In a recent speech, Michelle Obama stated, “I am sick of all the chaos and the nastiness of our politics.  It’s exhausting and, frankly, it’s depressing. I understand wanting to shut it all out.”  She said this at a rally to get out the vote for the upcoming elections.  Of course, when she is trying to encourage people to get out and vote, she is really saying she wants people to go out and vote for Democrats.

But I want to particularly focus on her statement about “the nastiness of our politics”.  She is correct that politics is quite nasty. She has insinuated at other times that the nastiness and divisiveness is coming from Trump and his hardcore supporters.

I think everyone has to be realistic and realize that the nastiness of politics didn’t start on November 8, 2016 when Trump was elected president, or on the day after the election.  It didn’t start when Trump took office in January 2017.  It didn’t start when Trump started running for president.

You could say that Trump’s election was a symptom of the divisiveness of politics.  Some people were tired of the status quo, and Trump was their option to revolt against the status quo.  Others chose Bernie Sanders.

There are probably almost as many Americans who couldn’t stand Obama during his time as president as there are Americans currently who can’t stand Trump.  The difference is that things were a lot quieter during the Obama years.  Sure, if you turned into conservative talk radio, or Fox News, or certain websites, then you could hear opposition to Obama.  But most of the establishment media sources did not oppose Obama in any meaningful way.

With Trump, it is non-stop opposition on almost everything.  It isn’t just the news shows either.  Stand-up comedy has been wrecked by Trump.  Or better stated, stand-up comedians have wrecked themselves with their Trump Derangement Syndrome (TDS).  I can’t even tune into any of the late night shows any more.  And Saturday Night Live just ceases to be funny when any politics are involved.

Saturday Night Live has always made fun of presidents and other politicians.  But the show tried to at least have the appearance of being somewhat even-handed, and it was at least funny some of the time. When the show tries to make fun of Trump, it just comes across as overbearing and trying too hard to make him look bad.  Their number one priority has shifted from making people laugh to trying to make Trump look evil or like a buffoon.

Why Politics is Divisive

Politics has always been nasty and divisive.  That is because politics involves the obtainment of power.  It involves being able to use force or the threat of force against other people in order to tell them how to live their lives.

I’m sure you have had arguments over politics, whether it is with a friend or coworker, or with someone on Facebook.  Sometimes these arguments can be quite nasty.  Relationships have been broken due to disagreements over politics.

Unfortunately, this is largely because there is so much at stake.  Nearly everyone is trying to tell everyone else how they should live their life.  They are trying to dictate what they are allowed to earn, what they are allowed to keep, what they are allowed to put in their body, with whom they are allowed to associate, and with whom they are allowed to trade.

Think about other areas in your life that don’t involve government or the use of force. You might like to drink Coke. Your friend might like to drink Pepsi.  Another friend may prefer water over either of them.  You can all peacefully disagree.  You probably aren’t going to argue about it on Facebook.  If you do, it will likely be a friendly disagreement of personal taste and will not lead to any strain in relationships.  It is because there is no force involved. You can choose whatever option you want.  Your choice is not being imposed on you by your friends or anybody else.

Politics is nasty because people are vying for power that they want to use against others. Some may say they want the power just so that it is not used against them.  But this is rare, and when someone does gain the power, it becomes almost irresistible not to use it.

This is what happens when there is great power to be gained.  This is what happens when people look to use the violence of government instead of the peace of the marketplace.

The only answer to greatly reducing this nastiness and divisiveness is to drastically reduce the state power.  This means drastically reducing budgets.  This means drastically reducing the size and scope of government at all levels.

Given that we do live in a world of big government, we should be thankful that there is nastiness.  This means that we still have the ability to speak out and tell the truth.  We don’t want to live in a place where the nastiness is hidden.  This is a totalitarian society.  Perhaps there was little nastiness, at least on the surface, in places like the Soviet Union, Cuba, NAZI Germany, or today’s Venezuela.  For anyone who openly rebelled, it likely meant severe punishment, which could include death.  In terms of the freedom to speak against government, the United States is probably the best place to live on the planet.  I would rather nastiness than quiet being enforced at gunpoint.

Michelle Obama can talk about the nastiness of politics all she wants, but she and her husband are part of the problem.  They pursued power over others, so what should she expect?  When you force people to do things, some people aren’t going to like it.  She wants to silence these people.  Her version of getting rid of the nastiness isn’t reducing the power of the state.  Her version is silencing the opposition.

The Federal Open Market Committee (FOMC) released its latest monetary policy statement.  As expected, the FOMC raised the federal funds rate, which is the overnight lending rate for banks.  The new target range will be from 2% to 2.25%.  You can see the changes made from the last statement here.

More interesting than the FOMC statement itself is the implementation note.

First, in order to raise the target federal funds rate, the Fed must raise the interest rate paid on bank reserves.  It cannot easily raise the interest rate any other way barring a massive deflation in the money supply or a massive hike in reserve requirements for banks. Neither of those things is going to happen, at least to the extent that would be necessary.  Therefore, the Fed must pay interest to banks to hike its target interest rate.  This is more bailing out of the banks, although we do not generally hear this policy referred to in those terms.

The implementation note reads:

The Board of Governors of the Federal Reserve System voted unanimously to raise the interest rate paid on required and excess reserve balances to 2.20 percent, effective September 27, 2018.

The rate paid to banks is actually slightly below the upper limit of the target rate.  This was also done in the previous hike in order to achieve the targeted range.

The second interesting thing in the implementation note is regarding the Fed’s draining of the balance sheet.  They are allowing some maturing assets to mature without rolling them over.  This is basically the equivalent of selling off assets, at least in terms of the size of the balance sheet, which is the base money supply.

The implementation note reads:

Effective in October, 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 $30 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 $20 billion.

Therefore, starting in October, the Fed will not be rolling over up to $50 billion per month in maturing debt.  Broken down, this is $30 billion per month in Treasury securities and $20 billion per month in mortgage-backed securities.  It is still not completely clear on what the Fed does with non-performing mortgage-backed securities.

Overall, the Fed is in monetary deflation mode.  This is after an unprecedented growth in the base money supply from 2008 to 2014.  The balance sheet will never return to anywhere near what it was in early 2008.

We don’t know what will happen to the massive excess reserves built up by the commercial banks. We should expect them to go down with the Fed’s deflation of the base money supply.  The excess reserves actually look to be going down faster, which could offset some of the Fed’s deflationary policy.

However, they did trick us on the way up.  When the Fed was creating money out of thin air like crazy starting in late 2008, many people were predicting severe consumer price inflation.  We have gotten some high asset price inflation (particularly in stocks and housing), but consumer prices have been relatively tame in comparison to the digital money printing that happened.  One of the reasons for this was that banks held on to the new money and did not lend out a lot of it.  The fractional reserve lending process did not multiply the effects of the Fed’s loose monetary policy.

After the FOMC released its latest statement and people digested the words of the Fed chair, long-term rates on U.S. Treasuries went down a bit.  The short-term rates were relatively flat.  For the month of September, the yield curve stopped flattening and actually steepened a little.  On September 26, 2018, this slightly reversed.

I still think that the yield curve is our best source of data right now.  A flat or inverted yield curve is the best predictor of recessions, and I see no reason why it would fail us this time.

If we are to believe the Austrian Business Cycle Theory, then there should be a liquidation of the bubble activity that sprang up on the back of the Fed’s loose monetary policy. While the Fed’s target interest rate is still historically low, it is going up.  And in terms of the monetary base, the Fed is currently deflating.  This means that the artificial boom activity that relied on loose money and artificially low interest rates should be exposed in the somewhat near future.  We don’t know how long this thing can play out. I have to admit that the boom has lasted longer than I would have thought.

The boom is only a boom for those who have been able to benefit from the asset price inflation. For the average guy who doesn’t own a lot of stocks, and especially for those who don’t own a house, there isn’t much of a boom.

When the boom finally goes bust, the people hurt the most will be those who lose their job, and those who own a lot of assets, especially if they are leveraged.  For most everyone else, the bust may not be that bad.  In fact, it may help make life a little bit more affordable once again.

We hear stories about people winning the lottery and then losing all of their money within a relatively short time period.  It is no coincidence that this is a frequent occurrence.  People who are poor and don’t know how to handle money still don’t know how to handle money if they happen to stumble upon some of it.

The majority of people who play the lottery on a regular basis are not good with money.  If they were good with money, they probably wouldn’t be playing the lottery.  I am speaking in generalities.  There are exceptions.  There are people who are good with money who also throw a couple of bucks each week towards the lottery, whether it is buying a couple of tickets or contributing to the office pool.

There are stories about people winning the lottery who handle their money quite well. These are people who probably already had some accumulated wealth, or at least would have likely accumulated some in the future.

There are self-identified socialists and welfare statists out there who think we need more equality.  The problem is that they are not talking about getting rid of the Federal Reserve, which disproportionately hurts the poor with the inflation tax.  They are not talking about getting rid of government regulations that keep the poor from competing against businesses.

The socialists and welfare statists want more equality of outcome through wealth redistribution. Whether they know it or not, they are advocating that everyone be poorer.  They can get more equality by making everyone equally miserable, except of course for the elite running the show.

Nobody is equal in this world.  You probably heard it from your parents that life is not fair.  We are all born with different looks, different talents, different skills, and a different environment.  LeBron James was lucky in that he was born with DNA that gave him great size and extraordinary basketball talent.  That’s not to say that he hasn’t worked hard.  It’s just that there is almost nobody else on this planet that could have been as good of a player as LeBron James, even if they devoted every free second to working on basketball.

The fact that we are all different is actually a great blessing.  I have no idea how to build a car and don’t know much about fixing a car.  Yet I drive one almost every day.  I am lucky that there are people in this world who do know how to make cars and fix cars.  If everyone were the same, we wouldn’t be blessed with the division of labor that we have that makes us so wealthy.

Why the Rich Get Richer

We could take all of the wealth in the world and divide it up equally amongst the 7 billion plus people on the planet.  This would be impossible, but let’s just say that it was possible.  It would be quite devastating just in the shifting of resources.

But let’s just say this could be pulled off, but it was a one-time socialist policy.  If the policy continued that everyone would stay equal, then it would be a typical socialist disaster such as the Soviet Union, or, more recently, Venezuela.

If all of the resources were divided up equally just one time, what would happen after about 5 to 10 years?  While not everything would return exactly back to the way it was, it is easy to predict that most people who were previously wealthy would once again be wealthy, at least in comparison to everyone else.  Those who were previously poor (before the one-time redistribution) would find that they become poor again.  Just as with the lottery, there would be exceptions.

This would occur from country to country, and it would occur within countries.  The U.S. would become a relatively rich country again because of a relative respect for property rights and entrepreneurship. The people of India would find themselves poor again.

Within the United States, the people who were previously wealthy would largely become wealthy again. They would find ways to make and keep money.

There is a reason for this.  Wealth is largely a reflection of people’s mentality.  People who get wealthy and stay wealthy tend to have long-term outlooks. They tend to work hard. They tend to work smart. They also do things consistently.

Think of someone who goes to his or her job during the day and does the bare minimum.  They get home and watch television the rest of the night.

Then think of someone who goes to his or her job and puts in extra effort.  They work a little overtime to make sure their work is done and of high quality.  They get home and relax a little, but then they spend some time reading and learning a new skill.  They pay attention to their finances.  Maybe they even start a small side business.

The person that puts in extra effort and does it consistently is going to end up further ahead.  Maybe this person only does 5% more every day, but this compounds over time.  It pays dividends in the form of more opportunity, higher income, more savings, and other ways.  And again, it compounds over time.

Luck plays a big factor in life.  Your health can be subject to luck.  Your childhood was subject to luck.  There is no question you were lucky if you were born into a family with two loving parents.  Your looks are an element of luck.  Your talents are an element of luck.

At the same time, there is an issue of drive and good decision-making.  If you have drive and good decision-making, then maybe you could say that you are lucky that you were born with that.  But no matter how you look at it, those are major factors in life.  If you have a lack of drive and a lack of good decision-making, then you probably aren’t going to be successful in life. You probably aren’t going to get much fulfillment.  Ultimately, you probably won’t find much happiness.

In terms of wealth redistribution, it doesn’t solve anything.  It makes everyone worse.  It causes more poverty.  It causes resentment from both ends.  It certainly doesn’t give anyone drive or better skills at decision-making.

Wealth redistribution is a recipe for misery, whether it is done out of jealousy, envy, or truly caring about the poor.

We are not meant to be equal.  We all have different talents and different goals in life.  Some people are content with working less and enjoying a more modest lifestyle.  There is nothing wrong with this as long as they aren’t trying to force anyone else to subsidize them.

We should celebrate our inequality.  Our diversity is what makes our world go around.  And if you want to get rid of poverty, then you should advocate for less wealth redistribution, not more.  We need to create more wealth, not forcefully redistribute it.

I recently attended an event featuring Jordan Peterson.  He is on tour promoting his book 12 Rules for Life.  Peterson is a clinical psychologist, an author, and something of a YouTube star.  He was also a university professor.

At the event, there were actually a few protestors outside holding up signs and doing a few chants. I didn’t even understand their message or what they were protesting.  My guess is that most of them have never listened or read 10 straight minutes of Peterson.  If they have listened to him at all, it was probably out of context.

Peterson became somewhat well known when he refused to obey the dictates in Canada that he use gender-neutral pronouns.  In other words, Peterson did not want to eliminate the words “he” and “she” from his vocabulary. This is what our world has come to.  He took a stand based on free speech implications.

I really don’t find Peterson controversial at all.  Although he is more favored by the political right because of his refusal to give in to ultra political correctness, Peterson does not really identify with any particular political group.  He generally favors the free market, but that is no different than many people out there.  And even when it comes to politics, it tends not to be the arena that gets emphasis from him.

Most of what Peterson said at the event is common sense.  He talks about taking responsibility, being honest and courageous, and being a productive individual.  He is known to use some big and fancy terminology, and I wonder how much of a sensation he would be without it.  It’s hard to say if he would be more effective or less effective if you spoke more simply.

Peterson’s message is negative to a certain extent, but also positive in another.  He said if you find happiness, then you should enjoy it, because it isn’t going to last.  He basically says that the basic state of humans is misery and that we should find ways to better our lives and make them less miserable. He pointed out that we are in the top 1% in terms of history.  Even in today’s world, many Americans are in the top 1%, or at least in the top 10%.  I would say that most Americans are better off than more than a billion people living in China and more than a billion people living in India.  And those aren’t the worst places on earth.

I think his basic message is what has helped many young men get on their feet and take responsibility for their lives.  Sometimes you have to get back to the basics.  Even professional athletes, during times of struggle, have to remind themselves of the basics.

It makes sense that struggling people would be helped by Peterson’s message.  They already have a negative outlook on life.  Peterson is acknowledging that life is hard, which I think they appreciate.  It is just acknowledging the truth.  But then he says that you can take steps to lessen the misery and maybe actually get to a point of contentment, at least for some time periods.

There was a short little interview session at the end.  He was asked if he would consider running for president if the laws in the United States were changed.  (He is Canadian and would currently be ineligible to run.)  Peterson may not have directly answered the question, but he believes he is more effective in preaching his message.  On this, I believe he is correct.

He was also asked about wealth redistribution.  He spoke about how amazing it is that extreme poverty has largely been eliminated.  He said that if we want to eliminate starvation and extreme poverty, then we should be seeking less wealth redistribution.  We should allow the rich to get richer because it produces more wealth, even for those at the bottom.  He also spoke about people who are actually better off without money because they are self-destructive when they have money.  He used an alcoholic as an example.

Peterson’s message on wealth redistribution was right on point, and I appreciated it as a libertarian.  I am glad he said it. At the same time, from a personal standpoint, I tend to like his self-help content better just because it is different.  I travel in some libertarian circles, so I understand the benefits of free markets and have basically heard all of the arguments.  I know it is a point missed by the majority of people, so they do need to hear it.  But for me personally, I get more out of his material when he talks about human nature, happiness, and other deep thoughts that can help me think and reflect on my own life.

My one major criticism of the show is that I think Peterson talked too much (over an hour) in his monologue.  I thought it would have been better if he had just talked by himself for about a half hour and then spent an hour or more taking questions in more of a discussion format.  If he does another tour in the future, I hope he will consider this, or something similar.

I am a libertarian. I am also an advocate for good financial decisions and money management.  I sometimes tie these two things together.  At the same time, I also have to wear two different hats at times.  Let me explain.

Let’s say that I am chatting with someone and they say something along these lines: “I just don’t have very much money.  I can pay my bills each month, but that is it.  If I take one nice vacation each year, I don’t really have anything left.  I’ve been stuck in the same job for a while.  It pays the bills (barely), but it isn’t fulfilling and I don’t know how to get off this treadmill.”

These types of stories are common in America.  Admittedly, they are first-world problems.  Someone in a third-world country would be thrilled to have a job that pays the bills and allows them some luxuries as well.  They would be even more thrilled if they only had to work that one job at about 40 hours per week.

In the U.S., I have said that we live in contradictory times.  “It was the best of times; it was the worst of times.”

We have luxuries that were unimaginable even a couple of decades ago.  Compared to a century ago, it doesn’t even compare.  We have transportation in the form of cars, airplanes, and other things.  We have electricity.  We have air conditioning.  We have refrigeration.  We have these little devices we carry around in our pocket in which we can almost instantly communicate with other people, as well as use it to look up billions of pieces of information.

At the same time, middle class America is struggling, and I don’t think libertarians should ignore this fact.  Most aren’t struggling to put food on the table.  Most have a roof over their head, although the tens of thousands of homeless people in Los Angeles alone run contrary to this.  It’s just that, compared to, say, the 1950s, we aren’t completely better off.  There have obviously been some cultural declines.  But even in terms of living standards, not everything is up.

I know that most of us would not trade places with someone in the 1950s or the 1970s.  They didn’t have smartphones and some other luxuries we enjoy today.  But the prototypical family seen in Leave it to Beaver is not completely off the mark. The husband went off to work, while the wife stayed home.  She raised the children to a large extent.  When the children went to school, she took care of the house and made sure that dinner was ready and the laundry was done.  This may sound like a stereotypical example, but it was the truth to a large degree.

The wife/ mother didn’t have to work.  The husband/ father could work and make enough income to support the whole family.  They had a house. They probably had one television set, although this was still somewhat of a luxury that was not widely available yet in the 1950s.  When a child got sick, the doctor would typically make a house visit, and it didn’t cost an arm and a leg.

In today’s world, there is a far greater percentage of women in the workforce.  I know that many women choose to work.  But even here, we have to realize that the choice is more of a tradeoff.  I believe there are many working mothers who would choose not to work, or not work full time, if their husband’s income was adequate to support the lifestyle they want.  Since the family wants their smartphones, and they want to be able to take one nice vacation per year, and they want a decent sized house, they send the wife/ mother to work.  Such a lifestyle often requires two working parents.

The problem is that we should not be faced with this.  Stated differently, we would not be faced with this if we had a relatively free market.

The reason we have to work more in order to enjoy the new luxuries of life is because government has made our lives so expensive.  If you add up government spending at the local, state, and federal levels, then about 40% of your income is being consumed (misallocated) by government. For some people, their share might be above 50%.  And that isn’t even counting all of the regulations that inhibit voluntary transactions especially in some areas such as medical care.

It shouldn’t be like this.  We should be able to enjoy a much greater living standard over time without having to send the second parent off to work.  In fact, we should be able to work less while still enjoying higher living standards.  We should be able to get our smartphones and big screen televisions without having to work more and without having bigger expenses in other areas.

Wearing Two Hats

This is where I sometimes have to wear two hats.  I want to sell people on libertarianism by pointing out that much of their hardship is because of government.

At the same time, I don’t want to give them the impression that they are virtually helpless in changing their situation because of the government.  In other words, I don’t want to give them an excuse for not bettering themselves.

In the example I used above, I want to point out that the struggling person would not be struggling so much if it weren’t for big government.  If the government, particularly at the federal level, were a fraction of its current size, then each individual would have more resources at their own disposal.  This is a libertarian argument.

But I would also want to point out that this should not be an excuse to not change.  If you aren’t saving any money, then you have to adjust at least one of two things.  You either need to make more money, or you need to spend less. There is also the combination of the two things, which is often the best remedy.

If you need to raise your income, then look outside of your current job to see if you are missing something.  Don’t sell yourself short.  Or find ways to serve your employer better so that you are seen as more valuable.  There is also an option of exploring entrepreneurship or some kind of gig on the side.

On the spending side, see if there are ways you can cut back.  This isn’t about deprivation so much as it is about prioritization. Figure out what really matters the most to you and focus on those things.  Go through your budget for one month and see if you are spending money on things that just aren’t really worth it to you.

Even though big government is holding us back, we shouldn’t use that as an excuse to not move ahead. We have to play with the cards we are dealt.  I don’t think you should do anything immoral.  As a libertarian, I don’t think you should be in a position where you feel compelled to advocate for big government.  But after that, you have to play ball in the ballpark that they’ve put you in, even if you don’t like everything about the ballpark.

In conclusion, sometimes it is important to wear two hats when advising people.  But it is ok to point out that you are wearing two hats.  For their own good, and for the good of society, they should advocate more liberty.  But at the same time, don’t use the current situation of big government as an excuse not to better your position in life.

The 2018 mid-term elections are coming up in November.  We call them mid-term elections because we are using presidential elections as a base point.  They are often seen as a referendum on the president.

It must be realized that the mid-term elections tend to go against the party that occupies the presidency.  Since Trump is a Republican, the Democrats seem to be favored to gain seats in this year’s election.

In the case of Trump, I don’t think many, maybe even most, Republicans in DC like Trump.  But since the Republican grassroots tend to like Trump, the Republicans in Congress are forced to go along with Trump’s agenda.  They can’t be seen as opposing him too much, or else they risk their job, particularly in Republican primaries.

I don’t think the mid-term elections are completely a referendum against the president, even though they are viewed this way.  It is just that some voters want balance.  They don’t want one-party rule.  They want some opposition against the most powerful person, or at least whom they view as the most powerful person.  Some of this is conscious, while some may just be instinctively voting this way without deeply thinking through it.

In this respect, the voters are not completely wrong.  We typically are better off when there is not one-party rule across the presidency and Congress.  When Bill Clinton was president with a Republican Congress, there was actually some spending restraint.  On the other hand, when we had Bush and the Republicans controlling Congress, we got massive spending and deficits.  We also got massive entitlement expansion (Medicare prescription drugs) and war under Bush, but that was more of a bipartisan effort. Under Obama and the Democrat Congress, we got Obamacare.  Once the Republicans took over Congress, we didn’t get any more massive expansions in spending.

This certainly isn’t a perfect science, and the government can easily expand under any combination. But there is a tendency to have a little more gridlock when there is not one-party rule.  I view this as positive.

There have been some good things with Trump domestically so far.  The cut in taxes, particularly corporate taxes, is positive.  The repealing of regulations is positive.  However, the spending and deficits have exploded that much more under Trump, and his tariffs are a disaster.  On foreign policy, he has made some peace motions toward Russia and North Korea, but he has been bad in many other ways, including the continuation of wars in the Middle East.

For the mid-term elections, there are basically three possible outcomes.  One, the Republicans maintain control of both houses of Congress.  Two, the Democrats win both houses of Congress.  Three, the Democrats win a majority in the House of Representatives, but do not win enough seats to gain a majority in the Senate.

It is technically possible that the Democrats could win the Senate and lose the House, but this is highly unlikely.

Perhaps the best-case scenario for liberty is that the Republicans lose the House but keep a majority in the Senate.  This would provide some opposition to Trump, although the opposition might come on all the wrong issues.  Keeping the Senate for the Republicans would likely ensure better potential candidates for any more Supreme Court openings, but even here we can’t be certain.

So what about the economy?

In short, I don’t think it is going to make much of a difference what happens.  If Trump and the Republicans want to get more tax cuts through, they better do it now.  If the Republicans somehow are able to hold a majority in the House, I think it will be a slim majority.

Trump likes to take a lot of credit for the booming economy.  Many voters will credit or blame the president for the economy. I think this is incorrect on all fronts, as the Federal Reserve has a much bigger impact than the president. It also has to do with luck and the timing of the boom-bust cycle.

I understand why Trump is taking credit for the economy, especially given his ego.  But he is really going to regret it if the economy tanks.  It will be really hard for him to deflect the blame because he is trying to take credit for everything good now.

The mid-term elections may add some uncertainty, which the markets (i.e. investors) tend not to like.  But they can also get over uncertainty quickly, just as they did with the election of Trump in 2016.

I think whatever happens with the economy is basically baked into the cake at this point.  There have been malinvestments from the Fed’s loose monetary policy, particularly from 2008 to 2014.  Sure, little things can impact the timing of when the downturn finally comes and just how big of a downturn it is.  If Trump keeps piling on tariffs, it isn’t going to help the economy.  Still, I maintain that the Fed’s policy is the most important.  And even there, the Fed cannot necessarily prevent a recession, even if it reverses course on interest rates.

I may do another post about the mid-term elections before they happen, and maybe a post after the results.  But this is more of a curiosity.  I don’t think it will have a deep impact on the economy.  For that, I’d rather watch the yield curve.

When the Federal Reserve sets its monetary policy, it is looking in the past more than it is looking in the future.  The Fed is trying to predict the future (and possibly change the future with its policies) by looking at statistics in the past.  Fed members will look at the price inflation rate, the unemployment rate, interest rates, the yield curve, and other factors in trying to predict what is on the horizon.

It has now been 10 years since the onset of the financial crisis.  The recession actually started officially in December 2007, but this was backdated.  We didn’t know we were in a recession in early 2008, or at least we don’t know officially.  The big dominos started to fall in September 2008, even though there had been certain events prior to that.  Housing was already falling from the peak of its bubble, and some lenders were already failing. But it wasn’t clear that we were in a major financial crisis and recession until around September 2008.

I recently looked at a chart of the federal funds rate.  This is the rate targeted by the Fed when it sets monetary policy.  It is the overnight lending rate for banks. Since late 2008, this rate has had less meaning because commercial banks have piled up massive amounts of excessive reserves. Therefore, the banks have little need to borrow overnight money to meet reserve requirements since they already easily meet reserve requirements.  The Fed controls the federal funds rate these days by paying interest on bank reserves.  This sets a floor below the federal funds rate.

Prior to 2009 though, the federal funds rate was largely controlled by the Fed’s buying and selling of assets – specifically U.S. Treasuries.  If the Fed wanted to lower the federal funds rate, it would buy U.S. government debt.  This would be done by essentially printing money, or its digital equivalent.  It was monetary inflation.

If the Fed wanted to raise the federal funds rate, it would do the opposite.  It would sell some of its U.S. Treasury debt.  It would reduce its balance sheet as necessary.  It would be deflationary in most cases, unless the rate was naturally rising without any Fed action.

The interesting thing, when looking at a chart of the history of the federal funds rate, is that the Fed was actually lowering the rate prior to the recession. It actually started to lower the target rate around September 2007, which was even before the official recession began.  The Fed kept dropping its rate throughout 2008.  Again, this was before the worst of everything became apparent in September 2008.  It was in December 2008 that the Fed finally lowered the target rate to near zero.

You can view the history of the targeted rate here.

The key point here is that the Fed correctly saw that there was economic weakness.  They tried to react to this by lowering the target rate, which would have also been mildly inflationary (although nothing compared to what was seen from late 2008 to 2014).

In other words, maybe Fed members saw a recession coming.  They would just never publicly say so.  They will use terms such as “lower growth” or “suboptimal conditions”, but they never say that they see a recession is coming. Otherwise, they would get the blame for “talking down the economy” when the recession actually does hit.

But the biggest takeaway from all of this is that the Fed was unable to prevent the biggest financial crisis and recession since the Great Depression, even though they likely saw something coming.  They were already lowering the federal funds rate.  They were loosening monetary policy, and it wasn’t enough to stop it.  At that point, the damage had already been done.  The loose policy from the Greenspan years was already over.  There was already massive malinvestment that needed to be corrected.  The market correction was going to take place regardless of what the Fed did at that point.  The damage had already been done.

I say this to make the point that it may not matter what the Fed does in the next couple of years. I’m not saying that what they do is completely irrelevant.  But when the misallocated resources are ready to be corrected by the market, the Fed isn’t going to be able to stop it.  They probably won’t even be able to delay it, barring some unlikely move towards hyperinflation.

In fact, if the Fed puts a halt to its balance sheet reduction, that will be a warning sign. If the Fed puts a halt to its rate hikes (of the federal funds rate), this will also be a warning sign. If the Fed actually starts lowering rates and/or starting monetary inflation again, then this is probably not going to prevent anything.  It will just be a further warning that things are likely to get bad really fast.

We’ve already got the yield curve as a warning indicator of a coming recession.  While the Fed’s monetary policy is not quite as reliable, it may add confirmation when the time comes.  The Fed was actually right to a certain degree in 2007, but it was helpless to correct its previous bad policies.

On economic matters, Trump gets things wrong.  He has a few good instincts as far as reducing regulations and reducing some taxes, but after that he lacks a basic understanding.  With many politicians, you wonder if they are just lying in order to gain power and influence.  But with Trump, you really get the feeling that he just doesn’t understand economics.

One of the issues tied to Trump’s tariffs is the trade deficit.  Trump says that trade is not fair.  He says that the United States is getting ripped off with a huge trade deficit, and he is trying to correct that.  He’s also going to find out, if he hasn’t started to realize it already, that it isn’t easy to turn around the trade deficit.  And if you do solve this imaginary problem, you probably just created a whole set of new problems that aren’t imaginary.

There isn’t really such a thing as a trade deficit if the trade is done voluntarily.  There is stealing.  If one country invades another country and takes some of its resources, then perhaps you could say that this is a trade deficit. But that’s not really what Trump is talking about.

The main reason that the United States runs this so-called trade deficit is because it is an attractive place for investors.  A good example is China selling goods to the United States.  But the Chinese often don’t get goods in return. The exchange might be in the form of services.  Or the exchange might be in the form of investments.

If there were any trade deficit at all, it would be other countries getting the short end of the stick.  They are manufacturing goods and sending them to the United States.  They are often not getting any hard goods in return.  They are getting the equivalent of certificates in investments that may or may not be returned in full.

One of the main things bought by the Chinese and Japanese are U.S. government Treasury bills and bonds.  In other words, they are purchasing U.S. government debt.  So the Chinese will manufacture goods and send them to the United States and receive a bunch of IOUs from the government.  And Trump is complaining about this?

This is actually the one area where trade deficits do matter in the long run.  When these foreign central banks accumulate U.S. government debt, it allows the U.S. government to sustain its reckless spending for longer with cheaper interest rates.  So in this sense, it hurts us.  But that is a problem of spending and debt.  It is not caused by the trade deficit.  The trade deficit is just a reflection of the spending and debt.

But Trump isn’t telling foreign central banks not to buy U.S. debt, let alone actually sell it. He is a low interest rate guy.

Other than the national debt, the trade deficit is basically irrelevant.  It is mostly the workings of the marketplace given the circumstances.  Sure, if the Chinese economy were freer, then maybe the Chinese would invest more of their capital at home.  But the fact that their capital flows to the U.S. does not harm the U.S. economy (other than the government debt as discussed above, which is the fault of the U.S. government).

Let’s say you live on an island with 99 other people.  A foreigner comes in and offers to trade with you.  He will give you some food and luxury items in exchange for a small hut on the island.  You agree.  He decides to come to your island for two weeks out of the year and live in the hut.  As long as he is peaceful, there should be no problem.  This could be considered a trade deficit for the 100 people on your island though because the hut is on the island.

Maybe the foreigner comes to your island and offers to give you food, and in exchange you will give him food five years from now.  Again, this is a trade deficit.

Maybe the foreigner comes to your island and offers to give you food in exchange for one hour of consulting on how to survive on a small island.  You provide your services and get the food.  Although you gave him a service, it was not actual hard goods.  Therefore, you have a trade deficit.

You can start to see how absurd this whole thing is.  Yet there are economists who worry about the trade deficit, and Trump worries about the trade deficit.  It isn’t really a deficit if it is voluntary trade.  The trade just involves different types of goods and services.

We all run trade deficits at a personal level.  If you go to the store and buy a pair of shoes, then you are running a trade deficit with the store.  But the owner of the shoe store will take the money and run a deficit with someone else.  This is how it works. It doesn’t change much just because there are national borders involved.  The only difference is the exchange in currency.

The trade deficit can be a reflection of certain things.  As mentioned above, it is probably higher because of the overspending and debt issued by the U.S. government.  But then it is just a symptom of the problem and not the problem itself.  So if Trump really wants to reduce the trade deficit, then drastically cut spending and allow interest rates to rise.  Unfortunately, I don’t think he is going to take this position.

There have been two newsworthy events in the last couple of weeks.  One is the scandal within the Catholic Church, and the other is the death of John McCain.  One of those events, the death of John McCain, received far more media attention.

To be sure, the revelations of the child sexual abuse scandal of the Catholic Church in Pennsylvania certainly did receive some headlines in the so-called mainstream media.  It is hard to ignore a long cover-up within the church where it is reported that hundreds of priests sexually abused more than 1,000 victims, most of whom were minors.

This happened over a span of perhaps 7 decades.  It included the sexual abuse of little boys and girls, although it seems to have been more boys than girls.

Then there is Pope Francis.  I have never liked Pope Francis since right after the time he became Pope.  He has had a left-wing agenda.  He blathers on and on about social tolerance, environmentalism, wealth redistribution, and socialism.  He talks about these things more than he actually talks about, you know, Catholicism.  The few good things he has said are overshadowed by his seemingly communist agenda (and I try not to use that word lightly).  Overall, I have thought he is a hypocrite and a fraud.

Now, there are credible allegations that this scandal was known about at the top.  Pope Francis has personally been implicated, and he doesn’t seem to be denying the allegations.  I know this doesn’t automatically make him guilty, but you would think he would have something to say on the matter.

Pope Francis likely knew about what had happened, and he likely helped cover it up. Archbishop Theodore McCarrick has been implicated as one of the abusers, and he was sanctioned by the previous Pope, Benedict XVI.

According to the allegations made by Archbishop Viganò, “He [Pope Francis] knew from at least June 23, 2013 that McCarrick was a serial predator.  Although he knew that he was a corrupt man, he covered for him to the bitter end; indeed, he made McCarrick’s advice his own, which was certainly not inspired by sound intentions and for love of the Church.  It was only when he was forced by the report of the abuse of a minor, again on the basis of media attention, that he took action [regarding McCarrick] to save his image in the media.”

When Pope Francis said that we should be tolerant of homosexuals, most people didn’t realize that it included homosexuals who rape little boys.

The problem is that this is an explosive story that has not received the vast media attention that it likely deserves.  If you are just watching the mainstream media, you may not have heard about these credible allegations against Pope Francis.

Instead, we got to hear over a week’s coverage on the death of the maverick, John McCain. McCain was a maverick (according to the establishment) because he crossed party lines.  In other words, he supported all of the worst policies of both major parties.  Most importantly, he could be counted on to support any war, regardless of the party in power in the White House.

McCain is regarded as a war hero because he dropped bombs on innocent people in Vietnam.  He was captured and supposedly tortured, although there are many disputes about what actually happened.

There is one thing that isn’t in dispute though, and that is that McCain spent the rest of his life shilling for wars to expand the U.S. empire overseas.  Instead of talking about the brutality of war and spreading a message of not putting others through the same pain, he chose the opposite path.  Since he got to fight and suffer through war, he was quick to make sure that others would suffer as well.

McCain was one of the worst elements of society.  He was evil in almost every way.  But if you watched the establishment media last week, you would never know it. If you believe their words, then McCain was a hero and a great man of principle.

Conservatives like to refer to the mainstream media as the liberal media.  This is obviously not a reference to classical liberalism. Still, it is even hard to call it the left-wing media.  It is the establishment media that will shill for big government at every turn. You must worship the state.

Fox News was, of course, paying homage to McCain.  But all of the other networks were doing the same.  They are all in agreement on this point – that John McCain was a great man.  For that, we can be sure that the opposite is true.

The establishment media can’t be too far to the left because they are paying homage to a war criminal. There are a few leftists out there who referred to McCain as the war hawk that we was.  But there were few of them in the last week.  It seems to be only some libertarians and a handful of hardcore leftists who are willing to tell the truth about McCain at this point.

Most of the leftists support McCain now because him and Trump were enemies.  They care more about taking down Trump than they do about war.

Meanwhile, during this same time, there was little said about the allegations against Pope Francis?  Why would that be?

It is because the establishment media loves Pope Francis.  He is their favorite Pope because he is a defender of the state in all its forms.  He wants more centralization and more socialism.  Therefore, the media would rather keep these allegations (against Francis) quiet if they can.  They will only address it if it becomes too explosive to ignore.

So that is the world we are living in today.  The media pays homage to the war criminal, while they ignore these explosive allegations of Pope Francis helping out child rapists.  It is a good thing we have the Internet.

The Federal Reserve (“the Fed”) currently holds about $1.7 trillion in mortgage-backed securities.  Prior to 2009, the Fed owned zero mortgage-backed securities (MBS).  It began its accumulation in January 2009 in the wake of the great financial crisis that appeared in the fall of 2008.

The Fed went through three buying sprees of both U.S. government debt and MBS.  They were labeled quantitative easing (QE). There was QE1, QE2, and QE3. QE is nothing more than monetary inflation.  The Fed buys assets with money created out of thin air.  Most of this money is not created on a printing press.  It is digital.  That is why I often refer to digital money printing.

QE3 ended in October 2014.  For almost four years, the Fed has not been inflating the money supply directly.  The money supply can still change based on bank lending and bank reserves.

The Fed is actually reducing its balance sheet right now, although at a relatively slow pace. Still, month after month, those tens of billions of dollars in assets start to add up to some real money.

The Fed is currently reducing its balance sheet by $40 billion per month.  $16 billion of that is in mortgage-backed securities. The FOMC implementation note does not say that the Fed is to sell off these assets.  Rather, it is to not roll over maturing securities up to these amounts.  These reduction amounts are supposed to be increased again, but things can change.

The thing that is not clear is what happens with any assets (debt) that the Fed owns that are defaulted on.  This obviously is not an issue with U.S. Treasury bills and bonds, as the U.S. government does not default on its debt, unless you factor in the depreciating value of the currency.  The problem is with the MBS.

First we have to understand how the Fed collected these securities.  During the housing bubble, banks and other lending institutions made loans to people for houses (and other types of residential properties).  It was common for these loans to have low down payment amounts, such as 3%, instead of the more conventional 20%.  When the housing bust happened, somewhat in sync with the financial crisis, many people defaulted on their mortgages.  They either couldn’t pay, or they chose not to pay.  If you have a $200,000 mortgage and your house is now worth only $150,000, it is sometimes easier to hand your keys over to the bank and default.

The Fed’s buying of MBS from the banks was part of the bailout.  While the public complained to some extent about the bank (and other) bailouts, the bailouts kept happening for many years after 2008, as the Fed bought up these MBS.  The Fed was not paying market value for them.  They were buying these securities for what they were previously worth.

With these mortgage securities, some people would have continued to pay their mortgage, while others did not.  In many cases, there were negotiations to refinance or allow the homeowner (more of a renter, with the bank acting as landlord) to stay in the house with modified payments.

No matter what, we have to assume that a certain portion of the currently-held $1.7 trillion in MBS is bad debt.  We have no idea what percentage this is.  So what happens with the securities that are bad?

I don’t know what tricks the FOMC has up its sleeve, but I see no way to completely drain this portion of the balance sheet without somehow acknowledging that some of it is bad debt.  Therefore, you can’t actually reduce the balance sheet with a retraction in the money supply for all of these securities.

Is the Fed just reducing its balance sheet without actually deflating the money supply when it comes to these MBS?

We know this isn’t the case with the U.S. government debt.  The Treasury actually pays back the interest owed and the principal amount for maturing debt.  The Fed ends up returning most of this money to the Treasury after it funds its own expenses.  It is a tricky game, but at least the accounting works with the Treasury. When the Fed reduces its balance sheet of U.S. Treasury bills and bonds, then this money is sucked back up by the Fed.  There is monetary deflation.

With the MBS, it is unclear what is taking place or what will take place in the future.  The Fed could write off the bad debt, but this is ultimately inflationary.  The Fed printed money (digitally speaking) to buy this debt, and then it is letting the debt expire or be written off without reversing the original digital money printing.  If people aren’t paying these old mortgages any longer, then there is nobody to collect the money from to reverse the original monetary inflation.

There is no question that the Fed is currently engaged in a slightly deflationary policy.  But we don’t know for sure to what extent, and it is also tricky trying to figure out how banks will react to this in the near future.

The excess reserves held by commercial banks have been going down since 2014.  Part of this is in lockstep with the Fed’s tighter monetary policy, but it seems that excess reserves have gone down a bit faster than the Fed is reducing its balance sheet.  Therefore, the Fed’s policy is slightly deflationary, while the banks seem to be slightly inflationary.

There is a lot of confusion to sort through with the Fed’s balance sheet and bank reserves. That is another reason why a permanent portfolio setup is ideal at this stage of the game.  It is also why it is easier to follow the yield curve and let the bond market tell us what is happening.  If the yield curve inverts, then maybe I will speculate a little in shorting stocks.  Until the inversion happens, anything goes.