Why Tax Reform Won’t Work

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Amazon vs. Trump and South Carolina

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Walking a Tightrope Between Inflation and Recession

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Should You Dollar-Cost Average Into the Permanent Portfolio?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Trump Endorses Congress Policy of War and Weaker Dollar

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

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

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

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

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

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

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

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

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

Will Janet Yellen be the First Modern Fed Chair Without Recession?

The three Fed chairmen prior to Janet Yellen all presided over recessions.  The crazy thing is that the last four Fed chairs date back to 1979.

There have only been a total of 18 Fed chairs dating back to 1914 when operations began.

Paul Volcker took over in August 1979 when consumer price inflation and interest rates were both in the double digits.  He presided over recessions in 1980, 1981, and 1982 (arguably one recession).  Volcker was brought in by Jimmy Carter to save the dollar.  He saved the dollar and ruined any chance Carter had of being reelected.  Volcker halted monetary inflation and allowed interest rates to float higher.  This is what led to the recession or recessions of the early 1980s.  This was the correct policy.  It was probably the last time that a good cleansing of the malinvestment was allowed to take place.

Volcker eventually did preside over some monetary inflation, but he was a relatively good Fed chairman if such a thing exists.

Alan Greenspan took over in 1987 and a market crash happened shortly after in October 1987.  He presided over recessions in 1990-1991 and 2001.  He holds much responsibility for the major recession/ financial crisis in 2007-2009 even though he was no longer in office.  Greenspan was in office for a long period of over 18 years.  Despite supposedly being a disciple of Ayn Rand, Greenspan was mostly terrible, engaging in consistent monetary inflation.  The monetary pumping pales in comparison to the period of 2008 to 2014, but it is still no excuse.  The Fed’s policies of easy money and low interest rates led to the tech stock boom and bust and then the housing bubble and bust.  It was also the main culprit of the financial crisis.

Ben Bernanke was left holding the bag.  He took over in February 2006 and adopted the correct policy of tight money.  The problem is that this exposed all of the previous malinvestments from the Greenspan era.  And as soon as the financial crisis hit, Bernanke was part of the plan for bailouts and massive monetary inflation.  Bernanke wasn’t a bad Fed chair because he presided over the major recession that became evident in 2008.  He was a bad Fed chair because of the bailouts and QE1, QE2, and QE3.

He left office in early 2014.  Janet Yellen took over and we have not yet seen an official recession.  Growth has certainly been lackluster, but not officially recessionary.

Yellen presided over the end of QE3.  It was already winding down when she took office and it finally ended in October 2014.  Since that time, monetary policy has been tight.  Sure, interest rates have remained low, but the Fed’s balance sheet has not expanded during this time.

Again, this is the correct policy.  Even though she is considered to be a Keynesian and to the left (she was nominated by Obama), she has still fallen in line with the establishment.  Up to this point, her policies have actually been mostly good, setting rhetoric aside.

The problem is that she hasn’t really been tested yet.  Bernanke didn’t really do any damage until the crisis hit.  Then he ramped up the digital printing presses as no other Fed chair has ever done in history.  We should assume that Yellen would do the same if faced with a major financial crisis.

Yellen’s term is set to expire in early 2018.  While Trump had initially indicated that he would replace Yellen, now there has been a softening and some indication that he might allow her to stay.

It is incredible that Yellen has been able to avoid a recession on her watch for nearly 4 years.  Whether or not a recession hits before early 2018, I think it would be wise for Yellen to step down (from her point of view).  I know these people like the prestige and power, but she should thank her lucky stars if she can exit gracefully without a recession on her watch.  She can hand off all of the problems to the next Fed chair.

If there are no major economic changes between now and early 2018, Yellen could leave office as being one of the least inflationary Fed chairs in modern history.  That is a story that most libertarians could not have predicted.

Don’t Lose Your Freedom with Financial Independence

While the financial independence (FI) community has grown in recent times, the whole concept is still not appealing to most people, if they even know about it.

There is a big difference between contributing to your 401k versus living on $25,000 per year.  Most middle class people, if they are really determined, can find a way to set aside a small percentage of their income.  But the idea of living on $2,000 per month or having a savings rate of 50% or more just seems miserable to most people.

Living on $2,000 per month sounds miserable to me, at least in this stage of my life with a family.  When I was in my young 20s right out of college, I was living on less than $2,000 per month.  But that was when I had two roommates and my health insurance premiums were something in the neighborhood of $10 per pay period.  Everything was much cheaper at that time, but particularly health insurance.

I have heard claims from people of living on $7,000 per year.  This seems absurd to me, unless you are being subsidized such as living in your parents’ basement for free.  Even the claims of living on $25,000 per year seem absurd for someone who has a family.  In today’s world, health insurance can cost you $10,000 per year right off the bat, unless you work for an exceptional employer that covers most of it.  In most cases, you would only find an “exceptional” employer in the form of the government.

I have discussed a lot recently about the financial independence/ early retirement community.  I already think that the 4% rule is going to steer people wrong, especially when we see a major market crash.  And if you have your money in a money market fund, then you are not going to be living off the interest because you aren’t going to get a 4% return.  You are going to eat into your principal savings amount.

You could have your money invested somewhere other than stocks making a decent return.  But real estate has its own set of risks, and it is also not purely passive income in most cases.  And in the case of a business, that is probably not going to be purely passive either.

Within the financial independence/ early retirement community, I also hear a lack of discussion on the issue of inflation.  That is a huge factor that should be considered, yet it seems to be largely ignored.

People who retire early because their living expenses are really low are probably making a mistake.  If you can actually live on $25,000 per year, then 25 times that (4% rule) is $625,000.  For someone who is, let’s say, 45 years old, that does not seem like very much money to retire on.

Don’t get me wrong here.  That person is far better off than the person who is living paycheck to paycheck and has little in the way of savings.  But it will also be hard for this early retiree to go back to work because his savings fell short.

With such a low budget of just over $2,000 per month, you could be set back significantly with one major expense such as a medical event.  And as I already mentioned above, what happens with inflation?  If prices double over the next two decades, you will be spending over $4,000 per month and likely eating into your principal savings.

Again, there are also no guarantees of returns.  If you have your money in stocks, that is really scary, which is what many in the community advocate and do.  Imagine retiring on just $625,000 and then seeing a major stock crash that cuts your portfolio in half or more.  Good luck living the next 4 decades or so on just $300,000.

The other aspect in all of this is personal, and it involves enjoyment and life pleasures.  While we should certainly take advantage of the many enjoyable things in life that are free or close to free, we should also acknowledge that some things just cost money.

What kind of life would it be to live on just $25,000?  I don’t really like the idea of early retirement anyway because most people should be doing something productive.  That could mean working on a calling or a passion, but it should still be something.  But I certainly could not imagine not working while also living on a small amount each month.  Wouldn’t you want to earn money and take a nice vacation or enjoy some different experiences?

In conclusion, I like the idea of saving money and adding freedom and flexibility to your life.  With that said, you shouldn’t be striving to leave a particular job.  You should be striving to go into something.

And if you are going to go the financial independence/ early retirement route, make sure you are factoring everything in.  You should account for recessions, inflation, and unexpected expenses.  You should also factor in a scenario of getting bored and wanting to do new and exciting things.

If you make a high income and are achieving financial independence because you are living a middle class lifestyle while earning an upper class income, then you will be much better off than the person who is retiring early just because he tries to live on such a tight budget.

The whole idea of achieving financial independence is to have freedom.  But if you then have to live on $2,000 per month, that doesn’t sound like very much freedom to me.  It sounds like a rather dull life.

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.

Combining Free Market Economics with Investing