Back in the summer of 2015, I predicted that Bernie Sanders would not get the Democratic Party’s nomination for the presidency in 2016.  I was correct on that front, but I was wrong in how close Sanders got.  I thought one of the few other candidates would emerge to challenge Hillary Clinton, but her only competition in the primaries ended up being Sanders.

If not for the Democratic Party establishment (and the establishment in general), Bernie Sanders could have possibly gotten the nomination in 2016.  It is impossible to say how he would have fared against Trump in the general election, but it would have certainly been a different dynamic.

Sanders, at the age of 77, is again running for the presidency.  But there are a lot more candidates this time around. Sanders is near the top of the polls, but the percentages for each candidate are low because there are so many, and because it is so early.  The only person who currently beats out Sanders in the polls is Joe Biden, who will likely be the establishment’s choice.

But the establishment is not as much against Bernie as it was 3 or 4 years ago.  If they had known that Sanders could have beaten Trump, they would have much preferred Sanders.  Clinton was the ultimate establishment candidate, and she was unable to beat Trump.

Just as many on the left fear Trump, many on the right fear Sanders.  This includes conservatives and libertarians. After all, Sanders is a self-identified socialist, and one thing that unites conservatives and libertarians, at least in rhetoric, is their opposition to socialism.  (We won’t go further into the fact that most conservatives support the socialist military and the socialist entitlement programs.)

From a libertarian standpoint, there are a few things about Bernie Sanders that a libertarian might like.  It is hard to say that he is anti-war, but he is certainly less enthusiastic about war.  He also tends to be better than the average politician (which isn’t saying much) on some issues of civil liberties.

Unfortunately, Sanders follows the Murray Rothbard rule where a politician tends to focus on the issues where he is the worst.

How often do you hear Sanders harping on the issue of war and foreign intervention?  He will talk about it briefly if he is asked a question about it, but then he’ll return to talking about free healthcare, free education, etc.

The reality, though, is that Sanders is going to moderate all of his positions if he is elected president.  He will already moderate them to some degree if he just gets the nomination.

Barack Obama II

No matter the rhetoric, every president seems to just be mostly a continuation of the last one. Trump has been a little different because of how crazy he drives the establishment.  But most of his policies are just a continuation of the past.  He hasn’t started any new major wars, but he has continued on with the old ones, and he has continued on with the empire.

If Trump is not bold enough to face down the establishment when it comes to foreign policy, what makes anyone think that Sanders will be able to do it?

It is so obvious to me, but I don’t think it is obvious to others who invest their time and energy in politics.  Sanders will not be much different than anyone else we have seen in the presidency in modern times.

We will essentially get Barack Obama II.  If Sanders becomes president, he will basically have some of the same leftist rhetoric as Obama.  He will be politically correct, which will be somewhat of a change from Trump. When it comes to policy, Sanders will be similar to Obama, which isn’t all that far off from Trump.

He won’t be exactly like Obama because the world will be different in 2021 than it was from 2009 to 2017.  If anything, Sanders will “accomplish” even less than Obama, especially if the Republicans maintain a majority in the Senate.

Obama came into office as the peace candidate, and he gave us Libya, Syria, and Ukraine, along with a continuation of the previous wars.  He did not dismantle the empire.  He expanded it.  Did anyone expect anything different when he appointed Hillary Clinton as Secretary of State?

On foreign policy, Sanders will be controlled by the establishment.  How do I know this?  He already told us in 2016.  After being cheated out of the nomination by the Clinton camp and the DNC, he went on to campaign for Clinton.  He wanted to make sure he kept in good standing with the establishment.

Anyone who can support the bloodthirsty warmonger that is Hillary Clinton is not going to be a peace president once in office.  I don’t know if Sanders will start any new wars because of budget reasons. I don’t know if he will be able to wind down any of the current wars.  But for the most part, Sanders will be controlled by the establishment on foreign policy.  I have no doubt about this.

On civil liberties, we may see a few minor changes in the right direction.  Maybe the federal government’s war on marijuana will finally be brought to an official end.  That would just be Sanders going along with the times, just as Obama came around to loosening the government’s grip on going after marijuana users.

Sanders may do a few other things in a positive direction.  Maybe mandatory minimum prison sentences for drug users will go down or be loosened in some way.

However, Sanders is not against the whole idea of the government’s war on drugs.  He is not a constitutionalist.  He is not a decentralist.  He is certainly not a libertarian.  His bedrock principles lie in the use of more government violence, which is why he considers himself to be a socialist. He is not going to end the federal war on drugs.

Regarding his socialist philosophy, I don’t think Sanders is 100% socialist.  I don’t think he is arguing for the government to own all of the means of production.  I don’t think he wants to completely abolish private property.  He is basically advocating a bigger welfare state.

I’m not saying that we shouldn’t’ be fearful of even more government interference in the domestic economy, but I feel like we are getting that anyway.  Trump has done some good things in regards to tax cuts and reduced regulations, but he has also been quite bad on many things.  The federal budget (along with the debt) keeps going higher.  Spending was already out of control, and it has only gotten worse. Also, Trump has raised tariffs and caused something of a trade war, which is terribly bad for American consumers.

I think the best Sanders could hope for is to take another step towards fully socialized healthcare. Obama gave us Obamacare.  It was called the Affordable Care Act, but it has been anything but affordable.  That was his signature achievement in the eyes of the left, and it was a complete disaster.

About 80% of the budget is taken up by Medicare, Medicaid, Social Security, the military, and the interest on the national debt.  The rest of the budget is mostly made up of things that the American people believe are necessary, along with things that are paid out to satisfy the lobbyists and special interests.

Where is Sanders going to cut anything out of the budget?  Maybe he can take out a little from the military.  Maybe he can take out a tiny fraction from foreign aid, but it is doubtful he would even go that far.  Meanwhile, more baby boomers continue to retire while the entitlement programs go further into the hole.

Sanders can say he will raise taxes on the rich, but this wouldn’t be anywhere close to raising enough money for any of his pet projects.  It is also doubtful whether he could actually raise taxes directly in any significant way.  If we go into recession, he isn’t going to raise taxes.  He will turn into a Keynesian, if he isn’t one already. Even Keynesians will say that you shouldn’t raise taxes in a recession.  They say that a recession is a time to run big government deficits.  Of course, we already have big deficits.

Sanders is on the far left, politically speaking.  But so was Obama.  Obama was in national office for a very short time before he became president. He didn’t have that much time to expose himself.  But if you go back to when he first became a senator, he sounded like a Marxist at times.  He moderated his message for the presidency.

Maybe Sanders truly does consider himself to be a socialist.  But he is a politician first, just like Obama.  He won’t be a socialist president.  He will moderate his message.  He values power too much, and he values the opinions of the establishment.

If you are worried about a President Bernie Sanders, I think you should stop worrying so much. We are going to have problems no matter what.  Whether Trump is re-elected or anyone else gets in there, we still have an empire overseas, and we still have massive debt and entitlement promises that won’t be fulfilled.

When the ship sinks, maybe it would be better to have a self-identified socialist as the captain. At least it will make it more difficult to blame free markets, although they will still try their best.

Sanders is a politician first.  He is unlikely to get his socialist proposals enacted into law.  If he does, then that is the fault of the American people for allowing it to happen.

The big news this past week was that the long-anticipated Mueller report concluded that there is no evidence that Trump and his campaign colluded with Russia.  This is after more than two years of Rachel Maddow blabbering on and on about Trump’s collusion with Putin.  Will Maddow and the rest of the establishment media keep pushing this story, or will they find something else to obsess about?

Now that we are well into 2019, they can start talking more about the 2020 presidential election. They can cover the vast “choice” of Democratic candidates, each of whom wants to outdo the others with greater political correctness and greater socialism.  Or perhaps the media will just find other stories to obsess about with Trump.

Trump Derangement Syndrome (TDS) is a real thing.  People who hate Trump and obsess over Trump just cannot think straight. He has infected their minds. If they trip over the curb, they will find a way to blame Trump for it.

The whole Russia story was a hoax from day one.  It served many purposes.  It gave an excuse to Hillary Clinton on why she lost the election.  It was an attempt to take down Trump, or at least keep him in check.  It was also a way to prevent Trump from talking and getting along with Putin, just as he said in his campaign.  Any motions of peace that could hurt the military-industrial complex were quickly met with accusations of Trump being Putin’s puppet.

Meanwhile, the whole investigation was a result of a fake dossier put out by Fusion GPS, which was being paid by the Clinton campaign.  You have to wonder if Meuller’s report came out relatively clean for Trump because he didn’t want to risk exposing the real criminals, himself included.  This whole thing was rigged.

Maybe Mueller made a secret deal with the Trump campaign.  He would essentially vindicate Trump, as long as Trump restrained himself from certain activities.  Maybe it was just a deal for Trump to keep his mouth shut about the real story.  Maybe it included keeping establishment figures around, such as the execrable John Bolton.

In any case, it seems that the worst of the Russia story is behind us, although you never know. It was a seemingly good week for Trump, which drives the anti-Trumpers that much more crazy.  Their desperation just grows.

The Bad News for Trump

While the Mueller report got most of the headlines, something happened in the financial markets that spells big trouble for the Donald.  As I recently wrote, the yield curve inverted when comparing the 10-year yield vs. the 3-month yield.  The last time this happened was in 2007, just before the major recession and financial crisis.

It is almost impossible to predict the financial markets, yet the inverted yield curve has been almost flawless.  It’s not to say it couldn’t be wrong this time, but it is looking highly likely that we will be in a recession prior to November 2020.

This is bad news for Trump.  The field of Democrats looks weak to me.  Joe Biden can be likeable to some people, but he is probably more of a buffoon than Trump.  Meanwhile, Sanders and all of the other socialist wanna-be’s would be a field day for Trump.  He would just harp on socialism and the horrible details of the Green New Deal.

But if the economy is in a deep recession, Trump is not likely to win the election.  The president does not have that great of an impact on the economy, especially in the short run, but it is the president that takes the blame (or credit).

The biggest problem for Trump is that he has taken credit for the supposedly strong economy. It was only in his campaign that he was warning about bubbles.

Trump will try to blame the Fed, but I don’t think it will work very well.  He would be right to blame the Fed if he pointed to the loose monetary policy from 2008 to 2014.  The problem is that he is blaming the Fed for raising rates too much.  This will help in exposing the asset bubbles, but it would have been inevitable at some point anyway.  If the Fed had not had a policy of raising its target rate and reducing its balance sheet over the last year or so, then maybe it could have kept things looking good for a little while longer.

Trump cannot do anything to stop a recession at this point.  If it is going to happen within the next 18 months, it won’t really matter what he does.  Unless he can convince the Fed to start QE4 right now, it won’t matter. And even if the Fed did start another digital money printing spree right now, it still might not be enough to delay a recession that long.

It amazes me how little attention the inverted yield curve gets, despite being the only reliable indicator for a recession.  Most people are just unaware of it.  Most of the rest just simply ignore it.  We can hear about earnings reports, inflation reports, manufacturing reports, and every other statistic all day long.  But for forecasting a recession, the bond market works best.

I have no idea how bad the next recession will be.  But any recession at all will be met with the establishment media heavily blaming Trump.  They’ll blame his tax cuts.  They’ll blame his tariffs.  They’ll blame not enough regulation.  They’ll throw everything at him, and I don’t know if he will be prepared with a good response.  Trump is not going to start teaching the Austrian Business Cycle Theory.

After many months of harping on this subject, it has finally happened.  On Friday, March 22, 2019, the yield curve officially inverted as measured by the 3-month yield vs. the 10-year yield.  According to the U.S. Treasury’s own data, the 10-year yield stood at 2.44 on Friday, while the 3-month closed at 2.46.

The inverted yield curve – where long-term yields drop below short-term yields – is the best recession indicator that exists.  It is almost impossible to predict the financial markets, especially in our world of central banking and a mixed economy.  But an inverted yield curve is about the surest thing there is.

The last time these two metrics inverted was in 2007, and we know what happened shortly after that.

At this point, a recession prior to the 2020 election is looking highly likely.  I give it somewhere around a 50/50 chance of hitting in 2019.  While the inverted yield curve is great at predicting a recession, there tends to be a lag. We could still be a year out, but now is the time to prepare.

The trend had been going towards this inversion for many months now.  But after the Federal Open Market Committee (FOMC) released its latest monetary policy statement on Wednesday, the 10-year yield dropped big, while the 3-month yield barely moved.

The Fed has now said that it will stop hiking its target rate for 2019, and also that it will soon stop its deflationary policy of allowing $50 billion per month to roll off of its balance sheet.

Some are pointing to the Fed meeting as a cause for the 10-year yield dropping and the yield curve inverting.  But this may be confusing cause and effect.  I’m not saying that the Fed meeting had nothing to do with the short-term reaction of the bond market.  However, I do think it is more a case where the Fed decided to stop hiking rates and to stop reducing its balance sheet because of the flattening of the yield curve.  The Fed was acting in response to the bond market.

Last year, James Bullard warned that the Fed should stop hiking rates and challenging the yield curve.  He was already recognizing the flattening curve.

It is important to remember that the Fed already started reducing its target for the federal funds rate prior to when the financial crisis became apparent in 2008.  The point is that it probably doesn’t matter what the Fed does from here.    Powell could come out with a statement tomorrow saying the Fed has decided to start QE4 (more monetary inflation) and to reduce the federal funds rate.  If anything, this would just panic the market more.  It would not stop a recession that is already on the verge of happening.

The recession is already baked into the cake.  It was the Fed’s ultra loose monetary policy from 2008 to 2014 that caused the current unsustainable boom.

What to Expect and What to Do

You should prepare for a recession coming soon.  If it doesn’t happen in 2019, then 2020 is almost certain.  Either way, you need to get mentally prepared and financially prepared.

Getting financially prepared is obviously easier said than done.  We don’t know exactly how the recession will take shape, but we can take a pretty good guess based on past experience and based on what has happened over the last 10 years.

The most important thing is to keep your main source of income in a recession.  This is the number one priority for most people. The only exception is if you have a lot of wealth and you use that wealth (or are planning to soon use that wealth) as a source of income.  Otherwise, you need to do your best to keep your job.  Or if you are an entrepreneur, you need to plan on surviving the recession.

I don’t have a lot of advice in this area except to be aware of what may be coming and to work hard to avoid the worst-case scenarios.  If you are an employee, you want to be seen as a productive employee who is highly beneficial to your company.  This doesn’t guarantee not being let go, but it certainly increases your odds. And if you work for a company that is already on shaky financial ground, you may want to look elsewhere while unemployment is still relatively low.

Aside from your main source of income, you obviously want to do your best to protect the wealth that you already have.  The biggest boom in the U.S. over the last 10 years has been in stocks. I am referring to major financial assets when I say this.  I’m not including something like Bitcoin, although I expect that bubble to burst too.

I advocate a permanent portfolio for your financial assets. This includes 25% in stocks, but the other portions of the portfolio should get you through a recession.

I may decide to short stocks at some point.  I may just buy a bear fund or some kind of ETF that bets on a down stock market. I will avoid betting on any individual stocks falling.  If I short the market, I will do so cautiously with money I can afford to lose.

The other sector that has boomed is real estate.  This is not universal.  I don’t think housing is in as much of a bubble as it was 12 years ago.  I don’t think you should sell your house right now just because you think the housing market will go down, especially if you are comfortable with your monthly expenses and you are planning to stay in your house for a while.

There are exceptions to this.  If I owned a house in San Francisco, I would cash out now.  I probably would have already cashed out a couple of years ago, and it has only gone up more since then.  There are other hot markets in the U.S. that are likely to see big declines. In Canada, I expect the housing markets in Vancouver and Toronto to take a hit.

Aside from stocks and housing, I think it is important just to get rid of any debt that you can, and to save some money for an emergency fund.  In a recession, they say cash is king.  Maybe long-term U.S. government bonds will be king, but you probably can’t go wrong with cash (or cash equivalents).  You want some liquidity.

If you can make some little cutbacks right now, it is a good time to do so.  It will make it less miserable when the recession happens.  You will have already partially adjusted.  If you are accustomed to eating out 3 times a week, you can at least cut it back to once or twice now.  If you wait for the recession and you have to go from 3 times to zero, it will be hard on you mentally.  People get accustomed to a certain lifestyle, and it can be difficult mentally to cut back, even when cutting back on luxury items.

If you are mentally prepared for a recession, you will be much further ahead than most.  You won’t be taken by surprise.  And if you do have to adjust your lifestyle, it won’t be as much of a shock to your system.

In conclusion, a recession is likely coming soon, and you should already be in the process of preparing mentally and financially.  You can’t control what happens to the economy, but you can control many aspects of your own situation.

One last important point is that price deflation may occur in the short run.  This means that you may have good buying opportunities, whether it is for investments or consumer goods that you need.  If you need a new car, maybe there will be some good deals out there soon.  If you are looking to buy a house to live in or to invest in, be patient and wait for the buyer’s market.

Cash is king not just because of the security it gives you.  It also gives you opportunity when others are in crisis mode.

I recently received an email suggesting the subject of optimistic vs. pessimistic libertarians. I have written before on the topic of optimism vs. pessimism, but not as much specifically on those within the libertarian movement.

The person who emailed me said the following:

“I was first brought to libertarianism by economic people like Peter Schiff.  The doom and gloomers.  Telling me the dollar is going to crash under the weight of govt spending.  Telling me I need to prepare..buy gold…there is going to be a lot of pain coming soon.  
 
“But slowly over time I started to hear people like John Stossel.  He is excellent at showing you how much better so many things in life have become, often due to the free market.  He bucked the media’s narrative and showed me how much crime has dropped over the last 20 years, how much the internet has freed up information and how private businesses have made life so much more convenient for us etc.”
 

He concludes by asking if I am a positive or negative libertarian and whether I am optimistic for the future, both short and long term.

If you compare Peter Schiff to John Stossel, there are two different messages.  It doesn’t necessarily make either one of them wrong.  In my own opinion, I think Stossel may be overly optimistic, and I think Schiff is overly pessimistic. But they both have valid points.

When taking a step back and looking at the worldwide trend, it is mostly good news.  There is still a lot of pain and suffering constantly throughout the world, but it was even worse in the past.  Extreme poverty has dropped to a fraction of what it was just a few decades ago.  There is still widespread poverty by Western standards, but it isn’t to the same level as it was.

You can pull up statistics on this subject, but you have to pay attention to definitions.  They do get somewhat subjective.  When I think of extreme poverty, I think of someone who is malnourished with very little food and with no access to medical care, and perhaps no access to clean water.  It isn’t the same type of poverty as someone living in a tiny apartment having to work two jobs to pay for rent and groceries.

At one time, the majority of the people on the planet were in extreme poverty.  Now it is maybe 10%.  This is an incredible achievement for mankind.  In spite of (some might argue, because of) a huge increase in the population of the world, the overall poverty rates have plummeted.

This is best seen in China, where they have gone from a communist system to something of a centralized Keynesian system.  It is still far from being a free market system, but it is a lot closer than it was 4 decades ago.  It has vastly improved the lives of hundreds of millions of people.

In fact, China may be a good example of what the future holds for most of the planet.  The overall trend is up, but there is going to be some serious short-term pain.

Peter Schiff frequently warns about the US dollar, but there are libertarians who are actually much more pessimistic than him.  Schiff may warn of a dollar collapse, but he isn’t typically warning of a complete breakdown of civilization.  There are some people who warn about hyperinflation and total chaos.

I don’t think Schiff believes there will be total chaos everywhere.  If he did, he wouldn’t be living in Puerto Rico of all places. He would be buying a house in a rural area in which he could live off the land when everything goes bad.

I don’t think there is going to be hyperinflation when it comes to the U.S. dollar.  I’m not saying that it’s impossible, but just that it is highly improbable.  But there will be economic pain in the future as compared to what we have become accustomed to.

The unfunded liabilities in the U.S. have been estimated to be as high as over $200 trillion. Even if they are “just” $50 trillion, it is an amount that cannot be fulfilled.  These are promises that were made that are impossible to keep.

There are going to be broken promises.  The government retirement age is going to go up when the government can’t pay the bills and further monetary inflation is not an option.

I like to say that we are living in the best of times and the worst of times.  Of course, most people really aren’t living in the worst of times.  We are very fortunate to live in today’s world.  If you live in the U.S., you are living in one of the wealthiest countries in a time of the greatest wealth ever seen.  The problem is that we have nothing to compare it to from our personal lives.  Someone who is 30 years old only can compare his current life to his life as a younger adult or kid living in a first-world country.

There are many people living in the U.S. today who are struggling.  There are people struggling with health and mental issues. There are people struggling with family issues.  There are people struggling with financial issues.  Part of this is our culture, and part of this is the burden of government.  In some ways, these go hand-in-hand.

In some aspects, 1950s America was better than today.  In some ways, it really was a simpler time.  But for the most part, we are better off today than we were then.

The problem is that we should be much better off than we are currently.  We would have much greater freedom and prosperity if the state were radically smaller.  Right now, the government at all levels (federal, state, and local) spends about $60,000 per year per U.S. household.  This is a massive misallocation of resources.  If this money were actually spent or saved by those who earned it, then we would be vastly wealthier than we are now. Instead, we hear about people working extra hours and barely getting by.  They are barely getting by with smartphones, but they should be able to enjoy new technologies without having to struggle to pay for health insurance and rent.

It is also important to note that communication today is like nothing we have ever had. This is obvious, but people tend to forget it.  We hear about corruption, lying media, and other things that simply wouldn’t have been exposed in the past.  Between cell phones that take video, and social media to share it, there aren’t many secrets anymore.  But we have to remember that it isn’t that there is any more corruption today than there was in the past.  It is just that there are more stories of corruption because it is exposed.

So even though we hear more negative news, it is actually positive.  It means that people aren’t getting away with things as much. I don’t know if there is more police abuse of power today than in the past, but there is definitely more exposure.  It would be naïve to think that police corruption was rare decades ago.  It’s just that people weren’t taking videos then.

In conclusion, I think the overall trend is positive.  If you look at the U.S., the government has become bigger in many ways.  At the same time, we have a check against the establishment media that didn’t exist before.

We also have several other positive trends.  Gun control advocates have gotten almost nowhere.  Most Americans do not want to ban guns.  Meanwhile, states have essentially nullified the federal government’s war against marijuana users.

Perhaps the best news is that homeschooling has exploded in popularity.  Although parents have to pay their property taxes to support the government school system, they still decide to shrug off the enticement of “free” education and instead choose to do it themselves.  This is a great victory against the state, and I see the overall trend only continuing.

I am a long-term optimist for liberty.  As Harry Browne said, human nature is on our side.  People want to be able to choose things in their life.

In the short-term, I am a bit more pessimistic.  I do think there are going to be major financial/ economic problems.  It will not be confined to the United States.  In fact, I think China, Japan, and Western Europe will suffer more greatly than Americans.

The only thing hard for Americans is that we are used to high living standards.  It will be an adjustment for some people when they have to stop eating out at restaurants and have to drive a 10-year old car. Maybe some people will have it much harder than this, but I don’t think there will be anything close to starvation for most Americans.  Most people will still have a roof over their heads and food on the table.

If the government and the central bank react appropriately – that is, do nothing – then any hard period won’t remain hard for very long.  People can adjust quickly if allowed.  If the government and central bank prolong the suffering through more spending and monetary inflation, it will be unnecessarily that much more painful.

It will be similar for the rest of the major countries.  The good news is that there is actually less fighting going on now than in the past.  The 20^thcentury was a very bloody century.  The U.S. government continues to run an empire overseas and starts these wars in countries that most people don’t care about.  This is bad news for the people in these places.  The good news is that we are not likely to see any major world wars, and let’s hope that there is no use of any nuclear weapons.

As long as we can remain in relative peace, then the world will continue to prosper in a positive direction.  But it won’t be straight up.  There will be periods of pain.  We will probably hit one of those periods of pain soon.

There is great fascination with the recent story about celebrities paying big dollars to get their children into certain colleges/ universities.  This probably happens frequently, but in this case, the money was being paid covertly for cheating.

I find it fascinating from the human psychology aspect.  The two most well-known people in this scandal – Lori Loughlin and Felicity Huffman – paid big money just so that their children could get admitted to relatively top-name schools.  Now they are exposed and are in major trouble with the law.  But even if it were not against the law, is it really worth it to spend hundreds of thousands of dollars just so your kids can get into a good school?

This is a demonstration about today’s society and how much people care about appearances. These people are so concerned about what others think that they spend ridiculous amounts of money and risk major jail time just so that they can brag about where their kids are going to school.

They are facing jail time and huge legal costs, while also maybe losing their careers.  Loughlin was reportedly fired from the Hallmark Channel, and she may also be let go from the hit Netflix show, Fuller House.

Perhaps the most ironic thing is that her daughter is likely dropping out of school, and the companies Sephora and TRESemme have ended partnerships with her.  The daughter didn’t need to go to a top-name school. She already had name recognition and would have likely had a successful career without even going to college.

Loughlin and her husband reportedly spent about $500,000 in bribe money in order to get their daughter into the University of Southern California.  Actually, there was no guarantee she would get in.  The bribe money just improved her chances.

The Wrong Type of Bribe

While I think this is fraud, and it is also an absurd thing to do, I have to question whether this rises to a criminal offense.  The only real victims here are the colleges that were defrauded, and perhaps a few unknown people who might have been admitted otherwise.

What happens to someone who lies on a job application and the company finds out about it years later after hiring the person?  The most likely result is just that the person gets fired.

When you get down to it though, these people basically used a lot of money in order for their children to gain admission.  Meanwhile, let’s look at the other ways that are used to gain admission to higher education.

1. Affirmative action, where people of certain races or cultural backgrounds are given preference over others, is common everywhere.  Why are people given the option to identify their race on an application?  And if you belong to a certain minority group, you can almost be certain that this will help your chances.
2. People who make big donations to a school are far more likely to have their children admitted to that school.
3. It’s often a case of whom you know and not so much what you know.  There are many people admitted to certain schools just because they know the right people.
4. To go along with the previous two points, there is a general favoritism towards legacies. If your parents and grandparents both attended Harvard, this is probably going to increase your chances of getting into Harvard.

Yet, all of these things are legal.  They are all discriminatory, but they are seen as acceptable in terms of the law.

In this current scandal, there is an element of fraud, so I’m not saying it is the exact same thing.  But it is hard to miss the similarities.

Incidentally, Elizabeth Warren is now running for president, and she lied on her college application that she was a Native American.  Why isn’t she given the same treatment?  Is it just because of the statute of limitations?  Where is the uproar that she cheated?

With that said, maybe this whole cheating scandal will prevent Warren from winning the presidential nomination for the Democrats.  It will be hard for her to avoid the similarities.

Restitution

Lori Loughlin was released on a one million dollar bond.  You would think she was some kind of violent threat to society.

Under a more libertarian system of law (i.e., a more just system), jail time would not even be considered.  It should be a strictly civil matter.  If there is any punishment under the law, it should be restitution.  I am not even sure who the restitution money would go to, but it would be better than locking up people who are no threat to society and having the taxpayers pay for it.

These people are receiving punishment anyway outside of the law.  The rich parents are losing their jobs, as well as some of the kids involved.  This alone is devastating.

Meanwhile, anyone willing to fork over half a million dollars to improve their child’s chances of getting into a good school obviously cares about how they look in the public eye.  They care a little too much.  This whole incident is embarrassing and humiliating.  If all charges were dropped today, then these celebrities would have suffered enough with the shattered careers and the humiliation.

My last point in this whole saga is to look at the role of the FBI in this whole thing.  In the case of Felicity Huffman, FBI agents appeared at her house at 6:00 in the morning with their guns drawn in order to arrest her.

Is this really necessary?  It is like a repeat of the Roger Stone incident.  I’m sure she would have just surrendered herself at the courthouse or the police station if she had been ordered to do so.  She likely had no further evidence to hide at that point, and she was not a high flight risk.

And why is the FBI even involved in this whole thing?  Don’t they have terrorists to catch or something?  This is a total waste of resources, although I suppose it is better than the resources being expended on finding (creating) evidence that Russia hacked our elections.

Many years ago, I wrote a short e-book on the pros and cons of paying off (or paying down) your home mortgage.  It really comes down to being a personal choice based on your personal situation.

I tend to be more in favor of paying down or paying off a mortgage as compared to the typical person, including the typical financial person.  But I only favor this in the right circumstance, mainly that you have significant liquid reserves.  I am absolutely against putting extra money towards a mortgage if you still have a lot to pay off and you don’t have a good emergency fund set up.

For those who are adamant about not paying off a mortgage early, the main reason is typically that you can earn a higher rate of return by investing your money.  A secondary reason given is that you can deduct the interest on your taxes (if you itemize), but that reason has become mostly irrelevant for a large majority of homeowners with tax law changes.

In terms of an investment return, I like to remind people that you have to factor in taxes. If you make a 5% gain on your investments and you have to pay a 20% tax on your gains, then your after-tax return is only 4%.  But if you pay down a mortgage with a 4% interest rate, you are essentially getting a 4% “return” without having to pay taxes on it.

The other major thing to consider is that paying down your mortgage is a 100% guaranteed return. If your interest rate is 4%, then any additional you put towards principal is getting the equivalent of a 4% return compounded.  You may think you can get a 6% or 8% return (before taxes) by investing your money instead, but you don’t really know that.  You aren’t going to get that kind of return right now investing in U.S. Treasury bills or annuities.  You could put it in the stock market, but you could also end up in a bear market getting a negative 8% return instead.

If you take a long-term look at history, then statistically speaking you are better off investing in a broad U.S. index fund.  But as the SEC correctly warns, past performance does not indicate future results.  So even from a mathematical standpoint, investing your money instead of putting it towards the principal on your mortgage is not a slam-dunk.

But aside from this, we are human beings living in the real world.  Our emotions are not controlled by mathematical formulas.

Emotionally Empowering

I recently listened to an episode of the ChooseFI podcast, where they talk about financial independence (FI).  The guest on the show talked about how he and his wife were able to pay off their mortgage in just five years, even though it seemed like an impossible task when they first started.  Five years to the day, they walked in to the bank and made their last payment. They documented it with a video.

This has to be one of the most persuasive videos I have ever seen when it comes to paying down and paying off your home mortgage.  It wasn’t about investment returns or planning for retirement.  It was raw emotion.  It showed the great feeling you can get when you can declare yourself debt free, including on your home.  I don’t expect you to necessarily be as emotional as the woman on the video, but you can get that feeling of joy and accomplishment.

The family in this video obviously sacrificed a lot over the course of five years to make this happen. They found ways to make more money while keeping their spending tight (with 3 kids).  It was because of the sacrifice and feeling of accomplishment that she was so overcome with emotion.

If they had invested that same money and invested it in the stock market, she wouldn’t have been making a comparable video.  You don’t get really excited because your investment portfolio just hit $200,000.  Maybe some people do, but I don’t think it would be to this extent.  And unless you sell all of your stocks when you hit a particular milestone, then it could easily fall back the next day.  After you hit $200,000 (or whatever milestone you are going for), you could check back in a month and see it is back down to $190,000.  With a paid off house, this doesn’t happen.

The other important thing here is that you should enjoy the journey.  I am guessing the parents made it into something of a game, or a challenge, if you will.  There was probably a lot of gratification along the way watching the loan amount go down, slowly at first, and then faster.

I hear entrepreneurs talk about this all the time.  They talk about enjoying the journey.  Even when they hit a roadblock, they look at it as a challenge to be overcome in their little game.  They want to hold the Super Bowl trophy at the end, but they also want to enjoy playing the games that get them there.

If you decide to choose to pay extra towards the principal on your mortgage, make it fun. Even if it is just 20 dollars extra a month to start, as the couple suggests, it is something.  You can hang a spreadsheet on your wall and make a tick mark every time it goes below the next thousand-dollar mark.

Personal finance is fun to some people, believe it or not.  You can make it fun for yourself by turning it into some kind of a game or a challenge.  This is easier to do with paying down your mortgage than it is with investing, and you will find you have more emotional attachment to paying down your mortgage.

There are a lot of Democrats running for president for 2020.  The list is only going to get longer.  Only one of them is going to get the chance to challenge Donald Trump, assuming Trump is still the president and is running for re-election.

Much of the focus so far has been on domestic issues.  There has been a noticeable increase in progressive (i.e., leftist or socialist) rhetoric coming from the Democratic Party, and that includes the presidential candidates.

They are almost trying to outdo each other in terms of how much they can increase spending and increase taxes on the so-called rich.  In Elizabeth Warren’s case, it really is the rich, as she is proposing a tax on wealth.  Most tax increase proposals are on income.

It was easy for Bernie Sanders to be the far left candidate in 2016 against Hillary Clinton, at least in terms of rhetoric.  The field was very limited then.

Now, Bernie has many challengers, and it is not certain that he is the most politically leftist candidate.  When one of them proposes free healthcare for all, the next one will propose the same thing and up the ante with free universal childcare.  And the way they will provide these “free” services isn’t really explained except for higher taxes on the rich.

In terms of going against Donald Trump, I am not sure how much it is going to matter who the Democrats nominate.  Trump’s re-election is going to hinge so much on his political problems with the media and the establishment in general.  It is hard to say if all of the allegations against him will stick in the court of public opinion.  The hardcore Trump supporters will mostly still support him, and the Trump haters will obviously continue to hate him.  It is more a question of how the middle-of-the-road voter will vote, or even whether they will vote at all.

I think most of the election will revolve around domestic issues, unless something unexpected happens that is significant.  In this case, it really is the economy, stupid.  It’s ironic that that slogan came from the Clinton era, because Hillary Clinton ignored it at her own peril.

If we are in a deep recession in November 2020, then Trump will likely lose.  If the economy is booming, or seemingly booming, then Trump has a good chance to win.  If it is somewhere in between, then the election is likely to be really close.

Where a President Matters

It has long been my opinion that the president doesn’t really impact the economy that much, at least in terms of a domestic agenda.  Now, if you had a radical libertarian in office, then things would likely change, but they would have already changed because of the obvious change in public opinion.

A libertarian president could use the bully pulpit to advocate a massive reduction in spending. This is really what needs to happen.  That is what would make Americans more prosperous.  Tax cuts don’t matter much in the long run if spending continues to go up.

The one area where the president has the most power, or at least should have the most power, is foreign policy.  The president could declare an end to all wars immediately and bring the troops home.  This would put a stop to the killing of innocent lives, at least by the U.S. military.  It would put a stop to the massive destruction, at least by the U.S. military.  Unfortunately, the chaos already created by these wars can’t be undone. But they would have a better chance of fixing themselves in the future without the presence of U.S. troops.

Ending all of the wars would also help Americans economically.  It would be a major reduction in spending, or at least it should be.

Trump had some good things to say in 2015 and 2016 from a non-interventionist standpoint.  He also had some bad things to say. But it was better to hear his inconsistency rather than the consistent cheerleading for war by the other candidates.

This is the main reason that the establishment hates Trump so much.  It isn’t because of his brash personality or his mean tweets. It is because they fear he will contract the empire and the military-industrial complex.

Unfortunately, Trump has been mostly bad on foreign policy, just like his predecessors.  He has surrounded himself by war hawks, some of whom are from previous administrations.  He has surrounded himself by people who actually opposed him before his election.  They probably still oppose him, but they are just not vocal about it. They would rather have a seat at the table and have some influence, which they have had.

Trump has been mostly unable to achieve anything significant in terms of foreign policy.  The best you can say about Trump at this point is that he has not started any new major wars.  It was about this time into Obama’s presidency that the conflict in Libya was underway.

The question is, what if a Democrat wins the presidency in 2020?  Will we see any significant change in foreign policy?

Tulsi Gabbard – The Only Hope?

I wrote a blog post on Tulsi Gabbard, asking if she would make a good president.  I still stand by what I said that she would be the only one I would consider voting for from the Democratic Party.

However, I am leaning a little more in not voting for her if she somehow miraculously got the Democratic nomination.  I already vehemently disagree with her other leftist positions, particularly when it comes to economics.

Gabbard was recently on The View.  One of the co-hosts is Meghan McCain, the daughter of the late Senator John McCain.

After Meghan McCain thanked Gabbard for her “service”, she went on to say, “When I hear the name Tulsi Gabbard, I think of Assad apologist.”

Gabbard tried to stand her ground, but she did say this: “There is no disputing the fact that Bashar al-Assad in Syria is a brutal dictator.  There is no disputing the fact that he has used chemical weapons and other weapons against his people.”

Actually, Tulsi, there is disputing this.  Whether Assad is a brutal dictator is somewhat subjective.  Maybe it is a repetitive term.  But relative to other dictators, Assad is probably one of the better ones.  He has allowed people of different religions to peacefully co-exist in Syria.  It was the U.S. intervention that destroyed all of this.

And there is plenty to dispute as far as Assad using chemical weapons on his own people. These are just claims of the U.S. government.  It is no different than the claim of weapons of mass destruction in Iraq.  They are completely unsubstantiated.  They are probably purposely made up for their interventionist agenda.

If I had been Gabbard responding to McCain, I would have said, “When I hear the name McCain, I think of blood-thirsty warmonger.”  Maybe that’s why I wouldn’t make it in politics.

I don’t even like Gabbard’s response when everyone thanks her for her service and her bravery in going to Iraq.  If she is so opposed to intervention, then she should say that they shouldn’t be thanking her because she never should have been in Iraq.

Forgive me for being such a cynic here, but I know how these things go.  If she is wavering at all now, she will only waver more if she ever gets into office.

Near the end of the interview, Joy Behar asked her if her position would be popular with the Democratic Party.  Behar said that Trump said something similar when he was running.  Gabbard responded that he may have, but Trump has not followed through and has broken his promises.

But the real question is: why would Gabbard be any different?  She is a little more consistent than Trump was during his campaign.  But just because she says she will follow through, it doesn’t mean she will.

If I am doubting Gabbard, you can only imagine how I feel about the rest of the field of candidates.  Bernie Sanders and Elizabeth Warren are not hawkish in their rhetoric, but they mostly try to avoid talking about foreign policy.  It is not a priority for them.

And let’s remember that Sanders ended up supporting and campaigning for Clinton in 2016, even after what she and the party did to him.  Anyone who can even pretend to support Hillary Clinton is not going to be a non-interventionist in foreign policy as president.

I am glad that Tulsi Gabbard is running for president.  At least people are having discussions that otherwise wouldn’t have occurred. But I am doubtful that she will get the Democratic Party’s nomination.  The establishment is against her for some of the same reasons they are against Trump.  They may fear her even more.

But even if Gabbard were to become president, I don’t trust that she would fully follow through on what she is saying.  When I detect just a little bit of hesitation or wavering as I detected in her appearance on The View, I fear she will not be strong enough to follow through.  I have seen what happens to people when they get into power and are surrounded by the vultures.

A change in American foreign policy will come when there is a drastic change in public opinion. A change may also come when the government can no longer afford to pay for it all.

I have been paying close attention to the yield curve.  When the 10-year yield drops below the 3-month yield, I will be ready to call a recession.  We are not there yet (as of this writing), but it is close.

The Federal Reserve went on an unprecedented digital money-printing spree from 2008 to 2014.  The adjusted monetary base nearly quintupled.  However, this did not result in exorbitant consumer price inflation as some predicted.

I generally contribute the relatively low price inflation to two things.  First, the economy has been rather lackluster since the financial crisis of 2008.  It scared a lot of people.  It’s hard to say that consumers have been hesitant to spend and take on debt, but I think the last 10 years have been a little less crazy than the previous 10 years.  There may be another housing bubble now in some areas, but it is still not to the extent of the previous housing bubble in most areas.

The other major reason that consumer price inflation has been somewhat low over the last decade, at least compared to the massive increase in the Fed’s balance sheet, is that the commercial banks have piled up excess reserves.

Up until 2008, the excess reserves were close to zero.  In our current world of central banking, the banks lent out almost all of their deposits that they were legally allowed to.  If they fell below their legal limit, they would just borrow overnight from other banks that had a little extra.  The interest rate paid was essentially the federal funds rate.

It all balanced out as long as there were no massive cash withdrawals, which wouldn’t have been allowed anyway.  As long as the money stayed within the banking system, the banking system basically stayed solvent. Or at least that was the case until the financial crisis, when banks got caught with a lot of bad loans, mostly in the form of mortgages.

In response to the 2008 financial crisis, banks piled up excess reserves, which was basically unprecedented in our world of central banking.  This coincided with the Fed’s new policy of paying interest on bank reserves, including excess reserves.  While the rate was very small (0.25%) to start, it was still something. It is better for a bank to earn a risk-free one-quarter percent than to make risky loans at slightly higher rates.

Until 2008, the total excess reserves were around $2 billion, give or take.  In our world of trillions, it was basically a rounding error.  But from 2008 to 2014, coinciding with QE1 through QE3, the banks increased excess reserves to about $2.7 trillion by 2014.  This was at about the same time that QE3 was winding down.

The Slow Wind Down

Currently, the Fed is engaging in a slow wind down of its balance sheet.  It is allowing about $50 billion per month to roll off its balance sheet, which reduces the adjusted monetary base.  The Fed is not actually selling off assets. It is just not rolling over all of its maturing assets.

Excess reserves have fallen to about $1.5 trillion.  This is quite a drop from its high in 2014.  It is somewhat corresponding to the decrease in the monetary base. This major fall is in spite of the Fed now paying a higher interest rate on bank reserves.

This is what makes it so tough to see what is coming.  The Fed went on a massive money creation spree for 6 years.  It obviously caused major misallocations, but it could have been so much worse.  The Fed has gotten away with this because of the relatively low consumer price inflation.  There has certainly been asset price inflation in housing and stocks, but people generally cheer this.

Now the Fed is tightening.  The Austrian Business Cycle Theory tells us that the malinvestments should be exposed, and we should see a correction/ recession.  But while the Fed is tightening, the excess reserves are dropping fast.  So just as the monetary inflation was not amplified on the way up, the monetary deflation is not being amplified on the way down.

According to the CPI, consumer prices are fairly stable, so this is not telling us much.

We really are in uncharted waters.  We have never seen anything like this, or even anything close to this.  It is amazing the Fed has essentially gotten away with this, at least up until now.

The major drop in excess reserves is making me more cautious in predicting that a major crash is imminent.  If banks are lending a little more right now, it may extend the boom.  It may extend the bubbles.  But the large majority of the decrease in bank excess reserves is because of the drop in the Fed’s balance sheet.

I am still leaning towards an economic downturn.  I thought almost for sure it would happen before the 2020 election, but that isn’t all that far off now.  I don’t know if the major drop in excess reserves will buy enough time to keep the artificial boom going past the 2020 election.

That is why I am mostly paying attention to the yield curve these days.  There are so many other moving parts going in different directions, but the interest rates tell the best story.

If the yield curve inverts, then a recession is coming in the near future.  But until that happens, I don’t want to bet against the U.S. economy.

I recently received an email question from a reader.  Since it may be relevant to many people, I am answering it in a blog post. The email is as follows (reprinted with permission).

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I have about $13k in credit card debt at 25% interest.I also have $12k in an auto loan at 10%.  My savings account currently has about $25k in it, mostly in a modified permanent portfolio.  

Should I just take that $25k, wipe out my savings and pay off all of my debt? My job is pretty secure at the moment.  If I had an emergency I would always have open credit cards.  And long term I would be able to save more not having to service all of that debt.  Opinion?  Financially it seems that having no debt is the smart thing.  Psychologically however, seeing money in my savings is comforting.  Seeing open credit on a credit card (that could possibly be taken away at any time by the issuer) is not as comforting.

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The question basically boils down to whether it is appropriate to sacrifice an emergency fund to pay down debt.

First, this is a personal scenario.  The details of the question are good, but I can never know everything about a person’s situation.  It isn’t just a math question.  He says it is comforting seeing money in savings, but I don’t know how much discomfort there is in carrying the debt.

I don’t like to tell someone what they should do because everyone’s situation is different with specific details.  And even if you get two people with virtually identical financial situations, they probably have different personalities.

With that said, the big thing that pops out at me is the high interest rates.  The 25% interest rate on the credit card debt is really high.  Even the car loan debt at 10% is high, especially in today’s environment of relatively low interest rates.

I am an advocate of setting up a permanent portfolio, which he follows. But I don’t like the thought of making a 5% return on investment (or something like that), yet paying 25% interest towards debt.

As I like to say, you don’t get rich by paying interest.  You get rich by collecting interest.

If I were in this situation, I would immediately pay off all of the credit card debt with the savings. Again, I can only say what I would do given what I know.

I am assuming that he has access to all of the money and that it isn’t in a retirement account. Therefore, it should be easy to access and get into his bank checking account.  I would pay off the total balance of the credit card debt as soon as possible and stop paying those enormous interest rates.  I would then vow to pay off the total balance every single month until the end of time, barring a major emergency.

The auto loan debt is a little trickier.  It is still a high interest rate, but I wouldn’t want to go down to zero savings. I have no idea what the monthly payments are, but I am guessing the principal balance is going down by $300 per month or so if it is somewhat typical.  Therefore, in another three months, the auto loan may be down to $9,000.

I don’t know how much he saves each month.  If it is zero, he needs to find a way to change that.  He needs positive cash flow, even if it is a couple of hundred dollars per month.

I would leave at least a month’s worth of expenses in savings.  Beyond that, he could pay down the auto loan at this time without completely paying it off, but it isn’t quite as clear to me with this.  If he has a decent savings rate and he feels rather secure in his job, then he could pay the whole thing off.

It does make a difference regarding someone’s personal situation.  If you are supporting a family and own a house, it is probably good to have some money in reserve.  If you are single and renting an apartment, you are less likely to have emergency expenses.  Then it comes down more to the math, which says to pay off the high interest debt.

As was said in the email, he can always access the credit card again in case of an emergency. But I would want it to be a very serious emergency to go back into credit card debt.  I doubt that the credit card companies are going to shut down the card or cards, assuming there are no stolen cards or identity thefts. Even with a stolen card, you should get a new one in less than a week.

In summary, if I were in this situation, I would immediately pay off the entire balance of the credit card debt.  I would think about paying down the auto loan while maybe keeping a month’s worth of expenses in the bank.

I like the permanent portfolio, but not at the expense of paying 25% and 10% interest rates on debt.

Once the debt is gone, then your savings rate should go up.  That is with anything.  If you pay off a home mortgage, then your cash flow should increase each month by that amount (the principal and interest).  In this situation, the money that would have gone to credit card payments and auto loan payments each month can be put back into savings.

Without any credit card debt and car loan debt, then it should be easier to save and build up that emergency fund.  Then the permanent portfolio becomes a good option.