Consumer Prices Jump, But Less Than Expected

The latest numbers for the Consumer Price Index (CPI) were released on October 13, 2017.  The CPI rose for September by 0.5% after going up by 0.4% in August.  However, the September rise was actually less than the forecast for a 0.6% increase.

The year-over-year CPI jumped up to 2.2%.  Meanwhile, the more stable median CPI is also at 2.2% from the previous 12 months.  The median CPI increased by 0.2% for September.

One of the main reasons that consumer prices were expected to jump was because of the higher gasoline prices in the wake of the hurricanes.

Still, it is not as if these higher numbers are irrelevant.  The soaring gas prices make sense during the hurricanes and shortly after, as supplies are diverted to the hard hit areas.  But they have not fallen back to the levels seen before the hurricanes hit.  Therefore, it is a legitimate expense for most people that has increased.

If you look at the CPI just for August (0.4%) and September (0.5%), it is nearly a jump of 1% over the course of two months.  This is significant when compared to the relatively low price inflation numbers over the last several years.

In our world of finance, the markets react based on the difference between reality and expectations.  We didn’t hear any dire warnings of inflation when the forecasts were made.  But when the actual CPI numbers come in 0.1% less than expected (0.5% versus 0.6%), then all of a sudden there are questions about whether the Fed should follow through with its plans for a rate hike and a slow draining of its balance sheet.

I don’t know about the rate hike that is expected in December.  It will have some impact on the financial markets just because of investor expectations.  But overall, this rate is not that meaningful right now.  It is a reflection of the rate paid by the Fed on bank reserves.  Banks get free money (more bailouts) for simply not lending depositors’ money.

The federal funds rate is not being driven by the Fed’s balance sheet at this point.  The Fed could engage in monetary inflation or monetary deflation and it wouldn’t much impact the target rate, unless the deflation were really significant.

The bigger deal at this point is the Fed’s balance sheet.  Assuming the Fed keeps reducing its balance sheet slowly as it has stated that it will, then the void will have to be filled by investors.  I haven’t heard of any plans to reduce the annual deficit, so someone has to buy the bonds to finance it.

Investors have already been funding the deficit for the last three years since the end of QE3.  Now they will have to finance the deficits, plus an additional $10 billion per month that the Fed is draining from the monetary base.

While I don’t think Trump is going to make it to 2020 without a recession, we might still have some legs left in the mini-boom.  It is not a boom for most middle class Americans, but it is a boom for stock investors and some real estate sectors.  The high CPI numbers for August and September tell me that we may still have a little bit of boom left to go.

I expect the CPI numbers to decelerate in the coming months.  If, however, they continue to come in high, then the good times (for some) will keep on rolling for a little while longer.

Cash is King, Even in a Permanent Portfolio

I have been a strong proponent of the permanent portfolio as described by Harry Browne.  While it is defensive in nature, it also typically provides growth above price inflation in the long term.  Of course, there are no guarantees of anything, but I consider the permanent portfolio as the best strategy for long-term passive investing.

There are probably better investments for those with an entrepreneurial spirit.  Your best investment is in yourself in almost any situation.  But from a monetary standpoint, someone with a profitable business that does not require an exorbitant amount of time to be spent by the owner is probably the best investment there is.

Real estate investors can also do quite well, at least for those who are savvy.  If you can own rental properties and have them managed by a dependable management company, then this is close to passive income.

Still, for anyone with a significant amount of wealth, I think having some assets in a permanent portfolio is a good idea.  It is a matter of diversification.  Even a long-time business owner or real estate investor can run into problems.  Even Bill Gates sells off some of his Microsoft holdings to diversify in other investments.

In the past, I have made suggestions for tweaks you can make to your own permanent portfolio.  The most common objection is owning government bonds, especially with interest rates so low.  It is still an important piece of the puzzle because bonds will do well in a depression/ deflationary type situation.  They will probably do well even in a more mild recession.  If you really hate bonds, I have suggested putting a slight percentage into paying down mortgage debt.

For risk takers, I have also suggested a more aggressive version of the permanent portfolio in which you reduce your cash portion.  For example, you could put 30% in stocks, 30% in gold, 30% in long-term government bonds, and 10% in cash.

This portfolio is more aggressive and would have bigger ups and downs.  It would do much worse in a recessionary environment, as cash tends to help in this situation.  But over a long period of time, there is a greater chance for greater returns.

This is just my own suggestion for someone looking to be more aggressive.  I haven’t seen this suggested by others.  I never heard any such suggestion from Harry Browne.  He would have said to keep a separate portfolio for speculations.

Of course, most people out there are either too conservative (too much cash) or they are too aggressive (too heavy in stocks).  It is more the latter.  One thing you can be sure of is that almost nobody owns any significant portion of gold investments.

Right now (October 2017), all asset prices seem to be on the high side.  The permanent portfolio has not done that great because interest rates have been low for quite a long time now.  The bond and cash portions have put off low returns in the low interest rate and relatively low price inflation environment.

Stocks make me nervous with them hitting all-time new highs, seemingly almost every day.  Gold does not make me quite as nervous, but it could still take a decent dive if we hit a bad recession.

Bonds are a good protection for a recession, but they carry their own risks.  With the Fed threatening to decrease its balance sheet (albeit slowly), who knows if private investors will pick up the slack?

Despite past suggestions of decreasing the cash portion for those who want to be aggressive, I don’t think now is the time to do it.  You want to have a good cash portion if we hit a recession, and I believe the risks of a recession are greater now than they have been in a while.  During down times, cash is king.  There is a caveat to this.  It is only king if we are not in an environment of high price inflation.

With that said, even in the 1970s, while cash was a loser, it wasn’t horrible either.  The interest rates went into the double digits, so you could put money in a money market fund and make a good nominal return.  It would lag behind inflation, meaning the real return would still be negative, but it wasn’t really bad.

It is always important to have cash (which includes cash equivalents like checking accounts, savings accounts, and money market funds).  It is not just for emergencies though.  It can be used to buy assets when they are cheap.  Assets become cheap in a recession.  This is why cash is king.  In a recession that is not accompanied by high price inflation, cash is in high demand.

Until the Federal Reserve starts another round of massive monetary inflation, I don’t expect price inflation to take off.  You may lose a little bit with your cash holdings, but it will be minimal.  At this stage, it is better to have liquid funds to buy cheap assets in a recession.

In terms of major asset classes, stocks have been king for the last several years.  But kings get overthrown all the time.  Cash will rule once again, at least for a period of time.

Who Loses With the Trump/ Republican Tax Plan?

With Trump and the Republican’s failure to repeal Obamacare, they have moved on to tax reform.  I could say tax cuts, but that might be misleading, as there are also tax hikes in the plan too.

For a libertarian, there are things to cheer, and there are things to denounce.  We should cheer virtually any reduction in taxes, especially when it comes to tax rates.  I do not count tax credits in which some people actually receive money for the year, as this is another form of welfare.

We should denounce tax hikes, but this should also generally apply to the removal of tax deductions and most tax credits.  While the complicated tax code is far from ideal, it is better to have most deductions than to not have them, as it ultimately results in some people paying less in taxes by having these deductions available.

If we could have a law that would just raise taxes on bureaucrats and politicians, then maybe I could make an exception, but even here I would just assume that the law would be written so as to result in the exact opposite of its stated intention.

Here are a few things to cheer about the Trump/ Republican tax proposal:

  • Reduces corporate tax rates
  • Reduces corporate taxes through a change in how companies can claim depreciation
  • Reduces the tax on S corporations, partnerships, and sole proprietorships
  • Eliminates the federal estate tax
  • Eliminates the alternative minimum tax
  • Possible repeal of the 3.8% investment tax through Obamacare
  • Possible opportunity for companies to repatriate money from overseas and pay a one-time tax

Unfortunately, we don’t know all of the details yet.  It is possible a few of these things could end up being negative too.  We all know that once the legislators, lobbyists, and administrators get going, there is some crazy language in these bills.

For example, while S corporations, partnerships, and sole proprietors may end paying a lower tax instead of the top marginal tax rate of 39.6%, the proposal also says that measures will be taken to prevent the reclassifying of personal income to business income so that wealthy individuals do not avoid paying the high marginal tax rate.  You can see where this thing could get messy quickly.

For the overall tax rates, we also can’t really say whether this will be positive or negative.  Unfortunately, while we have been told that the reform will contain three rates of 12%, 25%, and 35%, we have no idea what the income thresholds are.

It is rather foolish, if not devious, of Trump to lay out this proposal without identifying the income thresholds for the different tax brackets.  There isn’t much point on telling us the different rates if we don’t know how they apply.  If the top rate of 35% kicks in after you make just $50,000, then this would be a horrible plan.  It would be a massive tax hike.  On the other hand, if the 25% rate didn’t kick in until an individual makes over $100,000, then this would be great, as most middle income people would be looking at a big reduction in overall taxes.

One of the big negatives about this plan that we do know about is the reduction in deductions.  While the mortgage interest deduction would still be there, more people would not be claiming it because the standard deduction would go up significantly.  And while we should seemingly cheer for the increase in the standard deduction, we don’t know if this will be much of a benefit because we have no idea about the income thresholds for the various rates (see paragraph above).

We do know that deductions for state taxes are likely to go away if this plan becomes reality.  This has a lot of people upset, especially those in “blue” states.  It seems that Trump is trying to get his revenge on those who live in states that did not hand him electoral votes in November.  While it is not a perfect correlation, the blue states tend to be states that have higher living costs, higher incomes, and also higher taxes.  By eliminating deductions for state taxes on the federal income tax return, it will disproportionately hurt those in the blue states.

Of course, for conservatives, and even libertarians, it is tempting to cheer this on, especially for those living in red states.  After all, if the blue state people don’t like it, then they should lower their taxes.  They are the ones who cheer for higher taxes, especially on the wealthy, so that is what they are getting.

Both sides can make the argument that the other side is being subsidized. On the one hand, the high tax states are being subsidized because they get to claim more deductions on their federal tax returns, which could come at the expense of lower tax states.

On the other hand, low tax states are being subsidized because they tend to also be states with overall lower incomes.  Therefore, the people in these states are paying lower taxes than those with higher incomes.

With all of that said, there are still many people living in New York, California, and other high tax states who did not vote for Hillary Clinton.  They already have my sympathy because they live in these high tax states, and now they may be paying even more if this tax proposal passes as it is.  Of course, if it really bothers them, they could always move to a different state.

Overall, there is no question that this tax plan would tend to help those in lower income and lower tax states, while doing the opposite for higher income and higher tax states.

The cut in corporate taxes would be very positive for almost everyone.  It has been needed for a long time.  While people don’t see it directly benefitting them, it will help them in the long run.  It will mean more competition, more products coming to market, and ultimately higher wages and cheaper prices, all else being equal.

If I could pick one tax to cut or eliminate, I think it would be the employer portion of the payroll tax.  This is rarely discussed because people want to live under the illusion that Medicare and Social Security are like insurance programs in which you pay premiums.

The employer portion of the payroll tax is highly burdensome on independent contractors and small business owners.  In addition, by eliminating this tax, it would help increase wages, as the cost of hiring for employers would drop.  Unfortunately, I think we are a long way off from this tax even being reduced.

There is one more key thing to discuss in all of this.  It is something that even most conservatives ignore.  This tax plan, whether or not it is supposedly “revenue neutral” (I really don’t like that term), is not addressing the fundamental financial problem that we have.

Our problem is that we are highly regulated and highly taxed.  We also deal with a central bank that distorts the price of money.

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

I know the whole theory about the Laffer Curve and how tax reductions can lead to higher tax collections.  If taxes are burdensome enough, this can certainly be true.

But again, the government is still spending $4 trillion per year.  These are resources being consumed and allocated that are not in accordance with consumer demand.  Government spending is typically a misallocation of resources.  Almost all spending that is not being used strictly to enforce contracts or protect property rights is spending that is misallocating resources.  Therefore, most government spending makes us poorer.

If we really want to increase our living standards, we should be calling for massive cuts in spending by Congress.  Unfortunately, there aren’t many calls for this.  Instead, we get more tinkering with the tax code.

Even though some people lose more than others with this tax plan, most Americans lose because the federal government keeps spending $4 trillion per year.

Would Mark Cuban Make a Good President?

It’s possible that there may be a second billionaire running for the U.S. presidency in 2020.  Mark Cuban, owner of the Dallas Mavericks and a shark on Shark Tank, said in an interview that he is considering a run.

Cuban said he is an independent all the way through, but this seems to contradict his support for Hillary Clinton in the 2016 election.

Cuban has a strong Type A personality that is very similar to Donald Trump.  I think that may be part of the reason that Cuban has been so anti Trump.  There is not enough room for both of their egos in the same room.

There aren’t that many billionaires in the world, yet we face the possibility that we could have two running in the 2020 election.  If Cuban runs as a third-party candidate or as an independent, then maybe we could have three billionaires if Oprah decides to throw her hat in the ring as a Democrat.  It would certainly be a race of outsiders.  Trump would be the only one who could not be considered an outsider at that point.

I see nothing wrong with a billionaire running for president.  It isn’t the money that got Trump elected, as his campaign spent far less than others.  The only significant role that money played was that it got him the prestige and notoriety in the first place.

Some people think it is better for a rich person to be a politician because they aren’t as likely to sell out.  If the person is already rich, then they are not in it for the money.  They are less likely to be bought.

Unfortunately, this theory went out the door in the first six months of the Trump presidency.  They don’t need to buy him.  They (the establishment) just has to pressure him.

That is Trump, but what about Mark Cuban?  Would Cuban make a good president from a libertarian perspective?

Cuban would be 62 years old for the 2020 election.  He looks young for his age.  There is little question that he would hold his own against other candidates.  While Kevin O’Leary (Mr. Wonderful) is probably known as the toughest shark on Shark Tank, I think he is just more sarcastic and funny.  Cuban can actually be the toughest one.  Sometimes he can be downright mean.

I heard suggestions years ago that Cuban is a libertarian or has libertarian leanings.  On a few things, this might be true.  But he is certainly not any kind of principled libertarian.

The man supported Hillary Clinton in 2016.  That is enough said.  He clearly has very poor judgement.  He doesn’t have bad judgement when it comes to business decisions, but he is obviously not a very good judge of character.  He is obviously not very bright when it comes to political issues, unless he is just evil, which I don’t think is the case.

The SEC tried to nail Cuban several years ago for insider trading.  He could have landed in federal prison.  He fought them hard and won.  It was probably his best moment.  And he was proud of beating the charges.  But does he not realize that Hillary Clinton and the establishment that he supports is the very system that almost locked him away for many years?

I hope that all libertarians realize now that things are probably not going to change based on who is sitting in the Oval Office.  Unless the person is a radical libertarian with a long history of sticking to principles, then it won’t matter.  But if the country were to elect someone like Ron Paul, then things would be changing anyway, as it would demonstrate a radical shift in public opinion.

Cuban would not be much different from Trump.  You can’t go into the presidency and make radical changes unless you are prepared for an all-out battle with the establishment.  Trump still faces a huge battle against the establishment even as he has fallen in line.

Unless Cuban is going to withdraw all troops from foreign lands and dismantle all of the so-called intelligence agencies, then nothing significant will change, or at least it won’t change because of who is in office.  Things could change because of a massive depression or other events, but that could happen with anyone in office.

If the spy agencies and the foreign policy don’t significantly change, then nothing significant will change.  Cuban could tinker around the edges with tax rates, just as Trump is trying to do.  He could repeal a few executive orders or make some new ones.  But overall, not much would be different.  He would be corrupted by the establishment very quickly, just as Trump has been.  He would be another billionaire sellout.

Barring a major recession or depression, the federal budget is going to stay above $4 trillion per year.  This is why our living standards have not been advancing at a pace of previous generations.

If we see Trump and Cuban go head to head in 2020, it would make for some good entertainment.  But that is all it would be.  A Cuban presidency would not result in any more change than a Trump presidency.

There are really only two ways we are going to move towards liberty.  One is through changing public opinion.  The other is by having a severe economic downturn, coupled with the broken promises of so-called entitlements.  This will force Congress to reduce spending.  Until this happens, the presidential race and other political races are mostly for entertainment purposes.

Warren Buffett is Right: Dow One Million is Not Ridiculous

Warren Buffett recently suggested that we could see the Dow Jones Industrial Average hit the one million mark within the next 100 years.  He says it is not a ridiculous forecast at all if you do the math.

According to this article from USA Today, the Dow would only have to go up by 3.87% per year for the next 100 years to hit the 1,000,000 mark.  This is quite doable, given that the index has gained an average of 5.73% per year over the last century.

The Dow is currently trading well above the 20,000 mark.  It would only have to go up by a multiple of a little under 50 times its current value.  While a 50 times return on an investment is huge, it isn’t huge when you use the compounding effect over a 100-year period of time.

Therefore, unfortunately, Buffett is right.  I say “unfortunately” for a reason.

In fact, I will one up Buffett and say that Dow one million is possible within the next 30 years.  And it is all possible for one reason: the central bank’s ability to create money out of thin air.

When we talk of Dow one million, we are talking about it in nominal terms.  We are not talking about the real inflation-adjusted value.

The primary reason the market goes up is because of monetary inflation.  They are not necessarily directly correlated in the short run, but the broad stock market will tend to move somewhat in correlation with the money supply over the longer run.

When I say or write this, it puzzles most people.  This is because we are accustomed to the world we live in.  When you have experienced inflation your entire life, you can’t imagine a world without inflation.

In a true free market without significant monetary inflation, a broad index of stocks would not likely go significantly higher, at least in terms of capital gains.  The main idea of becoming a shareholder (owning a piece of a company) is to share in the profits.  This is typically expressed in the form of dividends, at least when the government’s tax and regulatory schemes are not distorting this process.  When a company has greater dividends, or when investors believe that dividends will likely be higher in the future, then the share price will typically rise in response.

But on net, you wouldn’t see the significant capital gains in the broad market that we see today, even when accounting for the busts.  In a free market with relatively stable money, investors would buy shares to benefit from the dividends and the possibility of capital gains.  But someone buying an index fund probably wouldn’t be counting on the capital gains.  However, with increased technology and production, coupled with relatively stable money, the purchasing power of their money would likely increase.

There are many problems that the Federal Reserve and other central banks present.  Monetary inflation redistributes wealth.  It manipulates and distorts interest rates.  It causes artificial booms and busts in the economy.  Overall, it misallocates resources and makes us poorer on net.

Inflation is especially problematic for those trying to plan for the future.  This can include entrepreneurs.  It can also include people looking towards retirement.

How are you supposed to plan for retirement if you have no idea what your money is going to be able to buy 10 or 20 years down the line?  At least when you are working, you can hope that your wages will keep up with price inflation, even if they do lag behind.

We should hope that we won’t see Dow one million, even if it is 100 years from now.  We especially wouldn’t want to see it in the next few decades.

I know that people often equate a booming stock market with good economic times.  But these times are often the misallocations.

It feels like good times when you are on a lavish vacation, and you really probably are having a good time.  But you are consuming resources and your bank account is going lower.  It is not sustainable, and your vacation will eventually come to an end.  So too, will the boom.

We should hope that the government and central bank adopt some kind of gold standard.  Better yet, the Federal Reserve Act should be repealed, and we should have a completely free market in money.  But barring this radical move towards liberty, we should at least hope that the Fed engages in minimal, if any, monetary inflation.  Our living standards would be far better off in the long run.

If the Fed took a tight money stance over a long period of time, with no indication that it would return to loose money, then stocks would suffer greatly, at least in nominal terms.  But we would actually be more prosperous, as more resources would be allocated in accordance with consumer demand.

Buffett believes people should buy and hold index funds.  He recommends almost the exact opposite of what he did to become rich.  Buffett says you should bet on the U.S. economy.  With his talk of the Dow hitting one million, he is not so much betting on the U.S. economy as he is betting on continued monetary inflation.

Libertarian Thoughts on NFL Players Taking a Knee

While I am quite opinionated on political matters, I haven’t gotten particularly worked up over the situation in the NFL and players taking a knee during the national anthem.  As with many things political though, I have criticisms of both major sides.

Here are some random libertarian thoughts on the whole situation, in no particular order of importance.

  1. If the players were protesting war overseas and the killing of innocent people, I would be fully on board with their stand.
  2. If the players were protesting the drug war that likely does disproportionately impact the black community, then I would be fully on board.
  3. Some of the players taking a knee probably can’t even articulate why they are doing it, except for using a couple of phrases they are repeating.
  4. Unfortunately, Colin Kaepernick, the person who started it all, is sympathetic towards socialism and tyrannical dictators.  While American justice is far from perfect, it pales in comparison to the victims of Castro and Guevara.  With this statement, I am not talking about the victims of U.S. foreign policy.
  5. I think much of middle class America sees it as hypocritical for a bunch of millionaire athletes taking a stand against black oppression.
  6. I have never been in the military and I have never been directly hurt by the military, but it doesn’t mean I can’t take a stand on foreign policy.  Therefore, even though these players are doing well financially (or should be), it doesn’t mean they can’t take a stand for those who aren’t doing well.
  7. On the other hand, it does dilute the message talking about black oppression when it is coming from people who have done very well for the most part.  I wonder if their ancestors from 200 years ago would take offense to this.  Are they really oppressed as compared to what took place 200 years ago, or even 80 years ago?  To me, it isn’t in the same ballpark.  I am saying this with the full acknowledgement that there will likely always be some injustices in this world.
  8. I like to watch football to escape politics.  I like the entertainment.  Is there anywhere I can turn for some entertainment for an escape now?
  9. It isn’t as if the NFL has now just become political.  It was already horrible.  Every time I go to a game, I am surrounded by flyover jets, a giant flag covering the field, military appreciation, and the continuous honoring of military veterans.  It is all war propaganda.  It was no surprise to learn that our tax money is used to pay NFL teams to promote the war propaganda.
  10. What is this ritual of putting our hands over our hearts during the national anthem?  Is there much difference between this and the Nazi salute?  It is a show of nationalism and obedience to the state.  That is just my opinion on the matter, and I know most will disagree.
  11. I also can’t stand the pledge of allegiance.  I pledge allegiance to my family and to not harming others who do no harm to me.  I don’t want to pledge allegiance to the state.
  12. How about we just stop playing the anthem before sporting events?
  13. I have defended Trump on some of his Tweets and other things in the past, or at least pointed out that his enemies are irrationally hysterical.  But his comments on this situation in the NFL are really stupid, for lack of a better word.  While it is better than making threats against North Korea, it is still terribly divisive for no reason.  He really needs to start minding his own business in many ways.
  14. If the fans really don’t like all of this, then they do have the choice to stop attending and watching NFL games.  This may have already started in significant numbers.  The marketplace will sort this whole thing out.  Player salaries may end up going down if ratings take a hit.  This will hurt all players, including those who are standing for the anthem.
  15. ESPN has already been hit with bad ratings as compared to previous times.  I think a large part of this is the network’s almost obsession with politics and culture.  I don’t want to tune into SportsCenter to hear about how heroic Caitlyn Jenner is for turning into a woman.  I want to watch sports highlights.  Again, I am trying to get away from politics and cultural debates.
  16. It is really funny and sad to actually hear people think that the government should get involved in such matters.  It is the same when I hear people saying that flag burning should be illegal.  They want to cheer on the flag and sing about the land of the free, yet they don’t see the contradiction.
  17. I am so tired of people talking about “1st Amendment rights”.  I mean, has anyone saying this actually read the 1st Amendment?  It says that Congress shall make no law.  As long as Congress is not passing a law (or threatening to do so) preventing players from speaking out or taking a knee, then it has nothing to do with the 1st Amendment.
  18. Just because players have a right to take a knee (because it probably wasn’t spelled out in their contract), it doesn’t mean they are protected from all consequences.  If you work in an office, what would happen if you walk up to your boss and call him a jerk?  Can you just claim your right to free speech and expect no consequences?
  19. You should have the right to speak freely, but this does not trump property rights or freedom of association, or at least it shouldn’t.
  20. If only we could get some Americans to stand up as passionately for the millions of victims of U.S. foreign policy.

These are my own libertarian thoughts and do not necessarily represent the thoughts of other libertarians.

Monetary Deflation, Here We Come

The Federal Open Market Committee (FOMC) released its latest statement on monetary policy on September 20, 2017. Whereas everyone was talking about interest rates before, now we have a second issue.

For interest rates, which is the target federal funds rate, the target will remain the same for now, which is between 1% and 1.25%. The Fed has been controlling this rate by paying interest to banks on required and excess reserves. Even though the target rate will remain the same for now, there is an expectation that this rate will go up another one-quarter percent in December.

The bigger news is the Fed’s balance sheet. Starting in October, the Fed will begin what is referred to as a “balance sheet normalization program”.

In the FOMC’s implementation notes, the details are spelled out. The Fed will only roll over maturing debt after it exceeds a certain amount. Starting in October, it will be $6 billion for Treasury debt and $4 billion for mortgage-backed securities. In total, the Fed will stop rolling over $10 billion in debt each month. In other words, the Fed’s balance sheet will be reduced by approximately $10 billion each month.

This reduction should increase if the Fed sticks by the description from the June 2017 statement. If it continues on course, it will eventually be draining its balance sheet by a total of $50 billion per month. When this ends, nobody knows.

Of course, if economic conditions change significantly, it could easily impact this whole process of balance sheet normalization.

Despite Janet Yellen’s reputation as a Keynesian, she has been far better than Bernanke up to this point. This isn’t saying much though, because Bernanke didn’t do much until the financial crisis hit. That is when he turned up the digital printing presses.

QE3 ended in October 2014, shortly after Yellen took office. We have seen very little monetary inflation from Yellen’s Fed. Still, this is after a period of unprecedented monetary inflation (2008 to 2014).

It is important to realize though that we are about to see actual monetary deflation, assuming the Fed follows through with what the FOMC statement says. While the Fed will not actually have to sell off its assets, it is essentially doing the same thing by not rolling over maturing debt. It is not clear how the Fed will get rid of its mortgage-backed securities, since so much of this was bad debt to begin with.

Based on this policy, we should see the monetary base and corresponding balance sheet go down. This is monetary deflation. It does not mean we have to see consumer price deflation.

You have to wonder how long all of this will last though. It has been 9 years since the worst of the financial crisis became apparent. There has been huge monetary inflation, but not huge consumer price inflation. We have seen asset price inflation, especially when it comes to stocks.

The Fed handed stock investors a gift. For people who bought in March 2009, they really got a gift. They would be wise not to be too greedy.

The Fed will also take it all away. If the big rise in U.S. stocks is primarily due to the Fed’s loose monetary policy, then we should not be surprised when a deflationary policy takes it all away.

Things take time to play out. Investors have been expecting this announcement for a while now. Investors also know that the Fed still stands as the lender of last resort in any kind of crisis.

The stock rally may last longer before heading down. It is hard to bet against a rising market. At the same time, the Fed’s new policy of monetary deflation should send warning signals to those who own stocks. What the Fed has “given” us, it will also take away.

How the Government Subverts the Will of the People

While I am not a big fan of democracy when it comes to the state, I often find myself wishing that we actually were more democratic.

Democracy is somewhat of an anti-libertarian idea.  Much of the Bill of Rights is anti-democratic in nature.  The government shall not prohibit your speech, even if it is unpopular.  There is no need to protect popular speech, as that will naturally be allowed.  The key is to protect unpopular speech, as long as the speech is not threatening violence.

Democracy can be thought of as two wolves and a sheep voting on what’s for dinner.  Taken to its extreme, democracy will naturally violate property rights and individual liberty.

With that said, certain democratic processes can help protect individual liberty from an overreaching government.  Also, it is important to note that democracy is only dangerous when we are talking about violence or encroaching on property.  In other words, democracy is dangerous when it comes to dealing with the state because the state uses force or the threat of force to make people comply.

If you and your friends have a vote on where to go for dinner, there is no harm done.  Sure, you may not like the choice of restaurant that a majority of your friends picked, but you are not forced to go out to dinner with them.  If you don’t like their choice, you are not compelled to go to that restaurant.

It seems in today’s world that we would often be better off if the politicians in Washington DC were to actually listen to their constituents.  The powers-that-be often ignore public opinion.

I want to illustrate this with two examples.

First, there is the bailing out of banks.  This was opposed by a large majority of Americans in 2008, but it happened anyway.  I think opinions would have changed if it had been a choice between bailing out the banks versus the bankruptcy of the FDIC.  In other words, people would only accept the bailouts if the alternative were seeing their checking and savings accounts gone because their bank had failed.

The government could have bailed out the banks just enough to make depositors whole, but of course, the bailouts went way beyond this.  The stock and bond holders of these companies should have essentially gone to zero.  This is one of the few industries where a libertarian could actually make a case for nationalization.  This is only because of the government’s explicit guarantees and interference in the industry in the first place.  If there were no central bank and FDIC, then this would not be acceptable from a libertarian standpoint.

The Federal Reserve (which is essentially a branch of the federal government) has figured out a way to bail out banks without any fuss.  The Fed pays interest on bank reserves.  Every time you hear an announcement of the Fed raising rates, this means that the Fed is paying more to the banks for their reserves.  The Fed is paying the banks not to lend.  Every time you hear about the Fed raising rates, think “bank bailout”.

This is barely reported in the establishment media.  Even for those paying attention to the likes of CNBC, it is not widely understood.  Most Americans don’t know this is happening.  The Fed gets to bail out banks (or subsidize them) without the American people even knowing.  It makes everything a lot cleaner from their end.

The second example of the federal government subverting the will of the people is in foreign policy.  There are secret operations all over the place, while most Americans remain in a state of ignorance.

One of the best examples is Syria.  To be sure, there are many other places we could use as examples.

The interesting thing about Syria is that Obama tried to go to war several years ago.  He was trying to get the American people on board with the idea of going after Syria in 2013, but Americans largely rejected the idea.  When John Kerry smugly stated that we could only avoid war if Assad were to give up his weapons, Putin pounced on the statement and said that Russia would ensure the removal of Assad’s chemical weapons.  War seemed to be averted.

Since that time, Obama, and then Trump, have waged war on Syria.  We hear of some stories about troops on the ground and bombings, but most of it is rhetoric.  We don’t hear that the U.S. government has essentially waged an all-out war against Assad, the person who is actually trying to get rid of ISIS.

Again, the will of the people is ignored.  The government relies on the establishment media to cover up these things.  The problem with the establishment media isn’t just that they lie, it is that they choose not to report certain things.

I do want to clarify that even though the politicians are ignoring public opinion, the American people could still put a stop to this stuff.  It is easy for someone to say they are against war with Syria in a survey.  But they may also say that we should be trying to eliminate ISIS.  And some people just don’t care that much, even if they have an opinion that leans one way.

If a large segment of the American population understood that these covert operations were taking place, and if they were strongly anti-war, then things would change.  Politicians can only go against public opinion up to a point.  If the public gets educated and demands certain things, then things will change.

The American people often hold contradictory opinions on things. Most people will say that they are against running up the national debt, but then in the next breath they will not be in favor of any major cuts in government spending.  Many people hold similar contradictory views on foreign policy.

Still, I think it is important to educate people and make them aware of what their government is doing in their name.  It is not enough just to say that you don’t favor a war or a bank bailout in a survey.  You have to have some knowledge of the subject, and you must have a firm set of principles.  Until that happens with a greater number of people, the politicians will continue to get away with things.  They will continue to subvert the weak will of the people.

CPI Report: The Mini-Boom Continues?

Over the last few years, there have been periods where the economy seems to be in something of a mini-boom phase.  The GDP numbers have remained low (but still mostly positive), but certain sectors seem to be booming.

To be sure, it hasn’t been an overall boom for the American middle class.  The only good news is that unemployment rates have dropped, although even these numbers are sketchy.  Some Americans have just given up looking for work, or have decided it isn’t cost effective to send a spouse back to work.  If incomes are low enough, the after-tax income of a spouse could be not much more than the cost of daycare for the children.

The primary areas for the boom have been stocks and housing.  Some might say we have a boom in bonds, but interest rates were already low.  Even in stocks and housing, it depends.  Some of the big names have done well, such as Apple and Amazon.  There have been some bad ones too.  It is just that the big stocks have tended to pull up the overall market.

In housing, it all depends on the location.  Some places, particularly in California, are probably in another bubble.  In most areas, there has been significant appreciation over the last 6 years or so, but still not up to levels that were seen 10 years ago.

The boom in stocks and housing has benefitted some in the middle class, but it has also hurt some in the middle class.  If you don’t own a house or stocks, then it doesn’t do you much good.  In fact, when it comes to housing, it is a detriment to anyone who doesn’t own.  They are priced out of the market, and they are likely paying higher rents.

When it comes to stocks, most middle class Americans don’t own stocks except for the mutual funds in their retirement accounts.  Unfortunately, they are going to see a good portion of the gains wiped away when the bust finally hits.

The problem with this mini-boom – especially in these two sectors – is that it is built on the Fed’s previous loose monetary policy from 2008 to 2014.  The appreciation in asset values can quickly vanish.

I think the consumer price index (CPI) numbers are not all that accurate.  The CPI doesn’t account enough for asset prices.  And low CPI numbers can deceive us in terms of the damage that the Fed is doing.  Even if the Fed’s monetary inflation doesn’t immediately result in high consumer price inflation, it is still misallocating resources.

Still, I think the CPI is useful for trends.  It can also somewhat tell us the demand for money.  The CPI numbers had been trending down, which threw up a cautionary flag for an impending bust.  It was signaling that maybe consumers had slowed down spending.  When consumers are spending less (not bidding up prices as much), this can result in lower consumer price inflation, all else being equal.

However, the latest CPI numbers for August 2017 show a bump up in price inflation.  The August CPI was up 0.4% from the previous month.  The more stable median CPI was up 0.2% from the previous month.

The year-over-year CPI is now at 1.9%, while the year-over-year median CPI is at 2.2%.

This is a slight reversal from the previous trend.  Since the CPI has picked up again, it indicates that this mini-boom may have some more legs.  Anyway, it seems that most asset bubbles last longer than what seems likely.  Therefore, even though I am light on stocks, I would not be surprised to see stocks run higher before the bust.

We can continue to keep an eye on the Fed’s monetary policy coupled with the CPI numbers.  It is also important to pay attention to the yield curve, as a flattening yield curve could indicate a coming recession.

Meanwhile, I am in cautious mode.  I don’t want to get too sucked into the boom, but I am also not ready to massively short the market.  This is why I recommend a permanent portfolio.

Do Investors in U.S. Government Debt Misallocate Resources?

The national debt recently topped $20 trillion.  This pales in comparison to the unfunded liabilities, which, by some estimates, are over $200 trillion.

The continual deficits and accumulation of government debt is a major problem.  Unfortunately, many people mistakenly believe that we are just burdening future generations.  In a sense, this is correct.  But they fail to realize that we are burdening ourselves right now.

When the Federal Reserve monetizes the debt (creates money out of thin air to buy the U.S. government debt), then it is a little more obvious for those who are paying attention.  The central bank’s creation of money means there is more money circulating, while it has done nothing to increase the production of goods and services.  This eventually means that our dollars are worth less than they otherwise would have been.

Although interest rates are still near historic all-time lows, the Fed has essentially not been buying U.S. government debt for nearly 3 years.  It has only rolled over maturing debt.  QE3 ended in October 2014.  Since that time, the adjusted monetary base has been relatively flat, or even slightly down.

This means that investors are buying U.S. government debt at low rates.  This could also include foreign central banks, although Japan and China – the two major buyers – have not been big buyers over the last few years.

Whether or not it is smart for private investors to buy U.S. government bonds is a separate issue.  U.S. government debt is still seen as something of a safe haven.  As long as there is no significant consumer price inflation, this will probably hold true.  And although interest rates are low, they could go lower in a recession, which means that the value of the bonds will increase.

But are these investors misallocating resources?  In a sense, they are.  But it is really the government spending the money that is the misallocation.  The bond investors are just helping to fund it at lower rates.

And this is where we are still harmed today.  The government is misallocating resources.  Virtually all government spending is a misallocation of resources unless it is spending money that would have been spent that same exact way anyway.  But if people were voluntarily willing to spend money building statues in a park, then it wouldn’t be necessary for the government to compel it.  Of course, you could make the argument that some people might be willing to voluntarily contribute to building statues in a park if it weren’t already being done by the government.  But we can be sure that not everyone would choose to spend their money in this way.

To be sure, most of the money spent by government at all levels has little to do with defending property and enforcing contracts.  All other spending has to be a misallocation or, at best, moot.  This isn’t to say that some people don’t benefit at the expense of others with certain types of spending.  But on net, we are poorer when government spends money, as it is allocating resources that are not in accordance with the highest preferences of consumers.

When the government accumulates debt, it is spending extra money that it cannot get away with spending through direct taxation.  It is a hidden form of taxation.  But it isn’t just hurting future generations.  It is hurting us economically now.  It is diverting real resources to other uses than what would otherwise be freely chosen by consumers in an open market.

Debt does hurt future generations as well.  But the main way it hurts future generations is that we are reducing advances in production and technology now.  We are reducing the rate of compounding growth.

Imagine if the whole world hadn’t advanced for 2,000 years up until the year 1950.  Even if free markets were introduced at that time with substantial growth, we would be far poorer today.  People would have had to invent electricity, airplanes, automobiles, the telephone, and so many other things after this period.  We would be really poor today if this had been the case.  We build off of previous generations.

In conclusion, it doesn’t matter who is buying the U.S. government’s debt.  The problem is that the U.S. government is spending so much money and misallocating resources.  We are poorer than we otherwise would be.  This accumulation of debt hurts our living standards today.

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