When the FOMC meets every 6 to 8 weeks, it gets some media attention, at least as far as the financial media goes.  You probably won’t hear much on CNN or Fox News, but you will hear about it on CNBC and Bloomberg television.

Aside from key statements from the Federal Reserve chair, the most common news reported is whether or not the Federal Reserve has decided to raise or lower interest rates.  These days, at least for now, it is whether or not the Fed raised interest rates.

But the Fed isn’t directly raising interest rates.  Its implicit guarantee to buy U.S. debt, if needed, is always there, which tends to keep interest rates lower than they otherwise would be.  There is no way we could have a $21 trillion national debt and a 10-year yield on U.S. government debt under 3% without a backing from the central bank.

The one rate that the Fed directly controls is the federal funds rate.  Prior to the fall of 2008, this rate was controlled by increasing (buying debt) or decreasing (selling debt or not reinvesting maturing debt) its balance sheet.  Since the major commercial banks now have trillions in excess reserves, the Fed can no longer easily control the federal funds target rate by buying and selling securities.

The Fed now controls the federal funds rate by setting the interest rate paid to banks for their reserves.  In the last FOMC statement, the rate paid to banks was increased to 1.75%.  This sets something of a floor on the federal funds rate.  By doing this, the Fed is subsidizing the banks at the expense of the taxpayer.

When the Fed subsidizes things, it usually does so at the expense of those holding U.S. dollars.  But in this case, it really is more the American taxpayer subsidizing the banks.  The Fed is paying higher interest rates to the banks instead of returning this portion of money to the Treasury each year.

While interest rates are an important subject, you can consider them manipulated forever, at least for as long as the central bank exists and has any power.  Again, if the Fed went away tomorrow, you could be sure that interest rates on U.S. debt would instantly spike.  There is a reason that cities and states are far more limited in the amount of debt they can issue.  They do not have the digital printing press.

The biggest issue that most everyone is missing right now is the Fed’s very gradual reduction in its balance sheet.  According to the FOMC, it is basically baked into the cake for now.  Of course, if the stock market were to crash next week and a recession all of a sudden appeared, you could be sure that the Fed’s tightening would be stopped rather quickly.

Since late 2015, the FOMC statements have been accompanied with implementation notes.  In the March statement, the implementation note stated (in part) the following:

“The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during March that exceeds $12 billion, and to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during March that exceeds $8 billion. Effective in April, the Committee directs the Desk to roll over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during each calendar month that exceeds $18 billion, and to reinvest in agency mortgage-backed securities the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $12 billion. Small deviations from these amounts for operational reasons are acceptable.”

In other words, the Fed, starting in April, will be draining off $30 billion per month from its balance sheet ($18 billion plus $12 billion).  By the 4th quarter of 2018, it will be up to $50 billion per month, if things stay on track.

If you look at the adjusted monetary base, you can’t even see it yet.  There are several variables that go into the monetary base, so the Fed’s tightening can’t really be seen at this time.  When the monetary base is near $4 trillion, a $30 billion runoff in one month is less than 1%.

But by the end of 2018, if the Fed does not change course, you will see a difference.  There will be a visible reduction in the balance sheet.  So while the tightening is very gradual, it is happening.

I can’t emphasize this point enough because the stock market boom was largely a result of the Fed’s ultra-loose policy from 2008 to 2014.  It takes time for things to shake out, but this easy money led to malinvestments and unsustainable bubbles.  I believe stocks are the biggest bubble (not counting small things like cryptocurrencies).

Now that the easy money is being taken away, it should not be surprising that the propped up stock market goes down with it.

I don’t know if the increased volatility is the start of the bear market or if we will still have another run to new all-time highs.  But at some point, the Fed’s tightening is going to impact the financial markets.  You should prepare accordingly.

It is easy to look back at the past and say “I should have done this.”  The “this” can be any number of things.  I knew about Bitcoin long before the average person on the street, yet I didn’t invest (more like speculate) in it.

When stocks were hitting all-time highs in the U.S. in late 2017, it was easy to find people who said they wish they would have known there would be such a great bull run in stocks.  While this is rather obvious, we still hear it all the time (and not just about investing).

But if we could go back in the past knowing what will happen in the future, then a lot of things would be easy.  It reminds me of Back to the Future II where Biff goes back in time with a sports almanac and is able to become very rich by correctly betting on the outcome of sporting events.

I have discussed paying down or paying off a mortgage.  I even released a special report on the subject several years ago.

Most people who pay off their mortgage do not later regret doing so.  But I have heard people challenged by others for doing so, saying they could have received a better return on their money elsewhere.  The person who paid off their mortgage will respond that they would have put their money in stocks instead if they had known that we would experience this great bull run.  But, of course, nobody knew for sure that stocks would boom to the extent that they have.

The person who paid off their mortgage understands that life is unpredictable, which includes the investment markets.  In fact, it is because of this unpredictability that they paid off their mortgage.  It is a way to add an element of certainty in our uncertain world.

If you have a mortgage with a 4% interest rate, you would be much better off putting the money in stocks or some other investment if the other investment could guarantee you a return of 8%.  (Even here, you have to consider that you would owe taxes on the gains.)

I think most people who are advocates of paying off their mortgage would even agree that the investment with the 8% return would be a better use for their money than paying down their mortgage.

But in our real world, there are no guaranteed investments with a return of 8%, at least that I know of.  There are ways to guarantee savings though.  If you have a credit card balance that charges 12% interest, you can save yourself the 12% (guaranteed) by paying it off. And if you have a home mortgage with a 4% rate, you can give yourself the equivalent of a 4% guaranteed rate of return (tax free if you don’t itemize) if you put your extra money towards it.

Don’t get me wrong here.  There are reasons that you shouldn’t pay down your mortgage.  Most importantly, it is an illiquid asset that will tie up your money.  But having knowledge of the past returns of other investments is not an argument for not paying down your mortgage.

If this were the case, you could also walk around saying, “I sure regret buying car insurance last year, because I didn’t get into any car accidents last year.”  That is either stating the obvious, or worse, just irrational thinking.

Therefore, you shouldn’t regret your past decisions just because you now know the results of the past.  If you are going to reflect, you should put yourself back in the position you were in then of not knowing what the future would bring.  You may have made a bad decision, but it isn’t because of things that happened beyond your control.

If you put all of your money in tech stocks in late 1999, you can look back and say it was a bad decision.  But it wasn’t a bad decision because tech stocks subsequently crashed.  It was a bad decision because you did not take the risks into account and properly diversify.

Nobody can predict the future with any certainty.  You certainly can’t predict the investment markets, because it is made up of millions of people buying and selling.  They are based on human action, which we cannot fully predict, and we certainly can’t account for all of the variables.  We have no idea what stocks will do tomorrow or next year.

One thing you can predict is that when you pay off your mortgage, you will no longer be paying interest to the lender.

On Thursday, March 22, 2018 and Friday, March 23, 2018, the Dow Jones fell over 1,100 points.  U.S. stocks suffered their worst week in over two years.

This happened to coincide with news of tariffs being imposed by Trump.  Since the anti-Trump establishment media will blame anything on Trump, it was easy to blame the stock market plunge on Trump’s tariffs.  It is a precarious position to see the Keynesians, along with a few self-identified socialists, all of a sudden defending free trade.  Of course, they aren’t really defending free trade, but just being anti Trump.

From a libertarian standpoint, there is no question that Trump is an economic idiot.  He either doesn’t understand basic economics, or he is playing on the lack of economic competence of part of his base.  It is probably both.

On the one hand, Trump will propose sanctioning countries such as North Korea.  In other words, he wants to cut off trade to certain countries to teach them a lesson.  On the other hand, he proposes reducing trade (in the form of tariffs) for the U.S., which he claims will be economically beneficial.  How can he have it both ways?

Regarding tariffs, we can also see the major abuse of power.  How did Trump get the power to single-handedly slap tariffs on aluminum and steel?  He can cite national security all he wants, but it doesn’t make it legal according to the Constitution.  Just as people who try to sell war will keep changing the reasoning, so does Trump with his tariffs.  He will cite national security one minute (which is a farce), and then he will cite jobs the next minute (which is also a fallacy).

The bottom line is that tariffs are a tax on imports, and they make life more expensive for most Americans when there are additional tariffs on American imports.  It may temporarily provide a benefit for certain industries, but it comes at the expense of everybody else’s standard of living, including employment in other sectors.

Overall, tariffs are bad economically.  However, we can’t say that it is new tariffs that caused stocks to plunge.  Stocks weren’t taking a nosedive when Bush and Obama enacted new tariffs.  We also didn’t hear much about these tariffs when they were enacted.  Bush and Obama were more quiet about them.  Trump is trying to take credit for the tariffs, so he will also take the blame.  And with the hostile media towards him, he will definitely take the blame.

Still, we don’t really know what caused stocks to plunge.  The buyers and sellers were meeting at a lower price than what was previously the meeting point.  It probably had little to do with tariffs.  A little extra taxation on a few products doesn’t put everything into a tailspin.

We don’t know the reason for the stock plunge, and we don’t know if it will continue.  If it does continue, I would argue it has far more to do with the Austrian Business Cycle Theory than anything about tariffs.  It is the policies of the central bank that drive the artificial booms and busts more than any tariffs could do.

The Federal Reserve had an extremely loose monetary policy from 2008 to 2014.  This is when we saw a five-fold increase in the monetary base with QE1, QE2, and QE3.  And even since October 2014, despite no more QE, interest rates have stayed historically low.  The Fed’s willingness to step in and support the bond market has helped prop up bond prices (keep interest rates down), even though the Fed has not been actually buying assets on net.

But the Fed has been very slowly increasing its target federal funds rate by increasing the interest rate paid on bank reserves.  It raised its target rate another one-quarter of a percent last Wednesday.  But instead of examining the Fed, the media is quick to blame Trump and his tariffs for the market selloff.

If you want to blame anyone for the market selloff, you can point to Ben Bernanke, who presided over the greatest monetary expansion in history.  Even though he has been out of office for four years, he largely owns these bubbles that will eventually go bust.  He owns the massive misallocation of resources that happened under his watch.

Sure, most of the other Fed members, past and present, would have taken similar actions as Bernanke.  But there is no question that a potential crash in stocks is because it is an unsustainable bubble that was blown up by the policies of the central bank.

Trump was politically stupid for taking credit for the booming stocks in 2017.  He was also politically stupid for enacting tariffs, which only enables further blame to be placed on him when things go bad.  If stocks continue to fall, he is going to take the blame, even if he wasn’t primarily responsible for it.

The bust was already baked into the cake because the bubbles are unsustainable.  But Trump doesn’t understand this, and the average voter doesn’t understand it either.

The question of whether your house is an investment will likely be a debate until the end of time in the financial community.  Some see it as a great way to build wealth, while others see it as an expense.

There are good arguments both for and against buying a house.  The main point is that you should only buy a house when you can afford to do so.  You should only buy a house if you have some backup reserves for all of the potential things that can go wrong with a house.  Despite getting homeowners insurance, there are a lot of big potential expenses that a policy likely won’t cover, such as a new roof or a new air conditioning unit.

There is no question that a house is a consumer good.  It just happens to be a consumer good that is a necessity.  A 2,500 square foot house with 5 bedrooms is not a necessity.  It may seem like a necessity for a large family with a lot of stuff (or even a smaller family with a lot of stuff), but there are many large families living throughout the world that have accommodations far smaller.

The shelter part is a necessity.  Assuming you don’t want to be homeless, it is a basic necessity.  Even homeless people have to seek some shelter, especially when it is cold.

Assuming you are at least middle class, living in the U.S., it is reasonable to expect a decent living environment with indoor plumbing, electricity, air conditioning, appliances, and some room to move around.  Even most of the lower class in the U.S. gets to have these basic things.

There is a point where getting a larger house becomes more of a luxury than a necessity.  This is highly subjective, but the point is important.  There is nothing wrong with a family buying a larger house than what is reasonably necessary.  We just shouldn’t delude ourselves that this is somehow an investment.  It is basically a consumption item.  But in our world of central banking and inflation, it is something that tends to go up in value – at least nominally – over the long run.

You can buy an investment house to make money, especially if you don’t live in it.  Otherwise, it is hard to call it an investment, unless you are renting out rooms while living in it yourself.  There is a difference between a wise financial move and an investment.

As far as rental real estate, this is essentially a business.  You could also buy a van and rent it out to people.  You could buy a powerful snow blower and rent it out to people when it snows.

If you buy a house for $100,000 (without a mortgage), and you can net $8,000 per year after expenses by renting it out, then your return is 8% per year.  This is a good return.  If the house appreciates in value, then this is bonus money.

If you buy a house to live in, it may or may not be profitable.  It is hard to calculate, even after the fact.  There are many expenses that go into owning a house that are hard to add up.  You would also have to consider the possible return on your money during this time if you hadn’t spent it all on a house.

I find that most people’s opinion on this subject reflects their actual experiences.  If someone bought a house in California 8 years ago and it has doubled in price, then they are thinking pretty highly of real estate.  If they are smart enough to sell and become renters (or buy in a much cheaper area), then they will probably always have a high opinion of real estate because it was so profitable.

If someone bought a house in a bubble area in 2006 and held on, they still might not be back to even 12 years later.  It would be hard to convince this person that buying a house is a good investment.

There are some lucky people who buy a house and have it appreciate significantly.  If they are smart, they cash out.  If they are dumb (unless they are truly wealthy), they sell the house and move to an even more expensive house in the same bubble area.

Aside from the possibility of getting lucky with major appreciation, the main benefit of buying a house is that it acts as something of a forced savings plan.  Every month when you pay the mortgage, a certain portion of that is going towards the principal, even if it is relatively small at first.  If you stay in the house for a long time, you can eventually find yourself owning the house (as long as you keep paying your property taxes).  This has been a way for middle class families to build some wealth.

Of course, there is also a benefit of owning a house in that you can control what you do with it, as long as you are not violating any association rules or local ordinances.  You also can’t be kicked out by a landlord, as long as you keep paying your mortgage and property taxes.

When I am asked whether someone should buy a house, I list a few conditions that should be met before someone considers buying.

1. You should be planning to live in the house for at least 7 years, if not longer.
2. You should have some extra money set aside for repairs and maintenance.  You could call these “unexpected expenses”, except any homeowner will know that they aren’t that unexpected.  You are guaranteed to have some major repairs.
3. Check the rental rates in your area versus the monthly cost of owning a similar sized house.  If the expenses to own a house (which include mortgage, insurance, property taxes, association fees, maintenance, and repairs) are significantly higher than it would cost you to rent, then you should probably just rent.

If, based on the three things listed above, you are still in the running for buying a house, then it really comes down to your preference.  Even here, I would not recommend getting in over your head with too much house.  You should never buy as much house as what you qualify for with a loan.  You don’t want to be house rich and poor in every other way.

The one caveat to all of this is for someone with significant wealth.  If you are worth $50 million, go ahead and buy the $4 million mansion in California.  I’d rather take advice from you on how you accumulated so much money.

Whether a house turns out to be a good investment or not really depends on the real estate market.  It depends on where you buy and when you buy.  Part of this is pure luck, as you cannot predict the future.

However, you can look at prices compared to rent and see what is reasonable.  You also control your own finances and whether you can still afford to stay in a house even if there is a major downturn in the economy.  If you plan to stay in the house for a long time, then this virtually eliminates the need to worry about short-term fluctuations in the housing market.

If you are buying a house to live in, buy it as a consumer good.  You don’t pay extra for leather seats in a new car because you hope to get a good return on your money.  You buy the leather seats because you want them and you think it is worth the cost.  You should look at a house in the same way.

The U.S. national debt just hit $21 trillion.  It received a few headlines.  Surprisingly, it seemed to receive almost as many headlines as it did when it surpassed the $20 trillion mark, which was an even more round number.

I don’t remember any headlines when the national debt surpassed $19 trillion, but that was still when Obama was president.  The anti-Trump establishment media is more than happy to point out the rising national debt under Trump and the Republican Congress, as if the recent cut in corporate tax rates is somehow to blame.  Of course, I am glad when any media outlet points out the astronomical debt, but I wish they would do it for other reasons than just trying to blame Trump.

To be sure, the national debt is bipartisan, and it has been for a long time.  The national debt first surpassed the $1 trillion mark under Reagan.  And despite Reagan’s reputation as a fiscal conservative, the deficits under his watch really were unprecedented for that time.  And tax cuts under Reagan cannot be blamed for the ballooning national debt.  There were also tax hikes under Reagan.  And more importantly, federal tax collections ended up rising significantly after the multiple recessions of the early 1980s.  It’s just that federal spending went up at a greater pace than did tax collections.

Over the last 35 years, the Clinton years of were the least harmful in terms of deficits.  Whether you want to credit this to Bill Clinton or the Republican Congress, that is not the point here.  It was during a relative boom time, and some of that was an artificial boom due to a relatively loose monetary policy from the Greenspan Fed.  When tax collections are booming (especially from the tech stock bubble), it makes it easier to reduce the deficits.

But even under Clinton, the national debt went up significantly.  Even when the budget was supposedly balanced, they were borrowing money from the Social Security “trust” fund in order to cover the difference.  Therefore, although things were relatively better during the late 1990s, there were many factors that were in play, and the national debt was still going up, even if more slowly.  If you look at the numbers by year at this site, the national debt went up every year under Clinton.

Now we are at a point where almost nobody cares.  The American people will say they care if polled, but they don’t really care.  It is like somebody who says they want to be a millionaire, but who sits on the couch all day watching television.  He may want to become a millionaire, but he is not willing to prioritize that in his life.  The American people might like to see a reduction in the national debt, or at least a balanced budget, but they aren’t willing to give up their favorite federal programs.

This is why the issue is bipartisan.  There is no true opposition to the national debt, other than from libertarians.  And libertarians take the position (correctly) that the budget should only be balanced if it is because of spending reductions.  We don’t want a balanced budget from additional taxes.

According to this site, the national debt per citizen is $64,249.  The debt per taxpayer is over $173,500.  By the time you read this and click on the link, it will probably be higher.  I know the national debt will be higher.

Of course, $21 trillion is not the true national debt.  Part of this debt is money that the government owes to itself, which it subsequently owes to the welfare state.  For example, part of the national debt is money that is owed to the Social Security trust fund.

The problem here is that the Social Security trust fund, even if you count the IOUs, doesn’t have near enough money to satisfy its future obligations, if we define obligations as what has been promised by politicians.

The total unfunded liabilities, most of which is accounted for by Medicare and Social Security, exceed well over $100 trillion.  Some estimates have put them over $200 trillion.  This is a ridiculous number (not because it isn’t true) that is hard to comprehend.  Therefore, almost everyone just ignores it.

Think of a family that earns $70,000 per year.  They have credit card debt and student loan debt totaling $200,000.  They can barely stay above water just making the minimum payments.

To this family, would it make a difference if their total debt were $150,000 instead of $200,000?  Would it make a difference if it were $220,000?

Of course, we know there is a difference.  But the only difference to this family would be the amount of interest they owe each month.  They have little hope of actually paying off the debt unless they win the lottery.  They could buckle down, create a budget, and live very frugally for several years.  But that is painful, and it takes future orientation.  You would not only have to look beyond tomorrow, but even beyond the next couple of years.

It gets even worse when talking about debt from the U.S. government because that is nobody’s responsibility.  Everyone figures that it is everyone else’s problem.

At some point, there has to be a set of losers in this game.  Even an outright default would mean major losses for bondholders.  When it comes to Social Security and Medicare, default means less money flowing to the senior population.

There will be some form of default when it comes to Medicare and Social Security.  It is guaranteed.  It is not just a matter of politics, but a matter of math at this point.

This doesn’t mean that Social Security checks will stop arriving in the mail.  It will be a series of mini defaults.  The paychecks will be worth less due to a depreciating dollar.  This already happens, but I expect it to happen at a greater pace eventually.

The biggest part of the default will come in the form of raising the age that people are eligible to collect on their so-called benefits.  They will probably start by raising the age to 70.  It will likely eventually be raised to 75.  For someone under the age of 50, it is almost guaranteed that the age will be higher than what is currently listed.

The sooner this run up in debt stops, the better off most of us will be.  We aren’t just piling on debt for future generations.  We are hurting ourselves now.  If the government were forced to balance the budget by drastically cutting spending, then it would mean more resources being directed in accordance with consumer demand instead of being directed by politicians and bureaucrats.  Even if it were painful initially, our living standards would ultimately benefit.

The ballooning national debt is a representation of our government and central bank going out of control.  We all pay the price in the form of lower living standards, except the tiny few who are direct beneficiaries of the corrupt system.

The latest consumer price inflation numbers came out for February.  The year-over-year CPI now stands at 2.2%, while the year-over-year median CPI stands at 2.4%.

While consumer price inflation has picked up a little in recent months (with a significant 0.5% in January), overall consumer price increases have remained fairly steady.  Of course, if the dollar is depreciating at 2% per year, we shouldn’t just accept this, as it still makes us poorer than we otherwise would have been.  And the CPI numbers do not take into account the full damage done by previous monetary inflation in misallocating resources.

Still, relatively speaking in our modern-day central bank world, 2% consumer price inflation is low.  The Fed is right around its benchmark.  This enables the Fed to very gradually reduce its balance sheet and raise its target federal funds rate.  At the same time, the Fed doesn’t have to rush into it and risk spooking markets too much.

It is amazing how much of a free pass the Fed has gotten over the last decade.  It engaged in massive monetary inflation with QE1, QE2, and QE3.  It multiplied the adjusted monetary base by a factor of almost 5, yet we have not had the corresponding consumer price inflation (not counting health insurance).

No matter what the Fed has done, the CPI has stayed within a relatively narrow range.  And even interest rates have remained in a relatively tight (and low) range.

Federal Reserve officials have had the luxury of something like a Goldilocks economy.  While wage growth and GDP has certainly been slower than what most would prefer, at least they can point to a little wage growth and low unemployment rates.  And at least the GDP is in positive territory.  Despite the struggles of the American middle class, the statistics tell them that they are doing just fine.

Based on the government statistics though, it really is a Goldilocks economy.  It isn’t too hot, and it isn’t too cold.  Price inflation is low, but positive, which is what the Fed wants.

The problem for the Fed (which is no longer Janet Yellen’s problem) is that this can’t last forever.  This “not too hot, not too cold” scenario is going to end.  It has to end at some point.

The reason it has to end is because of the previous malinvestment.  The money creation from 2008 to 2014, coupled with artificially low interest rates, has misallocated resources.  When it is realized that resources are not being allocated in accordance with consumer demand, then there is going to be a correction.

The Fed can allow the correction to happen (the best choice), but that would be painful, even though it is the better long-term solution.  The Fed can try to stop the correction, or at least ease the pain, by creating more money out of thin air.

I don’t believe in the Keynesian theory that there is a trade-off between inflation and economic growth, or a trade-off between inflation and employment.  The 1970s already proved the Keynesians wrong with high price inflation and recession.

Still, I think in the short run, there can be a trade-off.  If the Fed engages in massive monetary inflation, this can certainly help to mask some of the problems and give a short-term boom.

Right now, the Fed is walking on a balance beam.  If it leans too far to the right, it gets a recession.  If it leans too far to the left, it gets higher price inflation.  The Fed is always walking on this balance beam in a sense.  The problem is that, with the previous misallocations, the Fed is running out of beam to walk on.  It is narrowing and becoming more like a tightrope.  (Richard Maybury has used a similar analogy.)

The Fed will eventually be faced with a scenario of a correction or a return to money creation.  And even if it turns to money creation, it may not be enough, as it would likely only resort to this if we are already in a recession.

Some might ask why the Fed can’t just keep printing digital money forever to keep the boom going forever.  But even here, it can’t last forever.  We would eventually have runaway price inflation.  As Mises said, we would end up with a crack-up boom, which isn’t really a boom at all.  It is hyperinflation, which in itself is far worse than anything a regular recession or depression could give us.

To be sure, it would be possible to have an economy where we have low (or no) price inflation coupled with economic growth that goes on and on.  That would be true prosperity.  That can only take place in a free market economy.  If there is constant manipulation of the money supply and interest rates, there are going to be unsustainable bubbles that form.

It might be technically possible to get out of our current mess if we had a quick turn to the free market, coupled with some life-changing technological innovations.  The good forces of prosperity would have to overwhelm the correction or realignment of resources.  But given the extent of the previous monetary inflation, and given that the federal government is consuming over $4 trillion per year, this is not at all likely.

In conclusion, just because the Fed has been humming along with its Goldilocks economy, it doesn’t mean it will last forever.  Stock investors have already shown signs of fear, as volatility has picked up considerably.  Remember that the Fed’s balance beam will eventually run out, and the Fed will fall to one side or the other.  It will bring the rest of us down for a ride.

Imagine a young adult, say in their mid-20s, who just won the lottery.  After taxes, the amount in one lump sum comes to a million dollars in 2018.  What is the best strategy for that person?

First, we have all heard the stories of people who won the lottery only to lose all of the money a short time later.  Sometimes the outcome is even worse with drug addictions, ruined relationships, and even suicide.

This is one of the big problems with the lottery.  When the money isn’t really earned, it tends to not be respected.  The person may be entitled to the money because the person put down the money to buy the lottery ticket.  But since the winnings didn’t come from a combination of hard work, creativity, and pleasing customers, the money is not highly regarded.

One of the most popular posts I have ever written is on the HGTV show My Lottery Dream Home.  I shared how some of the lottery winners were taking a large chunk of their winnings to buy a lot more house than needed.  To be fair, I see many lottery winners who are quite conservative with their money but just want a little upgrade in their living conditions.

If you earn your money through hard work, diligent savings, calculated risks, and patience, then you are far more likely to take good care of that money.  You know how much work and effort it took to make the money, so you are not going to easily blow it all.

With that said, let’s go back to the example at hand.  The average lifespan for someone in a first-world country is approaching 80 years old.  For someone in their 20s who is in relatively good health, they could expect to have a decent chance of reaching 90.  That means at least 60 years left of living.

In other words, full-time retirement is probably not an option.  A million dollars isn’t what it used to be, especially if you are living in the United States with expensive health insurance.  Of course, one option to make your money last is to move to a place with a relatively low cost of living, even if that means finding a less developed country on the other side of the planet.

If you could invest the million dollars and earn a 4% return after inflation, then you are only looking at $40,000 per year before taxes.  While some people could make this work, it wouldn’t be a very comfortable lifestyle.  And that budget will quickly vanish if you introduce children into the equation.

You may think that 4% seems low for a return, but it may actually be too high.  If price inflation is running at 3% per year, then you would really need to earn 7% on your money.  And if you invest aggressively into stocks, then one market crash of 50% is going to wipe out any plans of retirement.

If I were counseling someone in their mid-20s who just won a million dollars, I would recommend being relatively conservative with it.  I would recommend that at least half of it go into something similar to a permanent portfolio.

If the real estate market were not too expensive at that time, then paying cash for a house would be a decent use of some of the money, as long as the house is basic enough.  In an average cost of living area in the U.S., I wouldn’t pay more than $200,000 for a home, unless you have children and need the space.

If you spent $200,000 on a house, then you wouldn’t have this money to invest.  But, you also wouldn’t have a mortgage payment.  You would just have the taxes, insurance, utilities, and other expenses that go with owning a home.  But you could ideally cut your monthly expenses by at least $1,000 per month by owning the house outright.

If you have a permanent portfolio and you buy a house outright, then I would slightly lessen the allocation towards bonds in the permanent portfolio.  Instead of 25% in long-term government bonds, I would cut it back to maybe 15 to 20 percent.  The reason is that paying for a house (and not taking a mortgage) is somewhat of a hedge against deflation in itself.  If you currently have a mortgage at 4% interest, then any extra money you pay towards the principal is essentially locking in that 4% rate.  As you pay off the mortgage, you are shifting from an inflation hedge to a deflation hedge.

And that brings us to investment real estate.  For the person who wins a million dollars in early adulthood, I think investment real estate still provides a good opportunity for long-term investing, as long as you aren’t buying at the height of a bubble.  I know that the wisdom on the street is to take out a loan and let the tenants pay off the mortgage.  You can also write off the interest expense.  But for someone with so much money at a young age, I think it is wise to be conservative and not use the leverage.  You can buy a property for $150,000 and net $1,000 per month (just as an example).  This is likely a better and less risky return than what you will find in stocks.

Also, for investment real estate – and this goes for anyone – I would not recommend buying really expensive properties.  Generally speaking, they don’t make good rentals.  It is better to not put all of your eggs in one basket.  I would rather see someone buy three properties at $150,000 each than buy one property at $450,000.

And lastly, we need to address the whole idea of retirement.  Generally, I don’t think it is a good idea to retire early in life, if at all.  There is a difference between being financially free (the option to retire) and early retirement.

But not retiring early does not mean misery.  It doesn’t mean you have to go to your cubicle job five days a week.  You can be productive in many ways now, especially with the internet.

And that is one of the beauties of having a nice nest egg to start.  If you are in your mid-20s with a million dollars, you should use the opportunity to invest in yourself and learn new skills.  Of course, this could be said for someone without a million dollars too, but someone who doesn’t have to go to a 9 to 5 job Monday through Friday has a real opportunity for personal growth.  Imagine how much you could learn about website building or internet marketing if you spent 40 hours per week studying it.

And for someone in this situation, it would be easy to do something where you have passion and can still make some extra side money to supplement your investment income.

Now, what would you do if you won a million dollars?

Take your answer, and do it anyway.  You probably don’t need a million dollars to do it.

Frederic Bastiat (1801 – 1850) was a French economist who wrote on economics and the law.  He preceded Henry Hazlitt by about a century in pointing out the seen versus unseen consequences of government intervention in the economy.

Among libertarians, Bastiat is perhaps most famous for his little book titled The Law.  It was published in 1850 near the end of his rather short life.

Bastiat mostly praises the United States during that time.  Speaking of the U.S., he wrote:

“There is no country in the world where the law is kept more within its proper domain: the protection of every person’s liberty and property.  As a consequence of this, there appears to be no country in the world where the social order rests on a firmer foundation.  But even in the United States, there are two issues – and only two – that have always endangered public peace.”

So while Bastiat was praiseful of the U.S., he understood that there were problems here as well.  Bastiat continued:

“What are these two issues?  They are slavery and tariffs.  These are the only two issues where, contrary to the general spirit of the republic of the United States, law has assumed the character of a plunderer.  Slavery is a violation, by law, of liberty.  The protective tariff is a violation, by law, of property.”

Bastiat was absolutely correct.  The U.S. of the first half of the 19th century was one of the freest places on earth, not only during that time, but in history.  But these two issues were completely anti-liberty in every sense.  Incidentally, they were also the two main issues that led to the so-called Civil War. (It wasn’t really a civil war because the southern states were just trying to secede, not take over power.  The Revolutionary War was also a war of secession and not really a civil war.)

If only more people back then had listened to Bastiat.  This is a generalization, but the southern states needed to listen to him on the issue of slavery, and the northern states needed to listen to him on the issue of tariffs.

While chattel slavery is no longer with us in the United States, it is still a great stain on the history of this country, and that history still serves as something of a divide.

Meanwhile, on the issue of tariffs, apparently many people still haven’t learned any lessons.

Donald Trump needs to read Bastiat.  Actually, he just needs to read some basic economics.  To impose protective tariffs is damaging on many levels.  While a small minority of people may benefit in the short term in those specific industries, nearly everyone pays a price in the loss of liberty and the reduced living standards.

Most of the 1800s was a prosperous time in the United States.  It’s not that anyone today would switch places with someone back then, but it was a time of significant economic growth and progress.  There was no federal income tax (except briefly tried by Lincoln).  There were no payroll taxes.  There was no Federal Reserve (although there was still some government interference in banking).

Overall, not counting the slaves, people were relatively free.  But unfortunately, they were not free to trade with foreigners without having heavy taxes (tariffs) imposed.  If tariffs had been much lower or non-existent, then economic growth would have been even greater during this time period.

We, as a human race, are able to live relatively comfortable lifestyles because of the division of labor.  If we didn’t have the division of labor, we would all be in extreme poverty, if not dead.  No matter how independent you are, you rely on the division of labor.

If you have an island of 1,000 people that is cut off from the rest of the world, the people there are going to be poor.  They can certainly use the division of labor within their island, but they only have so many hands and brains to be productive and creative.

If you have an island of a million people, assuming they have some respect for property rights, they will be far better off than the island of 1,000 people.

In the U.S., we can still be somewhat prosperous if all economic activity had to stay within our borders.  There are about 325 million people.  Still, we are better off if we can voluntarily trade with the other 7 billion people on the planet.

Just as it wouldn’t make sense for Floridians to cut off trade with the people in Alabama, it doesn’t make sense for Americans to cut off trade with Canadians, Chinese, or anyone else.

Tariffs limit this ability to trade.  It subsidizes specific industries at the expense of all consumers.  Tariffs make us poorer than we otherwise would have been.

And tariffs still don’t make sense even if they are done in retaliation. If the Chinese want to impose tariffs on certain imports, then it is Chinese consumers being hurt.  There is no sense in American consumers also being hurt in the name of fairness.

We are so much better off because of global trade where people are able to specialize in the things in which they excel.  We should seek more trade, as each party in a voluntary trade deem themselves better off when making the trade. Otherwise, they wouldn’t make the trade.

Trump is only going to shoot us in the collective feet by imposing tariffs.  He needs to start thinking.  He needs to read some basic free market economics.

The terms communism and socialism are sometimes used interchangeably.  This is mostly appropriate, as they are similar systems.  Socialism is considered an economic system, while communism can be considered both an economic and political system.  The problem with this is that socialists have to use the political system in order to enforce their desired economic system.

Both communism and socialism are systems where the state owns the means of production.  The advocates of these systems will say that the public or working class would own the means of production, but this ultimately means that the state owns and controls the means of production.

Some will say that property ownership can still be allowed in a socialist system, but then this would negate the system of being fully socialist.  It would be a mixed economy.  Many people who call themselves socialists really are not full-blown socialists when it comes down to it.  They just want more government control than what currently exists.  If they believed in full-blown socialism, then they wouldn’t be able to own the clothes on their back or have any money.

Regardless of how you define the terms, communism is an extreme form of socialism.  Communism happens when socialism is brought to its logical conclusion.  If socialism isn’t fully followed, then elements of the market economy have to be let in.

This is why it is virtually inevitable that all true communist regimes resort to massive violence.  It is no coincidence that the most brutal tyrants in history existed in communist systems.  You can certainly have brutal tyrants existing in a system that is not communist, but they are less likely to get away with mass murder of their own people.

Stalin, Hitler, and Mao were some of the most brutal dictators of the 20th century, and really in history.  Hitler was considered a national socialist, and Stalin and Mao were considered communist.  While Germany was never completely socialist, it certainly headed in that direction under Hitler.  In China and the Soviet Union, these were about as communist as you can get.  But even here, they weren’t ever 100% communist.  There were always elements of the underground economy.  There had to be, or else nearly everyone would have starved to death.

Even if you had a populace that was completely cooperative, it would still be impossible to have a fully communist system without violence.  As Ludwig von Mises pointed out nearly 100 years ago, socialism cannot work because there is no rational price system to allocate scarce resources.  You will end up in extreme poverty.

Of course, any country with a substantial population will never be fully cooperative.  There may be a good portion of the population that implicitly consents to the state, but you will always have people who don’t go along.  You will especially have people who don’t go along when they are starving with little to lose.  Even some of the most obedient citizens will rebel if they are desperate enough.

But even if every citizen were obedient, then they would either die of mass starvation, or else the state would have to let some market elements breathe within the system.

The state rests on violence.  That is the definition of government in today’s world.  A government is defined as the only entity with a legal monopoly over the use of violence within certain boundaries (unless the government shares that monopoly with another government).

Socialism and communism take this use of violence to an extreme.  If the state owns and controls everything, then the people under that state have no say.  If they rebel in any way, they risk having violence used against them.

You may hear some people advocate democratic socialism, but this is essentially an impossibility when dealing with any substantial population.  If the state owns the means of production, then the people can’t really have a voice.  And what happens if the people vote in favor of freer markets?

You may hear reference to democratic socialism in places such as Norway or Sweden, but these aren’t socialist countries.  They are welfare states to a certain degree, but they are nothing close to actual socialism.  They have a system of English common law where property rights are upheld to a great degree, or at least up to the point that the welfare state allows.

In a system of full-blown socialism or communism, there has to be violence in order to maintain the system to any degree.  If violence is not employed, then it will no longer be a fully socialist/ communist system.  If voluntary exchanges are allowed, this entails some form of private ownership.  The communist regime can either choose to use the firing squad, or it can choose to allow market elements to leak in.  There really is no third way.

The closest thing to a communist regime today is North Korea.  But even there, there is some semblance of property rights and limited trade.  After that, there are varying degrees of socialism and free markets.  Every country has a mixed economy, but some are more socialist than others.

The reason that communism and socialism have directly led to the deaths of hundreds of millions of people in history is not a result of the systems being implemented the “wrong way”, as the socialists today would say (if they even admit to the mass murder).  These systems worked exactly as they were supposed to work.  In order to maintain a system of socialism and communism, you have to resort to massive violence.