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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.

Relieve Anxiety Today, Even if it Means No 401k

I am a big proponent of being future oriented.  It is unclear how much this can be taught versus how much is in your DNA.  But there is no question that it is something that can be taught to a certain degree.  Kids that grow up in an upper class or upper middle class household are more likely to be future oriented, particularly if the parents did not spoil them too much.

In fact, future orientation is really what determines your class.  It isn’t so much how much money you make or how much wealth you have accumulated; it is a matter of your outlook for the future.  This is why some lottery winners end up losing it all and end up being poor again.  These people were never in the upper class because their mentality stayed in the lower class.

I also really like the concept of compounding interest.  It is a great concept to teach to your kids, which really goes hand-in-hand with future orientation.  You shouldn’t just live for today.  You should plan for tomorrow.

With all of that said, I think some people get carried away with looking too far into the future at the expense of today.  Sure, in order to save money, we have to defer gratification to a certain degree.  But it also doesn’t mean you should be miserable.

In the present day, I say that, at least for Americans, we have never had it so good in some respects, yet life is actually harder than previous generations in other respects.  Communication and technology are far better than ever before.  But some basic living expenses such as medical care are more expensive than they were a couple of generations ago.

Middle class America is struggling to a large degree.  This is a reflection of taxation and regulation.  When the government at all levels consumes about 40% of our production, it makes it hard to get ahead.  Then they also pile on regulations, which makes our lives even costlier.  This is especially evident (or should be) in medical care and insurance for medical care.

I find that there is more anxiety today than there was in the past.  Maybe it is an illusion, but it is my perception.  I also see the statistics about the number of Americans on anti-depressants.  I don’t know if this is because doctors are just pushing drugs, or if it is because Americans are more depressed than ever before.  I suspect it is a combination of these two things.

We see statistics about how little wealth the average American has.  Perhaps more accurately stated, we see how little the median American has.  The rich people bring up and distort the average.

We hear various statistics such as: 57% of Americans have less than $1,000 in their savings account.  These statistics have to be taken with a grain of salt to a certain extent.  There are some people with considerable wealth who don’t have a traditional savings account.  They may have their wealth tied up in other things and figure they can always use their credit card if they need some extra money in a pinch.

I do believe that lack of money is a major stressor in people’s lives.  We hear the saying that money won’t buy you happiness.  This is true.  But a lack of money can cause you misery.

Americans are frequently told that the way to obtain wealth and eventually retire is to buy a house and contribute to a retirement plan, such as a 401k.  While this isn’t always bad advice, it can also steer people the wrong way, and it often makes people unnecessarily miserable.

Think about someone who has virtually all of their net worth tied up in housing and a 401k plan.  If you are still working for the employer that holds the 401k plan, then it is basically illiquid.  And your house is basically illiquid too, unless you plan to move.  But even there, most people just move into another house and use the equity from the last house to buy the new house.

While it may seem good for the future to have a couple of hundred thousand dollars in net worth on paper, it is important to ask yourself, “At what price?”

For many, the price is not having any liquid money in a checking or savings account.  Therefore, every little or not-so-little expense in life becomes a major stress point.

Now, it is true that some people are just bad with money.  They could rent an apartment and not contribute to a retirement account and they would still end up with no money after each year.  For these people, they probably are better off putting money into a house and a retirement plan rather than buying more junk that they don’t need.

However, there are many people disciplined enough that they could pay less for a mortgage (or rent) and contribute less to a retirement account (or none at all) and save some liquid money.

There is something to be said to have $25,000 just sitting in a checking account.  You can pick your own number.  Take your monthly living expenses and multiply it by at least four, if not six.  You should strive to have liquid funds in this amount.  If you spend $4,000 per month on average, try to get $24,000 in the bank.

Many people call this an emergency fund.  But really, it is just an anti-anxiety fund.  If your car needs a repair, then you don’t have to lose sleep over it.  If you need a new appliance in your home, then it becomes less of a big deal.

The key here is stress reduction.  It is great that you are planning for your retirement in 30 years, or whatever it may be for you.  But it shouldn’t be at the expense of your health.  You shouldn’t add significant stress to your life.

Even if you are retired and tight on money, is this stress weighing on you?  For me, I would rather go out and work part-time, even if it is just for a year, in order to build up a cushion.  I would rather be working than sitting at home and “relaxing” while stressing constantly about money.  If you are in this position, you can always find something relatively fun to do.

While I will continue to preach about saving and future orientation, I think more people should also work on stress reduction.  And one way to reduce stress for a lot of people is to have money that is freely available for when it is needed.

Your health should really be your number one investment, and stress reduction is a major part of maintaining good health.  You will always have little stresses in your life that are unavoidable.  But if you have a significant sum of money in the bank, it will help reduce your stress in a lot of situations.

The Best Tax System Without Eliminating Them

Tax reform is in the news again, and while it will certainly have an impact on people, it is mostly tinkering around the edges as usual.  When the federal government is spending about $4 trillion per year, it almost becomes a moot point to argue about little changes in rates and tax brackets.  Either way, the federal government is going to continue to spend $4 trillion per year.

As a libertarian, I am generally opposed to taxation, at least in its current form.  I am not opposed to voluntary taxation, but some would argue that it would cease to be taxation at that point if it is all voluntary.  For the number of rich businessmen and Hollywood stars who promote big government, they could fund the federal government all by themselves if they so chose.  But that would require a substantially smaller federal government, and many of these people really just want to see other people forced to pay more.

Warren Buffett wants higher taxes, but when asked why he doesn’t contribute more voluntarily, he says that his money is better spent going to charity.  In other words, he thinks of himself as wise enough to donate money to the “right” charities, but he deems it necessary to force others to contribute to the charity that is government.

Given that we are a long way off from voluntary associations and voluntary taxation, there is a much better way for the federal government to collect taxes, at least for the general population.  To be sure, it wouldn’t be better for the politicians and bureaucrats in Washington DC who seek to control us.

I have, at times, been critical of the U.S. Constitution.  I think we would have been better off with the Articles of Confederation.  The Constitution was a centralization of power.  But with that said, it wasn’t exactly drafted overnight with little thought given.  There is some cleverness to the whole document, even somewhat in defense of liberty.

We have to remember that the United States was not originally considered to be one entity.  It was originally formed by the 13 colonies, which were really like their own countries.  But since the 13 colonies had similarities and wanted open trade, they formed a confederation.  Even though the Constitution centralized power, it was still largely respectful of the states as distinct and separate.

The United States was originally thought of as a plural term (as opposed to singular).  Today, you would say, “The United States is a great place to live.”  Back in the late 18th century, you would say, “The United States are a great place to live.”

In terms of taxation, the Constitution did not allow direct taxes.  There were excise taxes allowed.  There were tariffs allowed, which are taxes on imports.  In fact, the issue of tariffs was one of the major problems in the United States in the early days, with the other being slavery.  It was really these two issues which led to the improperly named Civil War.

Article 1, Section 2 of the Constitution addresses taxation.  It actually gets more attention from its reference to slaves as three-fifths of a person.  But a lot of people who reference this do not fully understand that it was for purposes of the census, which dictated two things primarily: the amount of representation for each state, and a state’s share of taxes if there were any imposed.

Article 1, Section 2 states: “Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers, which shall be determined…”

In other words, if the U.S. government wanted to impose direct taxes on the people, it had to be done via the states.  The U.S. government could not impose an income tax (legally speaking), which is why it was necessary for the 16th Amendment in 1913.

It was up to each state to collect any taxes imposed.  If the government wants to spend $100 billion and New York has one-tenth of the total population of the states, then New York would pay its share of $10 billion.  But it would be up to the state legislature (or whatever is decided in that state) on how the $10 billion would be collected.  It could impose its own income tax or collect the money through some other method.

This not only was supposed to prevent direct taxation from the federal government, but it also was a mechanism in place that helped keep taxes down.  It shows what a joke it is today to hear politicians arguing about class warfare and how to best tax 325 million people.  If the original Constitution had stayed intact, then no such arguments would be necessary.  It would fall to the state level, if anywhere at all.

This ties into the whole idea of federalism.  It ties into the idea of independent states and the fact that each state had equal representation in one house (the Senate) and according to population in the other house (the House of Representatives).

The incredible brilliance of Article 1, Section 2 is that, within the same sentence, it says that representatives and direct taxes will be apportioned according to population.  They are offsetting to a large degree.  A state wants more representatives, but it also wants less taxation.  Therefore, there was less incentive for a state to lie about its census.  They wanted a higher population reported for representatives, but they wanted a lower population reported if they were going to be taxed based on it.

It makes it easier to see the difficulty in counting or not counting slaves in the census.  While people will say today that slaves only counted as three-fifths of a person, it was actually the northern states with little or no slavery that tended to prefer to not count slaves at all in the census.  It would have been the southern slave-holding states that tended to prefer that slaves count the same as any other person, especially if taxation remained low.  In other words, this could have been a difficult issue even for abolitionists back then.

While we can be thankful for change in many ways, particularly in the recognition of the immorality of slavery, it is unfortunate that some of the good parts of the Constitution have been changed or ignored.  One of those things is taxation.

The Constitution set up a good framework for tax collection.  It was far from perfect, but it would be much preferable to the disastrous tax code we have today.

This would actually be a good incremental step for libertarians to support in favor of smaller government and decentralization.  If the federal government wants to take our money, make them do so through each individual state.

FOMC Statement, New Fed Chair

The FOMC released its latest statement on monetary policy.  As expected, there were no major announcements.

The Fed will maintain the target of the federal funds rate between 1% and 1.25%.  It will achieve this by continuing to pay 1.25% on bank reserves.  It is nice work for the bankers that they can hold other people’s money and “earn” 1.25% interest from the Fed.

The Fed has finished up its first month of “balance sheet normalization”.  It is the first month of many, unless it abandons its plan entirely.  At its current pace and plan, the Fed won’t be back to its original levels of 2008 for about another decade.  In other words, it will never happen.

The Fed is allowing $10 billion per month to expire of maturing government debt.  That is only $120 billion per year.  If it eventually ramps it up to $50 billion per month as planned, that is still only $600 billion per year.  While that is a big sum in comparison to the $800 billion monetary base of 2008, consider that the Fed created well over $3 trillion from 2008 to 2014.  And chances are, the Fed will never get to the point of rolling off $50 billion per month.

The next FOMC meeting is in mid-December, where it is expected that the target for the federal funds rate will move up by another one quarter percent.

Meanwhile, Donald Trump is getting ready to announce his appointment for the next Fed chair.  According to sources, it is going to be Jerome Powell.  By the time you read this, it will probably have been announced already.

The bottom line is that Powell is another establishment guy.  He may be marginally different from Janet Yellen or other considerations for the position.  But if the last year has told us anything, Trump is not draining the swamp.  He is merging with the swamp.  He has been taking some of the credit for the boom in stocks, which is stupid because then he is going to own the crash.  At this point though, there was no way that Trump was going to appoint someone outside of the mainstream.

The Fed chair is sort of like the president.  It is something of a figurehead position.  The Fed chair is expected to fall in line with establishment opinion.  Even Greenspan, who was supposed to be a disciple of Ayn Rand, mostly fell in line.

Looking back on Janet Yellen’s term, she has actually been one of the better Fed chairs, rhetoric aside.  There is no doubt she is a Keynesian and a shill for the establishment, but her actual policies as Fed chair have been tight by comparison.  Of course, this is similar to saying that government spending stayed relatively stagnant under Obama.  He was starting out just as the budget had exploded.

It is the same with Yellen.  The balance sheet had already exploded prior to her coming in.  Therefore, it wasn’t as challenging for her to keep a relatively tight monetary policy.  She oversaw the wind down of QE3, and it is has been a tight policy since October 2014.  To be sure, Yellen would have been quick to ramp up monetary inflation again if the economy had hit another recession.

Good luck to the next Fed chair.  The last major recession started almost a decade ago.  Since then, we have had unprecedented monetary inflation and government debt.  There are major asset bubbles, especially in stocks.  Surprisingly, even housing seems to be getting into bubble territory again, at least in some regions.

We have no idea when the next economic downturn will happen, but it looks like it will be a doozy when it does.  Stocks keep hitting new all-time highs.  The Dow has gone from a low of below 6,500 in March 2009 to its current level above 23,000.  What could possibly go wrong for the next Fed chair?

JFK Died, Trump Lied, and the CIA High-Fived

The federal government released many of the remaining files related to the Kennedy assassination on October 26, 2017.  This was based on legislation signed in 1992 requiring that the remaining documents be released unless blocked by the president.

The legislation was signed by then-president George H. W. Bush.  Where was Bush on the day that Kennedy was assassinated?  Does anyone really know this?

In the lead up to the release, Trump stated that he would allow the full release, but subject to the receipt of further information.  When he issued this statement (through Twitter, of course), it became apparent that not all of the files would be released.

Although some files have been withheld, Trump didn’t really lie because he gave himself that out.  He was purposely playing word games.

Still, I think he is lying for other reasons, namely that the remaining files are being held for national security reasons.

Here is the obvious question that you probably won’t hear from the establishment media.  If there was no conspiracy to kill JFK, what could possibly be in these documents that would risk national security?

The major players in the establishment have no problem making false accusations against Russia and slapping on sanctions, so there can’t be anything implicating the Russians.  The same would probably go for Cuba.

Since the assassination was not prevented, there wouldn’t be much to disclose in terms of the lead up to the assassination, unless there really was a conspiracy outside of Oswald himself.  And they can’t be worried about revealing any detective or spying techniques in trying to solve the case.  Would there really be any technology secrets from 1963?

The only logical conclusion is that the documents implicate certain people or a group within the government, which would most likely be the CIA.

I believe that it was the CIA, along with Lyndon Johnson, that took out Kennedy.  Kennedy had already stated that he wanted to rip up the CIA.  He dismissed the CIA director, Allen Dulles.  Not coincidentally, Johnson appointed Dulles to the commission to investigate the assassination.  In other words, the commission was set up by Johnson, and Dulles was appointed by Johnson, and these are the two most likely suspects of any kind of conspiracy.  And to be sure, both of these men were rotten to the core.

While most of the people involved in any conspiracy would now be likely dead, or at least close to it (George H. W. Bush), the CIA is still one of the most vicious government agencies.  It is responsible for secret coups and the instigation of wars and other conflicts.  It is the face of the deep state.

The assassination of JFK is still highly relevant to today’s world.  I don’t think many people understand this.  The assassination was a coup d’etat.  Kennedy tried to oppose the deep state.  He wasn’t going along with the CIA and other elements of the establishment.  Therefore, they had to get rid of him.

The problem is that our government is not much different today.  It is almost impossible to oppose the establishment, as was quickly learned by Donald Trump.

There are a lot of similarities between Trump and Kennedy.  I know the Kennedy fans hate to hear this.  The difference is that Trump has seemed to finally given in to the establishment.

Sure, Trump will still say inflammatory things and still oppose certain establishment things on the margin.  But for the most part, he has given in to the intelligence agencies and the spying agencies.  His blocking of the last remaining files on JFK are evidence of this.  He could have just said, “I want them all released.  I don’t care if you think it risks national security because I can’t imagine there would be anything that would do such a thing.”

You have to wonder if Trump actually knows what happened to Kennedy.  You have to wonder what the establishment, particularly the CIA and spy agencies, have put over his head.  Did someone go to Trump and hint to him that he better fall somewhat in line and not expose too much or else he risked the same fate as Kennedy?

If that is the case, what hope is there of ever dismantling the deep state?  Really, there is only one hope.  We can’t rely on one person to ride in and fix things and expose the truth.

The only way to dismantle the deep state is to get public opinion on our side.  This means opposing big government on everything.  It means tens of millions of people demanding that budgets be cut, or better, agencies abolished.  The only way to dismantle these agencies is to no longer grant them any power.

I know some will say that the CIA and FBI do some good things.  And I have no doubt that there are some decent people in these agencies who actually do solve actual crimes.  But when you give the power to do good, you are also giving the power to do bad.  And it becomes especially bad when you centralize power to this degree.

This is why the JFK assassination matters so much.  It symbolizes the deep state.  It symbolizes the fact that most of the top “leaders” in this country are criminals.  And it wasn’t just the group of leaders in 1963.  It is a continuous process where, as Hayek said, the worst get on top.  Political power attracts the worst elements of society.

We should not be surprised that not all of the files were released.  Even if they were, we should not expect any smoking guns.  If there were any smoking guns, the documents would have already been burned.  The best we can hope for is to piece together a few more things.

But until the American people are willing to withdraw their consent and to stop granting vast amounts of power to Washington DC, then not much is going to change.  The people enslave themselves.

Bitcoin Defies the Logic of Money

The U.S. dollar price per bitcoin recently went over $6,000.  For anyone who invested in Bitcoin from the early stages, they have done very well.

Although the advocates of Bitcoin and other cryptocurrencies will typically speak against the government fiat currencies, I think some of them fail to realize that Bitcoin itself is essentially a fiat currency.  Sure, it can’t be created out of thin air in unlimited quantity, but it is still backed by nothing.

Mises and Rothbard taught a lot about the subject of money.  Money is a medium of exchange.  It is hard to consider Bitcoin or any other cryptocurrency a form of money at this point because it is not yet widely accepted.  But it is not unknown either.  There are online retailers that will accept Bitcoin.  There are charities and other non-profits that will accept Bitcoin.  At $6,000 per bitcoin, who wouldn’t want to accept them?

Mises and Rothbard explained that money originates in the marketplace because of its value and usefulness.  It is subjective value, but people did not originally seek gold and silver just to be used as money.  They were sought-after commodities, and they became of form of money because of this subjective value and their unique physical characteristics.

It was only after gold served as money in the marketplace that governments were able to come in and play games.  There were certificates issued that would represent a certain quantity of gold.  These certificates served as money, as they could be redeemed for gold at any time, at least until the government changed the rules.  Finally, the government would renege on this promise and people were left holding certificates with no gold backing.  Mises claimed that a fiat money could only come about because of the original gold backing (or some other backing).

But Bitcoin and other cryptocurrencies seem to be defying this logic.  Bitcoin is not backed by anything.  You can’t trade it for any particular commodity.  If anything, people trade it for U.S. dollars or other fiat currencies.

Perhaps Bitcoin is serving as a main form of money in a place such as Venezuela.  But even there, it is not likely being widely used.  Still, it is showing that it is possible.

I never would have guessed that Bitcoin would last this long and go up this high (again, in terms of U.S. dollars).  It is my lost opportunity, even if it all comes crashing down.

Even though it is hard to consider Bitcoin a major form of money at this point, it is still somewhat trying to prove Mises (an economic genius) wrong.  Perhaps Mises underestimated just how much some people dislike government-issued currencies.

There are cryptocurrencies popping up all over the place now.  And that is really indicative of the problem.

Can I just start a new currency called “Libertarian Investment certificates”?  I can hand them out to people and they can use them for trade in the open marketplace.  Aside from the technology, how is this any different from Bitcoin?

I don’t like criticizing Bitcoin too much, and it is not because I didn’t invest in it early on.  It is because many of its advocates tend to be on my side of the fence, at least in terms of criticizing government money.  As long as they aren’t trying to force anyone to use Bitcoin or any other cryptocurrency, then I certainly don’t regard them as enemies.

Still, for me, it doesn’t take away the fact that bitcoins and other cryptocurrencies are essentially made up out of thin air.  Bitcoin has more similarities with a government-issued currency than it does with gold in this respect.  Gold has been in demand for thousands of years, and it has other uses than just serving as a form of money.

For this reason, my long-term bet is still on gold (and silver secondarily).  I think the wave of the future in terms of free market money will be a gold-backed digital currency.  This is already starting to become a reality.  We just need for some more loosening of government restrictions.

This is a business that a company could easily start.  You have a warehouse of gold and you issue digital certificates representing the gold in the warehouse.  The warehouse could be fully audited (unlike the Federal Reserve).  It would be similar to Bitcoin, except it would be backed by gold.  It would be redeemable in gold (probably for a fee).  You could trade small fractions of a certificate that represent one ounce of gold (or however they are issued).

If you want to speculate in Bitcoin, I am not going to tell you otherwise because I have been wrong up to this point.  It is a very volatile investment and very risky.  But if you do speculate by buying bitcoins, then it should probably not be a buy-and-hold strategy because I don’t think they will last forever.

In the end, gold will beat Bitcoin and every other cryptocurrency.  It is just a matter of time.  History is on the side of gold.

The Case for Tax Cuts, Even With Higher Deficits

In my most recent post, I discussed whether tax cuts can help grow an economy, even if there are no cuts in government spending.  I concluded that although cutting spending would be the key driver of increased economic growth, it is possible for tax cuts to help with growth without spending cuts if taxes are really high and acting as a severe disincentive to work.

If we are on the left side of the peak of the Laffer Curve, then the cutting of taxes will ultimately lead to less tax collections by the government.  If spending remains the same (or increases), then the deficits are going to increase.  While this is seemingly bad, there is a long-run case to be made for this, as opposed to not cutting taxes at all.

To be sure, cutting taxes can have an initial stimulative effect, just as creating money out of thin air has an initial stimulative effect.  But government spending and monetary inflation both ultimately misallocate resources and hurt wealth generation that is in accordance with consumer demand.

In addition, cutting taxes can give some of us a better chance in terms of saving extra money in the short run and investing in assets that benefit from the inflation.  But cutting taxes and not cutting spending will, on net, typically not be beneficial for society as a whole and for economic growth.

However, the case to be made for tax cuts is that it will perhaps put stricter limits on spending in the future.  To examine this closer, let’s take an extreme example.

Let’s say that the deficits keep getting bigger and bigger.  Let’s say that interest rates also go up as the debt goes up.  The interest payments from the Treasury get larger and larger.  The interest payments consume a greater and greater portion of the federal budget.

If the federal budget remains the same overall, then a bigger and bigger percentage has to go towards paying the debt.  This means that spending will be cut elsewhere, whether it is on military spending or domestic welfare.

Let’s say we hit a scenario where the federal government is still spending $4 trillion per year in total, but payments on the national debt now equal $2 trillion annually.

In round numbers, the government currently spends about $4 trillion, with about $300 billion (a little less) going towards interest payments.  Essentially, the government is spending around $3.7 trillion on everything else.  In the above scenario, the government would now only be able to spend $2 trillion on these same things if the total budget remains the same.

This would mean massive cuts.  Some would say it would mean cuts to “services”.  But for libertarians, it would mostly be positive.  It would mean major cuts to the military and a likely scale back on interfering in other countries.  It would likely mean reduced entitlement spending.  It would mean massive cuts, or perhaps eliminations, to whole departments such as education, energy, commerce, and transportation.  Maybe it would mean major cuts in drug enforcement, the spying agencies, and the intelligence agencies.

Instead, this $2 trillion would be going to the holders of U.S. government debt in the form of interest payments.  This would likely include substantial amounts to the central banks of China and Japan.  It would also mean substantial amounts going to investors.

In any case, it would likely be a better allocation of resources.  At least the private investors would likely put the capital to productive use.

But more importantly, we would see a continued rise in interest rates.  Maybe we would see a default on the debt at some point.  We would likely see the U.S. dollar lose its status as the world’s reserve currency.  And even though the Fed can create money at will, there are limits here.  The limit is that they don’t want to see runaway price inflation.

And once the Fed has to stop (or at least severely slow down) its creation of money, then it will be up to private investors and foreign central banks to buy the debt.  But the government won’t be able to afford to issue a lot more debt at this point, especially at high interest rates.  Ultimately, the politicians in DC will be limited to what they can collect in taxes.

Unfortunately, even though this will all be painful when it inevitably happens, it is likely going to be necessary in order to downsize the federal government.  Unless we have a quite dramatic turn in public opinion towards libertarianism, this is our likely path for downsizing Washington DC.

If overall spending by the federal government could fall to $3 trillion annually, or even $2 trillion, we will be so much better off.  There will be winners and losers in the short run.  However, in the longer run, it will be mostly those with the political power who lose.  The average American will be a beneficiary in the long run, even if there is some short-run pain.

If tax cuts with higher deficits can speed up this process, we will actually be better off.  I would rather see the government have to downsize extensively in the next five years than have to wait another couple of decades.  The quicker that this downsizing can happen, the quicker we will return to greater prosperity.

Can Tax Cuts Grow the Economy Without Spending Cuts?

Frank Shostak recently wrote an article for the Mises Institute titled “Tax Cuts Without Spending Cuts Won’t Grow the Economy“.

I wholeheartedly endorse the spirit and main point of his article, but I do want to dig deeper into the main argument.

I recently wrote a post about the Trump/ Republican tax plan.  There are some positive aspects about it, along with some negative ones.  In some ways, it really is like rearranging the deck chairs on the sinking Titanic, except that some will make out better than others.

In my post, I wrote the following, “But this tax proposal does not really deal with our high tax burden. The reason is because it doesn’t address spending. Regardless of whether this thing passes, the federal government will still be spending about $4 trillion this year. This is money coming out of our pockets one way or another.”

This is basically the whole point of Shostak’s article.  Still, I might take exception to the title of his piece, along with one sentence within the article.  He writes, “Contrary to what the followers of supply-side economics claim, it is not possible to strengthen economic growth by lowering the tax rates whilst keeping the size of government outlays intact.”

He is basically correct in this, but we have to make a caveat.  This is only true to the point where tax cuts are not so confiscatory as to severely hamper economic activity.

While I do not endorse much of what supply siders say, I do think they are correct to a certain extent on the Laffer Curve.  It is not anything brilliant that Arthur Laffer came up with.  It simply says that there is some tax rate (or tax rates) in which tax collections to the government will be maximized.  This is easy to confirm when you take the rates to either extreme.

If tax rates are zero, then the government is not going to collect anything, unless it is voluntarily handed over.  If marginal tax rates are 100%, then almost nobody is going to work above the income threshold that puts them in this bracket.  They are not going to work for free.  Of course, in a country of 325 million people, you can almost always find a few exceptions.  There would be a few people who would work just to send all of their earnings over to the government.

The point is, tax rates at zero and 100% would yield the government virtually nothing.  Therefore, the maximum collections would be somewhere in between these two rates.  The Laffer Curve doesn’t claim to know the exact rate, although it doesn’t stop us from speculating.  The maximum tax collections might happen at 20% or 80% or whatever.

Therefore, if marginal tax rates are really confiscatory so as to severely hamper production, then a cut in rates could actually yield more tax collections for the government.  We must also figure that taxes could be cut so as to yield approximately the same tax collections.

For example, let’s say the government could maximize its revenue with a top marginal rate of 50% to collect $4 trillion.  Let’s say the current top rate is at 60% and the government is collecting $3.5 trillion.  Let’s also say that the rate could be lowered to 42%, which would yield the same collections as the 60% rate due to the increased economic activity.

Therefore, in this example, the government could cut the top rate from 60% to 42% and it would still yield the same revenue of $3.5 trillion.  In this scenario, it would be hard to argue that tax cuts would not be beneficial for economic growth, even if government spending remained the same (regardless of whether the government is running a deficit).

I don’t want to overemphasize the Laffer Curve as is done by the supply siders.  Of course, at least for any libertarian, the goal is not to maximize the government’s collection of taxes.  In addition, not knowing which side of the curve we are on, it is hard to justify tax cuts on the basis of increased government revenue, or even a revenue neutral tax cut.

The major problem here, which is rarely discussed by supply siders, is the existence of a central bank that can create money out of thin air.  This enables the government to run high deficits and accumulate huge amounts of debt that wouldn’t be possible otherwise.  If you cut taxes at the state or local level, you really can starve the beast.  In the case of the federal government, they can just issue more debt.

In addition, the whole idea of increasing government tax collections by decreasing tax rates is clouded by monetary inflation.  When tax cuts were pushed and implemented by the Reagan administration in the early 1980’s, there was ultimately an increase in tax collections.  (Despite what the left often claims, the larger deficits/ debt were not a result of tax cuts.  They were a result of increased spending.)

But the increase in tax collections was also partially a result of the monetary inflation.  The Fed had a tight policy in 1979 and the very early 1980’s, but the Fed started to loosen up again.  In order for government tax revenue to increase that much over a period of time, there almost has to be monetary inflation.

To summarize, I do think it is possible to strengthen economic growth by lowering tax rates in certain situations, even if government spending remains intact.  But that is not likely the scenario we are in now, with the possible exception of the corporate tax rates.  The corporate rates are very high, especially as compared to the rest of the planet, and lower corporate rates could bring more businesses to be headquartered in the United States.

Still, I agree with the general spirit of Shostak’s article.  We would see much greater economic growth if the government were to significantly cut spending.  Government spending diverts real resources away from their most efficient use as determined by consumer demand in the market.  Government spending is a misallocation of resources that makes us poorer.

While seemingly everyone is discussing tax cuts, we desperately need government spending cuts.  That is what would significantly improve the lives of middle class Americans.