Category Archives: Uncategorized

Why Do Foreign Central Banks Still Want U.S. Debt?

The latest report of major foreign holders of U.S. government debt was released on July 18, 2017, which reports the latest holdings at the end of May 2017.

Japan still holds the number one spot, but China is in a very close second.  From one year ago, both countries have decreased their holdings (China more than Japan), but it hasn’t been that significant.  The total holdings are also down, but again, not significantly.

Foreign central banks are mostly mercantilist, but this is especially true of the Chinese and Japanese central banks.  This means that they will buy U.S. Treasuries in order to hold down the value of their own currencies in order to boost their exporting sector.  The problem (for the people in those countries) is that it ignores the consumer.  It makes ordinary things more expensive for the people living in China and Japan.

The U.S. is not mercantilistic for the most part.  Donald Trump can be at times, but policies so far have not reflected his rhetoric.  Americans certainly have a lot to complain about in terms of the Federal Reserve and the U.S. government, but American consumers have nothing to complain about when it comes to being subsidized by foreigners.  As long as foreigners still love the U.S. dollar, Americans will continue to be subsidized.

Also, while the Fed has certainly been really bad for the last decade, it has engaged in a tight monetary policy for nearly three years now.  It has not expanded the monetary base since October 2014.  Meanwhile, the other major central banks of the world (Japan, China, Europe) all continue to inflate.  So even though the U.S. dollar should not be loved, it is easy to see why it is the most favored currency relative to all of the others.

You never know what will change in the future, but I certainly don’t see this mercantilistic view changing for the central banks of China and Japan any time soon.  If they decide to dump their U.S. Treasuries, it will be for other reasons.

It is easy to hear talk of China dumping U.S. Treasuries, but it hasn’t happened yet.  Maybe Chinese officials will allow some debt to mature without rolling it over, but it will not likely be significant.  The Chinese central bank will likely continue to accumulate more gold, but it will still be a small fraction compared to its holdings of U.S. debt and debt denominated in other currencies.

We have heard a lot of talk in the U.S. over the last few years about the Fed raising interest rates.  But if the Fed continues to raise its target rate and we get a recession, then long-term interest rates on U.S. bonds will likely go down.  American investors view U.S. government debt as safety, so that it where they will run to in difficult times.  Likewise, foreign central banks view U.S. government debt as a safe haven.

Therefore, until we see significant consumer price inflation, I do not think we are going to see significantly higher interest rates.  If anything, long-term rates will probably drop in the next recession.

If the Fed reacts aggressively (recklessly) in the next recession and expands its balance sheet further, then maybe we will finally start to see significant broad consumer price inflation.  Until that happens, you shouldn’t bet against the U.S. bond market.  Foreigners and U.S. investors still view it as a place of safety.

President Trump: A 6-Month Libertarian Review

Trump has been in office for 6 months, and the world has not yet fallen apart.  When Trump was elected, it seemed like a little bit of a relief in that tensions with Russia would likely go down.  Hillary Clinton was provoking a game of chicken with Russia in Syria.

Unfortunately, things haven’t worked out that way.  It was naive to expect Trump to get into office and overturn the U.S. empire.  Just going against the spy agencies is a feat in itself.  There is so much hatred for Trump though, that alliances have formed against him whether they admit it or not.

The Hillary Clinton supporters and the war hawks in the Republican establishment are on the same side.  Even the Bernie Sanders wing, to a certain extent, has joined the party.  They care more about opposing Trump than starting another war, let alone a war with a major nuclear power.

Since Trump won the presidency, all of the Trump enemies are trying to find an excuse to delegitimize Trump.  Instead of just attacking Trump personally (which they continue to do), they also will risk war with Russia by making up stories about Russian interference in the election.  In doing so, it has made things worse with Russia.

Luckily, Trump finally met with Putin recently.  It should have happened sooner.  I don’t think Trump wanted to go out of his way to meet up with Putin because of appearances, not that Trump should be one to care about appearances.  We can all wonder what was said in that meeting with Putin.  The hope (for us who favor peace) is that Putin told Trump the truth.  The hope is that Putin told Trump that the spy state was against him (Trump) and that there are insiders who are continually betraying him.  The hope is that Putin told Trump the real story of what is happening in Syria and that it is the U.S. that has been killing innocent people and funding the terrorists.

In terms of the Russia investigation, the most interesting story in the last week is Trump’s comments on the betrayal of Jeff Sessions, his attorney general.

Trump said of Sessions: “How do you take a job and then recuse yourself?  If he would have recused himself before the job, I would have said, ‘Thanks, Jeff, but I’m not going to take you.’  It’s extremely unfair – and that’s a mild word – to the president.”

These are incredibly strong words.  While Sessions was a Trump supporter early on (at least in his words), Trump obviously feels betrayed at this point.  I see this as a positive development.

From a libertarian standpoint, Sessions is terrible.  He may have a few good attributes as compared to other politicians (not saying much), but he is horrible on the issues that he focuses on.  He is a big proponent of asset forfeiture, and he is a major drug warrior.  While he comes across as a “law and order” kind of guy, he certainly isn’t that when it comes to the Constitution.  He wants to ramp up the war on marijuana, even in states where it has been officially legalized.  Of course, if he followed the Constitution, he would know that there should be no federal war on drugs.

It is also positive that Trump feels betrayed because there might be hope of him opening his eyes.  While I am no great fan of Steve Bannon, I think he is more trustworthy than almost anyone else Trump has around him.  At least Bannon is not an establishment guy, and he does not promote conflict with Russia like most of the others do.

I know that Trump has been a failure on most of his promises.  He pulled the U.S. out of the Paris agreement, which made both sides happy.  Sure, the left is outraged, but they like it that way.  They need someone to beat on.  But let’s face it – that whole climate agreement was basically unenforceable anyway.  I liked the symbolism of Trump withdrawing, but it probably wasn’t much more than that.

On Obamacare and taxes, Trump has been a failure.  Many Trump supporters would say it is a failure of the soft Republicans in Congress, which is right to a certain degree.  But Trump should have pushed for immediate repeal before getting into office.  He should have had the language of a bill ready to go on day one.

On government spending and deficits, Trump has been just as bad as all of his predecessors.

Even in the areas where I strongly disagree with Trump (tariffs and building a wall), he has done virtually nothing.  I am glad on these fronts, but it just shows that not much has changed.

If there was one hope for libertarians, it was that Trump would change the foreign policy, or at least attempt to do so.  So far, he has mostly been a disappointment.  But maybe things are looking up a little after his meeting with Putin.  He has also supposedly agreed to stop funding some terrorists.  Maybe that is a result of his meeting with Putin.

Trump played too much ball with the establishment that is trying to take him down.  He really shouldn’t trust most of his cabinet and his advisors.  Most of them will hurt Trump in a second if they see it benefits them.  Some of them already have hurt him whether he knows it or not.  This includes Mike Pence.  Pence is staying quiet on the sidelines for a reason.  He will turn on Trump when the time is right, if that time should arise.

Maybe this is naive on my part, but I still have a small hope that Trump has some honesty and decency about him.  It doesn’t mean that anyone should look up to him or think that he is an image of morality.

I see similarities with Trump and John F. Kennedy.  Kennedy had his moral indiscretions as well.  But I think Kennedy wanted to avoid nuclear war.  He had something of a conscience.  I think Trump might be the same way.

If Trump can just come to the full realization that the spy state, the deep state, the establishment, and the military industrial complex (or whatever you want to call all of these overlapping things) are all in opposition to him, then we will be better off.  At least then he can fight against them instead of naively giving them more power.

While Trump has virtually no authentic support in Washington DC, he has to remember that nearly 63 million people cast a vote for him last November.  That is where his power lies.  That is where he needs to find friends.  Those are the only people he can truly trust.

CPI Shows Disinflation – Be Warned

The Bureau of Labor Statistics (BLS) released the latest consumer price index (CPI) numbers for June 2017.

The CPI for June came in at zero.  That is 0.0%.  The year-over-year stands at just 1.6%.

The more stable median CPI came in at 0.1%.  The year-over-year median CPI now stands at 2.2% after being at 2.5% for the first three months of 2017.

When I said that the year-over-year CPI stands at “just” 1.6%, that is not to mean that lower price inflation is bad.  As consumers, we hope for less price inflation, unless you actually like to pay more for the things you buy.  We should actually hope for an increase in purchasing power due to advancing technology and production capabilities.

The problem here is that this is mostly a monetary phenomenon.  It would be great if monetary inflation stayed near zero and we gained purchasing power.  The problem is that this disinflation is a result of a prior artificial boom, even if it hasn’t felt like that much of a boom.  The other problem is that the Fed will likely react in harmful ways, as it typically does when things get bad.

The term disinflation is an appropriate one at this time.  It means there is a decrease in the rate of price inflation.  We are still losing purchasing power, but at a slower rate.

This is a warning sign of a softening economy.  The American middle class has already been struggling.  The good news reported is in primarily two things:

  1. A booming stock market
  2. Low unemployment (at least according to the government statistics)

Unfortunately, there are problems with both of these things.  For stocks, it is a bubble waiting to implode.  The boom in stocks has largely been a result of the low interest rates and the easy money since 2008.

In terms of unemployment, it is complicated.  It does not include the people who have given up looking for jobs.  And just because the official unemployment rate is low, it doesn’t mean great things are happening.  Sure, it is better for people to be working who want to work.  But at the same time, we should consider that wages have been mostly stagnant.

The disinflation we are seeing in the latest CPI numbers could mean that some air is starting to come out of the bubble.  This is why I have continued to caution on stocks.

The Fed has kept the monetary base relatively stable for nearly 3 years now.  But from 2008 to 2014, it was a time of very loose money.  And even with the Fed’s tighter policy, interest rates have remained low, which has probably contributed to the boom in stocks.

We also have to wonder how the lower CPI numbers are going to impact the Fed’s decisions going forward.  Is the Fed going to continue to raise its target federal funds rate in the face of disinflation?  And how low do the price inflation numbers have to go before we start hearing talk of another round of quantitative easing (digital money printing)?

This could still take a little while to fully develop, but be warned here.  There are many warning signs of a coming recession.

The Case for Higher Interest Rates

There is a lot of talk currently by Janet Yellen and other Fed officials about interest rates and the Fed’s balance sheet.  There is always debate going on in the financial community about where the Fed will take interest rates and how fast.

Right now, the Fed controls the overnight lending rate for banks (the federal funds rate) by paying interest on bank reserves.  It is not controlled (as in the past) by increasing or decreasing its balance sheet (the money supply).

Therefore, the Fed does not directly control interest rates.  In fact, it is possible even the opposite will happen of what is expected.  If the Fed continues to raise its target rate, most people are expecting market interest rates to rise.  But if the Fed’s raising of its target rate coincides with a recession (whether or not it is the cause), then long-term interest rates will probably go down as investors seek safety out of stocks.

Now let’s forget about the Fed and look at what might happen if market interest rates were to rise significantly.  Many libertarians and those of the Austrian school have been stating that there is a bond bubble.  The problem is that some of these people have been saying it for a rather long time.  Of course, anyone who knows Austrian economics and the study of human action should know that it is impossible to predict the market with certainty, especially the timing.  This would require predicting how billions of people are going to act.

We probably are in a bond bubble, but we don’t really know when it will finally collapse.  Things can go on for a lot longer than what seems possible.  After all, Social Security is still humming along.

It is common to read (amongst both libertarians and non-libertarians) that if interest rates go up by a certain amount, then it is going to lead to payments on the national debt going up by a certain amount.  This is all true.

The problem is that many analysts say this as if it would be a dire situation.  You may hear someone say something such as, “If interest rates go up to this level, then the federal government will owe $500 billion per year in interest payments, and then we will be in big trouble.”

My question is, “Who will be in big trouble?”

I think that higher interest rates would ultimately be a blessing for the average American.  Sure, just as with a recession, there will be aspects that will be painful.  But you need this short-term pain in order to straighten things out onto a path of greater prosperity.

The biggest problem we have economically is the massive level of government spending.  I understand this is debatable.  The regulations we live under are horrendous and stifle business to a great degree.  One could also say that the Fed is the biggest problem, but I think this really just goes hand-in-hand with government spending.  It is the Fed’s ability to create money and buy assets that allows the great level of deficit spending by the federal government.

Virtually every dollar spent by the U.S. government is a misallocation of resources.  Of course, some spending is far more damaging than other spending.  I would rather see someone get their Social Security check than to see more money go into bombs and tanks in order to go to war.

The federal government is currently spending in the neighborhood of $4 trillion per year.  The bulk of this spending (about 80%) is on military (called “defense”), Social Security, Medicare, Medicaid, and interest on the debt.

Let’s say, hypothetically, that the national debt grew bigger and interest rates spiked up so high that the annual interest payments on the debt amounted to $2 trillion, which is half of the current budget. Meanwhile, as similar to the 1970s, the dollar is quickly losing its status as a reliable currency.

Therefore, the Fed has to pull back and allow its target rate to rise even further, as similar to the late 1970s and early 1980s.

All of a sudden, Congress is essentially forced to cut spending.  Actually, even if it doesn’t have to cut overall spending, it has to divert nearly $2 trillion to interest payments that was previously being spent on other things.

If Congress does not drastically cut Medicare and Social Security, then it will be cutting most of the military and most of the discretionary items.

Where does this $2 trillion of interest payments go?  It goes to investors.  That includes going to foreign central banks such as Japan and China.  It includes private investors.  It includes private pensions and 401k plans.

I would much rather see $2 trillion per year diverted to investors than continued to be spent and misallocated by the bureaucrats in Washington DC.

While virtually all government spending is a misallocation of resources, some misallocations are worse than others.  I would rather see money going into private hands where it can be saved, spent, or reinvested, rather than being spent on government programs that take away our liberty.

In addition, the higher interest rates would likely lead to overall spending being reduced.  This is what we so desperately need.

After the fall of 2008, many state and local governments were forced to cut back, especially with falling tax revenues from property taxes.  Meanwhile, because of the Fed, the federal government’s spending exploded.  That was the exact opposite of what we needed.

One of the main reasons that the American middle class is struggling so much is because government is simply spending too much of our money.  It doesn’t matter if it is done through taxation or through deficit financing.  All of this spending is misallocating resources.  This money is going towards resources that are not in the highest consumer demand.

Therefore, I say we should hope for higher interest rates sooner rather than later.  It will be a painful time either way.  Right now is a painful time as many Americans struggle to save money and pay their bills.  They are in need of a correction.  They need reduced government spending, especially at the federal level.  This can be brought about by significantly higher market interest rates.

myRA Retirement Account Another Government Boondoggle

In early 2014, then president Obama announced during his State of the Union address a new government-sponsored retirement program.  It is called myRA, or my retirement account.  It also has a play on words (or letters) with IRA, which is an individual retirement account.

The myRA is a type of Roth IRA, which allows after tax dollars to be contributed, just like a Roth IRA.  It is geared towards people without a lot of money and those who don’t have employer-sponsored plans.

You can contribute small dollar amounts.  Therefore, it would be common for a participant to contribute 25 dollars per paycheck to a myRA account.  However, you are limited to $15,000 in the account. Once it reaches this amount, it has to roll over into a private retirement account.

While it is better to save something rather than nothing, good luck to somebody who is planning a retirement based on savings of $15,000.  I don’t know how many people will reach the $15,000 limit by contributing a few hundred dollars per year while earning very little interest.

And that is the other catch.  It is not like a Roth IRA where you can buy stocks, mutual funds, or other types of investments.  In a myRA, you will be put into government bonds, which don’t exactly pay very well right now.

In this article about the myRA plan, a certified financial planner makes the comment that because you are investing in U.S. Treasury bonds, that it is guaranteed, and you will not lose value.

In nominal terms, this is probably correct.  But she is obviously not accounting for depreciation of the money.  If you are earning 2% interest and consumer prices are going up at 3%, you are losing money in real terms.  Your purchasing power is going down.

In the title of this post, I label the myRA as another government boondoggle.  But this is really giving it the benefit of the doubt.  A boondoggle is just a waste of money or resources.  Unfortunately, like many government programs, there may be ill intent on the part of the people who designed it.

They put out the program as a way to invest safely without risk.  That is why participants have to buy U.S. government debt.  But the politicians and bureaucrats are setting the stage for getting people to buy U.S. government debt in their retirement programs.  Whether it is to keep interest rates low, or to confiscate money through inflation, or to eventually default on the debt, or simply to allow massive government spending to go on longer, the motivations by the government officials are to benefit themselves at the expense of others.

This is why all retirement accounts are concerning to a certain degree.  I have offered reasons why not to invest in a 401k plan.  One of those reasons is that the government could eventually force you to invest a portion in U.S. government debt for “the good of the country”.

As the U.S. national debt gets worse, the government is going to look for new ways of financing its deficits.  The politicians and bureaucrats in Washington DC are going to do everything they can to encourage (force?) people to buy into U.S. government bonds.

The good news about this whole myRA plan is that most people are simply ignoring it if they even know about it.  According to this article near the end of 2016, there were only about 20,000 participants.  Out of a country of 325 million people, that is basically a drop in the ocean.  Of course, there are probably a lot of people not participating because they can’t afford to because they have to pay for Obamacare and the massive government spending.

Let’s hope this program continues to go nowhere.  But just be warned that as the fiscal problems continue to grow in Washington DC, there are going to be creative ways of trying to extract more money out of you.

FOMC Minutes from June 2017 Meeting

The minutes from the last FOMC meeting were released.  You can view them here if you need to read something to fall asleep.  There are a few parts that may be interesting, but most of it is Fed speak and mostly useless.

While the FOMC hiked its target federal funds rate at the last meeting, that isn’t really the big news.  This rate does not mean a lot right now anyway because it is not driving the monetary base.  It is the overnight lending rate for banks, but most banks don’t need to borrow overnight to meet required reserves because they have built up massive excess reserves since 2008.

In the past, when the Fed wanted to raise its target rate, it would sell off assets into the open market.  This was monetary deflation.  In the inverse, it would buy assets if it wanted to lower its target rate.  Since 2008, this no longer holds true.  The Fed is hiking its target rate by paying a higher interest rate on bank reserves.  It is independent of the monetary base.  The only reason its hike in its target rate is possibly deflationary is because the higher rate paid on bank reserves might entice banks to lend even less money.  If the banks can keep deposits with the Fed and earn a higher interest rate than before, why risk loaning out the money?

The bigger story with the Fed is its overall balance sheet.  It is now talking about reducing its balance sheet by not rolling over all of its maturing debt.  The big question mark right now is the timing of all of this.  Will they start soon?  Will it be next year?  And if they wait too long and the economy shows signs of a recession, would this take the balance sheet reduction off the table?

The only dissenting vote in the last FOMC meeting was Neel Kashkari.  He dissented because he thinks the Fed is being too hawkish.

It is important to note though that the Fed has not been inflating since it ended QE3 back in October of 2014.  In another three months, assuming nothing changes, we can say that the Fed has gone the last three years without inflating the money supply.

Our problem isn’t the Fed’s tight money policy of the last three years.  Our problem is the really loose monetary policy from 2008 to 2014.

I think the Fed is trying to tighten its policy in case there is another recession.  It has been almost 9 years since the financial crisis hit (when it became evident), and the monetary base is still almost 5 times higher than where it originally was.  If another recession were to hit right now, is the Fed going to double or triple its balance sheet on top of what it has already done?

In the FOMC minutes, there is one particular part that caught my attention: “However, the Committee would be prepared to resume reinvestment of principal payments received on securities held by the Federal Reserve if a material deterioration in the economic outlook were to warrant a sizable reduction in the Committee’s target for the federal funds rate.  Moreover, the Committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate.”

In other words, if the economy turns down, the Fed will not hesitate to resume its monetary inflation.

I would like to point out one other thing regarding these minutes and the stories linked to them.  There is an almost obsession with consumer price inflation being relatively low.  I follow the CPI numbers closely because everyone else is.  But I would like to remind everyone that you can still be in a bubble economy even with relatively low price inflation.  This is exactly what happened in the late 1920s in the lead-up to the Great Depression.  Consumer price inflation was low, but assets were booming.

Of course, Hoover, and then Roosevelt, did many bad things to prolong the initial downturn and make things far worse than they ever should have been.  But the point remains that stocks crashed from their bubble while consumer prices had remained relatively stable up to that point.

In other words, just because there is low consumer price inflation as measured by the government’s statistics, it doesn’t mean that there isn’t bubble activity in certain sectors.  This seems especially important to point out right now as stocks keep hitting new highs, despite continual lackluster economic growth.

This isn’t to say that stocks won’t run higher still.  But the saying here holds that I would rather be out too early than a day too late.

Declare Your Own Independence

It is another year of July 4th festivities.  While people barbecue and set off fireworks, we continue to get big government.  While many Americans will complain about their government, they still grant their consent.

You really have to point out to the average person that Independence Day is really Secession Day.  The same people who think it is horrible that the South tried to secede (which led to the misnamed Civil War) will cheer on Independence Day.  You have to point out to people that what the American colonists did was an act of secession.  To the British crown, they were committing treason by betraying their own government.

There were multiple reasons for the secession of the American colonists.  It is not black and white.  Some of the reasons were good, and some were not so good.  One of several reasons was taxation.

(As a side note, this whole idea of taxation without representation is not a good one.  It doesn’t really make me feel less enslaved knowing that people voted for the enslaver.)

When the colonists seceded, taxation from the British crown was probably in the neighborhood of 1%.  Now we fork over about 25% to the federal government (if you calculate spending instead of just direct taxation).  You can add another 15% or so from state and local governments.  How free should we feel paying about 40% to government at all levels?  And if you add in the regulations, you can bet that at least half of our productivity is being sapped by government.

Maybe there is something to the idea that we wouldn’t be any less free had the colonists never seceded.

The elements of American society where we do have relative freedom isn’t because of Independence Day.  It mostly isn’t really because of the Constitution either.  It is the mindset of the people.  The government will mostly reflect the mindset of the people.  The government will expand to the degree that it is tolerated by public opinion.

While I am pessimistic on some fronts, I am also optimistic on others.  I think the worst thing right now is the military empire.  The U.S. government intervenes in so many countries that it is almost beyond imagination.  Many people don’t realize just how many coups and secret operations are being performed by elements within the U.S. government.  I probably don’t know either.  But we do know for sure that the U.S. government is currently involved in a lot of wars and has a presence in well over 100 countries on the planet.

Aside from the immoral foreign policy, we also have the surveillance state that has become more known in recent years.  This is the NSA and the other so-called intelligence agencies.

Of course, there is also the economic front where we are highly taxed and regulated.  The economic piece of the puzzle would improve somewhat if the military foreign interventions stopped.  Things would also improve if the Fed stopped tampering with the economy so much.

Compared to the other first-world countries, the U.S. is still the best when it comes to a few things.  I can think of 3 things right away.

  1. Gun ownership
  2. Homeschooling
  3. Free speech

In terms of gun ownership, I think the U.S. is the best.  I also think it will stay the best for a long time.  Even though libertarians like to hail Switzerland, the Swiss are basically required to join the militia.  In terms of private ownership of firearms, nobody beats the United States.

Homeschooling has really taken off over the last couple of decades.  That is one positive aspect of the our pathetic government-run educational system.  You have to believe that children who are homeschooled have a better chance of getting to adulthood without being too indoctrinated, or at least not to the same extent as those attending government schools.

In terms of free speech, it is only in recent years that I have really come to appreciate this.  You can say almost anything in the U.S. as long as you aren’t insinuating violence.  I know the politically correct movement is out there, but most Americans don’t really like it.  They don’t want to be shut up, especially just for telling things that are truthful.

In Canada and Western Europe, things have really gotten worse in terms of free speech.  They have these hate speech laws where you can actually go to jail for saying politically incorrect things.  The whole purpose of free speech is to be able to say things that aren’t popular.  It is especially important to be able to criticize your own government and question the official stories put out by the government.

With these three things, I understand there are exceptions in the U.S.  There are gun laws.  There are certain requirements for homeschooling.  Even free speech is not absolute in all cases.  If a high-level government official wants to make your life miserable, then he can probably do so.  But overall, in these areas, we have a high degree of liberty, especially as compared to the rest of the world.

I think libertarians need to embrace this more.  I feel like there are some libertarians who are going to fight forever for liberty without ever enjoying any of it.  Are you going to fight until you get 100% liberty until you finally step back and take advantage of it?

Even in economic terms, we certainly have a lot to gripe about.  There is no question that the government and central bank are making it really hard on the middle class.  At the same time, you shouldn’t let this handcuff you.  There are many entrepreneurs out there who are embracing our digital world and making tons of money working at home.  They are doing things that just weren’t possible a couple of decades ago.  Meanwhile, there are some libertarians who are too busy making up excuses as to why they can’t do anything.  I beg you not to be one of these people.

You can’t fully secede from the state as an individual, but you can at least take advantage of the areas where you do have a great degree of liberty.  In this sense, you should declare your own independence where possible.

What if Everyone Chose Financial Independence?

There is a small but growing movement out there in the realm of financial independence (FI) and early retirement.  I prefer the term financial independence because most people aren’t going to retire at an early age and never work again for money.  I also don’t think it would be healthy for anyone to retire early and essentially do nothing.  If you aren’t going to have a job or business, you should at least pursue some kind of calling.

I have been listening to a podcast called ChooseFI.  The two hosts of the podcast tend to focus more on cutting costs than increasing income, but I generally find their discussions fascinating.  I don’t agree with the mantra of investing in a low-cost index fund and holding it with the expectations of getting an average return of 8%.  I advocate a permanent portfolio for relative safety.  But aside from that, I generally like the concept pushed by the FI community of living below your means.

Financial independence does not mean that you must have enough money to never work for money again.  Instead, it is accumulating enough money so that you feel free.  If you don’t like your job, you can quit it.  You can always find something more enjoyable that pays less.  Financial independence also takes away the stress of everyday expenses.  If an unexpected repair bill shows up, then it is no big deal if you have a lot of money set aside.  Unfortunately, with the struggling middle class with little in the way of liquid savings, this is a real stress for many families.

A deep recession may set back many who are striving for financial independence.  It may also set back some people who thought they had already achieved it.  If the U.S. stock markets fall by 40%, I believe it will impact many in this growing movement.  It may set in a new reality for many.

Still, I believe this growing movement of working towards financial independence is not going to stop.  As more people get interested in some version of financial independence, there is going to be an inevitable question that comes up from critics.

The question is: What if everyone were to choose financial independence?

The critics will say, if everyone chooses to go that route, then it won’t be possible because there will be nobody left to actually do anything.  If everyone is retired, then who is going to grow food and build houses?

This is really an economics question, and it deserves an economics answer.

First, and most obvious, not everyone is going to choose financial independence.  There will always be people who need to work, unless technology advances to such a degree that everything is produced for us by robots.  But if that were the case, then nobody would need to work because we would have everything.

Second, even if a large percentage were to choose financial independence and achieve it, it doesn’t mean that everyone will stop working.  Think about some of the rich entrepreneurs both past and present.  Think about Bill Gates, Warren Buffett, and Steve Jobs.  They all could have retired at a relatively early age with tens of millions of dollars and set for life.  But they all chose to keep working whether it was to accumulate even more money, or just because they saw it as something of a calling.  Rich people – if they didn’t get rich through government favors – are rich because they served people.  They generally like to serve people, whether it is out of kindness or for their own ego.  Even when they get rich, they tend to still want to serve people.

Third, if everyone listened to the ChooseFI podcast or read Mr. Money Mustache at a young age, you would still have people working in order to get to financial independence.  Even most people striving for FI do not achieve it by the age of 30.  That means most people are going to be working for at least 10 years (typically more) before they will get to FI.  They will put in at least a decade of productivity.  There will always be people in their 20s who are working and producing.

Fourth, if nearly everyone were striving for FI, it means that people would be consuming far less.  If people are frugal, then it means that less has to be produced.  If nearly everyone is striving for FI, it will probably mean fewer massage parlors, fewer nail salons, and fewer high-end restaurants.  It will mean a changing of consumer preferences.  In a relatively free market environment, resources will shift to the highest consumer demands.  If everyone is trying to achieve FI, then maybe there will be half the consumption than what is currently the case.  If so, you would only need half the production.

In other words, as long as there is something resembling a free market economy, then resources will adjust to changing consumer preferences.  If people want more leisure at the expense of consumption, then there is nothing wrong with this.  The market will adjust.

When you work and produce something of value, then you get money in exchange.  You can redeem your production by consuming something, or you can wait (save the money).  If you produce a lot in value at an early age and consume little, then you are just delaying your consumption for later on.  But you produced in great excess of what you consumed initially.  There will be people in the future who will produce things for you to consume.  They in turn will get your money as a certificate to redeem something for their production.

In a free market, it all works out.  As long as you don’t get governments and central banks interfering, then there is no need to fear a mass movement of people wanting financial independence.  There is no need to fear advancing technology and robots.  Prices adjust and resources are reallocated in accordance with consumer demand.

In conclusion, I think it would be beneficial if more people were to strive for financial independence.  Productivity increases with savings and capital investment.  We probably need more savings and less consumption.  The biggest problem is that we need the government to stop consuming so much in the way of resources, as it ultimately makes us poorer.

Google Fined by EU: A Libertarian View

The European Union (EU) recently fined Google about $2.7 billion based on claims that the company broke antitrust rules.  The decision from the European Commission stated that Google used its search engine to drive traffic to its own shopping platform.

In other words, Google used its own website to promote its own products.  How dare they do such a crazy thing?

In a touch of irony, Google is one of the few companies in this world – and probably the only big one – in which its prime function is to drive people away from its website.  When I do a search on Google, I am often shown links to Wikipedia, to Amazon, to other news sites, to blogs, and anything else that is out there.

I know that some libertarians will complain about Google because the company executives are a little too cozy with big government.  It is perhaps a legitimate complaint, but we should not forget that the success of Google is due to its great value that it has brought to its customers.  There are hundreds of millions (maybe billions) of people who use Google as their search engine.  Plus, there are many businesses and entrepreneurs who rely on Google for advertising.

If Google had gotten as big as it is because of government favors, then we would have a lot more to complain about.  But it doesn’t depend on government subsidies like solar energy or electric cars.  Google’s coziness with government came after it became big.  And apparently it is not cozy enough with the bureaucrats in the EU.

This whole thing reminds me of what happened to Microsoft in the late 1990s/ early 2000s when the Clinton administration went after it for being monopolistic.  Again, there is much to complain about Bill Gates and Microsoft from a libertarian point of view (especially in its use of patents and copyrights), but the whole thing was mostly just a case of extortion.  After that incident, Bill Gates became more political.  We are worse off for it, but Microsoft is probably better off for it because playing the political game can keep the government off your back.

The whole European Union is an extortionist organization.  Of course, there was nothing like a trial that happened.  The socialist/ fascist bureaucrats are just trying to suck more money from wherever they can.  They are also going after the other major companies such as Apple, Facebook, and Amazon.

Google, of course, disagreed with the decision and plans to appeal it. I know that the Google executives don’t want to shoot themselves in the collective feet, but I really wish they would take a harder stand.  Instead of arguing that they really didn’t break any antitrust rules, they should argue that these rules are illegitimate.  I also wish they would call out the EU bureaucrats and point out that they are a bunch of thieves.  I wish the Google executives would point out the total failures of the EU and the bureaucrats.  One can always hope.

I know that the Google executives are supposed to be looking out for the shareholders.  But if they sit back and take it, they are going to be continually abused, and they are going to find that their business is not very profitable in Europe.  It is hard to be profitable in an area that fines you $2.7 billion.

The ultimate revenge would be something out of Atlas Shrugged.  Google could release a statement that says it refuses to pay the fine, and if the EU continues to insist on fining the company, then Google will no longer offer its services in their jurisdiction.  Since the UK voted for Brexit, Google could still offer its services in Britain.  Of course, it can still offer its services everywhere else in the world that is not issuing billion dollar fines.

These antitrust laws are nothing but an excuse for the politicians and bureaucrats to extort money out of big companies.  If a company is not receiving government subsidies or using government to prevent competition, then a company will only be profitable by meeting consumer demands.  If it has a large share of the market, it is because it is doing a good job of meeting consumer demands.  But nothing is ever permanent.  Microsoft now has major competition from Apple.  For search engines, there were other companies that dominated the sector before Google.  In a decade from now, it could still be Google, or it could be some other company that we have never even heard of.

The only monopoly we should worry about is the monopoly over the use of legal violence.  That is held by governments (states) around the world.  The bigger and more powerful these monopoly governments get, the worse it is for human liberty and prosperity.

We Need Illinois Bankruptcy, Along with Others

The state of Illinois is on the verge of bankruptcy.  It was quite evident that things were not going well a couple of years ago when lottery winners were not receiving their money.  Still, as we know, things have a tendency to last longer than we think possible.

State and local governments are different than the national government in Washington DC.  The politicians in DC have the benefit of a central bank that can create money out of thin air.  This makes it possible to run huge deficits at relatively low rates.  When a government doesn’t have the ability to print money, or receive money from an entity that can print money (such as Greece from the European Union), then the government is far more limited in its ability to issue debt.

The state of Illinois can’t create money out of thin air like the Fed.  If it wants to borrow more money, and its fiscal soundness is in question, then lenders can ask for higher interest rates.  It puts a severe limit on the state government’s ability to borrow endlessly.

There are many good reasons that Illinois should go bankrupt.  This should be repeated by many state governments and local governments.  There will be winners and losers.

In a bankruptcy of a state government, the losers become apparent rather quickly.  They are people who previously were benefitting from the plunder of the population.  They are the politicians, the lobbyists, the government workers, the government retirees receiving large pensions, and really most anyone connected to government funding.

Yes, this includes retired teachers and firefighters if their pensions are cut.  But should the rest of the population suffer to pay for the lavish retirement of these people?  It is just plain ridiculous in many of these places when a teacher or firefighter can work for 20 or 30 years and then receive half their salary (or much more in many cases) for the rest of their lives.  There are not very many so-called private sector jobs that offer these kinds of benefits any longer.  In addition, they usually get some kind of great health insurance package that is not available to most other normal people.

When a middle class family is working hard and struggling to pay their bills, it isn’t fair that some retired teacher is raking in a portion of this family’s money and living the good life.

In a state bankruptcy, the winners will be the population at large that isn’t losing out on any great benefit.  Even some people who are seeming losers for no longer receiving some benefit may actually end up making out better in the end.

The bottom line is that there is a bubble in government spending.  This is true of the federal government.  It is true of state and local governments.  With state and local governments, some are obviously far worse than others.

After the fall of 2008, state and local governments were somewhat forced to cut back, or at least temporarily stop the expansion of government.  This was not true of the federal government.

Illinois is typical of the blue state mindset where there are few limits to taxation and spending and regulation.  But now they are finding out there are limits.  At some point, the people will not put up with paying more taxes when they are already struggling to such a high degree.  Even the excuse of it being “for the children” may no longer work for the politicians.

Just as with any bubble, it needs to pop.  While the popping is painful for those who benefitted from the excesses, the correction needs to happen.  There is a reason it is called a correction.  It is a reallocation of some resources away from government and towards actual consumer demand.  For most, it will ultimately mean a higher standard of living.

I hope that Illinois goes completely bankrupt.  I also hope that the people there realize that they are far better off with a much smaller government, despite the whining of the bureaucrats.  The timing of this seems to work well, as I don’t think the politicians in DC will try to get away with a major bailout of the state.  There are too many Republican politicians who would lose their job if they supported such a measure.