas.  The direct impact was one thing, but the rainfall, and the flooding that came with it, is another.

There are many useful libertarian lessons with this storm, and the lessons are similar whenever a major storm hits, or really any kind of natural disaster.

Houston is similar to New Orleans in that it is almost like a bowl.  It is quite prone to flooding.  It is questionable whether a major city should have ever been built there.  But either way, there are problems (misallocations) created by the state.  The government interferes with the insurance market.

It is not to the same extent as interference in the health insurance market, but it is still significant.  Many homeowners who live in areas prone to flooding are subsidized by the government with their insurance.  There are cases out there where homes are rebuilt three or four times because of flooding.  In a true free market, these houses would be virtually uninsurable.  Or at the very least, the market prices would be much higher and would limit the demand to live in these areas.

Another area of government interference is with the existence of FEMA.  This is a federal agency that is supposed to help in such situations.  To be sure, the agency probably has helped some people who were hard hit by the storm.  But when an agency has billions of dollars to spend, that should be expected.  In the case of New Orleans, FEMA seemed to hamper the situation by actually preventing the victims from receiving help by willing parties.

Another area that gets attention in these situations is that of “price gouging”.  Businesses and people are prevented from charging higher than normal prices, even though there are shortages and higher demand.  We are told that businesses shouldn’t be trying to gouge and make an extraordinarily high profit in such situations, but it is in these situations where the laws of supply and demand are most vital.  If the government would allow sellers to raise prices for such things as bottled water, batteries, and hotel rooms, then it would ensure that only those buyers in high need would buy.  In other words, it decreases demand.

The higher prices also send a signal to suppliers to bring in more supplies.  If you can charge five dollars for a one-gallon bottle of water, then maybe you load up a truck with water that is available 100 miles away and you drive it to the hardest hit areas.  This helps relieve the shortages.

There are many other areas where government interference can hamper recoveries.  The establishment media tends to focus on the government officials who did heroic rescues, but there are many more non-government people who did this while not getting paid.

With all of that said, there is one major lesson that I think we can take away from all of this, but it is a bit harder to see.  It is something that libertarians should point out often.

Since the storm hit, there has been tens of millions of dollars given to charity to help the victims.  And when I say charity, I actually mean charity.  This isn’t government spending taken through the threat of force.

There is certainly plenty of government spending on disaster relief, and this is what gets much of the attention.  It is almost as if it is put in the face of libertarians.  “See, if you had it your way, there would be no government to help these victims.”

But let’s flip it over.  If governments at all levels (federal, state, local) didn’t take nearly half of our money, then we would be able to afford to help these people to a much greater degree, and likely in a much more efficient manner.

Actually, it is incredible that there is so much voluntary charity.  Businesses have donated huge sums of money.  Even if it is just for good public relations, who cares?  It is helping provide disaster relief.

There are many celebrities who have donated their own money and time to help.  Some of them hold fundraisers.

This all happens in spite of the fact that nearly half of our money is taken from us.  Imagine if only one-tenth of our money was taken from us instead.

Rich celebrities and big businesses can afford to donate some substantial money.  Most middle class people cannot afford big donations.  Most of their money goes toward their living expenses, and taxes of course.

If the average middle class family received a raise of 50% in the form of lower taxes and lower inflation, imagine how much more generous people would be.  They could increase their living standards, save extra money, and still afford to be extra charitable.  Plus, people wouldn’t have the excuse that they don’t really need to be charitable because they are already charitable through their tax contributions.

Imagine if the federal government spent $1 trillion per year instead of $4 trillion per year.  Yes, there would be some “benefits” lost to people.  But with an extra $3 trillion per year, that is almost $10,000 extra per American.  That is about $25,000 extra per family per year. That is a huge sum of money.

What would you do with an extra $25,000 per year for you and your family?  I think it is safe to say that you might be a little more charitable.

Whatever numbers you use, the major point is that the government consumes a lot of resources.  When it comes in for the rescue in these situations, it should not be surprising.  If you gave me $13 billion per year to spend, I could make a big impact with that too.

As any good economist knows, we should not just look at the benefits that are easily seen.  We have to look at the unseen consequences.  In this case, if the government didn’t take so much of our money, then people and charitable organizations would be able to help so much more in these situations than they already do.

Practice What the Successful Do, Not What They Preach

Warren Buffett, one of the richest people in the world, says that you should invest in low-cost index funds in U.S. stocks.  He suggests a long-term view with a buy-and-hold strategy.

Yet, what Buffett suggests is almost the exact opposite of what he actually did to become so wealthy.  Perhaps it is not the exact opposite, as that might mean doing absolutely nothing in terms of saving, which many Americans are good enough at.

Buffett became fabulously rich by value investing.  It didn’t hurt that he started off in a decent situation as the son of a congressman.  His father, Howard Buffett, was about the closest thing to a libertarian in his time.  He was the Ron Paul of his time.  We have to wonder what went wrong with Warren.

Warren Buffett invested in companies that he correctly saw as having good value and good potential growth.  He became wealthy by not diversifying too much.  This isn’t to say that diversification is not a good strategy, but just that it is not Buffett’s expertise.

I don’t know if Buffett thinks others are simply too stupid to do what he did.  Maybe he is right.  Or maybe he realizes that he probably had a little bit of luck along the way to complement his skills.

I see this so often in the world though.  Somebody is rich and successful, and they tell you to do things that are different from what actually made them rich and successful.  It can happen with other successes besides money too.

For example, you could read someone’s book on how to save money.  Maybe the book has some good advice.  But the author may be well-off financially not so much because he was really good at saving money, but because he was good at making money by teaching others to save.

Dave Ramsey and Suze Orman are really rich.  They have made their money by teaching others through seminars, books, radio, and other outlets.  I have my disagreements with them on investing strategies, but I think their overall advice on debt and living below your means is solid.  But if you really want to be rich, it is not so important to follow their advice as it is to copy what they do.

As the title of this post suggests, if you want to be successful, don’t practice what successful people preach.  Instead, practice what they do.

This isn’t to say that any of these people are hypocrites for saying what they say.  Again, some of the advice is solid.  I am just saying that if you really want to learn from successful people, it is better to be observant about what they are doing.

I subscribe to several online marketers who try to teach others to be rich.  I rarely buy any of their products.  However, I often read the emails because I know they are at least somewhat successful.  I want to see how they write their emails and how they set up their landing pages.  I want to see how they market their material.  I learn more from this than I could probably learn from actually buying their course, or whatever it is they are selling.

There are many motivational speakers today, and you have the gift of YouTube and other media to view these people for free.  I am thinking of people like Gary Vaynerchuck, Tony Robbins, Peter Voogd, Stefan Pylarinos, T. Harv Eker and Tim Ferriss.  You can also find these people on many podcasts.

Many of these people have made a lot of money just by motivating others to do the same.  To be fair, many of them have made a lot of money in other things as well.  Still, there is nothing wrong with this.  These guys are really great motivational speakers, and I think you should largely listen to their advice.  Unlike the examples of Buffett, Orman, and Ramsey, these people do preach what they practice.

Still, even with these motivational guys, you can still observe what they do and how they market themselves.  There are lessons to be learned other than just listening to what they say.  You can follow what they do, and that doesn’t mean you have to be a motivational speaker.

I recommend that you listen and observe these people.  Of course, there comes a time when you have to stop listening, at least for a while, and take action.  If all you do is listen to motivational speeches about getting rich, you aren’t going to become rich unless you actually take action.

In conclusion, look at the successful people in this world and determine if they are preaching what they are practicing.  But this should include what they practice that makes them so successful.  It wasn’t Dave Ramsey cutting up his credit cards or making a budget that ultimately made him so rich and successful.  It is because he learned to communicate what he had learned.  He also took action in doing so.

Trump Succumbs to the Establishment

On Monday, August 21, 2017, Donald Trump addressed the nation regarding the war in Afghanistan.  If you don’t include cold wars, it is the longest running war in U.S. history.  Unfortunately, based on his speech, it is going to go on for longer still.

There was one particular part of his speech that caught my attention and should be of particular interest to libertarians.  It should also be of interest to those who supported Trump because they wanted some real change and some opposition to the status quo.

Trump said the following:

“My original instinct was to pull out, and historically I like following my instincts.  But all my life, I have heard that decisions are much different when you sit behind the desk in the Oval Office.  In other words, when you are president of the United States.”

For many years, and even up until he was elected, Trump spoke out against nation building in Afghanistan and suggested that we were wasting money there and wasting lives.  Now that he is president, things have changed.

This should be no surprise.  George W. Bush campaigned on a humble foreign policy and quickly became a war president, including the occupations of Afghanistan and Iraq.  Barack Obama, the supposed peace president, spoke against war and closing down the prison in Guantanamo Bay.  He not only failed to shut down the prison in Cuba, but he started new wars in Libya and Syria, and continued the wars that were already going on.  He also intervened in other places such as Yemen and Ukraine.

While Bush and Obama both spoke of less intervention, they didn’t do so in a hardcore way.  In other words, they didn’t sound like Ron Paul.  Still, it continually happens that a candidate will say one thing, and then all of a sudden things look different when they get into office.  Voters follow the definition of insanity: doing the same things over and over again and expecting different results.

I had mild hope that things would be slightly better under Trump in terms of foreign policy.  And while I expected the left to oppose Trump, I didn’t expect what has become an unofficial alliance the left has made with the war hawks in the Republican establishment.

While Steve Bannon was problematic in may ways, he was also one of the few people Trump had in a high level that believed in Trump’s nationalist agenda.  While libertarians shouldn’t necessarily cheer nationalism, especially when it comes to protectionism and trade wars, nationalism beats globalism when it comes to foreign policy.  When Bannon exited, so too did any hope of a less interventionist foreign policy.

It is interesting that Trump explicitly stated that things look different when you sit behind the desk of the presidency.  This was his way of deflecting criticism of him flip-flopping.  But in this statement, he told the truth.  But the big question is: Why do things look different?

If anything, I would hope that it would be harder to send people (essentially mostly kids) off to war.  You are making a decision that you know will take people’s lives.  Yet when these people get into office, they almost inevitably are drawn towards more war.

Some people say it is the lobbyists that corrupt politicians.  Perhaps this is so to a certain extent.  In the case of war, you have the military-industrial complex.  But Trump won his election without owing anything to the military-industrial complex, or really any of the major lobbyists.  The only ones that Trump owes for his victory are the actual people who voted for him.  He was vastly outspent, and he raised a small amount of money from big donors in comparison.

You have to wonder if, when you are elected president, you are taken to a private room and told the dark secrets.  Maybe Trump was told what actually happened to John F. Kennedy for opposing the CIA and an escalation of war.  Maybe he was told subtly, or even not so subtly, that he better stay within certain guidelines if he wants to survive.

I really don’t know on this.  It sounds conspiratorial, and I’m sure it wouldn’t go down just like this.  But there have to be pressures that we just can’t understand.

Of course, people don’t like to be ridiculed and continually slammed on a personal basis either.  This comes with the job, but the establishment media can make anyone’s life especially bad.  Even though the Trump voters completely ignored the media (and in many ways delegitimized them), it shows that the establishment media still has a great impact, even if they can’t always decide the election.

I wish Ron Paul had been elected president, if only to see what would have happened.  Would he have been able to resist the establishment, the deep state, the elitists, or whatever you want to call them?  Would Ron Paul, if he had been allowed to take office, have actually followed through on his promise to bring home the troops?

I think he would have followed through, but I also understand that he is somebody who is rare.  You have to have a combination of intelligence, honesty, courage, and strong principles.

Trump had some good instincts, and unfortunately, even as he stated, he has abandoned them.  But Trump never had any firm principles.  That is why, when he talked about foreign policy, he was all over the place.  One minute he wanted to bring the troops home, and the next minute he wanted to bomb the terrorists back to the Stone Age.  Sometimes he had these contradictory positions within the same debate.

Trump’s election was still unique.  He is the first unvetted candidate to get into office since at least World War 2.  Even though the establishment would have preferred someone other than Reagan, they could still tolerate him.  In the case of Trump, he was simply not acceptable at all to the insiders.

If Trump can’t resist the establishment, then it almost seems as if there is no hope.  Trump is not going to drain the swamp.

But it is good to step back and appreciate the fact that Trump was even able to get elected, especially with the hostility of the so-called mainstream media.  This alone is reason to celebrate.

We also have to consider that we don’t have to elect someone good to get some good change.  Just as the Berlin Wall fell and the Soviet Union came crashing down, change can happen rather suddenly and unexpectedly.  There is obviously a lot of dissatisfaction out there.  Maybe the different sides will realize that the only way to move forward is to separate and go their separate ways.  Maybe they will realize that they don’t have to force their views onto others.  Instead of struggling for the reigns of power, it is just a matter of withdrawing and leaving each other alone.

Trump is not going to drain the swamp.  He is now part of the swamp.  But the American people still have the capability to drain the swamp through public opinion.

Why Tax Reform Won’t Work

There is still talk of possible tax reform coming out of Washington DC.  With Trump getting beaten up every day by the establishment and its media, and with Congress in disarray, there seems little chance for any significant tax reform at this point.  Getting rid of Obamacare should have been easier than tax reform, and we have seen the lack of progress on that.

Even if we do end up getting some kind of tax reform passed, it probably isn’t going to make much of a difference.  There will be a slight shifting around of who pays more.  There will be winners and losers, at least as compared to before.  But it won’t be a win-win situation where the economy grows and our livings standards rise.

The biggest economic problem by far coming out of Congress is spending.  Without significant cuts in spending, tax reform is virtually meaningless.

I certainly understand the Laffer Curve and that a cut in marginal tax rates can actually lead to increased tax collections by the government.  But it is not as if tax rates are 90% or 70% as they once were.

If anything, there are going to be middle class tax cuts.  While these are certainly needed, it isn’t likely going to lead to much more in the way of savings and investment.  We aren’t going to see increased economic growth because of tax cuts for the middle class.

And as long as the government keeps spending around $4 trillion per year, this is going to suck resources out of capital investment that would have otherwise gone into satisfying actual consumer demand.  When the government spends money, it is misallocating resources.

Unfortunately, most of the proposals for tax reform are so-called revenue neutral.  In other words, these are not tax cuts.  They are just rearranging the tax code, but promising to keep funneling at least the same amount of money to the government.  If you have a slightly lower tax rate but also get fewer tax credits and deductions, it doesn’t do you much good if you are still paying about the same amount.

Of course, the big problem is the Federal Reserve and the ability of Congress to run massive deficits on a continual basis.  If the government spending isn’t coming directly out of your pocket through taxation, then it is being done indirectly (in a sneaky way) by depreciating the dollars in your wallet and your bank account.

There are some who will claim that tax reform is still important though because it will reduce compliance costs.

First, this is really far-fetched at this point.  We always hear politicians talk about simplifying the tax code.  How has that worked out so far?

Second, compliance costs aren’t that big of a factor in the big picture.  Perhaps it is significant for corporations, but that problem isn’t going to be solved unless corporate taxes are completely abolished.

For personal tax returns, it is a hassle, but not overly burdensome as compared to actually paying the taxes.  If you look at the average amount per household of federal spending, it is over $30,000 per year.  This does not include state and local spending.

Are you really going to worry that much about paying a CPA $500 to do your taxes, or buying tax software for $20 and spending a few hours to figure them out, when you are paying about $30,000 to the federal government?

I would rather do taxes once a month and pay half the amount than have the current situation.

For this to happen, the federal government would have to drastically cut spending.  This would include both the warfare and welfare state.  It would mean massive cuts to the military and major withdrawal of troops stationed (or fighting wars) overseas.  It would also mean huge reductions in so-called entitlement spending.  It would mean the elimination of several departments.

If we are not discussing major spending cuts, then all talk of tax reform is mostly meaningless.  If Congress is going to keep spending huge amounts of money, then it has to come from somewhere, no matter how the tax code is written.

Amazon vs. Trump and South Carolina

Amazon and the issue of sales taxes has been in the news lately.

First, there is a complaint against Amazon filed by the state of South Carolina.  The state government is claiming that Amazon owes the state a large tax bill for uncollected sales taxes.  Amazon is vowing to fight the allegations.

Second, Trump chimed in with one of his tweets.  While Trump is pilloried by the media for supposedly supporting white nationalists, colluding with Russia, etc., the establishment seems to stay rather quiet when Trump is on the side of big government.

Trump said in a tweet: “Amazon is doing great damage to tax paying retailers.  Towns, cities and states throughout the U.S. are being hurt – many jobs being lost!”

We are back to Trump’s protectionism and his overall ignorance of economics.  Trump is making the claim that since not all Amazon products are taxed, it is hurting physical retailers.  He is saying that this is costing jobs.

This is a stupid argument, as it is simply an argument for higher prices.  He could say the same thing about any company that comes in with lower prices, regardless of whether it is because of taxes.  If someone shows up to sell quality new cars for $10,000, then this will hurt sales for the big car companies.  It will mean that jobs will be cut from those car companies.

But Trump has probably never heard of Frederic Bastiat or even Henry Hazlitt.  He does not understand basic economics and that you have to look at the other consequences that are often unseen.

If Americans could all of a sudden pay $10,000 for the same new car that previously cost $30,000, then this would be a huge benefit to the consumer.  Sure, it would cost jobs at the car dealerships.  But now more Americans would have extra disposable money to invest or save or spend elsewhere.  This means it would lead to job creation in other areas where there is consumer demand.  This is called advancement.  This is how we increase our living standards.

The issue with Amazon is really a state issue and should be none of the federal government’s business.  It is true that some retailers sell on Amazon and do not always collect the appropriate sales taxes (according to the state governments).  Of course, this is partially the fault of state governments that make it so difficult to do so.

It is very complicated right now with Amazon sales.  There are many private retailers that sell on Amazon, and they use Amazon to fulfill their orders.  This is called “fulfilled by Amazon”, or FBA.  While the seller can include an add-on sales tax on their products, it is up to each individual seller to remit the sales tax back to each state.

If you live in Texas and you sell a product in Texas, then you are supposed to collect sales tax and remit it back to the Texas state government.  The problem arises when you sell in other states.  For example, if you have a presence in another state, such as an employee, then you are said to have “nexus”.  If you have an employee in California, or if you just go for a weekend to California for a trade show, then you are doing business in California and you are supposed to pay sales taxes on sales to California.

It gets even more complicated with Amazon.  If you live in Texas but you don’t travel anywhere outside of the state or employ anyone outside of the state, you may still have nexus in California and other states.  Amazon has warehouses throughout the country now in order to make good on promises of quick shipping to Amazon Prime members.  Therefore, if your product goes from Texas to an Amazon fulfillment center in California, then you would supposedly owe taxes to the state of California.

It is also a problem that Amazon can move its inventory around.  If you live in Texas and ship your products to a warehouse in Florida, Amazon may relocate your products to other states to spread them around, especially for large inventories.  Therefore, it is difficult for sellers to even know where their products have been and where sales taxes are owed.

It is a total mess.  It is especially messy for sellers.  While I am an advocate of federalism and states’ rights over centralization, I acknowledge that federal legislation could actually help Amazon sellers.  It would make it far simpler in terms of collecting sales taxes.

Many Amazon sellers take their chances in owing taxes, even though it is somewhat risky.  Imagine having to get a tax ID in 20 different states.  It can take several hours to fill out the appropriate forms for each state.  On top of that, some states will charge you fees to register, just so you can have the privilege of remitting more money back to the state government.

Maybe federal legislation will come out of this whole thing, but we know how politics in Washington DC goes.  They will find a way to mess it up.

For consumers, it is becoming harder and harder to buy products with no sales taxes on Amazon.  Much of that benefit is gone.  The big mess right now is for sellers.  If Amazon merchants did not have to go through so much hassle with sales taxes (for those that bother), there is an argument to be made that prices might be lower, as lower costs of doing business could spur more competition.

Amazon selling can be quite lucrative for those who know what they are doing.  As a side note, if you want to learn more about selling on Amazon, there is a great podcast hosted by Scott Voelker.  It is called The Amazing Seller podcast.

In conclusion, Trump is wrong to attack Amazon.  It is actually none of his business, and he is getting the economics wrong.  If you want to place blame here, it should go squarely on the state governments that have made a complete mess of the tax code.  If the state governments made it easy, then Amazon would make it easy.

If only Amazon could limit its warehouses just to Alaska, Delaware, Montana, New Hampshire, and Oregon.  These states have no sales taxes.

Walking a Tightrope Between Inflation and Recession

The proponents of Keynesianism believe there is a tradeoff between inflation and unemployment.  If the economy is hot and prices are rising faster than they like, then they might have to sacrifice a little employment to cool things off.  On the other hand, if prices are depressed and unemployment is high, then they advocate for a policy of more government spending and more monetary inflation.

The 1970s basically proved Keynesianism as wrong, but that doesn’t stop them from still advocating it.  During the 1970s, there were periods of high unemployment, high interest rates, high consumer price inflation, and even recession at the same time.

Of course, the reason that Keynesians advocate Keynesianism isn’t because they have read John Maynard Keynes from generations ago.  It isn’t because they have any principles guiding them in economics or otherwise.  Keynesian economics is used as an excuse to justify the policies they want of more government spending, central bank inflation, and economic centralization.

I have said for a long time that if Keynes had never existed, then the statists would have found somebody else to latch on to in order to justify their reckless policies.  The statists can always find some shill for the government that can pose as an expert.

Aside from price inflation and unemployment, most Keynesians will also say there is a tradeoff between recession and price inflation.  After all, recessionary conditions are typically linked with higher unemployment.

To a certain extent, there can be a tradeoff between recession and inflationary policies in the short run.  Inflationary policies can cover up weak economic growth for a while.  The problem is that it is the inflationary policies that ultimately cause the recession.

Easy money and artificially low interest rates lead to a misallocation of resources.  There is typically bubble activity in certain sectors.  When the misallocations are ultimately revealed, there is a bust.  This is the recession.  Then the Fed (or any other central bank) tries to cover it up with more monetary inflation, and the whole cycle starts over again.

In the United States, the early 1980s was probably the last time that malinvestments were allowed to clear.  The Fed let rates rise and stopped inflating, despite a recession (or some would say recessions).  While the Fed did eventually start inflating again, much of the growth of the 1980s was actually real prosperity and not just artificial prosperity created by money creation.

While there can be a tradeoff between recession and inflation in the short run, the tradeoff eventually runs out of room. This is what happened in the 1970s.  Despite a weak economy, the Fed still had to slam on the monetary brakes in order to save the dollar.  If the Fed had just kept on increasing its pace of monetary inflation, there would have eventually been runaway inflation or hyperinflation.

In other words, the Fed can’t maintain its current policies forever without something major happening.  Either we will eventually get higher consumer price inflation or we will get a recession.  Of course, it is also possible to get both eventually.

If the Fed had kept a stable money policy after the fall of 2008, then we would not face such a choice.  But with the Fed approximately quintupling its monetary base from 2008 to 2014, there have to be malinvestments.

We have not seen significant consumer price inflation.  It has stayed around 2% per year, or even a little less at times.  But we can’t say the same for asset price inflation.  Housing is booming in many areas, and U.S. stock markets are hitting all-time nominal highs.  This is actually similar to the late 1920s, just prior to the start of the Great Depression.  Economists largely missed the mark on that one because consumer prices were tame.  But asset prices were in a bubble.

If I had to pick between higher price inflation or recession at this point, I am definitely more on the recession side.  The Fed has had a tight monetary policy since QE3 ended in October 2014.  Unless banks start lending out a lot more money, which isn’t likely given that the Fed is paying higher interest rates on reserves, then we are more likely to see price inflation slow down if anything.  The previous misallocations will be exposed.

If we are going to get significantly higher price inflation, I think it will come after the next major recession.  The Fed will start digitally printing money again, and then we may see prices (aside from just asset prices) take off.  There is no guarantee, but I see this scenario as being the most likely.

Stocks may be able to run higher still, but it isn’t going to go on forever.  In all likelihood, there is going to be some kind of a recession before the next presidential election in 3 years.  It could come quite a bit sooner than that.

The Fed has been enjoying the last several years, as it doesn’t get much blame.  The economy is humming along, even if slowly.  Meanwhile, consumer price inflation, at least as reported by the government, is relatively tame.

The Fed has to do a balancing act between inflation and recession.  The problem is, it is running out of tightrope.  The rope eventually runs out and we inevitably get one or the other.  Or in the case of the 1970s, we can even get both at the same time.

Should You Dollar-Cost Average Into the Permanent Portfolio?

One common finance/ investment question arises when somebody comes into some new-found money.  The question(s) goes something like this:

I just inherited $20,000.  Should I invest all of it right away or wait until a market correction?  Or should I use dollar-cost averaging?

Of course, in most cases, the person asking the question is referring to investing the money in stocks.  If someone had invested a lump sum of money in U.S. stocks in March 2009, they would have done very well up until now.  But past performance is not an indicator of future returns.

I do not advocate investing in stocks except for speculation or as part of a permanent portfolio.  I do not buy the common theme that stocks always go up in the long run.  Tell that to the Japanese person who bought into the Nikkei at its peak in 1989.  They are down 50% nearly 3 decades later.  Just how long are they supposed to hold?  Just how long is the “long run”?

And while people will say that won’t happen in the United States, I am not sure how they can say that, especially given the massive levels of debt and regulation.  The only reason you might be able to make this claim is because the Fed would be more likely to engage in massive monetary inflation.

Still, Japan is not a third-world  country.  We are not talking about Ethiopia or Bangladesh here.  In the 1980s, there were many pundits in the U.S. worrying about Japan taking over the United States, economically speaking.

Stocks have paid well in the U.S. since the 1980s with a buy and hold strategy.  Still, this does not guarantee anything in the future.  And also consider that there have been major booms and busts within the last 3 decades, so it hasn’t been a smooth ride.

I recommend a permanent portfolio for more stability and safety.  The returns have been relatively lousy in the 2010s as compared to U.S. stocks.  But this is a reflection of low interest rates and relatively low consumer price inflation.  You give up some of the big returns in exchange for stability.  When stocks take a hit, as they did in the fall of 2008, the permanent portfolio is a good place to be, even if it declines.  The losses will typically be far less.

To get back to the original question, anyone that comes into $20,000, or any amount of money right now, should stay away from stocks, unless it is in terms of the permanent portfolio.  But that leads to another question.  Should you use dollar-cost averaging for the permanent portfolio?

If there were ever a time to use this strategy, it would be now.  Stocks are hitting new all-time nominal highs on an almost regular basis.  Interest rates are still extremely low by historical standards, which means almost no returns from the cash portion and not that much potential for the bonds.  Gold could still go up, but it is not likely to be significant until we see a return of higher consumer price inflation.

With that said, I wouldn’t hesitate too much to dump a lump sum of money into the permanent portfolio.  By its nature, you are not likely to take a big loss, even if the financial markets change quickly.  The permanent portfolio is designed to withstand virtually any economic environment short of an end-of-the-world scenario.  The permanent portfolio is far from perfect, but I haven’t really found anything that works better at this point.

The one environment that hurts the portfolio is a recession.  Even in this scenario, the long-term bonds are likely to go up in value as interest rates fall further.  This probably won’t offset the losses from stocks (and perhaps gold), but it is still far better than being heavy in stocks.

As Harry Browne wrote in his book, recessions don’t last that long.  It will either turn into a depression (good for cash and bonds), or it will turn into inflation (good for gold), or it will turn back into some form of prosperity (good for stocks).

If you have a good chunk of money ready to invest right now, a good strategy might be to invest the majority of it in the permanent portfolio, and to keep a small percentage (in addition to what is in the portfolio) in cash or a cash equivalent.

For example, if you have $20,000, you could put $16,000 into a permanent portfolio setup and leave $4,000 in a savings account.  You would actually have $8,000 in cash when you include the $4,000 (25%) that is in the permanent portfolio.

This way, if there is a downturn, you can put the additional $4,000 into the permanent portfolio.  I am not predicting an imminent major pullback, but it wouldn’t surprise me.  So if you are concerned about an upcoming recession, this is a strategy that you can use if you are hesitant to dump everything into the permanent portfolio.

It is true what they say: In a recession, cash is king.  Perhaps U.S. government bonds will be king too, but you get the point.

It is tempting to invest in stocks right now as you see your friends looking at their 401k balances grow.  It can be frustrating in a boom time when you are not fully participating in the boom.  But when the bust comes, you will be thankful, and this is the important thing to remember.

The boom may last a while longer.  Nobody really knows.  But when the fall in stocks finally happens, you will be able to sleep at night with your permanent portfolio.

Of course, this is just the investment perspective.  The most important thing is to keep your job or whatever form of income you have.  Your income is your number one priority in terms of finances.  Protecting the assets you already have is secondary.

Trump Endorses Congress Policy of War and Weaker Dollar

Donald Trump has signed into law legislation to increase sanctions on Iran, North Korea, and Russia.  It was passed overwhelmingly by the U.S. Congress.  As Ron Paul likes to point out, sanctions are virtually an act of war.

This legislation is especially egregious.  Iran has abided by its agreement on nuclear weapons, not that it should have been bound by such a thing in the first place.  This is just more bullying of a country that is no threat to Americans.  If anything, Iran wants ISIS destroyed, but it seems the U.S. government would prefer to fund and support ISIS and overthrow Assad in Syria.

The sanctions against Russia are also horrible, as relations are already bad.  This is due to an alliance between the war hawk Republicans (neoconservatives) and the left in opposing Trump.  It is helped along by the leftist media, who would prefer to risk war with a nuclear power than see Trump succeed at something – in this case, peace with Russia.

The crazy thing about this legislation is that Trump has spoken against it, while at the same time actually signing it.  He says he did it for “national unity”.  But this isn’t national unity.  It is political unity in Washington DC.  It goes against everything that he campaigned for prior to his election as president.  The reason Trump was elected was to stop political unity and to bring us some political disunity.

Trump also correctly pointed out the flaw of hampering the executive branch.  Under this new legislation, the president cannot get rid of the sanctions without congressional approval.  In other words, he has no room to do what he is supposedly good at: negotiate.

If we are lucky enough to avoid another major war, this new round of sanctions is only going to contribute to the demise of the U.S. dollar as the world’s reserve currency.  Americans will no longer be subsidized by foreigners, but I think it will be good for Americans in the long run.  It will put a more severe limit on the federal deficits.

Russia now has to avoid dealing with the dollar.  It does not have to use the dollar as a middleman.  Russian officials continue to accumulate gold reserves, and there is also speculation that they are looking more into cryptocurrencies.

With this new round of sanctions, even Western Europe is not happy.  The U.S. government is managing to make virtually the whole world mad in some way or another.  The major powers are realizing that they do not need to use the dollar as a middleman for trade.  This doesn’t mean they will stop trading with the United States.  But if Russia and China are trading (whether it is between governments or businesses), there is little reason to use the dollar any longer.

For this reason, I believe the U.S. dollar will lose its status as the world’s reserve currency.  It will not be replaced by anything, or at least not another currency.  The only realistic replacement is gold.  These new sanctions are not good for world peace or for world trade, but the price of gold in terms of U.S. dollars will likely go higher as a result.