CNBC ran an article titled: The Fed is looking at a new program that could be another version of ‘quantitative easing’.

The article states that Federal Reserve officials are floating the idea of getting banks to reduce their reserves while increasing their ownership in U.S. Treasuries (sometimes purposely misspelled as “Treasurys”).  This would supposedly enable the Fed to reduce its balance sheet further, while still maintaining some liquidity for banks.

The Fed massively expanded its balance sheet from 2008 to 2014.  With that, commercial banks increased their excess reserves by a huge amount.  In other words, a good portion of the money that was created by the Fed was not lent out by banks, but instead parked at the Fed “earning” a small interest rate.

The Fed has been trying to reduce its balance sheet from the previous unprecedented monetary inflation, and it has been doing so recently by $50 billion per month.  However, it has signaled that it would wrap up its balance sheet reduction program this fall.  This coincided with its halt in raising the federal funds rate due to a shaky stock market and a nearly flat yield curve.

The Fed is basically trying to juggle two fears here.  On the one hand, Fed officials are worried about a recession, as they should be with the recent brief inversion of the yield curve.  On the other hand, the Fed is also seemingly concerned about its massive balance sheet and what that could mean for the future.

And what happens if we do hit a recession in the next year or so?  Will the Fed dare to expand its balance sheet even more?  There has to be a limit at some point. That limit will be a loss of faith in the U.S. dollar.

The Fed tried a lot of new tricks starting in 2008 from buying mortgage-backed securities to paying interest on bank reserves.  It has seemed to work out so far, at least from the Fed’s perspective. Sure, it has massively misallocated resources and made our living standards lower than they otherwise would have been, but most people don’t understand this stuff.  If unemployment and consumer price inflation statistics look good, then the Fed must be doing a fine job.

But just because everything has worked out for the Fed for the last decade, it doesn’t mean it will last.  And just the fact that they are discussing these unusual ideas should tell us something. I’m just not sure if it is a sign of overconfidence that they can just keep tinkering with the market and everything will keep humming along; or if it is a sign of fear that something bad is about to happen.

With this latest plan, banks would be substituting Treasuries for actual bank reserves. Treasuries are not as liquid. Just how liquid they are depends on their maturity term.  I have to believe that the Fed will quickly swap back liquidity (bank reserves) for the Treasury bills if an emergency situation came up.

There’s No Free Lunch

It’s not clear what this talk means, let alone what would actually happen if implemented.  I think the Fed just wants to have options on how to deal with a future recession and/ or financial crisis.

When the recession/ financial crisis struck in 2008, the national debt was less than half of what it is now, and the Fed’s balance sheet was about one-quarter of what it is now. So if another recession started right now, the Fed would be building on top of all of this.  Its starting line is way ahead (or is that way behind?) where it was last time.

Is Congress going to double the national debt again within the next decade?  Is the Fed going to quadruple (or more) its balance sheet again?

We still haven’t felt the full effects of the loose monetary policy of 2008 to 2014.  The misallocations have largely not yet been exposed.  When things get tough, they will get tough quickly.  We could see falling housing prices and falling stock prices as we did over a decade ago.  This time, I think the fall in stock prices will be even worse than the fall in housing prices, unless you live in a really bubble area such as San Francisco.

Just because things have been humming along (despite the middle class struggles), it doesn’t mean it will just continue to do so.  Even the Fed has limits.  It can only digitally print so much money until there is a loss of confidence in the dollar.  This doesn’t seem likely to happen any time soon, but emotions change quickly, especially during difficult times.

When the next recession hits, the Fed will likely start another round of so-called quantitative easing.  But no matter how people react, it will just do more damage in the long run.  It might curtail investment even more, while the investment that does happen is malinvestment that is consuming resources that would have been used in other areas to satisfy consumer demand.  And if the Fed really gets carried away, then eventually we will see rising consumer prices.  It may be like the stagflation of the 1970s.  I can’t imagine the Fed letting the CPI rise beyond 10% without acting as Paul Volcker did, but you never can be sure during times of crisis.

It is quite difficult to predict anything at this point, but we know that the Fed is considering its options for when it needs them.  The Fed will continue to play its monetary tricks, but ultimately it can only engage in monetary inflation or monetary deflation.  They aren’t sure which way to go right now, but we know which way they will go when the next recession becomes evident.

Bill Weld has announced his intention to challenge Donald Trump for the Republican nomination for the 2020 presidency.  Weld’s most recent run for political office was as the nominee of the Libertarian Party for vice president in 2016.  While the VP candidate must be officially nominated by the Libertarian Party delegates at the convention, Weld was the choice of the presidential nominee, Gary Johnson.

I wrote quite a bit on Weld and his establishment credentials at the time.  On May 29, 2016, when comparing the Johnson/ Weld ticket to Trump, I stated the following:

“At least with Trump, there is a chance for a less interventionist foreign policy.  If Johnson gets in, then Weld gets in.  If Weld gets in, then the Republican establishment gets in.”

Is there any contesting now that Bill Weld is part of the establishment that seeks to maintain the general status quo of U.S. empire and statism?

You could rightfully argue that the Republican establishment got in with Trump anyway.  After all, you can’t get much worse that John Bolton and Mike Pompeo.  But at least with Trump, he sometimes takes some reasonable stances with regards to foreign policy.  He hasn’t started any new major wars yet, although you never know what tomorrow may bring.

But just imagine if Gary Johnson were president, with Bill Weld as vice president.  Does anyone honestly think that Johnson would have carried through on anything in regards to a less interventionist foreign policy?  Would he have withdrawn troops from the Middle East?

Gary Johnson, if he was even being honest with some of his non-interventionist rhetoric, is weak. If you are weak going into a position like that, you will not survive, or at least your agenda will not survive. Even if he did have a somewhat honest agenda of reducing the U.S. empire, he wouldn’t have been able to carry through on any of it.  Weld would have had his guys running the show from day one.

Donald Trump has been too weak to even get troops out of Syria.  He went further than almost anyone else would have been capable in that he announced a withdrawal from Syria.  But then Bolton and the rest of the establishment put him in his place and delayed the withdrawal.  Trump is weak, but he is not as weak as Johnson.  If Trump can’t pull a few thousand troops out of Syria, there would have been no hope for Johnson.

I even said similar things about Rand Paul when he was running for president.  He has been better on foreign policy issues since his run for the presidency ended.  But if he was not willing to stand up to the establishment while he was running for office, there would have been little hope had he actually been elected. Maybe there was a tiny bit of hope with him because it is possible that his father (Ron Paul) would have scolded him in private and told him to do the right thing and start bringing the troops home.

Weld – An Establishment Plant?

Sometimes conspiracy theories run too far and too deep for me.  Sometimes you don’t need a conspiracy to just believe that people acted in their own self-interest.

Bill Weld obviously got a little notoriety by being the vice-presidential candidate on the LP ticket.  But the more I look at the situation, I can’t help but wonder whether he was a plant, who was put there by and for the establishment.

Most people knew that the Johnson/ Weld ticket was never going to win the general election, barring something extraordinary.  Even if Trump and Hillary had both been recorded on video doing explicitly criminal acts, and the videos had been released a week before the election, it probably wouldn’t have led to anywhere near a Johnson/ Weld victory.

I think Weld’s main purpose was to stop Donald Trump from getting in the White House.  In other words, his main purpose was to help elect Hillary Clinton, which obviously didn’t work.  In the run up to Election Day, Weld was out there essentially campaigning for Clinton.  I still wonder whether Johnson felt betrayed by this, or if he was part of the plan.

Now Weld is set to run against Donald Trump in the Republican primaries.  I can’t imagine that Weld would be delusional enough to think that he could defeat Trump.  It’s possible that he could get really lucky at the last minute and something bad could happen to Trump.  But even here, the Republican electorate would likely find someone else to replace Trump instead of Weld, even at the last minute.

Weld is being put out there to challenge Trump not because anyone expects him to win.  It is simply a strategy to weaken Trump. Weld will hammer away at Trump and do the establishment’s bidding.  While the Democratic candidates (and there are many) hammer away at each other, at least there will be someone else outside of this crop of politicians who is also attacking Trump.  The main focus of the Democratic primary debates will be who can give away more “free” stuff, and who can attack Trump more.

We will have all of the Democratic candidates going after Trump.  The establishment media will obviously continue with their attacks.  And we’ll now have Weld from the Republican establishment side going after Trump.  The more, the merrier.

Lessons Learned for the LP?

The biggest takeaway will be whether the “Libertarians” who supported Johnson/ Weld will learn anything from this.  Unfortunately, I doubt it.  But I have to imagine that there will at least be a few people who scratch their heads and rethink the strategy of putting up “respectable” people as the Libertarian Party nominees.

I had a few debates with Libertarians over this in 2016.  I was told that the LP just wanted two respected former governors who have name recognition and credibility.  If Weld is what you want to call credible, then the word has lost all meaning to me.

He is only credible in the sense that he is a reliable shill for the establishment and statism. He is highly dependable to take the position that most favors the state.

The Johnson/ Weld ticket did get the most number of votes ever for the LP in a presidential election.  But so what?  It is meaningless.  Some of those votes were just protest votes against Donald/ Hillary.  They were not necessarily votes in favor of liberty.

The duo of Johnson and Weld did little to educate people on the benefits and morality of liberty. If anything, they did a great disservice by clouding the libertarian message.  Now there may be some people who think that Johnson and Weld are what it means to be a libertarian.

They didn’t grow the party with actual libertarians.  They didn’t help spread the message of liberty.  They didn’t set any foundations for future growth in the liberty movement.  They didn’t even do much to help us on any of the individual issues.  It didn’t take great courage to come out for the legalization of marijuana in a time when it is already happening by popular opinion.

The LP needs to find another Harry Browne (although nobody could match what Harry Browne did). There are a few promising prospective candidates out there now, such as Jacob Hornberger of The Future of Freedom Foundation.

It would be interesting to see what an actual libertarian could do in the general election. At the very least, maybe the next LP nominee could actually help educate others on what it means to be a libertarian.  It is almost the opposite of the things that are advocated by Bill Weld.

I am a big advocate of investing financial assets in a permanent portfolio as outlined by Harry Browne in his book Fail-Safe Investing.  I recommend at least half of one’s financial assets go into a permanent portfolio or something similar.

The setup is straightforward.  You are buying just 4 asset classes, all in equal parts.  They are as follows:

• 25% stocks
• 25% long-term government bonds
• 25% gold
• 25% cash or cash equivalents

The idea is to protect your assets in virtually any financial environment, while still getting long-term growth.  It isn’t the most exciting way to allocate your money, but it can help you sleep at night.  The portfolio can be a little frustrating during a bull market in stocks (as we’ve had for the last decade) when it seems like everyone else is making good money.  But when that environment changes, you will be thankful for the permanent portfolio.  You don’t need to ride a constant roller coaster.

I go into detail of the permanent portfolio in my short e-book titled How to Set Up a Permanent Portfolio.

One alternative option to the permanent portfolio is to invest in the Permanent Portfolio mutual fund.  The symbol is PRPFX. It makes it easy and convenient to get a permanent portfolio, especially if you can buy it in a retirement account.

However, I do warn people that PRPFX is not a perfect match to the actual permanent portfolio as described above.  There is more speculation in it, which can be good or bad.  Like any mutual fund, you also have to pay a management fee for the fund.

The Current Allocation

Here is a breakdown of PRPFX according to the annual report ending January 31, 2019.  The breakdown is as follows:

• 20.66% gold assets
• 5.89% silver assets
• 7.49% Swiss franc assets
• 7.61% natural resources (stocks)
• 12.59% real estate (stocks)
• 20.39% aggressive growth stocks
• 17.13% corporate bonds
• 7.46% U.S. Treasury securities

It adds up to almost 100%.  As you can see, the allocation is quite different from the permanent portfolio.

The portion allocated to Swiss francs may actually be down a little from where it once was.  I never agreed with this allocation, and I still don’t.  You don’t need foreign currency.  You are protected against dollar depreciation (or whatever currency you are using) with your gold allocation.

And why the Swiss franc?  I know it has been a historically stable currency, relatively speaking.  But it is no longer backed by gold (just like every other currency).  The franc could easily go down, just like the euro or yen.

The next thing that may stick out to you is the allocation of over 5% to silver.  In the real permanent portfolio, the only metal you invest in is gold.  With PRPFX, the gold allocation is reduced closer to 20%, so the precious metal allocation is still close to 25%.

The problem here is that silver is far more volatile than gold.  It will likely do better than gold in a bull market for precious metals.  But when the metals perform poorly, silver will tend to do far worse than gold.  In other words, the additional silver allocation adds more volatility.

In terms of stocks, PRPFX goes way over the 25% allocation.  It is actually over 40%.  And more importantly, it speculates in particular stocks. The fund isn’t just buying a broad index fund, such as an S&P 500 fund.  It is buying specific stocks in specific sectors.

To be sure, if any one stock went to zero, it wouldn’t hurt PRPFX terribly, but it would be a little noticeable.  And if there was a general crash in stocks, the stocks picked by the fund managers could very likely go down even more than the broader U.S. market, especially if energy and real estate took a big hit.

Meanwhile, the bond and money market allocations are light, and part of the bonds are corporate bonds, which can technically default, especially in a down market.

I am not sure how well PRPFX will hold up in a major recession or depression, especially if it is somewhat deflationary where stocks are crashing and gold and silver are also going down.  In this scenario, I think the real permanent portfolio will hold up a better than PRPFX.

This isn’t a recommendation against PRPFX.  Again, the fund is very convenient, and it adds a little more aggressiveness in a portfolio that was designed to be very conservative.  Some people may like this aspect.  I just want to make sure you know what you are getting into if you decide to purchase PRPFX in lieu of setting up a regular permanent portfolio.

There is this ongoing fear of technology in terms of economics.  Perhaps we are right to fear technology when it comes to nuclear weapons or the government spying on us.  But when it comes to doing things more efficiently that make our lives better, we should not fear technology.

It has become common to hear that robots are going to take our jobs.  This has been one of the main lines of argument for those promoting a universal basic income.  After all, if people don’t have jobs, how will they buy anything? Therefore, it is “reasoned”, we need the government to redistribute wealth by providing a universal basic income.

Those who do not fear the takeover of robots point out that other jobs are created.  For example, cars put the horse and buggy industry out of business, but it didn’t mean that people were worse off for it. Other jobs were filled, some having to do with the new technology.

If you go back 200 years ago, the majority of people in the United States were farmers or did some kind of agriculture.  Now, it is less than 2% of the population that do the farming for everyone else.  This has freed up the time for the rest of the population to do other things to better our lives.

The ones who are scared of the coming robots (or who want others to be scared) reject this. They say, “This time is different.”

Why this time will be different is never fully explained.  Are we supposed to believe that robots will do everything? Are they going to run a massager parlor?  Are they going to work as nurses?  Are they going to raise children?  Are they going to provide all of our entertainment?  Are they going to pet sit?

We live in a world of virtually unlimited wants, but we have scarce resources.  As long as that situation exists, there will be jobs for people.  If we ever got to a point where everything was provided by robots, then we wouldn’t need jobs anyway.

Those who are scared of the robot bogeyman will sometimes admit that there will still be jobs available.  But they say that the skills of people laid off won’t match the skills needed for the new jobs. They also say that if people could fill those jobs, then the wages will be so low that they won’t be able to buy the stuff that robots make anyway.

Understanding Free Market Economics

This is just a terrible lack of understanding of the market economy.

First, if people can’t afford to buy what the robots are making, then why would the robots make anything?  Who is paying the capital investment to make robots that can’t sell the products they are making? Why would they have these robots if they can’t make a profit?  It isn’t going to be very profitable if there is just a tiny circle economy of just the capitalists who own the robots.  Most entrepreneurs rely on the middle class as customers (and employees) in order to make significant profits.

Second, there is a major missed point in all of this.  If robots take the jobs of people, it means they are more efficient. They are more cost effective. It means that, assuming we have a relatively free market, the lower costs and competition will drive down consumer prices.  So even if nominal wages did go down, the cost of living would be going down too.

Imagine if all products were like electronics have been for the last couple of decades. Televisions get better and better in quality while the price keeps going down (in spite of monetary inflation and rising consumer prices).

Third, there is this worry about skills, but human labor is very versatile.  In addition, if robots take the jobs of all truckers (self-driving automobiles), it doesn’t mean all of the unemployed truckers have to go into the exact jobs that are created.  There is a market process, where price plays a function. In this case, it is the price of labor.

Let’s say we need more people in healthcare and we need more teachers.  It doesn’t mean all of the truckers have to go into these professions.  If there is a high demand for nurses, then wages for nurses will rise.  This will encourage other people to go into these professions.  It could be young people going to school, or it could be people changing professions.

Maybe someone who was going to be an accountant will become a nurse.  Someone who was going to be a plumber instead decides to be an accountant.  Maybe a former truck driver then decides to become a plumber.

The market sorts all of this out as long as it is allowed to function.  This is the price mechanism at work.  Prices allocate scarce goods, whether it is consumer products or labor.

Technology will make us richer.  It will even improve the living standards of those people who lose their jobs to robots, at least in the long term, assuming the market is allowed to function.  Real wages will go up.  Someone working a minimum wage job today is likely much better off than someone who was considered middle class 200 years ago. We have access to electricity, refrigeration, air conditioning, smartphones, and a long list of other things that mostly did not exist back then.

So to answer the question – How will people buy stuff when robots take their jobs?

They will buy things easily with higher real wages.  Things will be much cheaper if the free market is allowed to exist.

I recently listened to a podcast about investing in dividend stocks.  It is not necessarily clear on how to define a “dividend stock” other than the simple definition that it is a stock that pays a dividend to shareholders.

The only problem with this definition is that there are many companies that pay a dividend to shareholders, but they wouldn’t really be considered dividend stocks because the dividends are so low.  When the current dividend of a stock is lower than the yield on a short-term bond, it is hard to get excited about that stock just because of the dividend payout.  After all, you could just buy an essentially risk-free bond with a higher yield.

This podcast episode sparked some discussions in a forum, which is specifically for people interested in financial independence (FI).  Therefore, you would expect the people in the forum to be somewhat financially savvy, or at least above average.  Unfortunately, a little bit of knowledge can sometimes be harmful.

Someone posted that dividends are the only reason stocks are worth anything.  In other words, stocks really have to pay out dividends or have the potential to pay out dividends in order for the stock to have underlying value.  It was simply an academic point.  He made it clear – at least to me – that this was not investment advice.  He wasn’t saying that you should only invest in stocks that pay dividends.  He was just making the point, “Why would you ever invest in a stock if you knew the stock would never pay out a dividend?”

There is the greater fool theory, meaning that you just hope that someone will buy it from you at a greater price that what you paid.  You don’t care if the stock goes down in price, as long as it happens after you sell it.

It is quite clear that you can make money on a stock that never pays out a dividend, and the original poster on this forum would agree with that.  You can buy a stock, and then later sell it at a higher price.

But if you knew that a stock would never pay out a dividend, why would anyone think this has value in the long run?  What would be the point of owning something that never pays out any of its profits?

The responses to this original post were astounding.  It was one person after another being critical of the original comment. Again, the comment was supposed to be an informative point, and it wasn’t a suggestion to just buy dividend stocks.

The responses kept saying that you can make money on stocks that don’t pay out dividends, even though the original poster made it clear that he agreed with this point.

There were posts saying that dividends are irrelevant to the price of a stock.

There were posts saying that it doesn’t make sense to buy a dividend stock because the price of the stock goes down every time a dividend is paid out.  (This is a lack of understanding of how stocks are valued in accordance with dividend payouts.  The price has to change, all other things equal, otherwise you could buy a stock for $40 per share the day before a dividend payout, and then sell it again for $40 per share the day after the payout is made.  Why wouldn’t everyone do this?)

It was one comment after another of people who were completely missing the point of the post. There were a few people who saw the intelligence of the post and backed him up, but it was a minority to be sure.

There were a few people who pointed out that you buy stock so that you own a tiny share of the company and that you own a tiny share of the assets.  This is correct by itself, but it doesn’t refute the point about dividends.

If you own shares of Microsoft, you could say that you own a tiny piece of the office buildings and the office equipment.  But even this is questionable.  If the company were to declare bankruptcy and all of the assets were liquidated, the senior bondholders would get paid first.  The shareholders are typically last in line.

The reason you would buy Microsoft is not primarily to own the actual assets.  It would be to own a piece of the operations. More specifically, it would be to get a share of the profits from the software and other goods and services that it sells.

Would You Start a Business and Never Pay Yourself?

This is obviously confusing for many people.  Most of the ignorant comments I read were from people who regularly invest heavily in stocks, yet they don’t even understand the purpose of owning a stock outside of “making money”.

Let’s say you start a business.  After the first year, you break even.  Your revenue equals your expenses.

In the second year, your revenue exceeds your expenses by $100,000.  But instead of taking that profit as a salary, you keep it in the bank.  You then decide that you will take that $100,000 and spend it on better equipment and more marketing.  There is nothing wrong with this.  You are trying to grow the business.

The next year, you profit $300,000.  You make the same decision to take this extra money and buy even better equipment and to go even heavier into marketing and hiring more people.

The following year, even though your business is bigger, your profit is still $300,000.  You have to decide whether to put even more money into more equipment, labor, and marketing, or to start paying yourself a salary.

At some point, as the sole business owner, you are probably going to want to start paying yourself a salary, especially when you aren’t getting that much more bang for your buck with more investment capital.

Your other option is to sell the business.  Maybe someone would buy your business for $1 million, counting on the fact that they can turn a profit of $300,000 per year for the foreseeable future.

Paying yourself a salary is similar to getting a dividend from owning shares in a company. The only difference is that the sole business owner can decide himself whether to pay himself a salary. With shareholders, they are dependent on the decision of the company as a whole on whether dividends will be paid.

If you do sell your business without ever taking a salary, there is nothing wrong with this. But you have to assume that the next guy will probably want a salary at some point.  If you just keep rolling all profits back into the business forever, what would be the point of having the business?

That is the same as owning shares in a company.  It doesn’t have to pay a dividend to have value, but there at least has to be a potential of a dividend in the future.  If a company announced that it would never pay out a dividend, there would be no reason to own the company, unless you thought people would foolishly buy the stock knowing this.

Investing Advice

This isn’t investment advice, but I think it is important to know if you are investing.  It is important to understand why something has value and why it is a good idea to invest in something.  It is fine if you just want to try to get capital gains, but you should at least understand why there would be capital gains.

This is a little harder to write right now because there is seemingly a bubble and the “irrational exuberance” that goes with it.  It does become something of the greater fool theory.

But the market usually corrects this over time.  If companies aren’t profitable, they aren’t going to keep going up in value forever.

It’s not to say that a stock is good just because it pays a dividend.  In some cases, the company shouldn’t be paying out a dividend if it is in financial trouble.  If you are a business owner, you might have to cut back your salary (your dividend) during tough times.

If we had a normal functioning free market, I think dividends would be much more common. The tax code and other laws have greatly distorted the whole stock market.  The central bank (the Federal Reserve) has done the same. It is a system that favors capital gains over dividends.

But even distortions can be corrected to a certain degree.  If a company has no dividends, and if it has no prospect of dividends in the foreseeable future, why would the price of the stock go up? The capital gains can’t continue forever without the prospect of dividends.

A litmus test, outside of its use in chemistry, is considered to be “a decisively indicative test”.  People use litmus tests in politics.  Some people have lines they won’t cross.

I have my own libertarian litmus test.  It may not be 100% decisive, but it is pretty close.

A true libertarian litmus test would just ask if someone agrees with the Libertarian Party pledge:

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

The problem with the pledge is that there are many Libertarians (large “L”) who have signed the pledge but who don’t actually follow it.  They are Libertarians, but they are not small “l” libertarians.

You can also ask someone on the street if they advocate the initiation of force as a means of achieving political or social goals.  Some people will say they do not support the initiation of force (violence), yet they really do.  If they truly didn’t support it, then they would be libertarian.  They don’t understand that supporting government action, outside of strictly defending life and property rights, is an advocation of violence.

Simple Political Questions

I wrote a post back in 2015 about Edward Snowden.  I wrote about a good litmus test regarding someone’s stance on liberty.  I wrote the following:

You can ask someone two questions and get a pretty good idea of their overall political philosophy.

1) Do you think Edward Snowden committed treason?

2) Do you think we need more government control over healthcare?

If someone answers no to both questions, he is probably a libertarian, or at least somewhat libertarian leaning.  If someone answers no to the first question and yes to the second, then he is a leftist.  If someone answers yes to the first and no to the second, he is probably a conservative.

Again, this isn’t a perfect test.  I’m not saying that everyone who answers “no” to these questions is a defender of the non-aggression principle or libertarianism.  But someone who answers “no” to both of these questions is at least someone who is generally favorable towards liberty.  It is probably someone who we should consider an ally in moving towards a more libertarian society, at least from our current starting point.

Replacing Snowden with Assange

Julian Assange was recently arrested by the police in the United Kingdom after the Ecuadorian government revoked his asylum.  Assange will likely be extradited to the United States.

There were some people who originally taunted Assange and his supporters saying he just had to face his original rape charges in Sweden and that there were no official plans to extradite him to the United States.  This has already been proven untrue.  It was completely justified for Assange to fear extradition all along.  The phony rape charges were an excuse to get him into custody.

Assange’s true crime in the eyes of the state is that he has helped to expose the truth.

The U.S. government, just like most other governments, has elements of it that lie and engage in criminal activity.  This is especially true of the U.S. government because of its vast resources. That is the one downside of free market capitalism.  While we obviously don’t have a fully free market, the previous relatively free market of many generations has provided great wealth, which has enabled the government to consume vast amounts of resources, including for evil purposes.

Assange has exposed criminal (including murderous) activity within the U.S. government. Criminals don’t like to be exposed.  Therefore, Assange is a major enemy of the criminal class, who are the biggest proponents for locking up or executing Assange.

Wikileaks exposed the criminality of U.S. soldiers in Iraq, shooting people from a helicopter as if it were a video game.  This is murder, yet it is Assange who is charged as a criminal for exposing the murders.

Assange has exposed the deep state and their spying, murdering, and treasonous activities. He has continually poked at the political establishment.  It is amazing how little attention is paid in the establishment media to what he has exposed.  It was shown that CNN was telling Hillary Clinton the questions in advance of a debate with Bernie Sanders.  Imagine if this had been Trump.  Why don’t we hear of the Clinton campaign and media collusion?

Since Assange is in the news, it gives me a good perspective of where people stand politically. I have a friend on Facebook who is a self-identified socialist.  I consider him to be a cultural Marxist.  Yet, on the issue of Assange, we agree.

Going back to my libertarian litmus test, I could update it with Julian Assange.

1. Do you think Julian Assange should be prosecuted by the United States government for exposing secrets?
2. Do you think we need more government control over healthcare?

The second question could be changed to several other things such as a question on the minimum wage or on tax rates.

But it is amazing how you can just ask two questions and get a pretty good idea of where someone stands politically.  There may be a few outliers who would answer “no” to both questions yet is really bad on some other issues. 

You might even find a few people who answer “yes” to both questions, yet you can find some areas of agreement.  I would still say that someone who answers “yes” to both questions is basically an authoritarian, but it doesn’t mean they will be bad on all issues.

How do your friends and family answer these two basic questions?

Is this the calm before the storm?  If the recent inversion of the yield curve (as measured by the 3-month yield vs. the 10-year yield) is any indicator – which it historically has been – then there are rough waters ahead.

The current boom, if that is what you want to call it, has gone on for so long that it is easy to become complacent.  When today is basically the same as yesterday, it makes sense to think that tomorrow will be the same too.  And it usually is.  But eventually, something will change.

It only takes one big event to change the story quickly.  It could be an international event (economically, militarily, or politically).  It could be a major company suddenly on the verge of bankruptcy.  It could just be a massive down day for the stock market.

We have no idea when that day of change will come.  And even when it does come, we don’t know if it will reverse the next day.

A Look at the Data

Here is a summary of what has happened and where we are.

After the beginning of the financial crisis in 2008, the Fed went on an unprecedented spree of monetary inflation.  The adjusted monetary base went from under $900 billion in 2008 to over $4.1 trillion in 2014.  The federal funds rate was also near zero during this time.

After QE3 ended in 2014, the Fed stopped expanding, and it eventually started slowly decreasing its balance sheet around the beginning of 2018.  The monetary base is now down to just under $3.4 trillion. This is more than $700 billion down from its peak, but obviously it is still multiples of where it was in 2008.

Meanwhile, consumer price inflation remained relatively low during this entire time.  It is actually amazing just how consistent it has been, coming in around 2% per year.  With the crazy monetary policy, that is one trick the Fed has been able to pull off so far.

The consumer prices have stayed tame largely because much of the new money created by the Fed went into excess reserves held by the banks.  Excess reserves were close to zero up until 2008.  Then they exploded, somewhat mirroring the monetary base.  The excess reserves have fallen in recent years with the monetary base too.  In fact, the excess reserves have actually fallen more, as they are down over $1 trillion since 2014.  Perhaps this has helped to keep the “boom” going.

If we look at the Consumer Price Index (CPI), it is still relatively stable.  The March 2019 numbers were just released, and they are a little higher.  The more stable median CPI is now at an annualized rate of 2.8%.  If you go to the gas pump to fill up your car, you will certainly notice a difference there. But oil and gas prices tend to be more volatile.

Meanwhile, stocks have been quite stable after some scary moments for investors over the last year. U.S. stocks look quite strong right now, but they typically do at the tail end of a boom.

You Don’t Need a Special Event

Eventually, this “boom” will turn into a bust.  I put boom in quotes because it hasn’t been a boom for everyone.  If anything, life has just become more expensive for the middle class.

Unemployment is very low right now, but that just means that the market is clearing right now in terms of labor.  Despite minimum wage laws and labor regulations, employers are able and willing to pay workers to fill jobs.

The problem is real wages.  Nominal wages have been going up, but so has the cost of living.  The worst is probably health insurance and medical care. Insurance premiums are taking a huge bite out of people’s paychecks.  I don’t think the CPI fully accounts for this.

In addition, asset prices have gone up, which doesn’t get reflected enough in the CPI calculations. If you are trying to buy your first house, then you are on the losing end of the asset boom.  People who bought houses about 8 years ago are on the winning end, at least as of right now.  Or perhaps it is better to say that they were less on the losing end.  This will change for some people, if and when housing prices come down.

I don’t think the next downturn will be just like the 2008 financial crisis.  I don’t think we are in quite as much of a housing bubble today as we were then.  I also think the big banks are in a little better shape.  They should be, since they have been getting bailed out for over a decade now.  The Fed has bought their worthless mortgage-backed securities, and the Fed has been paying interest on bank reserves.

In terms of debt, we are in far bigger trouble today than we were in 2008, at least in terms of government debt.  The national debt is astronomically higher, and the annual deficit is running near $1 trillion. And this is supposed to be during the good times.

One major point of emphasis I would like to make is that the 2008 crisis didn’t happen because of the collapse of Bear Stearns and Lehman Brothers.  Those were consequences of the downturn.  They just made the crisis more obvious.

People often confuse cause and effect in economics, and it is no different with the financial crisis.  It wasn’t companies going bankrupt that caused the major recession and financial crisis.  It was the recession that led to the bankruptcies.

Sure, there were a lot of foolish decisions with the banks and financial institutions, but it was obviously widespread.  Without the housing bubble and previous loose monetary policy from the Fed (under Greenspan), then many of these financial institutions wouldn’t have gotten into such big trouble.

Therefore, don’t assume we have to have some big event to lead us to the next recession.  And if we do have a big event, it just may be a marker that the recession already began.

According to this recent article on Yahoo Finance (and other similar articles), Finland’s experiment with a universal basic income (UBI) shows promising results for those pushing the idea on a broader scale.

I have written before on the idea of a universal basic income.  There are even a few libertarians and libertarian-leaning people out there who support the idea, if it is coupled with reduced government welfare in other areas.  After all, it is more effective and efficient for welfare money to go directly to the recipients instead of going through a bureaucracy that takes a large portion of administrative costs and does not always work effectively for the welfare recipient.

Of course, there are a few major problems here.  The first problem is that a UBI is still antithetical to the idea of non-aggression and property rights.  But even on more pragmatic grounds, any libertarian should know that no program works out the way it is originally stated.  It would be incredibly naïve to think that all of the other welfare will just go away.  It is even more naïve to think that the special interests and their lobbyists would just walk away quietly.

We know that much of the political left supports the idea of a UBI.  But they are not usually talking about getting rid of the rest of the welfare state.

Now the left will try to claim some victory with this little experiment from Finland, where a small number of people were given a fixed amount of money from the government, but did not receive certain other welfare benefits.

Now the results are coming in, at least according to the reports of the Labour Institute for Economic Research.  The people who received a UBI generally felt happier and less stressed. They also tended to feel more in control of their lives and had more trust in society, although not to a great degree.

According to the preliminary reports, the UBI did not have much impact on the amount of work that the recipients picked up as compared to the control group.  The question of employment has been one of the biggest points of contention in the arguments for and against the UBI.

Let’s say that these initial reports are correct.  Does that mean that all of Finland should adopt a universal basic income? Does it mean that the United States should follow and adopt a UBI?  After all, according to the reports so far, people seem to feel happier and less stressed.

The Problem with Socialism, According to Thatcher

Margaret Thatcher once said that the problem with socialism is that eventually you run out of other people’s money.

Of course, there are many problems with socialism, both in terms of morality and prosperity. But Thatcher’s point was nonetheless hitting an important point.  We live in a world of limited resources, despite what Alexandria Ocasio-Cortez and Bernie Sanders may think (or their followers).

The fact that this article and many other similar stories are touting the positive results of this experiment in Finland is a testament to the economic idiocy that is present in our society.

When people are given free money, of course they feel healthier and less stressed. Welcome to planet Earth!

Even if you compare them to other people on welfare, it is still obvious that they will tend to be happier.  I would rather be given money with no strings attached than have to jump through a bunch of hoops and then receive certain things that may be equal to that same amount of money. I would rather receive $100 than a pair of shoes worth $100.  If I really want the shoes, I can always just use the money to buy them anyway.

So maybe this seems like a good argument for the UBI.  You just give people the money directly instead of making them fill out forms and then give them certain benefits in place of money.

Here is the problem. They are talking about a UBI for the entire population, which will be paid for by the entire population.

If you have a group of 1,000 people, and 10 of those people get a one-month vacation at a nice resort paid for by the other 990 people, then those 10 people will be quite happy with the arrangement, assuming they have no guilt in getting the vacation paid for by the others.  But what happens when all 1,000 people want to take a one-month vacation that will be paid for by those same 1,000 people?

When the UBI recipients are a small experimental group receiving free money (stolen money) from everyone else, it is easy to see how they are healthier and less stressed. When they are forced to help pay for everyone else’s UBI, then I suspect that stress may come back.

The UBI, just like all other government programs, only serves to misallocate resources. It may take up fewer administrative costs from the bureaucracies, but it is still a misallocation.  It discourages savings and capital investment.  Living standards will be worse than they otherwise would have been.

We know the saying: There ain’t no such thing as a free lunch.  It’s not exactly true, as this small group in Finland got a free lunch for two years.  The problem is that somebody else had to pay for the lunch.

When a whole country tries to get a free lunch, everyone ends up paying more for lunch, and they end up getting mush on their plates.

There is no question that there is a difference between tax breaks and tax subsidies.  For purposes of this article, a subsidy is when a person or group of people (such as a company) gets money or something else of value by having the government extract it from others.  A person or business or industry could also get favoritism in the form of regulations that limit competition.  This would be similar to a subsidy.

A tax break is a reduction in the taxes being paid.  This could be a reduction in the rate, or it could be an increase in deductions so that your reportable income is less.

A libertarian should never support a subsidy.  I’m not saying that a libertarian should never accept a subsidy.  For example, if you are paying $30,000 per year in taxes, and you can get a subsidy for $5,000 for something, then I certainly think you are justified in taking the subsidy.  You didn’t pick the rules of the game, so you should take advantage of the rules when you can, at least up to a point.  There are moral lines that most will not cross, and those lines are different for different people.

The key is that a libertarian should never be promoting a subsidy.  It is one thing to accept a $5,000 subsidy for college.  It is another thing to actually lobby the government for this subsidy.

I believe the libertarian position should be fairly clear on this.  Government subsidies are not compatible with the non-aggression principle.  A libertarian should not advocate for the initiation of the use of force, or threat of force, for political or social change.  A subsidy by the state is enacted by the threat of force (typically taxation).

Tax Breaks – Not so Clear

The issue of tax breaks is much trickier.  There is no clear-cut answer, at least as far as I’m concerned.  There is more nuance to the issue.

One might think that libertarians should support all tax cuts, but this isn’t always clear.

First, there is the issue of spending.  If the total government spending is not going down, then a tax cut isn’t much of a tax cut.  The government is still consuming those resources.  The cost is just being allocated in a different way.

If we are talking about federal spending, then the difference may be made up by more deficit spending and more monetary inflation.

(Note – I am ignoring the Laffer Curve here and assuming that tax rates aren’t so confiscatory that a reduction in rates actually leads to more money collected by the government.)

If there is more monetary inflation, then the people who didn’t benefit from the tax cuts are actually paying more through the depreciation of the currency that they hold.

Even on a state or local level, sometimes there are indirect tax hikes that aren’t easily seen. It might just be a higher property tax with the same rate because the assessed value of the property went up. If there is a tax break for someone, and spending stays the same, that extra money has to come from somewhere.

Second, targeted tax breaks are often a form of cronyism.  If the government gives an extra deduction for farmers only, this is probably due to lobbying from the farm industry.  Is there really that much of a difference if a farmer goes from paying $10,000 in taxes each year to paying just $5,000 because of an added deduction, versus the farmer just getting paid $5,000 from the government while still paying $10,000 in taxes?

A third reason not to support targeted tax breaks is that it does distort the economy.  Let’s say all Chinese restaurants in your city received a major tax break in which they don’t have to pay any property taxes.  Meanwhile, all of the other restaurants in the city are stuck with the same high property tax rate as before.  There is no question that this is a distortion.  Not only do the non-Chinese restaurants have to keep paying their property taxes (and possibly more to make up for the tax breaks to Chinese restaurants), but they also may lose business as a result.

If the expenses for the Chinese restaurants are far lower due to not having any property taxes, then they can charge a little less for food and drive more customers to their place.  If a family is split between eating barbecue or Chinese food for dinner, and the Chinese food will cost ten dollars less for the family, then it may drive them to eat more Chinese food than what otherwise would have occurred.

This Isn’t Obvious

I have a libertarian friend who believes that libertarians should support all tax cuts/ tax breaks no matter what.  He says that any time we can get less money in the hands of government, the better we are.  Unfortunately, this doesn’t work on a federal level at all because they just run bigger deficits.

But I don’t think a libertarian should take such a hard stance on this because I can come up with some ridiculous ideas.  What if there was a tax cut to anyone who professed to be a non-Christian? What if there was a tax cut to anyone who worked for the government?  What if there was a tax cut only to those people named Hillary Clinton?  Should we support all of those tax cuts?

I think it is ok for libertarians to disagree on this issue.  I do tend to support tax cuts, even when they are targeted. But there are times that they are so blatantly a form of cronyism that I just can’t.  It is something I have struggled with before on state ballot initiatives.

I can understand there is debate over Amazon and its setting up a headquarters in New York City, which it ended up backing out of.  I am not exactly jumping in the same camp as Alexandria Ocasio-Cortez on this, but I can see an argument against Amazon setting up there because of special tax breaks.  Why does Amazon get an exceptionally low tax rate to set up shop, while smaller businesses that have been there for a long time (or even if they haven’t) don’t get the same?

They say that Amazon will bring thousands of jobs to the city.  But if you gave the same tax breaks to hundreds of small businesses there, that would create thousands of jobs too.

In New York City, virtually everyone needs a tax cut.

And that’s really where libertarians should focus their energy when it comes to tax cuts. I believe that libertarians should support across the board tax cuts, even if overall spending is not initially being cut.  I would actually rather see a bigger deficit, even though I know the government is still consuming those resources.  At least with more debt, there is eventually a limit, and spending will eventually have to be controlled to some extent.

To go further, libertarians really shouldn’t focus on tax cuts much at all.  The focus needs to be on cutting budgets everywhere. If you can get the state to cut spending, then tax cuts will naturally follow.  And these will be real tax cuts in which you actually get to keep more of the money that you earned.