The Fed Still Holds Up Asset Prices, Despite Rate Hikes

The Federal Open Market Committee (FOMC) released its latest statement on monetary policy on December 13, 2017.  As expected, the target federal funds rate was hiked by a quarter percent.  The federal funds rate target is now in the range of 1.25% to 1.50%.

This was widely expected, and therefore, the markets did not react negatively.  Stocks were largely flat or up, and gold was up for the day.  The rate hike was already priced in.

When we talk of rate hikes now, it has almost nothing to do with the money supply.  While the Fed is continuing its program of rolling off assets at around $10 billion per month (a very small percentage of the monetary base), this is not directly correlated with the hike in the federal funds rate.  (The roll off rate will increase to $20 billion starting in January.)  Since the commercial banks still have huge amounts of excess reserves, the Fed increases the interest rate it pays to banks on their reserves in order to hike its target rate.

On the same day as the Fed’s statement, the latest CPI numbers were also released.  The CPI was up 0.4% in November, but the CPI less food and energy was only up 0.1%.  The more stable median CPI was up 0.2% and stands at 2.3% year-over-year.  Price inflation may not be as tame as what the Fed makes it out to be, but it isn’t roaring out of control either.

The place where we continue to see high price inflation is in assets.  These prices are largely ignored in the government’s statistics in calculating consumer price inflation.  The problem is that consumers do buy houses, stocks, fine art, and even Bitcoin.  While these are considered assets, they still have prices, and people spend money on these things.

For those who follow Austrian school economics (free market economics), it may be curious why asset prices continue to rise.  The Fed is hiking rates and deflating its balance sheet (albeit slowly).  The Fed stopped QE3 over 3 years ago now, yet the bubbles have yet to pop.

First, it does take time for things to play out.  Just as an inflation in the money supply does not hit instantly, a deflation also doesn’t hit instantly.  It takes time for the previous malinvestment to be exposed.

Even more importantly, I believe that this bubble is taking longer because of the financial crisis nearly a decade ago.  More accurately, I believe it was the Fed’s response to the financial crisis that is holding up this market.  And it is possible that it could make it last longer than what seems possible.

The Fed’s reaction to the crisis in 2008/ 2009 was unprecedented.  It was probably even a surprise to those who advocate massive intervention in the marketplace.  The Fed bailed out major banks and financial institutions, and it nearly quintupled the adjusted monetary base.  This would not have been believable if you had predicted this in 2007.

The Fed acted so aggressively that there is even more of an implicit guarantee than there was before.  At this point, it is even hard to use the word “implicit”.  It is almost a certainty that the Fed would act aggressively again if the bottom fell out.  In other words, the moral hazard has increased.

Stock investors and real estate investors know that if things turn ugly, the Fed will quickly step in and try to revive things.  If the Fed quintupled its balance sheet before, why can’t it do it again?  As long as the Fed is willing to step in with an aggressive easing (i.e. digital money printing), then there is a lot less to fear.

The same goes for bond investors, or even more so.  It is possible that stocks could fall despite more money creation from the Fed, particularly in the short run.  But for bond investors, they know that the Fed will create money by buying assets.  And when those assets are bonds, then there really isn’t much to fear as long as price inflation remains relatively tame.

The Fed isn’t holding down market interest rates and propping up asset prices by its actions.  It is doing these things because of its previous actions and the anticipation that it would do so again.

For that reason, it makes it difficult to short the market right now.  The boom and bubbles are unsustainable, and they will eventually turn to a bust.  But things could go on for a while longer because of the Fed’s willingness to step in right away.

The Fed will ultimately not be able to stop the implosion, but it does have the ability to kick the can down the road.  We just don’t know how much road it has left.

10 Reasons Not to Buy a House

There are arguments for and against homeownership.  For full disclosure, I am a homeowner.  I enjoy the benefits, and I also experience the hassles.

Homeownership is pushed in our society, particularly in the U.S.  It is pushed by public opinion, and it is also pushed through government in the form of many incentives and subsidies, particularly when it comes to handing out mortgages.  The push for homeownership has perhaps slowed a bit since the housing bust a decade ago, but it is still often touted as the smart thing to do.

Here are 10 reasons not to buy a house (or condo or townhouse).

  1. If you ever want to move or need to move, you will be thankful for not owning a house.  A house ties you down to one spot.  If you are offered another job, even if it is just on the other side of the city, it becomes a bigger roadblock if you own your house.
  2. Buying a house ties up liquid money.  Even with the subsidized mortgage market, most people have to put down at least 3%, plus closing costs, plus the costs of moving, plus furnishings, plus fixes, etc.  This can cause unnecessary stress if you don’t have backup reserves, especially for emergencies.
  3. If the toilet is broken, you are responsible for fixing it.  If you are renting, you can just call and wait for the maintenance guy.
  4. Home ownership not only takes your liquid money, but you should have money in reserve just to deal with the house for any unexpected repairs.  Actually, they shouldn’t be called “unexpected” because you are guaranteed to have repairs.  If you need a new air conditioning unit, expect to pay many thousands of dollars.  If you decide to buy a house, be sure to factor in all of the things that can go wrong.
  5. You also have things that will require somewhat regular maintenance such as your air conditioner and your garage door.
  6. If you aren’t in a condo or townhouse, then you are probably responsible for maintaining your lawn.  While some people like doing yard work, it is mostly a hassle.  It can also be an added expense.
  7. While this one does not have to be true, there is a tendency for it to be true.  When you own a house, you have a tendency to accumulate more stuff (i.e. junk).  It’s not to say that there aren’t many renters living with a lot of clutter, but there is something about owning a home that encourages the accumulation of even more stuff.
  8. If your monthly payments become a burden and you want to lower your expenses, it is difficult when owning a house, especially if you don’t want to sell it.  If you rent, it is easier to move.  You can just wait until the end of the lease and then find a cheaper place to live, even if it means finding something smaller.
  9. When you own a house, moving is very expensive.  Unless you are building a real estate empire and renting out your house when you move, then the process of moving is really expensive.  You really should never buy a place if you think you will not be living there for at least 7 years (at a minimum).  If you sell a house for just $100,000, you are looking at close to $10,000 in closing costs if you pay the standard 6% in real estate agent fees.  This does not include the actual cost of moving, nor does it include the holding costs if you move out before you sell.
  10. Homeownership is not an investment.  Some people get lucky in a booming market, and some are smart enough to sell near the top. But overall, buying a house is not an investment if you are planning to live there.  It is a consumer good.  It just so happens it is an important consumer good in that it provides shelter for you. But most people are not just buying a roof over their head.  Buying a house can be a good forced savings plan if you live there for a long time and don’t extend your loan.  But if your only goal is to make money, you are better off renting a really cheap place and investing the difference.

Again, there are many reasons to favor homeownership, but you should go into it with your eyes wide open.  You must consider your own situation and whether owning is right for you.

The Jerome Powell Bust

Jerome Powell will likely be the next chair of the Federal Reserve.  He will take over from Janet Yellen at the end of January 2018.  Whether Yellen knows it or not, her exit will be a blessing for her.  She should be quietly thanking Donald Trump.

Ben Bernanke took over as Fed chair in 2006.  He inherited a mess, but it wasn’t known at the time.  Even for those who knew there were underlying problems in the economy, most didn’t expect the drastic nature of the housing bust, financial meltdown, and overall recession.  There is absolutely nothing Bernanke could do to stop the bust from coming.  Perhaps he could have delayed it a little bit through monetary inflation, but it likely wouldn’t have postponed it for long.

Bernanke was a really bad Fed chair, but not because we had a severe recession and financial crisis.  He was a bad Fed chair because of his response to the financial crisis.  To the bankers and others who were bailed out, Bernanke was not a bad Fed chair.

He presided over the greatest monetary expansion in the history of the Federal Reserve.  He approximately quintupled the size of the adjusted monetary base.  But due to the piling up of excess reserves by banks, coupled with continued fear in the markets, consumer price inflation never really took off.  The same can’t be said for asset prices as reflected currently by the big valuation increases in housing and stocks.

While Yellen came into office as an Obama-appointed Keynesian, she has actually be relatively subdued.  She wrapped up QE3 in her first year and has not expanded the balance sheet since then.  While it took her a while, she actually just started the Fed’s program of reducing the balance sheet, even if slowly.

If we are to believe the Austrian Business Cycle Theory, the Fed’s loose monetary policy from 2008 to 2014 caused malinvestments (misallocated resources).  Therefore, resources are not all currently being used in an efficient manner in accordance with consumer demand.  At some point, these malinvestments will be exposed as such, and there will be a correction.  The Fed’s tight monetary policy will put further pressure on the situation.

Much like Bernanke, Jerome Powell is going to inherit a mess.  He will be stuck with the malinvestments that started under Bernanke.  Powell will likely oversee the bust phase.  Unfortunately, he is probably like Bernanke in other ways in that he will likely resort to significant monetary inflation when faced with a crisis.

When Donald Trump was campaigning for president, he mentioned a few times that there were bubbles in the economy.  As soon as he became president, he started taking credit for the boom.  This was stupid, but politicians just can’t help themselves.  Since Trump has been taking credit for the little boom, he will own the bust.

There will be many bubbles that pop.  Stock prices will take a huge hit.  Housing will take a hit in many areas.  Some fads like cryptocurrencies – particularly Bitcoin – will take a hit.  Some commodities will take a hit, although gold is less certain.

Assuming we don’t see a significant pickup in price inflation, government bonds will probably not go bust in the recession.  That bubble will get blown bigger in the short run.  Investors still see U.S. government debt as a safety vehicle.  They will seek to lock in long-term rates.  Therefore, expect interest rates to actually fall in the next recession.

The one bubble we need to pop more than anything is the bubble that is Washington DC.  We need a drastic reduction in the size and scope of the federal government.  Unfortunately, the only way we are likely to see this happen is to have much higher interest rates where the Fed can no longer intervene due to fears of rampant inflation.  As long as the Fed is allowed to step in as a buyer in the bond market, then the government bubble will probably keep going.

While the Fed has not been a net buyer of government debt for over three years now, it still stands there ready to act if needed.  This helps to support the bond market, even when the Fed is not actually buying.

Jerome Powell will be little different from previous Fed chairs.  But the situations may differ, especially in size.  The current system of Fed interference and massive deficits will come to an end eventually.  We know this because it isn’t sustainable over the long run.  When the next recession hits, the annual deficit will quickly balloon over a trillion dollars.  At some point, the debt will become unmanageable.

There is a tendency for us to let our guard down, partially due to the fact that we can’t constantly be on high alert.  When times are good, or at least decent, then we think they will just keep humming along.  But one day, something will happen and the dominoes will start to fall.  We don’t know when that will be, but we should at least not be surprised when the day comes.  Neither should Jerome Powell.

Sexual Misconduct vs. Killing Foreigners

For anyone living under a rock, there has been a huge wave of women coming out accusing many famous men of sexual misconduct, or worse in some cases.

The first major person to fall was Harvey Weinstein, or at least this seems to be the case that triggered the wave to follow.  Morning hosts Charlie Rose (CBS and PBS) and Matt Lauer (NBC) have both lost their jobs.  Senator Al Franken and Congressman John Conyers (among other politicians) have also been accused, but they have not resigned from Congress.  In Franken’s case, there is a picture that proves at least part of the accusations.

As a libertarian – and I’m sure the same goes for many conservatives – it has been a somewhat enjoyable spectacle.  The scandals have focused around Hollywood and Washington DC.  When I say Hollywood, I am really including New York and the entertainment industry in general.

It is the politicians and those in the entertainment industry who tend to be the greatest advocates of statism.  They are generally opposed to liberty, except in cases where it benefits them personally.

They are also a bunch of hypocrites.  These are some of the same people who were blasting Donald Trump for making lewd or rude comments about women.

Of course, these people were already hypocrites because they gave Bill Clinton – the rapist – a pass for decades.  They also gave a pass to his so-called wife who tried to smear the women who accused him.  Bill Clinton was charming enough that they could overlook his misdeeds.  If there is one really good thing about this whole thing, it is likely the end of the Clintons, at least in terms of political office.  With the uproar now, it gets much harder to defend Bill Clinton, even though the previous credible accusations against him have not changed.

To be sure, many of the women in politics and entertainment are just as hypocritical.  It would be hard to believe that none of these women knew what was happening behind the scenes.  And I’m not saying it would have been an easy decision for them to go public, as it probably would have ended their careers at that time.  Still, they had no problem sitting there with a straight face telling us about how we can’t elect the womanizer that is Donald Trump.

Despite the entertainment value of these people falling, it is also unsettling to a certain degree.  Most of the cases are not accusations of rape, and some are not even accusations of sexual assault.  Some of it is “misconduct”, which leaves open a big area for interpretation. If a man makes it known to a woman that he finds her attractive, does that become misconduct, even if it is done in a non-threatening way?

Harvey Weinstein is probably a criminal in that he used force or the threat of force against women.  In many of the cases, it is more a case of being immoral or being indecent.  Still, in a relative free market, there are consequences for these actions without having broken any laws.  If anyone wonders how a libertarian society can punish immorality, then here is a good example.

The unsettling thing about all of these cases is not knowing where it will end.  You start to get into a lot of gray areas that are not clear-cut.  It is also a problem that it could be setting us up for false allegations down the road.  My guess is that most of the allegations up to this point have been true, but even here I don’t really know.

It is not hard to think of a scenario where a few people get together and decide to make false accusations against someone who they detest for other reasons.  This is easy to envision with future political campaigns.  At some point, we are going to have to give the benefit of the doubt to those being accused, or at least apply a similar principle of innocent until proven guilty, even if there are multiple accusations.  Just because a couple of women say something about some celebrity doesn’t automatically make it true.

There is one other unsettling thing about this whole thing for me as a libertarian, which I alluded to in the title of this post.

There is this widespread outrage about men making inappropriate advances on women.  Meanwhile, innocent people overseas continue to die due to U.S. drone bombings, U.S. sanctions, and outright war.  There are victims in Iraq, Afghanistan, Libya, Syria, Yemen, other places in the Middle East, and many countries in Africa.

While Matt Lauer gets humiliated and is fired from his job, Barack Obama still walks around as a hero in the eyes of the establishment media.  It doesn’t matter that Obama helped starve people in Yemen, or that he caused massive death and destruction in Libya and Syria.

Maybe Harvey Weinstein will end up at trial. Maybe he will go to jail, as he probably should.  But meanwhile, George W. Bush, Dick Cheney, Colin Powell, and all of the other liars are walking free.  They can lie us into war and slaughter hundreds of thousands of people and destroy entire countries, yet they do not seem to be condemned in the same way that some of these celebrities are now.

Of course, this isn’t to defend the celebrities in any way.  It is an issue of proportionality though.  I wish society would have the same outrage at the killing of innocent foreigners as they do at men committing sexual misconduct.  Of course, there should be far more outrage at the killing of innocent foreigners, but at this point, I would be happy if it got the same attention.

This is the world we live in.  Still, there is an optimistic side to take.  You never know what is building up in society that will all of a sudden come loose.  Because of allegations against Weinstein, it caused a great wave of people to come forward out of the woodwork.

Maybe something similar will happen in foreign policy.  Maybe there will be a whistleblower that triggers a bunch more to come forward. Maybe some particular incident of foreigners being killed overseas will spark outrage about all of the killings.  Sometimes it just takes one thing to light a spark, and you never know where it might come from.

Let’s hope that one day we will see headlines plastered all over the place about the innocent people in the past who have died at the hands of the U.S. government with its interventionist foreign policy.  These are victims who can’t speak out, but there are others who can speak out for them.

Bitcoin $10,000 – Where Next?

The price of Bitcoin has reached a new milestone.  One bitcoin is now worth about $10,000, at least as of right now.  It will likely change significantly one way or the other by the time you are reading this.

For the cryptocurrency fans who don’t like the government currencies, they sure are celebrating a lot because of measuring Bitcoin in U.S. dollars.  Of course, I have to admit that I would probably be bragging about gold – or more so the bad U.S. dollar – if an ounce of gold were to hit, say, $5,000.

In Bitcoin’s run toward $10,000, I have even read comments by Bitcoin enthusiasts attacking gold bugs.  They say that they have been vindicated and that gold bugs have been all wrong.  This is somewhat curious, given that gold bugs and Bitcoin enthusiasts can overlap.  You don’t have to be one or the other, although most will have a preference for one or the other.

If you invested in Bitcoin early, then you have done really well.  But it isn’t because Bitcoin is money.  It is because you can trade your bitcoins for more money.  Your purchasing power in dollars has gone up.

Bitcoin enthusiasts seem to be declaring victory.  But there isn’t a defined finish line here.  There were people predicting a housing bust in 2004.  Think of the person in 2006 making fun of this prediction.  “Ha, ha – You predicted a housing bust two years ago and prices have gone up another 30% since then.”

Bitcoin is a major bubble.  We just don’t know when it is going to pop.  It could go to $20,000 or $100,000 first.  Nobody knows.  There is little historical basis for any of this, other than previous bubbles and busts.

A bitcoin is only worth something because some people are deeming it worth something.  It is subjective.  Unfortunately, other than serving its current role as a speculation, a bitcoin is not useful at all.  It is basically a digit somewhere, similar to the majority of dollars in circulation.  Dollars are mostly digital.  But at least with dollars, it is imposed by the government, which means it would take a lot to remove it as a form of money.

What makes Bitcoin so special?  There is technology that has gone into it, but this doesn’t mean anything in terms of why a bitcoin is valuable.  This is why there are now thousands of digital currencies that were made up out of nothing.  You too can start a cryptocurrency.  Just create your own digital coins and tell the world how many are available and just how great they will be.

This whole thing reminds me of Tulip mania.  There is a difference though.  At least if you paid a lot for a tulip bulb, you could at least get a nice looking flower out of the deal.

I know this is harsh.  As I’ve said before, I am sympathetic to those who promote cryptocurrencies because at least they are opposing the fiat government money that is forced on us.  Still, I don’t want to see people get burned by this speculation.  Therefore, if you do “invest” in Bitcoin, know that your investment could quickly go to zero.  You are not trading one form of money for another.  You are speculating.

There is a story about Joseph Kennedy knowing a stock market crash was imminent in 1929 when a shoeshine boy was giving him stock advice.  This was a sign that the bubble was near its peak.  Whether or not this story is true, the idea of it rings true.

I have read several comments in different forums over the last couple of weeks with people asking about Bitcoin.  They say they have never bought Bitcoin and wonder the best way to go about doing it.  They wonder whether now is a good time to get in, even though they missed the initial run.

I am not saying that a crash is imminent.  Bubbles can go on for a while.  They can last longer than some short sellers can remain solvent (to paraphrase Keynes).

If you are going to buy Bitcoin with your U.S. dollars or some other government currency, then please understand that Bitcoin is not money.  It is hard to even call it an investment.  It is a speculation.  There is nothing wrong with speculating, just as there is nothing wrong with going to the casino.  Just understand what you are getting into and that you could lose all of your money.

The Morality of People vs. the Government

Libertarians accurately point out the problems caused by government with great frequency.  It isn’t to say that we would live in a perfect world without the state, but things would be a whole lot better and more peaceful if state power were drastically reduced.  Our living standards would also be far higher, perhaps beyond our imagination.

While the government should be blamed for a lot of the ills in our society, we also shouldn’t forget that the government is often a reflection of the people.

Frederick Douglas said, “Find out just what any people will quietly submit to and you have the exact measure of the injustice and wrong which will be imposed on them.”

It was Etienne de la Boetie, over 4 centuries ago, who said that state power relies on the consent of the governed.  It was Murray Rothbard who later emphasized this point.  The government ultimately relies on the consent of the governed, even if that consent is not explicit.

Even with a dictatorship, there has to be a certain degree of consent, even if the population is scared to speak out.  If you have a country of a million people, it is impossible for one person to dominate all of the others without at least some tacit consent from the general population.  Even if the dictator has a group of loyal people around him, they still rely on a certain degree of consent.  A group of a thousand people ruling a country cannot last long if there are a million people who are angry and ready to overthrow them.

In the United States, the federal government is very much a reflection of the people.  This can be seen from both sides of the spectrum.  Politicians would love to raise taxes, but the people will only tolerate so much.  But we also don’t see government drastically reduced because most people aren’t clamoring for it.

The American people, to a large degree, continually contradict themselves in opinion polls.  They will say they don’t want deficits and a growing national debt, but then when it comes to specific spending cuts, there is little the majority favors.  Most say they would cut foreign aid, but this is a drop in the bucket.  Conservatives will say they favor cutting things like Planned Parenthood, but this is a drop in the ocean in terms of the overall budget.  The left might criticize some programs initiated by conservatives, but they are mostly complaining about control of the programs.

There are many other issues where these contradictions exist.

The only way to have a significant reduction in the size and scope of government that is a sustainable is to change public opinion.  We need for more people to understand the benefits of liberty.

We must also not overlook the issue of morality.  Most hardcore libertarians understand that morality plays an issue.  It is why they oppose the initiation of force for political or social means.  From an economics standpoint, nearly everyone would be better off if they applied this principle.  But for most libertarians, it really comes down to a moral issue that you should not force your views on others.  This includes not forcing others to pay for things they don’t want to pay for.

The recent events in Zimbabwe serve as a good reminder that the rulers depend on the consent of the people.  Robert Mugabe has been thrown out of power after decades of running (or ruining) the country.  But it wasn’t so much his brutal totalitarianism that did him in.  That had been going on for a while.  The people did not revolt when Mugabe was killing people and getting rid of the white farmers, thus causing a shortage of food.  The people weren’t protesting for violations of property rights, or interference of trade, or central bank hyperinflation.

The event that caused the downfall was when video appeared of one of Mugabe’s sons washing his expensive watch with expensive champaign.  It was a display of ridiculous wealth.  And most people who work hard to earn their money don’t treat their wealth with such disrespect.

It was easy to see that Mugabe’s son was wealthy because of funding from daddy.  But his antics did his daddy in.  He didn’t understand the danger in flaunting his undeserved wealth.  The poor people of Zimbabwe did not seem to be amused.  They knew this guy was living it up at the expense of them.  That was enough to upend the regime.

Unfortunately, probably not much will change there.  They will get another tyrant in power.  The reason it won’t change is because the mentality of the people there hasn’t changed.  They do not respect property rights to a high degree.  They generally do not have a high regard for liberty.

Most Americans certainly don’t adhere to the non-aggression principle or anything close.  They will adhere to it in their daily lives in dealing with others, but they don’t apply the same principle to the government.  Still, at least most Americans have some respect for the idea of property rights and liberty.  This is why the United States has more liberty than Zimbabwe.

In conclusion, this is why elections don’t matter that much.  They can serve as a measure of public opinion in some cases.  But the key to gaining liberty is to change public opinion in a more libertarian direction.  A libertarian president might do some good in the short run, but there would only be lasting change if the public endorsed the libertarian agenda.

If you want to help move the world in a more libertarian direction, then the focus should be on changing hearts and minds.  The best reason to elect libertarians to office is so that they can use the platform for education purposes.  Otherwise, it will mostly be a waste.  It is far better to help others see the benefits of liberty, as well as the morality of liberty.

The Biggest Middle Class Welfare Program

There are many conservatives who will criticize government welfare, yet not blink an eye at a $700 billion defense budget.  Unfortunately, most of it isn’t for defense, and the actual amounts on military spending and foreign adventurism goes beyond this amount when you figure in interest on the debt and spending on veterans from previous wars.

Many conservatives and most libertarians will rightly criticize domestic government welfare programs such as food subsidies (formerly food stamps) and housing subsidies.  It can be especially infuriating when you see someone pay for groceries with a government-issued card and then pay separately for beer and cigarettes.  Most competent adults understand that money is fungible and that the money used to buy the alcohol and cigarettes could have been used to buy the food.

But leaving aside welfare involving the military-industrial complex, there is also domestic government welfare that is rarely criticized by conservatives.  The biggest are called entitlements: Medicare and Social Security.

I know some conservatives will say that this isn’t really welfare because people paid into it.  This is why we have payroll taxes deducted from our paychecks.  There are several problems with this argument.

First, the money being paid out for these programs is funded through current taxation (or deficit financing).  The so-called trust funds are just filled with IOUs.  If it weren’t for current workers, the programs would be completely bankrupt.

Second, these are still forced programs.  It is not like contributing to a 401k or pension plan that is voluntary or sponsored by an employer.

Third, we all know that the “premiums” paid in the form of payroll taxes are not proportional in what is returned.  It might be closer than most other tax and spend government programs, but it is still not equitable.

Now what about domestic welfare that doesn’t include senior citizens?  What is the biggest middle class welfare program?

The answer is education.

Most people don’t want to admit this.  It may even be hard for a few libertarians to admit this.  If you are sending your children to public (i.e. government) schools, then you are accepting welfare.  And for the amount that is being spent on children (oftentimes more than $10,000 per student per year), it is a massive form of welfare.  If you throw in subsidies for college, the amounts are even bigger.

While many middle class Americans will look down on the person using a government-issued food card at the grocery store, they won’t think twice about waiting in a car line to pick up their kid at school.  And if anything, food is more of a need than education.  You can’t live without food.

This isn’t a criticism of people accepting welfare by sending their kids to a government school.  It is more a point that people are being hypocritical to a certain extent.

There have been many discussions between libertarians on whether it is appropriate to accept government welfare or subsidies.  I certainly do not think it is hypocritical for libertarians to accept government subsidies, especially to the point of what they are paying towards government.

The key for libertarians is to never defend these subsidies.  You can use the government schools, but you shouldn’t be voting to increase the school budget just because you currently have a kid in the system.

Of course, I am not advocating that libertarians or anyone else use the school system simply because they have to pay into it.  That is a sunk cost.  But if I recommend private school or homeschooling over government schools, it isn’t because it is welfare.  It is because I don’t want kids indoctrinated and taught to be obedient little citizens.

The education welfare system is especially bad for many reasons.  First, it does impact the upbringing and thinking of children in our society.  Second, it is very disproportionate, as those without kids and those who elect not to put their kids in the public schools are still forced to pay for everyone else.

Third, and perhaps the worst, is that it isn’t thought of as welfare at all.  It is a given in our society.

And while the federal government does have involvement in the education system, it is still mostly funded at the state and local level. It speaks to the popularity of government-funded education that no county (and certainly no state) in the United States has abolished government education.  Unfortunately, it is required by law in most states to provide education.

The education system is a disaster.  It is more of a disaster in some places than others, but it is generally bad everywhere.  I am not so concerned about what kids don’t learn as what they do learn. They are taught uniformity, obedience, and dependency.  And this is just in the “good” schools.

For this reason, I am actually glad to see the failing system.  Many kids rightly see it as a joke, and they don’t respect the system.  This is actually good in my book, as long as they aren’t getting into serious trouble.

In addition, the number of homeschoolers has increased vastly.  It is very common in many areas now.  This is helping to undermine the system.  What does it say about the system when a family is forced to pay thousands of dollars a year in property taxes to fund the school system, and they still choose not to use it?

The hope is that more middle class Americans will want to get out of the system because of the reputation associated with it.  There almost needs to be somewhat of an elitist attitude that goes with it.

If you homeschooled your kids 20 years ago, it was almost something of a stigma.  You didn’t exactly go out of your way to tell everyone.  But it is so common today, most homeschooling parents are proud, or at least not ashamed, of saying that they homeschool.  The tides are turning, where homeschooling is seen as a positive thing.

When the majority of middle class America is striving to homeschool or find private school alternatives, then there will be an overall shift in attitudes.  When government schools are seen as a welfare program for the poor, then we will know that things are in pretty good shape.

10 Reasons Hyperinflation is Unlikely in the U.S.

Most people don’t understand much about inflation, other than knowing that prices tend to rise over time.  They tend to give little thought about the reasons that the general price level rises.  Some will blame it on greedy corporations and capitalism, while there is a minority that will correctly link rising prices to monetary policy.

The definition of inflation has changed over time, and we can credit the statists for this trick.  Inflation, which once meant an increase in the money supply, is now defined by one of the consequences of inflation, which is rising prices.

Aside from the central bankers themselves and a few of the elites who benefit from having a central bank, most people don’t understand the process of creating money out of thin air and the consequences.  It is actually the critics of central banking who tend to have the greatest understanding.  This is why they are the critics.

With that said, there are some who travel in libertarian circles who are predicting hyperinflation at some point down the road.  I certainly don’t think this is impossible, even in the United States, but I do think it is unlikely.

For the purposes of this post, I’ll define hyperinflation as an increase in the general level of consumer prices of at least 50% per month.  For consumer price inflation to rise at this level, you would almost have to have a massive increase in the money supply (much bigger than QE1, QE2, and QE3), and there would have to be a severe lack of trust from the general public.

Here are 10 reasons that I think hyperinflation is unlikely in the United States.

  1. The central bankers and politicians have their savings and pensions denominated in U.S. dollars.  Unless they are secretly buying massive amounts of gold for themselves, they are not going to want to wreck their own retirement plans.
  2. The central bankers would lose much of their power if we had hyperinflation.  They depend on their control over others by controlling the currency.
  3. While we speak negatively of lobbyists in the U.S. (as we should), they do serve a purpose of keeping things from getting out of control, at least in some aspects.  The central bankers and politicians aren’t going to ruin the dollar at the expense of all of the lobbyists who line their pockets.
  4. While inflation can mitigate the debt in a sense, it does nothing to solve the biggest fiscal problem, which is the unfunded liabilities.  The government could reduce Social Security benefits by understating the cost-of-living increase for benefits, but it probably already does that.  And for Medicare, all of the medical costs would rise uncontrollably in a hyperinflation scenario.  Inflation doesn’t solve these unfunded liabilities.  It can only change the nature of the default.
  5. The U.S. dollar is still considered the world’s reserve currency.  While this won’t last forever, there are no other major currencies that are in good shape.  If you think we will see hyperinflation because of the national debt and a bubble economy, take a look at China, Japan, and much of Western Europe.  All of these places are in even worse shape than the U.S., economically speaking.
  6. The U.S. government and the U.S. consumer are subsidized by foreign central banks buying U.S. government debt.  And while this may not last forever, there is little indication that things are changing any time soon.  The U.S. government enjoys this subsidy, and the mercantilist foreign central bankers keep providing it.
  7. Since Ron Paul ran for president in 2007/ 2008, there are more critics today of the Federal Reserve than at any other time in the Fed’s existence.  These critics help keep a check on the Fed.
  8. To go along with number 7, today we have Facebook, Twitter, and many other forms of social media.  While your friends probably aren’t posting about the Federal Reserve (unless you have some libertarian friends), things would change quickly if price inflation ticked up into the double digits.  You would start seeing more links about inflation and how the Fed creates money out of thin air.  More Americans would become aware of the Fed and its damage if inflation really started to impact them in an apparent way.
  9. In U.S. history, except during wars on U.S. soil, consumer price inflation was at its worst in the late 1970s.  Jimmy Carter got Paul Volcker in at the Fed to severely tighten monetary policy.  This was approved by the establishment.  The people in power will not willingly allow hyperinflation and a total loss of the dollar.  At some point – maybe a 20% CPI – even Paul Krugman might say “enough”.
  10. Hyperinflation would mean a drastic reduction in the division of labor and a possible implosion of the banking system.  It would put most Americans into severe poverty.  Politicians and central bankers like to eat out at nice restaurants.  They enjoy their smartphones too.  They are probably not stupid enough to risk all of that, let alone their livelihood.

Again, hyperinflation is not impossible in the United States, but it is highly unlikely.  A more realistic possibility is that we have something similar to the 1970s again, where consumer prices are rising in the double digits on an annual basis.  This is something that you can more realistically prepare for, and something you should prepare for.

Your Top Two Expenses, If You Are American

When you think about budgeting your expenses, what are your biggest line items?  People think about mortgage payments, car loans, possibly student loan payments, and food.  If I look at my own credit card bill, groceries top the list for most months.

But these items are likely not your biggest expenses.  If you are an American living in the United States, then there are two expenses that are likely bigger than all of the items already mentioned.

Those two expenses are taxes and medical care (including insurance).

Both of these major expenses are because of government.  Taxes are obvious, as it is government that forces (or threatens to force) you to pay them.  Medical care and insurance are a little less obvious, but anyone who is somewhat competent and takes an honest look at the situation will conclude that it is government policies that have caused the dramatic rise in medical care costs.

These two expenses are not the highest line item for all Americans in the United States.  There are usually exceptions for everything.  But realize that these are the top two expenses for even many relatively poor people.

For taxes, I know we hear statistics about how the bottom 47% don’t pay taxes and that the top 10% pay the large majority.  But these statistics are for income taxes only.  The biggest tax that hits wage earners is payroll taxes: 7.65% for employees and 7.65% for employers.

But most people fail to realize that they are essentially paying over 15% on their wages because the employer portion is resulting in reduced wages for employees.

Of course, there are thousands of different taxes out there, many of which are hidden.  There are excise taxes, tariffs, corporate taxes, investment taxes, and the ultimate hidden tax of inflation.  All of these taxes serve to reduce wages, or make products more expensive, or to reduce our choices.

All government spending is a form of taxation, as it consumes resources that would have been otherwise used in the marketplace in accordance with consumer demand.

Therefore, even though many poor people don’t pay income taxes, they pay for the cost of government in many other ways.  Life is more expensive for them as a result.

Health insurance and medical care costs are a bit trickier, but even here I don’t think people realize that poor people still pay.  As related to the discussion about taxes above, all subsidies are being paid by somebody.  Subsidies for health insurance and medical care don’t just appear out of nowhere.  The cost is spread wide, and even the very people who are being subsidized are paying for part of it.

For those who buy health insurance, or who work for an employer that provides health insurance (usually at a price), the numbers are really unbelievable.  It is common for a family to be paying $1,000 per month in premiums, and sometimes it isn’t even for that great of a plan.

Also consider that your employer is probably paying a good portion of the cost as a benefit.  Therefore, the total cost of the health insurance plan for a family may be somewhere around $20,000 per year.  As discussed above with payroll taxes, this company benefit is coming at the expense of a reduced salary.  Therefore, your health insurance plan may be costing you and your family upwards of $20,000 per year or more.

This is simply ridiculous.  It is also unsustainable.  If we were getting wonderful healthcare, then maybe it would be a little more acceptable, but that is not even the case.  Diseases and ailments are running rampant in America, and the solution from many doctors is to just throw more pills at the problems.  Worse still is that many doctors, in hand with the pharmaceutical industry, get people on pills for things they didn’t even see the doctor for, such as depression or cholesterol.

It is becoming easy for the so-called socialists to promote single-payer healthcare (i.e. socialist healthcare).  When they point to other countries with socialized healthcare, they have a point that costs are lower.

The U.S. has a lot of money to burn because we are a relatively rich country.  In addition, we don’t have anything resembling a free market when it comes to medical care or insurance.  It is not 1950’s American anymore, which was not completely free market, but far closer than what we have today.

Today’s system in the U.S. is a total mess.  It is a result of a century of laws and regulations that have piled problem upon problem.  One intervention has created a problem that leads to another intervention.  Each “solution” creates a new problem, which calls for more solutions, and so on.  It is a giant bureaucratic mess.

While there are still a few elements of a marketplace in medical care, it isn’t much.  I can’t imagine that socialized healthcare would really be that much worse at this point.  If the wait times are as bad as some people claim, it might actually help some people.  They will be less likely to go to a doctor and will be less likely to be prescribed a statin drug or anti-depressant when going in for a fever.

If you require trauma care, there is still no better place to be than in a major city in the United States.  But aside from that, I really don’t see how things could get much worse with socialized healthcare.  I used to fear it, but there isn’t much to lose at this point now.

Of course, the true solution is to get the government out of the healthcare business, but I don’t see how this is possible at this point.  I think our only hope in the near future is technology and innovation.  I can envision a cruise line in international waters that shuttles people out in a boat.  You can pay for your medical care out-of-pocket and avoid the bureaucracy of the United States.

It is astounding that some people are actually paying more for health insurance than they are for shelter and food combined.  And to top it off, many of these are high deductible plans that barely cover anything until you spend thousands of dollars in medical expenses.  With this, there are some families easily paying $2,000 or more per month in health insurance and medical care costs.

Again, this is unsustainable.  Either the government will completely take over, or we will have to see some kind of turn back towards the free market.

This is why middle class America is struggling so much.  It isn’t cell phones or Starbucks that is causing budget problems for Americans. You could buy a $5 cup of coffee every day for a year and it probably wouldn’t add up to one month of health insurance premiums and medical care costs.  It certainly wouldn’t add up to one month worth of taxes.

If we want a dramatic improvement in living standards, we need to see a drastic reduction in regulations and a drastic reduction in government spending.  Until Americans realize this and expect it from their so-called representatives, then we will only see marginal gains at best.

My Experience With a Bed and the Economy

I am trying to get rid of a bed.  I was informed that some charities do not accept beds because apparently bed bugs can be a problem.  I contacted Salvation Army, and they do take beds, at least in my area. I scheduled a pickup, but the problem is that it wouldn’t be for another week and a half.

I don’t have a pickup truck.  My wife has an SUV, but it isn’t that easy to tie up a queen-sized box spring and mattress to the top and drive it.  I kept my appointment with Salvation Army, knowing that I can cancel it up until the day before.  But I wanted to get rid of the bed, so I posted an ad on Craigslist.

I put one picture on there and said it was in good condition.  I stated in the ad that I preferred if someone could pick it up on Thursday because I would be available most of the day.  I posted it on Wednesday morning.

I am selling the bed for $25.  My wife asked why I didn’t just give it away for free.  The reason is because I went to the free section on Craigslist and most of the stuff is junk.  This bed isn’t junk for someone who needs a bed.  I think putting a price on it actually gave me a better chance of getting rid of it, and it also eliminates too many strange inquiries.

I have received a lot of inquiries about the bed.  It is amazing how many people need a bed who don’t want to buy a new one.  I think a couple of the inquiries may have been scammers, but most of them I believe were legitimate.  The problem is that most people were not clear in their correspondence.  Some were incoherent sentences, or at least on the verge of incoherence.  Some inquiries were too vague.

I replied to a few of the inquiries and they either didn’t respond or took a long time to respond.  You can communicate through a hidden email system that Craigslist has, but at some point information has to be exchanged.  The problem is that I had trouble getting committals.

But there were two responses to the ad that really caught my attention.  One was an email from someone who claims to have lost everything in the hurricane.  She eventually responded again, but it took a day.  She asked if I could hold it until Friday because that is the day that she gets paid.

I had another inquiry from someone who actually left her phone number in the message.  I called her and talked to her.  She sounded nice enough.  She said she had to talk to her boyfriend, and I think she was realizing that her car (not truck or SUV) might not be able to handle the trip.  But before all of that, she said the same thing as the other woman.  She asked if I could wait until Friday or the weekend because she gets paid on Friday.

I believe these two women were being sincere.  I can’t be certain, but I don’t believe they were lying about their situation.  I wasn’t selling the bed for $300.  It is $25, and they both asked if I could wait until their payday.  Did they really not have the ability to scrounge together $25?

I actually would have given it away to the hurricane lady if she had gotten back to me sooner and if I thought her story were true.  I ended up arranging something with a guy that inquired who actually has a truck.  Hopefully, the small transaction will go smoothly because I want to get rid of the bed.

It is just amazing though how poor so many people are.  It is amazing just how close to the margin that so many people are living.  Any stresses that I have about money were put into perspective by this.

I told a friend about what happened, and he said that he saw a young lady put 3 dollars worth of gas into her car the other day.  This is an indication that she has almost no money.  Why would someone stop for gas to put less than 2 gallons in the car?

Middle class America is being ignored.  This is why Donald Trump won the election last year, despite the almost-universal negative press.  It is also why Bernie Sanders did so much better than people thought he would do.

To be sure, I don’t agree with almost anything that Sanders has to say economically, and I don’t agree with very much Trump has to say. But they both tapped into something.  They at least recognized that there is a struggling middle class.

Of course, the biggest problem is the government, particularly the federal government.  The federal government is spending $4 trillion per year.  It is consuming these resources, meaning that these resources are being misallocated.  State and local governments consume another couple of trillion dollars per year.  The total spending per American family ends up matching close to the median family income.  Is your family getting $50,000 or so worth of government?

Meanwhile, the regulations imposed on us are strangling as well.  I believe that medical care and medical insurance are the tipping point that has put so many people on the margin of near poverty.  Some people are paying insurance premiums that are equivalent to their rent or mortgage payment.  This is simply unsustainable.

The worst thing is that it is enrollment time for many people across the country right now.  For most, premiums are continuing to go up.  There is going to be a breaking point.

The breaking point is going to be a severe recession.  I like the term correction too.  It is a correction of an overbearing government.  The problem is that the Federal Reserve can shield the federal government from the correction, at least up to a point.  In 2008/ 2009, many state and local governments were forced to tighten up or even cut back.  Unfortunately, because of the Fed’s massive digital printing spree, the federal government ramped up its spending by running greater deficits.

We need a severe correction, even though it will be painful.  But the thing is, things are painful now, especially when people can’t by a bed for 25 dollars.

While a severe correction will likely bring higher unemployment, it will also reduce prices.  The Keynesians in DC worry about deflation, but price deflation is exactly what we need.  Right now, life is simply too expensive.

I don’t know when the correction will happen, but I know it is baked into the cake.  I usually analyze things through statistics like the Fed’s balance sheet and government spending.  But I don’t think there is any better evidence of economic problems than witnessing people who can’t afford 25 dollars for a bed because they are waiting for their next paycheck.

Combining Free Market Economics with Investing