The United States of America has now had an income tax for over 100 years.  The official anniversary was on October 4, 2013.  The income tax began in 1913 after the passage of the 16th Amendment to the Constitution.

1913 was an ominous year for liberty.  Not only did it mark the beginning of a permanent federal income tax, it also featured at least two other major things.  Right after the 16th Amendment was passed, another anti-liberty amendment passed.  The 17th Amendment changed the way that U.S. senators were chosen.  It went from a system of senators being chosen by the state legislatures to a system of direct election as we still have today.  Perhaps I will write a future post on why this was such a bad thing for the cause of liberty.  The third major thing in 1913 was the formation of the Federal Reserve.

Just these three things alone guarantees Woodrow Wilson as one of the worst presidents of all time, at least from a libertarian perspective.  And that is really bad considering that most presidents were bad in some way.

There were a few articles on the 100th anniversary of the beginning of the permanent income tax.  Drudge linked to one of them.

I think it would be an interesting poll or survey to find out how many Americans know how old the federal income tax is.  In fact, what percentage of Americans even know that there was once a time when there was no income tax?

I will occasionally mention to people in conversation that there used to be no income tax.  A typical response I get is that it was a much different world 100 years ago.  I usually respond in agreement saying we sure do live in a different world today.  There was actually a time in American history when people were free to keep most of the money that they earned.

Of course we need an income tax or some other massive form of taxation if we expect the federal government to be involved in virtually everything, from empire building, to retirement, to medical care, to just about anything else you can think of.

The difference between now and 100 years ago is that the federal government was very small and almost insignificant in the daily lives of most people.  There were tariffs and excise taxes, but overall amounts were a tiny fraction compared to what we are forced to pay today.  In addition, we get a lot of the government we pay for today.  In 1913, there was nothing in comparison when it came to regulations and overall government involvement.  It’s not to say that the federal government did not cause problems and misallocate resources back then.  It’s just that it was a small percentage compared to what we have today and it had a minor effect on most people.

I am hopeful that one day Americans will beat back this monstrosity.  There is absolutely no reason that we can’t live in a world without income taxes, except for people wanting big government.  If more people can see that they don’t need big government and that they could actually keep the money they earn without the world falling apart, then maybe the income tax will one day be a thing of the past.

If Congress does not raise the national debt ceiling, does that mean that the government will default?

This is a claim that I have heard several times already and yet we are not even into the final days of debating the national debt limit.  This really is deja vu.  I went through all of this the last time the debt ceiling was a big news item.  Unfortunately, the many myths are still being propagated out there, so I feel the need to set the record straight.  The fewer people being fooled by the propaganda, the better.

Not raising the debt ceiling will not mean a government default, at least on the interest payments on the debt already issued.  The only government default that would need to take place is broken promises.  Over 300 million people living in the U.S. have been promised goodies from the public treasury and Congress would be forced to not make good on many of its promises.  I suppose politicians in Israel and some third world dictators would also be directly affected if foreign aid were cut.

If the debt ceiling is not raised, then this simply means that the government cannot issue any more debt. It means that Congress would be forced to submit a balanced budget.  But we must realize that, due to tax receipts, the federal government alone would still be able to spend well over $2 trillion per year.

The problem here is that Congress does not want to make these drastic cuts.  It would mean cutting foreign aid.  It would mean cutting the so-called entitlement programs.  It would mean ending wars and occupations.  It would mean drastically reducing the welfare state at home.

Congress does not have the political will to do these things.  The politicians love their power.  And right now, unfortunately, public opinion is not strong enough in favor of cutting all of these things.

If you poll Americans, probably a good majority will say they would like to see a balanced budget.  But most do not know what this entails.  If you ask them if most of these government programs should be cut in order to achieve a balanced budget, then you quickly lose your majority.  Most Americans are contradictory in their thoughts, or else they simply have no idea what they are talking about.  They want a balanced budget, but they also don’t want to see their favorite programs cut.

This is why the Republicans in Congress will capitulate.  They will eventually raise the debt ceiling.  There is no way they are going to present a balanced budget.

We won’t get a balanced budget until we see a crisis in the dollar.  When the Fed is forced to stop buying government debt to avoid hyperinflation, then we will finally get an actual significant reduction in government spending.  If there is nobody who wants the U.S. government’s debt at lower interest rates, then Congress will have trouble issuing so much debt.  At some point, we will get something close to a balanced budget.

At that point, the question is what will be cut first.  I don’t know that I can answer that, but I am guessing that Medicare and Social Security will be the last to go.  I think Congress will raise the official retirement age, somewhere above 70, but current retirees will still see checks.  The checks may not buy as much, but there will still be checks.

In the meantime, you can count on more government spending and more monetary inflation by the Fed.  But don’t count on Congress to hold firm in not raising the debt limit.  And you certainly shouldn’t count on any kind of default in terms of U.S. government debt, except in regards to a devalued dollar.

Frank Shostak has written an article for the Mises Institute about the Fed and the money supply.  Shostak is one of my favorite writers when it comes Austrian school economics and monetary policy in general.

In this article, Shostak says that the Fed could delay its tapering until after December.  In other words, the Fed may keep its foot on the accelerator and continue to pump in $85 billion per month.  He sees this happening because he is predicting a slowdown in growth.

Shostak rightly differentiates between the Fed’s balance sheet and measures of the money supply.  Shostak in particular uses “AMS”, a measure of money supply that he prefers.  The Fed’s balance sheet (I usually refer to the monetary base) is what the Fed directly controls.  But the lending of fractional reserves by banking institutions then drive the money supply in circulation.

The whole ballgame has changed since 2008.  Excess reserves are well above the $2 trillion mark.  They were a rounding error above zero back at the beginning of 2008.  Before the fall of 2008, banks lent out most of the available deposits.  They just kept enough on hand to meet reserve requirements.  The lending process of fractional reserves essentially multiplies the money supply in circulation.

Since the large majority of new monetary base money has gone into excess reserves, this has kept the money supply in circulation from rising as dramatically as it would have.  It is important to understand this because this is one of the reasons for what has allowed the Fed to pump in so much money without seeing really high consumer price inflation.

So despite the massive pumping (QE) by the Fed, Shostak still sees a reduced rate of growth.  He sees the economy weakening and hence his prediction that the Fed could delay tapering past December.

This is basically a lesson in the Austrian Business Cycle Theory.  You can still have a bust with continual increases in the money supply.  Just a reduced rate of increase is often enough to trigger the bust.  Of course, a bust is virtually inevitable when the boom is built upon loose money and artificially low interest rates.

In conclusion, if Shostak is right about all of this, then we may see a recession in the somewhat near future.  Unfortunately, if we do have another official recession hit, then it may just encourage the Fed to create even more money out of thin air.  This will mean an even greater misallocation of resources and a worse standard of living for the average person.  It also means we have to continual fear bank lending and the possibility of much higher price inflation.

With all of the talk about the government being shutdown, what does this mean?  National parks and museums will not be open for business.  Many government employees will not go to work, although a sizable portion will still be working (or whatever term you want to use for government employees showing up at their job).

Here is a list of 10 things that won’t happen with the government shutdown.

1. Drone bombings in Pakistan, Yemen and various other countries will not stop.
2. The various wars and occupations throughout the Middle East, Africa, and elsewhere will not come to a halt.  The military will not be coming home.
3. The NSA will continue to collect data and spy on the American people.
4. The IRS will not be shut down.  You will still have to pay your taxes or face consequences.
5. The Drug Enforcement Agency will still be knocking down doors in the middle of the night, trying to stamp out illegal drug use once and for all.
6. The government schools will not be closing.
7. Social Security and Medicare will continue to be funded.
8. Food stamps (or whatever the politically correct term used now) will not stop being distributed.
9. Foreign aid will keep flowing to dictators and various other politicians in other countries.
10. The Federal Reserve will continue to expand the monetary base by $85 billion per month, at least until it decides to “taper”.

Recently, Lew Rockwell ran an article by Eric Margolis in which he discusses the Swiss.  He points out that the Swiss have remained neutral for centuries and have avoided war.  He also points to Switzerland as a well-armed society and the fact that crime is really low there.

Unfortunately, Margolis does fail on one thing, at least from a libertarian perspective.  He touts the tradition of the compulsory military “service”.  While I understand his sentiments towards the Swiss, I don’t think any libertarian should agree with compulsory military service.

As Margolis points out, there are many things to like about the Swiss people.  I wish that the U.S. would emulate Switzerland in many ways, particularly when it comes to foreign policy.  And I suppose I would rather see a conscripted military that acts in defense only, over an all volunteer military that is starting wars all over the place.

(I understand that some might argue that the U.S. military is not voluntary.  There have been retired military who have been called back up.  Plus, we still have to register for the draft, even though we haven’t seen a draft since the 1970’s.  But as of right now, if you don’t sign your name on the dotted line with the military, you can stay out of it.)

While the Swiss system may seem like a good thing, and in many ways it is, nobody should be forced to do something against his will.  If a country is truly under attack, I’m guessing that many people would be more than happy to step up and defend their homeland from invasion.  And if most people are not willing to do that, then why should it be mandatory?  Perhaps it isn’t worth fighting for.

So while the Swiss system of conscription is preferable to conscription used to fight wars (think Vietnam, the so-called Civil War, and even the world wars, just to name a few), it is still morally wrong.  It is using force on others who have done no harm.

This subject reminds me of gun control.  There are a few small towns in the south that have, or attempted to pass, legislation that requires residents to own a gun.  And while I am all for responsible gun ownership, as most libertarians are, nobody should be compelled to own a gun.  This is not the opposite position of the gun control crowd who want to prevent gun ownership.  It is using government force to promote a certain position.  The true neutral and libertarian position is for individuals to be able to choose on whether or not to own a gun, assuming it is not being used to initiate harm against others.

In conclusion, Americans can learn a lot from the Swiss, but we should only emulate the good things.  Conscription is not a good thing, even if it is supposedly used in self defense.  The act of conscription itself is an aggressive act.

This is a question that often gets asked in the gold bug community.  It is also a question that sometimes gets answered, even if incorrectly, by many prognosticators or wanna-be prognosticators.  So how high can gold go?

This is a question of timing.  That is where people trying to predict the future usually go wrong.  Most of the time, the prediction will put too short of a time frame on a certain event.

There were people in 2003 saying there was a housing bubble.  There weren’t a lot, but there were a few.  The ones who said it was a bubble and nothing more were eventually proven right.  The problem is the ones who said the housing bubble would crash in the next year (or whatever time frame was given).  They didn’t expect that it could go on for another 4 years.

I see the same thing with predictions on the price of gold.  I’ve heard various predictions of $2,000 per ounce, $5,000 per ounce, $10,000 per ounce, etc.  Some give a time frame and some don’t.  The ones who do give a time frame will probably be wrong.  The ones who don’t give a time frame will probably be right.  But if someone predicts $2,500 gold without a time frame and it takes 10 years from now to hit that price, I’m not really sure that much credit should be given.

If timing is out of the question, then the answer to our question is easy.  How high can gold go?  It can go to infinity.

I would be surprised if the U.S. dollar still existed as a form of money 200 years from now.  Something will change.  So in that respect, the U.S. dollar as we know it today will likely be virtually worthless in 200 years.  25 years from now?  That is a lot harder to say.

Of course, the price of gold could end up being $1,000,000 per ounce or something like that.  Even today, a 100 trillion Zimbabwe dollar is sold for a couple of U.S. dollars.  It makes an interesting souvenir and perhaps a good economics lesson for others who see it.

I have my guesses as to where the dollar price of gold is going to go, with a guess on the time frame.  But they really are just guesses.  We cannot predict human action.  I, nor anyone else, can predict what the Federal Reserve will do.  Even members of the Fed don’t really know what they are going to do in the future.  And we certainly don’t know how the market, made up of billions of people, will react to various economic conditions.

But for what it’s worth, which really isn’t much, my best guess is that gold will go to over $2,500 per ounce in the next three years.  If we hit a deep recession, all bets are off.  Of course, trying to time things, I will probably be wrong.  Better to be conservative and call it 5 years.

There is a lot going on in our world today.  Americans are caught in the rat race.  They are living the American dream by buying expensive homes (which are expensive to keep up), working stressful jobs, getting stuck in traffic, and, for many, accumulating debt.  Even if you don’t fit this profile, you probably have a lot of stress to deal with in life.  I come across more people with a lot of stress than those without.

I think it is important to sometimes take a moment and step back.  If you and your family have your health, a roof over your head, and you have food on the table, then you should say your blessings.  This has not been the norm throughout history and it is still not the norm in some places on earth.

If you watch the news and see what is going on in the world, there is a lot to be stressed out about.  And there is no doubt that the economy is in rough shape.  I also believe that things are going to get worse before they get better.  But again, if you have your basic needs met, then you should acknowledge this so that nothing else seems so bad.

We often stress out over little things when there are bigger things to worry about.  Even some of the big things are probably not really that big when put into perspective.  It is important to remind ourselves that we shouldn’t sweat the small stuff.  If you are worried about something that will have little effect on your life a year from now (if you can even remember it), then it probably isn’t worth worrying about it.  That isn’t to say that you should blow things off.  It is just to say that you shouldn’t stress yourself out about it.

If you are having trouble paying your bills (which seems to be a major stress for many), then step back and appreciate what you have first.  Then you should take active steps to improve your situation.  While taking on a second job sounds stressful, perhaps it would be less stressful than worrying about money.  And it doesn’t have to be a long term thing.

To be realistic in life, you should also consider bad scenarios that are possible, even if not highly probable.  For example, consider the possibility of a job loss.  I don’t recommend stressing out about this, but you should plan for such a scenario in having a backup plan.  Again, take action steps that could help to improve your situation.  This might mean gaining a new skill or it might mean cutting a few expenses so that a pay cut would not be too dramatic for you.  And to not get too stressed, you should also realize that it won’t be the end of the world.  You could always move into a smaller place or cut back on other expenses.

Just remember that if you have your health and you can provide for yourself and your family, then everything else is mostly peripheral.  In the face of pessimism, appreciate the things you have, even if your life can be stressful at times.

I have shared my views before on buying residential real estate, both for investment purposes and for your primary residence.  I have been clear that when you buy a house to live in, you are buying it mainly as a consumer good, whether you like it or not.  You need a place to live and most people prefer to have certain luxuries that are available.  There is nothing wrong with that, but you shouldn’t fool yourself into thinking that buying a million dollar house on the golf course is a good investment.  It is possible it could turn out to be profitable, but for most people it will be more of an expense.

If you buy a house at a reasonable price and your expenses are roughly equal to what you would pay in rent, then I think you will not regret it.  This is assuming that you buy in a decent area and you buy a house in decent condition.

I think for many, buying a house is like a forced savings plan.  There are many people who simply are not disciplined enough to put away large sums of money.  It burns a hole in their pocket and they feel the need to spend it.  This is part of the reason that there are many people close to retirement age who have very little in savings.  Most of their income in retirement will come from Social Security and pensions.

The small bit of good news is that some of these retirees will have lower expenses due to having paid off their house.  While you still have to pay your property taxes, insurance, and repairs, along with all of your other expenses in life, at least the regular mortgage payment isn’t there.  You are living almost rent free.

So while millions of Americans have little discipline in saving any significant money, many of these same people will pay their mortgage every month.  Some may be really careless and take equity out of their house for whatever reason.  They keep extending the term on their loan and they will never be in a position to pay off the mortgage.

But there are still many who don’t take money out and only refinance to get a better rate.  At some point, the mortgage will be paid off, even if it takes a full 30 years.  Again, it is a forced savings plan, at least in the sense that it is one less expense to worry about.  It will help the cash flow situation and make the dream of a comfortable retirement a little less far fetched.

If you own a house and have a mortgage, I encourage you to set up some kind of an amortization schedule.  You can make your own on an Excel spreadsheet.  There are many websites (like this one) where you can type in your approximate figures  and get an amortization table.  You can even find some websites where you can see the difference if you make a one-time extra payment towards principal, or even if you pay a little extra each month.  The compounding effect really speeds things up.  You might even be able to find such a tool through the company that holds your mortgage.  You should at least be able to see how much is going towards the principal balance of your loan each month.

I encourage you to look at this amortization table once a month and see the principal amount that is being paid down each month.  It grows slightly each month, maybe by just a dollar.  If you make an extra payment, you can make it grow faster.  Even if your amount going towards principal is only $200 per month, that will add up to over $2,400 in a year from now.  The following year, the amount will be even bigger.  So month by month, year by year, you are slowly paying down that huge loan.  As long as you don’t refinance or take money out, then it will eventually be paid off.

While this does not offset the lack of discipline of many Americans in not saving, it does help some.  And it is a very powerful feeling when you can one day be truly debt free and own your house outright.

The coming days will be filled with news about a possible “government shutdown”.  The budget runs on a fiscal year that ends on September 30.  The Republicans are proposing a budget that does not include the funding of Obamacare.  Some of the Republicans are saying that they are willing to see a so-called government shutdown unless Obamacare is defunded and/ or repealed.

Unfortunately, this is not great news for libertarians, despite the rhetoric.  This is mostly politics as usual.  The so-called government shutdown will consist of denying visitors access to the Washington Monument, national parks, and some museums.  It may slow down a few processes.

There are a lot of things that a government shutdown does not entail.  It doesn’t mean that Social Security checks will stop going out.  It doesn’t mean that all wars will end and the military will come home.  It doesn’t mean that foreign dictators will stop getting U.S. tax dollars.  It doesn’t mean that federal school funding will shut down.  It doesn’t mean federal agents will stop arresting drug users.

In other words, this is nothing for a libertarian to get excited about.  I suppose it would be a positive thing if Obamacare is defunded, but this is not likely.  If Obamacare dies, it is because it is self-destructing under its own weight.  In the words of Nancy Pelosi, we are still waiting to find out what is in the legislation.

Of course, most of the Republicans are using Obamacare for political posturing, even if they happen to be right that Obamacare is an abomination.  Most Republican politicians want their own form of fascist/ socialist healthcare.  Most do not advocate a free market in medicine and health insurance.

After all of this, we will also be in for a debate about the national debt ceiling.  Obama is making these ridiculous speeches saying that we have to pay our bills.  But the government can still pay the bills without raising the debt ceiling.  It is just that the politicians would actually have to balance the budget going forward, which they do not want to do.  That would mean giving up on their foreign wars, their drug wars, their funding of dictators, their handouts to rich farmers, and a good portion of the welfare state.  It would also mean a change in so-called entitlements.

I have absolutely no doubt that the Republicans will fold on this too.  Of course, it is ultimately the responsibility of the American people.  While I think there has been a bit of a change in public opinion towards more liberty, it is still way too far away.  The American people say they care about the national debt, but most will not care that much, especially if there are scare stories about government shutdowns and terrorists under your bed.  They will tolerate more government debt, as long as their lifestyle is not taken down too dramatically.

I think there would be a few Republicans in Congress who would actually stay strong and refuse to vote for an increase in the debt ceiling.  But there are not nearly enough, and most will fold under public opinion.

I can only hope that one day the American people are so strong in their feelings of not raising the debt ceiling that politicians will actually fear for their jobs if they vote for another increase.  Until that day comes, or until we see much higher price inflation, then expect more of the same.  Expect the national debt to keep going up.

I have been doing several posts on the topic of monetary inflation.  Among other things, I have pointed out that inflation is bad for the economy because it misallocates resources, and I have also pointed out that inflation redistributes wealth.

Today, I want to focus on government spending.  Without the existence of a central bank (in this case, the Fed) and without a monopoly on money, the federal government would not be able to spend anywhere close to the amount that it currently does.

Since 2008, the government has been averaging deficits of about $1 trillion per year.  This would have been unheard of prior to 2008.  We were at a point where government debt was paying for about a third of the total budget, or more.  While not all of this debt is bought by the Fed, a sizable portion is.  Plus, the Fed is what has enabled the low interest rates on government bonds and the assurance that there will be no default, at least in nominal terms.

If the government and the Fed did not control the money supply, then the only way the government would be able to issue debt is by actually finding investors.  This could include foreign central banks as it does now.  But without the ability to create new money out of thin air, the issuance of debt would be limited to a large degree.  If the debt got too high, then investors (including foreign central banks and governments) would stop lending, worried that the U.S. government would not be able to meet its obligations.  At the very least, interest rates would rise to compensate for the risk.  So the debt would be self limiting.

This is the way it is for state governments and city governments.  They can issue debt, but they are very limited.  They cannot kick the can down the road as far.  The necessity of a balanced budget (or default) comes up much quicker.

If there were no monopoly on money and no Fed to create it out of thin air, then the U.S. government would look something like Detroit right now.  Actually, it never would have gotten to this point.  There is no way that the government would have been able to accumulate over $16 trillion in debt from private investors.  We would have seen a balanced budget, or something very close to it, a long time ago.  The government would have to fund itself on the current tax collections.

Of course, if the government couldn’t spend so much money, then a lot of problems would be solved.  Perhaps there never would have been a war in Iraq, along with many of the other wars.  Perhaps we wouldn’t see disastrous monstrosities like Obamacare and Bushcare (prescription drugs).  Perhaps we wouldn’t see billions of dollars being handed away to dictators in foreign countries.  The list could go on and on.

If the government were forced to spend, let’s say, $1 trillion less per year than it is spending now, then that would be $1 trillion less in misallocated resources.  It would be money that could be saved, invested, and put into consumer products and services that are actually in demand in the marketplace.

Monetary inflation is disastrous in so many ways.  It works hand in hand with big government.  The two feed off of each other.  If there were no Fed to print digital money and if money were left to the marketplace, then the government would at least be forced to balance its budget.  This would mean much lower spending and it would mean an overall higher standard of living for the American people.