With the stock market showing signs of panic, and the yield curve on the verge of inverting, the possibility of a recession is looking more and more likely for 2019.  But while we can discuss the probability of a recession coming, perhaps a more important question is what to do in advance.  How can someone prepare for a recession?

Much of my focus for this blog is on investments.  I recommend a permanent portfolio as described by Harry Browne.  I believe this is an appropriate portfolio at any time, regardless of whether we know a recession is coming or not.

In terms of investments, people would obviously prefer to be in stocks during boom times.  But the problem is that we can’t predict the future.  It is hard to know what will happen tomorrow or next year.  Investing in the permanent portfolio is an admission that we really can’t predict what will happen, as it is dependent on millions of human beings acting.

It’s entirely possible that things could turn around.  It’s possible that the Fed could make a new announcement that it is stopping the reduction in its balance sheet.  Maybe stocks will return to a bull status.  Nobody knows for sure.

If you really believe that we will soon hit a recession and you want to gamble, then you can obviously short the market (bet on stocks going down).  Just realize that this is speculation, and you could lose much of your money if you are incorrect.

For conservative investors, it is better to stick with the permanent portfolio, or something close to it.  Even for really aggressive investors, there is nothing wrong with putting half of your money in the permanent portfolio and then using the other half for speculation.

Income

Although I tend to focus on investment strategy, this is not the number one priority for most people, or at least it shouldn’t be.  If you are older and have a high net worth, then your investment portfolio really is probably your number one financial priority.  But for most people, the most important thing is your income.

A recession can actually be beneficial for the middle class because it helps to lower prices and reallocate resources.  The problem is that the misallocated resources have to correct, and part of that process means a shifting of labor.  This means unemployment or reduced work hours for some.

If your income is the most important thing to you financially – and for most people, it should be – then you should take steps to reduce the likelihood of losing significant income.

There are a number of things you can do here.  If you are employed, then it is important to make yourself indispensible to your employer, or at least to be good enough that it would be painful for your employer if you left.  Most companies don’t go bankrupt.  It is more common to lay off a certain percentage of the employees.  If you are in the top 20% of employees, then you will probably be safe.

It is also important to maintain marketable skills.  If you do find yourself unemployed, you want to be able to find employment elsewhere.  In a recession, a lot of people are looking for jobs, so it is harder to find one.  You may have to take a pay cut.  But if you have skills that are useful to employers, then it will increase your chances of finding employment.

If you have any kind of a side hustle, then it is a good idea to keep that going.  Or if you don’t, perhaps you can experiment with something.  You may even be able to make extra money on the side with your skills from your full-time day job. You will obviously want to make sure you are not in conflict with your main employer on this.

A final point about income is that it is good to have friends and connections.  It is good to have connections anyway, but it is especially helpful when looking for work.  You have a much better chance of finding employment if you have a vast network of friends.  They can give you ideas.  They can tell you if there are openings at their work.  Or maybe they know someone else who is looking for someone dependable.  You will probably have a better chance of finding work from your network of friends than from handing in your resume to random companies.

Debt and Liquidity

In preparation for a recession, monthly cash flow becomes more important.  It is not just a matter of income, but also what your expenses are.  I think the most important thing is to have low fixed expenses.

If you eat out a lot and spend money on entertainment, this is the easier part to adjust.  It is better if you cut back before a recession hits, but at least you aren’t locked into anything.  If you have to start meal planning at home instead of going out to eat, you will easily survive.

The problem for many people is that they are locked into these long-term expenses.  They buy houses with a big mortgage and cars with car loans.  They may have student loan debt or other debt.  If a recession hits, they can’t easily cut back because these are obligations. They could default on these things, but that is what we’re trying to avoid here.  If you default on your mortgage, you give up your house. And good luck defaulting on student loan debt.

Even with smaller things such as a cell phone contract or a home equity line of credit, you should be careful.  You don’t want to lock yourself in for another monthly expense that is hard to escape.

In preparation for recession, you should try to pay down all debt that isn’t mortgage debt. This is good advice even if a recession isn’t coming.  You want to reduce or eliminate your debt so that your monthly obligations are less.

If you don’t have any debt (other than your mortgage), then you should definitely build up an emergency fund.  Some advisors will say you should have 6 months of living expenses.  But if a recession hits and you are unemployed, you are going to want more than 6 months of reserves.  I typically recommend 9 months, but even here I would go longer if you are worried about your employment situation.

Overall, you want to make sure that you have liquidity.  In other words, you need access to money to pay your bills and unexpected expenses.  This is why you shouldn’t pay extra on your mortgage unless you are set up with a good emergency fund first.  It is also why you shouldn’t be pouring money into a 401k plan unless you have a good emergency fund.  You can’t easily access money tied up in a mortgage (extra principal that you’ve paid) or in a retirement account (excepting a Roth IRA).

The key here is cash flow and being able to pay your bills when times are tough.

Mindset

It is hard to prepare for a recession.  There aren’t a lot of things we can do to prepare other than being smart financially.  All of the things mentioned above are really things that should be done whether you think a recession is coming or not.

Still, I think we shouldn’t overlook mindset.  If you think a recession is coming, then at least you won’t be caught off guard when it happens.  You can think a little more calmly and rationally about the situation.

If you are mentally prepared, you will also find it easier to adjust to a more frugal lifestyle. If you go out to eat a few times a week, then it won’t be as big of an adjustment for you if you have to start eating in all of the time.  For someone who eats out and thinks the good times will last forever, it is a much harder adjustment.

You can’t fully know what will happen to you personally in a recession, but it helps if you are mentally prepared.  Instead of looking at it from a pessimistic point of view, just understand that it is a reality that you are mentally preparing for.

It also helps to compare your situation to others in the world who have it much worse. Think of poor people living in huts on the side of the road who have to beg for food.  If you have to eat cheap meals at home, then it won’t seem so bad in the big picture.

Even during the Great Depression, at least 75% of the people who wanted to work had work. People found a way to survive. If you are mentally prepared, and you take some basic financial steps to improve your situation going into a recession, then you are likely to come through it without too much going wrong.

I hope you have a very Merry Christmas this holiday season, regardless of whether you celebrate.

I don’t have a huge audience with this blog, but I much appreciate the people who do take the time to read.

On many holidays, I remind people to enjoy themselves and to not engage in heated debates with friends and family.  This is especially important in our time of Trump.

You probably aren’t going to convince any of your friends and family of your viewpoint anyway. And if you do, it isn’t going to happen by being really argumentative, unless the person you are talking to has a really open mind.

I think Christmas time especially is a time to act like a libertarian instead of preaching libertarianism.  You can demonstrate to others that you don’t have to be a statist to be a giving and loving human being.  I believe that the act of being a libertarian means being loving because you don’t want to initiate force on others for your social and political goals.  However, it is important to sell libertarianism through your actions.

You can be a libertarian and never give anyone a gift.  You can be a libertarian and not spend Christmas dinner with family.  You can be a libertarian and even be unkind to others as long as you aren’t using force.

However, if you want others to be sold on a message of liberty, then you yourself have to be a role model.  If you are a kind and loving person whom people want to be around, then they are more likely to be open to your pro liberty views.

Sometimes I write these things as a reminder to myself just as much as I am writing for others.

Merry Christmas!

I am an advocate of paying down or paying off a home mortgage when the situation fits right. When it comes to contributing to a 401k plan, my feelings are somewhat mixed, although I generally find it makes sense to get an employer match.

The biggest problem with putting extra money into paying down a mortgage or contributing to a 401k plan is the same.  The problem is that you are locking up your money.  It becomes illiquid.

In the case of a mortgage, you can’t get back that extra you pay on the principal amount unless you refinance or sell your house.  If you pay off the mortgage in its entirety, then you get the benefit of the additional cash flow each month.

In the case of a 401k plan, you will likely be restricted from withdrawing “your” money if you still work for the employer that sponsors it.  You may be able to take a loan, but then that will hurt your future cash flow, as you have to start paying off the loan almost right away.

Even if you no longer work for the employer that sponsored your 401k plan, you will still get hit with regular income taxes (assuming it’s not a Roth 401k), and you will pay an early withdrawal penalty if you are younger than the designated retirement age of 59 and a half.

Therefore, if someone is considering paying down their mortgage or contributing extra to a retirement plan, I recommend that this only be done if a liquid emergency fund is already set up.  While personal situations call for different actions, I generally think a 9-month emergency fund is appropriate, although a year might be better.  This would be based on 9 months of living expenses, not 9 months of salary.

In the case of a mortgage, you can take into consideration whether you are actually able to pay off your mortgage.  If you can pay off your entire mortgage, but it will leave you with only 4 months of living expense, it may be worth doing anyway.  Your monthly expenses will go down by the amount of your mortgage (not including any taxes or insurance that is rolled in). Your monthly cash flow should increase substantially, and you should be able to build up your emergency fund quickly with the additional savings each month.

Liquidity is the Key

When setting up an emergency fund, liquidity is the most important factor.  If you lose your job or you have a major emergency expense, then you have to be able to access your money quickly.  If most of your money is tied up in your house, then this is not liquid.  It takes time to sell a house.  It even takes time to refinance, and this could be costly with closing costs.

When it comes to accessing emergency money, you typically need to be able to access it within a month.  There may be scenarios where you need to access money almost immediately.  But in today’s world with credit cards, you can usually push things off for a month without hurting yourself much.

Most people think of an emergency fund as a savings account or money market fund.  These are obviously appropriate vehicles. The problem is that they pay almost nothing in terms of interest.

I think it is good to have some extra money in your checking or savings account for emergencies. At the same time, I don’t think it is necessary to have 9 months of living expenses sitting in your bank account.

You can still have liquidity without having total safety.  If you have a non-retirement brokerage account, it is generally liquid.  You can access the money reasonably quickly.  The only risk is if you are investing in stocks or other investment vehicles that could lose significant value.  Therefore, you have to adjust based on the riskiness of your investments.

If you are invested heavily in stocks, then you may want to double the amount in that account that you would actually need for an emergency.  You should assume that you could lose half of your money with a market downturn.

If there were a major market downturn and you had to access your money, this would be painful because you would be selling securities that are down in value.  You would have bought high, and you would be selling low.  This is a bad investment formula.  Therefore, this “emergency money” should only be for really dire circumstances.  You shouldn’t be selling stocks when they are low in order to fund a broken water heater or to pay for Christmas gifts.

I am an advocate of the permanent portfolio as designed by Harry Browne.  It is far from being perfectly safe, as is the same with every other investment.  Even money in a bank has risk, especially when it comes to inflation.

The permanent portfolio will generally avoid major swings.  It is well diversified, which smoothes out the ride.  You won’t get the wild ups and downs as you would investing in one sector or one investment type.  Therefore, I think it is reasonable to have part of an emergency fund in the permanent portfolio if it is outside of a retirement account.

In addition, consider that you can invest in a Roth IRA, which is a way to allow your investments to grow tax free (assuming the government doesn’t change the rules). You have already paid taxes on your earnings that are invested in a Roth IRA, but you will not pay taxes on the compounding gains.  This is especially helpful if you have a large degree of uncertainty of tax rates in the future.  You lock in the certainty of paying the tax rates of today.

I think it is typically better to leave your Roth IRA alone in terms of not withdrawing money from it early.  You can add to it, and you can rebalance your portfolio as necessary, but you don’t really want to withdraw money before the designated retirement age if you can help it.

With that said, I still think you can account for a portion of your emergency fund with a Roth IRA (not a Roth 401k).  You can withdraw your money at any time.  And if you only withdraw the principal amount that you have contributed, then you will not pay any additional taxes or penalties.  You would only potentially owe a penalty if you withdraw capital gains within 5 years.

Therefore, if you have a 6-month emergency fund in your bank account and a sizeable amount in a Roth IRA invested in something relatively stable like the permanent portfolio, then I think this is appropriate for the needs of most people.  You would want to touch your Roth IRA last in most situations, but at least you know it is there when you need it, and you won’t be penalized for accessing your money.

The Federal Open Market Committee (FOMC) released its latest monetary policy statement.  There wasn’t total certainty in what the FOMC would do, but it did raise its target range for the federal funds rate by 0.25%. The target range is now between 2.25% and 2.50%.

The Fed is now saying it expects two rate hikes in 2019 instead of three.  Therefore, this was being labeled as a dovish rate hike by some, which I suppose is something of an oxymoron.

The financial news media is screaming that the Fed has hiked rates again.  This is only sort of true.  It raised the target federal funds rate, which is the overnight borrowing rate for banks.  It did this by hiking the interest rate paid on bank reserves.  But this does not necessarily translate into market rates going up.

The short-term yields initially went up on the news, but finished the day mostly flat.  The longer-term yields fell meanwhile. In other words, the yield curve has flattened more.

The 30-year yield is now at about 3%, which would have seemed highly unlikely a few months ago. The 10-year yield is below 2.8%. There is slight inversion between the 2-year yield and the 5-year yield.

I like to compare the 10-year to the 3-month yield.  That spread is now less than 40 basis points (0.4%).  We could be just a matter of a few months away from an inversion there if things continue.  If things really get crazy, there could be an inversion within weeks. That’s not my prediction, but I am just saying that it is not impossible.

An inversion of the yield curve is a major warning signal of a recession.

The stock indexes were largely up on the day when the FOMC statement was released.  Stocks quickly gave up their gains on the day, and they continued downward.  I watched some of the market movement live, and it was quite volatile for a while.  There were 100-point swings in the Dow within minutes.

The Dow finished down over 350 points, while the Nasdaq was down over 2%.  The Dow and S&P 500 both finished at lows for 2018.

Jerome Powell Speaks

Jerome (Jay) Powell, the chairman of the Federal Reserve, held a press conference shortly after the release of the statement.  There were a few interesting things to note.

Powell was asked numerous times (with slight variations) about Trump’s pressuring the Fed with his tweets and comments.  Now that Trump is president, he has become even more of a low interest rate guy.  He has taken ownership of this economy, which was a poor political calculation on his part. I suspect that when things get worse, he will blame the Fed even more than the Democrats.

The Fed will be to blame, but it will be more for its actions from 2008 to 2014 than from its actions today.  The Fed’s tightening is just helping to expose the malinvestments from the Fed-generated boom.

Powell was not about to flame up a battle with Trump.  Powell mostly sidestepped the questions by just saying that the Fed is an independent entity and is acting without political consideration.

This is ironic given the fact that the Fed chair himself was nominated by Trump.  The Fed exists because of the federal government and politics.  The Fed holds a monopoly over the nation’s money supply.

Thankfully, Powell was also asked about the Fed’s balance sheet.  He replied that the balance sheet reduction program will continue as planned.

The Fed is now draining approximately $50 billion per month from its balance sheet by not rolling over maturing Treasury debt and mortgage-backed securities.  While it has a long way to go to unwind QE1, QE2, and QE3, it is not insignificant either.

The Fed nearly quintupled its balance sheet from 2008 to 2014 to well over $4 trillion, and it is never going to reduce it back to anywhere near the levels of 2008. But at a reduction rate of $50 billion per month, that is $600 billion per year.  If the economy keeps softening, I expect the Fed to put a halt to this tightening in 2019, despite what Powell says now.

This sets the stage for an interesting 2019.  Will it finally be the year that the massive bubbles pop?

Some people are so contrarian that they don’t expect a recession because so many people are now talking about the possibility of one.  But we live in the internet age, where you can find opinions all across the board easily.

I listened to some of the people on CNBC today after the FOMC announcement.  There were several guests who were essentially saying that there are no bubbles.  And you even get a few saying that now is a good time to buy.  So there are plenty of bull optimists out there still.

If anything, the establishment media might be a little less hesitant to talk down the economy than in times past because they are so anti Trump.  I wouldn’t really listen to the establishment media one way or the other, except for possible entertainment value.

The main thing to watch is the yield curve.  And with the latest Fed move, the yield curve just flattened more.

In the 1980s, and even after, there were Americans who were warning about the Japanese taking over economically.  It’s still not clear what “taking over” means, but whatever it means, it obviously hasn’t happened.

Part of the supposed threat was that the Japanese were selling more inexpensive products to Americans, thus undermining American companies.  Today, most Americans don’t seem to have an issue with buying a Toyota or Honda (Japanese companies) or other foreign brands.  Of course, many of the jobs associated with these “foreign companies” are American.

If Americans face any threat, it is from their own government.  There is no foreign power willing or able to invade the United States via pure violence.  Therefore, the only way others can obtain property from Americans is through voluntary exchange.

When you think about the argument warning against the Japanese from decades ago, it is silly, but not just because it didn’t come true.  It is useful in this case to use a reductio ad absurdum.

Let’s say the Japanese (whether that means companies, individuals, or the government) started giving away cars and televisions to undermine American companies.  Americans could just go to the store and pick up their new car and television set for free.  If this is too ridiculous to imagine, then just think if a new car sold for only $2,000 that would normally sell for $20,000.

This would obviously be unsustainable for the Japanese, regardless of whether it were companies giving away products or the government heavily subsidizing them.

But let’s say that the Japanese decided to waste resources and had enough savings to do so for a long period of time.  Would it make sense for the Americans to turn down the free (or highly inexpensive) products?

Some would argue that it would cost American jobs.  This isn’t completely wrong, but we have to be specific.  It would cost Americans very specific jobs, but it wouldn’t mean there would be fewer jobs overall.

If I wanted a new car and only had to pay $2,000 instead of $20,000, then I would have $18,000 left over as compared to having to buy the American car.  I now have $18,000 in savings that I can continue to save, or invest, or spend on something else.  Now multiply this by tens of millions of Americans.

The important point is that we would not have to expend resources on cars and televisions any longer that we previously would have spent.  We now have additional resources to consume in the form of other products (goods or services).  The new jobs created would be determined by consumer demand.

Overall, Americans would be far richer at the expense of the Japanese who are subsidizing the products.

Tariffs and Artificial Intelligence

We don’t hear much about the Japanese taking over any longer.  Some people have switched it to the Chinese.

Hardly a day goes by that I don’t hear a bad economic argument about jobs being destroyed. It is used as an excuse to enact tariffs, which make foreign products more expensive.  They also make some domestic products more expensive if they are using materials that are imported (such as steel and aluminum).

The same claims are being made about artificial intelligence (AI).  We are supposed to be worried about robots taking our jobs.

Again, robots will take certain jobs.  They already have.  Just think about the self-checkout at a store.  This means a reduction of jobs for cashiers.

But when a company is able to reduce its labor force with the same productivity, then it reduces its costs.  This tends to happen across the board, and competition will lead to lower prices (all else being equal).

If robots became so efficient that they eliminated half the jobs that are currently in existence, this would actually be beneficial for people.  It could be temporarily painful for any particular individual who just lost their job, but you must consider that new jobs would be created based on consumer demand.  Since humans have virtually endless wants and needs, there is always work to be done.  It is just a question of what the work is and how it will be done in accordance with consumer demand.

In this scenario where half the current jobs go to robots, you have to consider that society would be so much richer, and this would be a benefit to everyone, since everyone is a consumer.  If robots can cook your meals, fold your laundry, and make you healthy at a very small cost, then you will have a lot of resources to consume in other areas that would not have previously been available or attainable.

Technology and robots make us wealthier because things can be done more efficiently.  And in regards to tariffs, we are better off with free and open trade without barriers.  This makes for more efficiency and lower consumer prices.

The Chinese are not taking over any more than the Japanese were decades ago.  We should actually hope that the Chinese and Japanese and everyone else get richer.  They will not get richer at the expense of Americans.  If anything, it will be beneficial to Americans, as it provides that much more opportunity for trade and efficiency.

We should not be fearful about jobs going away due to efficiency or changing consumer demand. As long as the government doesn’t interfere too much, there will always be jobs available.  And if anything, the jobs will actually be more fulfilling for people, as the robots take on the mundane tasks.

A few hundred years ago, the majority of the population worked on farms.  Maybe this was a dream come true for a few people, but I doubt that most people today want to be farmers.  We have computer programmers, massage therapists, dog groomers, marketers, athletes, singers, and the list goes on.  Most don’t want to be farmers, and they don’t have to be now because of technology and productivity.  Even most people working in a corporate job in a cubicle would not trade it for a long day in the fields.

The number of fulfilling jobs will only expand as long as we allow it.  We must accept free trade, and we must not be afraid of advancing technology.

The current protests in France are a rather big deal, especially if sentiment there is widespread across Europe.  The protests get some headlines in the United States, but probably not enough given their significance.

There are many takeaways from this whole thing, and I think most of them are positive.

First, it is important to understand that these protests are a continuation of what is happening elsewhere in the West in developed countries.  The British protested with Brexit.  The U.S. protested with the election of Trump.  The French are protesting in the streets, but maybe that is because they don’t have a good protest vote to make at the polls.

The protesters in France have and will be called many things.  They will be called fascist.  They will be called street thugs.  Maybe they will be called a basket of deplorables, but that term didn’t work out too well for Hillary.

I have no doubt that some of the criminal class has joined the protesters in causing mayhem and destroying private property (to the extent that it exists in France).  But I believe the origins of the protests are authentic, and it is largely anti state.  Now, if you go and ask the average protester, I doubt they will talk about the non-aggression principle or other overtly libertarian themes.  But they will say that the middle class is struggling and has had enough. Whether they call for a drastic reduction in government or more government help is another matter, but you could say the same about Trump supporters and Brexit supporters.

The bottom line is that the French president thought he could get away with another move to benefit the state at the expense of the regular person.  But he highly miscalculated and overstepped his bounds. He did the equivalent of not feeding his serfs.  If the serfs are well enough fed and don’t see too many luxuries enjoyed by the master, then the serfs will stay in line.  But every serf has his breaking point.

Americans have a tendency to not be quite as tolerant.  Perhaps a better term is obedient.  That is why we do not have the same level of taxation in the United States as what is seen in France.  It wouldn’t get to that point here.  But in the case of France, Macron added a straw that broke that camel’s back.

It’s interesting that people will say that they care about climate change, but it is easy to speak words.  Most Americans will say they oppose running up the national debt.  But when it comes time to actually cut something from the federal budget, then it becomes a lot more difficult and there is no consensus.

The same goes for global warming – excuse me, climate change.  Many of the protesters will say they support a green agenda, but that support wanes quickly when it means a downgrade in lifestyle. The French protesters realized that the higher gasoline taxes (on top of the already high gasoline taxes) were just a move to hurt the lower and middle classes, while lining the pockets of the state.

I think it is a positive development that even people in Western Europe are starting to see the fraud of the climate change agenda.  The agenda has little to do with the environment and a lot to do with taxation and control.

A Nanny State and the Consent of the Governed

The most surprising aspect for me of this whole protest movement in France is the origin of the name.  The protesters are being called the yellow vests, as they wear yellow vests when protesting in the streets.

Until a couple of days ago, I had no idea that French motorists are actually required to have these yellow vests in their vehicles in case of emergency.  I know Americans tolerate a lot of regulation in their lives, but would they really tolerate something this crazy?

We hear the term nanny state used.  I can’t find a better example of the nanny state than requiring all motorists to have yellow emergency vests in their vehicles.  The French protesters are really late in the game.  They should have been protesting the requirement of yellow vests long before these added gasoline taxes.

These protests are also a good demonstration that the politicians rely on the consent of the governed.  When these protesters hit the streets, it wasn’t long before Macron backed off his proposal to raise taxes.  Macron stayed in hiding and said he would delay the tax hikes.  But the serfs had already been awakened, and it seems to be going beyond this one tax now.

The state cannot survive without the consent of the governed.  The politicians and bureaucrats will always get away with as much as they can.  They will impose control to the degree that they can get away with it. The main thing that keeps them in check is not a constitution or the courts.  It is public opinion.  They rely on the cooperation of the large majority of the public.

I hear the objection that many people are against government or government leaders in the U.S. and elsewhere, yet they still go on.  For example, at least half the people in the U.S. oppose Trump, and many of them strongly so.  Yet Trump remains in power.

But you have to realize that the anti Trump people are not opposed to the state.  They are just opposed to one personality or one party.  They do not oppose the system.  There is widespread agreement from the American people on the state funding of Social Security, Medicare, Medicaid, education, and a long list of other things.  There are times that a majority will say they oppose a conflict overseas, but most of the people opposed are only passively opposed.  It is easy to say you don’t favor the U.S. military going into Syria, but it is more a question of whether you really care that much.

In the case of France, I don’t know if a majority of people are opposed to the gasoline tax hikes. But there is obviously a very vocal and irate minority.  It is one thing to take a poll and extrapolate that a few million people oppose something.  It is another thing when thousands of protesters hit the streets with authentic outrage.

In conclusion, I see the protests in France as largely symbolic.  It is showing that there is resistance against the state. Sometimes that resistance is quiet until there is a trigger one day.

This is good news for liberty.  France is not exactly a place of great liberty, but even here the people have a limit.  This is disrupting the plans of the globalists who seek centralization and state control.  It is a further disruption to the European Union. It is a disruption to the agenda of those who push climate change and all of the big government that goes along with it.  It is a disruption against political power.

We should celebrate these victories when they come, even when they aren’t purely libertarian.

Now that the establishment financial media is discussing the yield curve and the possibility of recession, there is going to be a lot of discussion on the causes.  The anti Trump forces will blame Trump, but I don’t know what the pro Trump crowd will blame.

During Trump’s campaign in 2015/ 2016, he was critical of the Federal Reserve.  He also pointed out that there were bubbles in the economy.  He was right. The problem is that his position has changed since becoming president.  He has taken credit for the boom in stocks and the overall economy, so it will be hard for him to not accept the blame.

Trump has been critical of the Fed lately, but it is because the Fed has been tightening and increasing its target federal funds rate.  Trump doesn’t want the Fed to burst the bubbles because it will take place on his watch.

If there is a recession on Trump’s watch, then I think the pro Trump crowd will blame the Fed. That will be their go-to excuse. They will be correct in blaming the Fed, but not for the reasons stated.  The Fed isn’t at fault because of its recent tightening. The Fed is to blame for its extremely loose monetary policy from 2008 to 2014.

I think there will be a lot of discussion about Trump’s policies on taxes, tariffs, and regulations.  Some will say that his tariffs brought on the recession.  Ironically, some of this may come from the left.

From a libertarian standpoint, it is good that Trump lowered corporate tax rates and some other taxes (although there are some libertarians who disagree on this point).  It is also good that he has actually reduced regulations in some areas.

On the bad side, Trump has enacted tariffs, which are taxes on imports and exports.  This causes consumers to pay more for products than they otherwise would have.  Also on the bad, side, massive government spending has continued on Trump’s watch, and it has even gotten worse.  The deficit has exploded again.  You know it is bad when we are looking at trillion-dollar annual deficits even if the economy stays out of recession.

I don’t want to say that all of these things have no impact on the business cycle.  They do have an impact.  Tax reductions can provide a temporary boost, even if it means bigger deficits.  Tariffs can certainly slow things down.  Massive overall spending by government is bad economically because it misallocates resources.

But none of these things are the primary cause of the artificial booms and busts that we see.

It’s the Monetary Policy

The main driver of the boom/ bust cycle is the Federal Reserve.  Its primary tools are the money supply and controlling of the interest rates.  These two things are related.  When the financial crisis hit in 2008, the Fed responded with unprecedented monetary inflation and near-zero interest rates.  The Fed continued its balance sheet expansion (monetary base inflation) until late 2014.

This is a classic case of the Austrian Business Cycle Theory, as taught by Ludwig von Mises. The artificially low interest rates and easy money cause resources to be misallocated and causes unsustainable booms.  The low interest rates send a false signal that there is more savings than what actually exists.

When the Fed stops inflating and suppressing interest rates, then the misallocations (malinvestments) are exposed.  The investors in the bubble sectors realize that it is unsustainable, and the bubble pops. This can happen eventually even if the central bank just slows down its pace of inflation.

If the central bank keeps inflating at ever-expanding rates, then eventually we will have what Mises referred to as the crack-up boom.  This is hyperinflation, which leads to far greater poverty than any recession or depression.

In other words, the recession that we will eventually get is baked into the cake.  It is unavoidable at this point.  The damage was already done.  It is just a question of how severe it will be and whether the government and the Fed allow it to run its course.

If we hit a recession soon, it won’t really be Trump’s fault.  But it was stupid of him to take credit for the so-called booming economy of the last two years.  We could certainly be much better off if he hadn’t enacted new tariffs. We could be better off if he had gotten Congress to cut spending instead of increasing it.  But no matter what, he can’t prevent a recession that was already in the cards.  The most he could do is to slightly speed it up or slow it down.

I think the mistake that many Austrian school economists have made is predicting a recession too early.  Maybe it is a mistake in predicting anything, since the Austrian school teaches that we can’t predict human action with certainty, which is the driver of the economy.

The problem is that timing is almost impossible.  Even though the Fed stopped its balance sheet expansion 4 years ago, it takes time for all of this to process through the economy.  Interest rates have crept up, but are still historically very low.  Bubbles can often last longer than what seems possible.  They can also blow up bigger than what seems possible.

As I have said, we actually need a recession for the benefit of the middle class.  It will be painful, but the current misallocations of the bubble economy are also painful.  Life has become quite expensive.  We need a recession, which will hopefully lead to a reduction in government.  One can always hope.

Barely anything changes, yet everything changes overnight.  This is what it felt like watching the financial media on Tuesday, December 4, 2018.  Out of nowhere, it seemed like everyone in the financial world was talking about interest rates, or more specifically, the yield curve.

Why now?

I have been writing about the yield curve quite a bit over the past 6 months or so.  The reason is that the yield curve has been flattening, and this is a classic (i.e., reliable) indicator of a coming recession.

The Fed has been gradually raising its target federal funds rate.  Long-term yields have gone up, but short-term yields have gone up faster.  Short-term yields were near zero for quite a while, so it isn’t surprising they have gone up.

The 10-year yield went above the 3% mark over the last couple of months.  It seemed it was going to stay above 3% with the likelihood it would rise more.  The 10-year yield is closely tied to mortgage rates, so refinancing has slowed considerably.  Some people may have felt some urgency in buying a house because they thought mortgage rates would continue to rise.  That narrative is now being questioned.

As I write this, the 10-year yield is once again below 3%.  But the short-term yields have not retreated and are continuing the rise, meaning that the spread between long rates and short rates has narrowed.

On Tuesday, the markets were spooked.  The 2-year yield and the 5-year yield narrowly inverted.  Everything seemed to happen at once.  Stocks plummeted, while longer-term rates also plummeted.  This means that long-term bond prices rose.

It isn’t clear if stocks sold off because of the flattening yield curve, or if the yield curve flattened because of falling stocks.  They seemed to feed off of each other.

The U.S. markets got a break on Wednesday because the state had to pay homage to one of its own. Perhaps there is some irony in the Bush family closing down the trading markets.  It seems a fitting legacy for the man who believed in voodoo economics.

We obviously don’t know for sure where the yield curve will go from here, but it seems more likely that it will invert in the somewhat near future.  I don’t count it has having inverted yet.  I look at the 3-month yield versus the 10-year yield.  There is still a spread of about 50 basis points (0.5%).

Perhaps the yield curve made headlines because the intermediate-term yields slightly inverted.  It also helped that the Dow fell 800 points, although I was already seeing the yield curve headlines at the opening of the day.

Is Recession Closer This Time?

In the past, the inverted yield curve has signaled recession, but there has typically been a lag.  If you wanted to short stocks, it was better to wait 6 months or a year until after the inversion.  The yield curve actually inverted in 2006, but we didn’t see the worst of the financial crisis until September 2008, although the official recession did start long before that.

The bond investors have tended to be ahead of the game.  That is why the yield curve is such a great indicator.  There aren’t many trends in the financial markets that act as predictors this reliably.

In our day of the internet, news travels a lot faster.  It is also seen by a lot more eyes.  In the past, the only people who knew about an inverted yield curve were those watching CNBC and reading the Wall Street Journal, and even they may not have known.  I’m exaggerating a little, but I hope you get the point.  Today, there are many casual investors, or even just people with a 401k who are curious about the markets, who will see the headlines on their favorite financial website.  I don’t know for sure, but I don’t think there was this much awareness about the yield curve and its implications in the past.

Of course, as with anything, there are a few people who are saying, “This time is different.” That is a classic line, which usually means things won’t be much different.  They are never exactly the same, but history tends to rhyme often enough.  Why would an inverted yield curve be any different this time?  Why would bond investors all of a sudden get it wrong as compared to everyone else?  Why would people be locking in long-term rates if they expected a booming economy ahead?

If anything, I could see a quicker onset of a recession.  More people, especially investors, are aware of the dangers of an inverted yield curve.  Some people will see the inverted curve and still not sell their stocks. There are always people who just won’t take action, even though they know they should.  But on the margin, we have to believe that some investors are going to start selling to at least get to a more conservative portfolio.

The problem with indicators is that even if they are true, they cease to be true once they are common knowledge.  Let’s say there is a company that sells winter-related things, such as snow boots and jackets. Once the beginning of February hits, sales start to fall off.  The stock price of the company starts falling too.  This starts happening every year around the first of February. Then investors become aware of this trend, so they start selling the stock in mid-January.  This becomes the new trend.  Eventually, the trend just ends.  Investors know that sales will fall off in February and start back up again around September.  The stock price becomes less volatile as market information becomes better known.

The question is, why this hasn’t happened with the yield curve?  We don’t see recessions that often, but there have been enough of them in our post Great Depression country.  At what point do investors start figuring out that an inverted yield curve means a likely coming recession and a likely fall in stocks? Instead of a one-year delay, why doesn’t this speed up due to learning from the past?

I don’t have a good answer for this, but I am just offering the possibility that maybe things are speeding up.  Maybe investors are wising up to the past with regards to the yield curve.  When the curve does invert this time, maybe the major selloff will being right away.  Or maybe we will already be part way through it.  After all, stocks have taken a big hit over the last couple of months, but the yield curve has not yet fully flattened.

My conclusion is that I have no idea what will happen this time, but that it is good to be prepared for a quicker onset of a recession.  We may not get 6 months or a year warning from an inverted yield curve until a recession begins.  When the yield curve inverts, we may already be in a recession.  It would be wise to prepare for this possibility.

This is a question that libertarians themselves need to answer.  If you were asked, “What is a libertarian?”, how would you answer?

By libertarian, I am referring to a small “l” libertarian, as opposed to a large “L” libertarian, which would be a member of the Libertarian Party.

Of course, there are many people who call themselves libertarians who are not really libertarians.  It’s not that I or anybody else owns the definition of libertarian, but we can be certain that someone like Bill Weld is most certainly not one.  There are some who have libertarian leanings, but it would be hard to identify them as true libertarians.

If you want an interesting experiment, ask some of your friends or family to define what a libertarian is.  You may be surprised to hear some of the answers.  Some may struggle quite a bit giving you an answer.

The most common response you will hear is a list of some defining characteristics.  For example, you will get a list of things that libertarians are against: gun control, taxation, regulations, etc.

One answer you might get is that a libertarian is against government.  This is technically not correct without clarification. Libertarians, including anarchists, are not (or should not be) against all government.  We are against government in its current form – i.e. involuntary government.  There is nothing wrong with voluntary governing bodies, as long as people are free to associate or not to associate.  A principled libertarian is only against involuntary government, which is the state.  We use the term government because essentially all political entities that call themselves governments are involuntary in our current world.

When you ask the question of what a libertarian is, you could get the response that it is someone who advocates liberty.  This is a correct response.  The only problem is that it is so general as to almost be meaningless. Technically though, this really is the correct definition.  A libertarian is an advocate of liberty.

The problem here is that there are many people who will say they favor liberty, yet they are not libertarians.  When you dig deeper, they don’t really favor full liberty.  Then you get down to a proper definition of liberty. There are many people who advocate entitlement programs and an interventionist foreign policy who will say that favor liberty.

The Libertarian Party Pledge

The pledge to join the Libertarian Party (LP) is actually one of the best definitions of being a libertarian that I have seen.  It reads as follows:

“I hereby certify that I do not believe in or advocate the initiation of force as a means of achieving political or social goals.”

This really gets to the heart of what it means to be a libertarian.  If you think deeply about that pledge, it was crafted carefully.

You may wonder why it doesn’t just say that you should never advocate the initiation of force. But I have an unusual example to answer this.

Let’s say one of my children called me up saying they were stuck in the middle of the desert. It is 100 degrees outside, and they are about to die of thirst before anyone can rescue them.  There is someone there in the middle of the desert who has 500 bottles of drinking water, but he refuses to give (or sell) one bottle to my child dying of thirst.  My child asks me what to do.  If my child can steal the other person’s property (one bottle of water), I say to do it.  It is an encroachment on the other person and his property.  In a sense, you could say that I am advocating the use of force (although not to actually physically harm the other person).

I think the qualifier “as a means of achieving political or social goals” is there for such a crazy example or others of similar nature.

If someone calls your wife ugly and you punch him in the face, I’m not sure that this disqualifies you from being a libertarian.  You shouldn’t have done it, and you will face the consequences of having done so, but it doesn’t mean you are advocating force for political or social change.

Aside from the nuances of the definition, I think it is important for libertarians to remember why they are libertarians.  It is easy to get sucked in to debates about cultural and other issues that really aren’t dealing with the initiation of force.

It is also important to use this as a defense or argument in favor of libertarianism.  It is easy to get wrapped up in debates over all of these details on issues.  But you can often silence, or at least confuse, someone by pointing out that he is advocating the use of violence to solve the problem that he seeks to solve.

Many people just simply don’t understand what it means to be a libertarian.  Libertarians can do a much better job or describing the political viewpoints of others.  Critics of libertarians will often make things up.  They will say such things as: libertarians don’t believe in helping people.  And if you don’t believe in government-funded education, then they will say you are against education, and so on.

Some people are being dishonest.  Some really just don’t understand libertarianism.  Sometimes it is a combination of those things.  They often don’t understand, but they don’t give any effort in trying to understand.

I was recently talking about property taxes.  My daughter asked about why we have to pay property taxes.  I said that we have to pay for the schools that she doesn’t use.  She asked what happens if I just don’t pay them.  I don’t know if I should have been this blunt, but I told her that they would fine me more money.  And if I still don’t pay, then they will put a lien on my property, and eventually, policemen may show up at the door to take me to jail or shoot me.

That is the hardcore fact that non-libertarians constantly try to avoid.  They never want to talk about the guys with guns who will show up at your door to enforce the policies they are advocating.  The men with guns will kidnap you and lock you up, and if you resist, they will kill you.  This is politics.

This is what people need to be reminded of (or taught) whenever a political discussion occurs.

Someone may have a wonderful government proposal that is intended to help a lot of people in need. But the question is whether I am free to disagree.  If I don’t go along with it, will men show up to shoot me?  That is the ultimate end of every government program. Most people obey so that the men with guns don’t show up.  But we should always be reminded that this is the ultimate end if we choose to disagree and disobey.