Even amongst promoters of a free market system, there is a mistake in thinking that technology is the primary driver of economic progress.  Advancing technology is incredibly important, but it has to work hand-in-hand with capital investment in order for it to mean anything.

Murray Rothbard wrote on this subject in his book Man, Economy, and State.  He refers to Mises on this point.

“The relative unimportance of technology in production as compared to the supply of saved capital becomes evident, as Mises points out, simply by looking at the “backward” or “underdeveloped” countries.30 What is lacking in these countries is not knowledge of Western technological methods (“know-how”); that is learned easily enough. The service of imparting knowledge, in person or in book form, can be paid for readily. What is lacking is the supply of saved capital needed to put the advanced methods into effect. The African peasant will gain little from looking at pictures of American tractors; what he lacks is the saved capital needed to purchase them. That is the important limit on his investment and on his production.“

Again, this isn’t to say that technology is not important.  It’s just to say that it is virtually useless without capital investment.  The technology comes with capital investment.  To get capital investment, you typically need a society that generally respects property rights and voluntary trade.

You can have some capital investment in a more socialist society, but it will be minimal in comparison, and the capital investment will be a misallocation.  Resources will go towards things that are not necessarily a priority for consumers.

Capital investment comes from savings.  If you are going to invest, then you first must save.  Even if you are just investing your labor, you are still saving in a sense beforehand.  If you are going to spend a week to work on a project, you essentially have to have access to food and water, and probably a shelter.  You need savings to sustain yourself if you are not working on something that immediately rewards you with basic necessities.

Prospering Quickly

It is a curiosity that, right around the end of the 18^thcentury, parts of the world started prospering as never before.  It was around the start of the new United States of America, but that is not the primary reason for the economic growth that occurred.  After all, taxation was actually very low in the American colonies under British rule.

It was certainly a period that had a great degree of economic freedom as compared to most other points in history.  Without this relative economic freedom (including in Great Britain), the Industrial Revolution probably wouldn’t have happened, or else it would have taken a much longer time to go through.

The economic growth that began around 1800 was sort of like a vehicle being pushed, or a giant boulder.  Once you get it going, you get some momentum.

Maybe there was 1% growth in the year 1500 somewhere.  But 1% of almost nothing is almost nothing.

The people who lived in the year 1800, even in the United States and Britain, had more in common with people from 1800 years ago than they would with people today.  The world is a completely different place, and mostly for the better.

The year 1900 was a lot different than 1800, and the year 2000 was a lot different than 1900. All three of these time periods are hard to compare with each other because of the extraordinary changes.  It really is a hockey stick graph where the standard of living was fairly constant for thousands of years before shooting upwards just over the last couple of centuries.

If an economy grows by 5% per year, this means that the economic output doubles approximately every 14 years (using the Rule of 72).  This is an unbelievable advancement.  Imagine your living standards doubling every 14 years.  This means a quadrupling after 28 years.  Compounding interest calculations work for economic growth in a society too.

Even at 2% growth, that is a doubling every 36 years.  This means that every generation will be twice as rich as the one before.

Capital Investment with Today’s Technology

Even though I have stressed that capital investment is the key factor, it is easier to catch up in today’s world with today’s technology.  As Rothbard described, an African peasant doesn’t gain much by looking at a picture of a tractor if he lacks the saved capital.  But in today’s world, if that same African peasant gets a taste of freedom, he can prosper much more quickly than someone could have 100 years ago.

We live in a global economy.  Any place that adopts a relatively free market economy will see capital investment pour in. The technology automatically comes with it.  The capital investment will quickly raise the living standards of the people living there.  The African peasant doesn’t need to be able to build a tractor or buy and own a tractor.  He can use the tractor owned by a capitalist, even if the capitalist is from another country.  The person using the tractor is worth more if he can use it competently. Someone with a tractor, even if he doesn’t directly own it, is far more valuable than someone working on a farm with a shovel or with his bare hands.

The same will hold true for any capital equipment, assuming that there is market demand for the product that the capital equipment helps produce.  If a poor person in a poor country is given a computer and a little training, he can help fulfill a need somewhere.  If you go on a site such as Fiverr, you can find someone in Ukraine to design a book cover. You can find someone in Egypt who can edit your videos.

There are many stories about poor countries that have been able to prosper quickly.  Hong Kong emerged as an economic powerhouse after adopting a relatively free market system after World War 2.

Perhaps the most amazing example, and certainly the biggest, is China.  While it is certainly not a free market economy, it is much freer than it was under its economic system of communism.  The agriculture sector was freed up to some degree in 1979, and it set off a wave of liberalization policies.

It is incredible how prosperous the Chinese have become.  It is still a centrally-planned economy to a large extent, and there are major problems that exist, but we can’t ignore the vast improvement.  Even if there are massive misallocations, at least there are resources to misallocate.  It is better to have bridges to nowhere and empty cities than it is to have virtually nothing.  Some of the Chinese prosperity may be an illusion, but some of it is very real.  I can’t imagine there are many Chinese people who would trade today for 1979.

Technology has continued to advance in our world, despite massive government interference everywhere.  Just imagine how incredibly wealthy we would be if the governments around the world were a fraction of the size.

If government were just cut in half everywhere (regulations, taxes, spending, inflation), then our living standards would explode upwards.  If you had a much greater degree of savings and capital investment, coupled with today’s technology, our wealth and living standards would rise to a degree that is probably unimaginable by most.

If our world can avoid any major world wars, and we can keep governments in check, then our living standards will continue to increase.  It won’t be straight up though.  There will be some setbacks.

If government interference is scaled back, then our living standards could explode.  The people living in the year 2100 will barely recognize life in the year 2000.  If technology really advances, then maybe some of us will still be alive to see it.

When Trump was a candidate for president, his inconsistencies were noticeable. On the one hand, he said the Iran deal was a disaster and that he would bomb the families of terrorists. On the other hand, he said that Bush lied us into Iraq and that we (the government) needs to stop these endless wars in the Middle East.

Since becoming president, Trump has maintained his inconsistency.  I have said several times though that I prefer his inconsistency to the consistency of most everyone else in the establishment. People like Hillary Clinton and Marco Rubio would take the wrong and evil side on virtually every issue dealing with foreign policy.  They are consistent.  I would rather someone who is inconsistent and sometimes wrong and evil over someone who is consistently wrong and evil.

Trump has been horrible with his appointments, particularly with people like John Bolton and Mike Pompeo.  You can’t really get much worse than those two.  Trump has been bad on Venezuela and Iran.  He has been mostly bad dealing with Russia, perhaps to push back against the fake stories of him being in collusion with Putin.  Trump has been bad with China because of his tariffs.  This is not good for relations.

Trump made great strides with North Korea until he let Bolton get involved and ruin any goodwill.  Trump tried to withdraw troops from Syria, and the entire DC establishment went ballistic.

The best you can say about Trump in regards to foreign policy is that he has not started any new major wars up to this point.  That is a better record (so far) than Bush and Obama.

A Vote for Trump

There is an old joke regarding the 1964 election between Lyndon Johnson and Barry Goldwater. The joke goes something like this:

They told me if I voted for Goldwater, our boys would end up fighting in Vietnam.  And they were right.  I voted for Goldwater, and they are fighting in Vietnam.

I could almost tell a similar joke that, for me, would be personally true.  Some of my libertarian friends told me I should vote for Trump or else we’ll have greater tensions with Russia.  And they were right.  I didn’t vote for Trump and we have greater tensions with Russia.

It’s not because Trump wants greater tensions with Russia.  But because the anti-Trump crowd hates Trump so much, they are willing to risk war with Russia just to try to take down Trump.  They may not see it quite this way, but they slightly raise the chance of nuclear annihilation because of their hatred for Trump.

Most of the left was never really anti-war.  Trump has shown this to be true.  If Trump takes a more non-interventionist position on something, the left will criticize him.

There really is such a thing as Trump Derangement Syndrome (TDS).  People who suffer from it can’t think clearly.  It doesn’t mean you have TDS if you don’t like Trump.  I am highly critical of Trump, particularly in regards to his stupid tariffs, his spending, and his mostly hawkish foreign policy.  But I don’t get upset with Trump over his Tweets and name-calling, unless that name-calling is to a foreign leader.

I don’t care about Trump’s tax returns.  I hope his accountants stiffed the IRS good and hard.

I don’t care about Trump’s brash personality.  If anything, it is refreshing to hear someone who is not a total phony.

On most days, I don’t much like Trump, but I do not suffer from TDS.  I can see when he does something positive, and I can still think clearly when his name comes up in a conversation.

Trump’s Moment of Truth

Trump recently did an interview, and it is probably not getting as much attention as it deserves. He gets several things wrong on Iran, but then goes the other way.  You can watch the whole thing for context, but these are the key statements that Trump said.

“And don’t kid yourself.  You do have a military-industrial complex.  They do like war.”

In regards to Syria: “I say I want to bring our troops back home.  The place went crazy.”

Eisenhower mentioned the military-industrial complex when he was leaving office.  But that was a little late.  It’s like when the former president of Mexico started criticizing the war on drugs afterhe had left office.

In this case, Trump is still president, and he actually said on video that we are dealing with a military-industrial complex.  This is what is so refreshing about Trump, despite his horrible positions on so many things, including foreign policy.

Trump basically admitted that he is not in charge.  I mean, if he is in charge, then he should just ignore the military-industrial complex.  He is commander-in-chief.  He can order all troops home immediately.  If he does so, and the orders are not obeyed, at least he is putting it out there for all to see.

Obi-Wan Kenobi was struck down by Darth Vader in front of Luke Skywalker for him to see. Trump needs to play Obi-Wan. He needs to expose the evil of the establishment, but I am not sure he has the courage to do so.  (Sorry for the Star Wars analogy to anyone who’s not a fan, but you get the point.)

Trump just told the world that he is not in charge.  I wish he would make it clearer through his actions.  I wish he would order an end to all of the wars.  Force the establishment and their military-industrial complex to react with furor.  At least it would be a good lesson for the American people.

With recent tariff hikes on some Chinese goods, there is some discussion about who exactly pays for these tariffs.  Do Chinese businesses pay for them?  Do American consumers pay for them?  Are they just avoided?

The answer is most likely a partial “yes” to all three of those questions.  In a market economy where some government interference is enacted, we can’t know who pays the higher price.  It is typically a mixed scenario, where costs are borne by several parties.

In the case of tariffs on Chinese goods, there is no question that Chinese suppliers will feel an impact in the form of reduced sales.  They could try to raise their prices, but Americans may turn to other suppliers.  The reason that Americans import so many Chinese products is because it is cost effective.  If that cost advantage goes away, then they might just import goods from another country or make them in the United States.

Tariffs are really just sales taxes on foreign goods.  Therefore, for the rest of this discussion, let’s just focus on taxes in general, and how much they are passed on to other parties.

If there is a tax added to a corporation, it isn’t just one party that ultimately bears the cost of the tax.  The corporation may pay the tax directly.  In the case of a sales tax, it would be the consumer paying directly.  But now we have to look at the indirect impacts.

If a corporation has to pay an additional tax, that money has to come from somewhere.  It could just mean lower profits for the corporation, but this obviously has its limits.  Most businesses aren’t going to keep going for a long time with tiny profit margins, unless you are Amazon where you are selling many millions of dollars every day.

Corporations will pass along these costs if it is possible.  This can impact wages for employees, as that is a way to cut costs.  The business could obviously raise its prices, but only if it will not lose more profit as a result.

Where Some Austrian School Followers Get it Wrong

I find that many followers of the Austrian School of economics get this point wrong. They are taught that the consumer ultimately determines the price of goods.  And while this is true, it leads some people astray.  They get too smart for their own good.

Here is the key point. When businesses are imposed with added costs in the form of regulations or taxes, it doesn’t mean that some of those costs do not flow down to the consumer.

Sure, the consumer ultimately determines the price because they are in control of their own money. If you don’t like the price of something, you are free to walk away.

But this doesn’t mean that prices are not impacted by costs (which doesn’t necessarily have to be just taxes).  This is such an obvious point, yet I see Austro-libertarians making this mistake.

I say it is obvious because you just have to look at the real world.  Gas stations sell gasoline for your car.  Oil is used to make the gasoline.  The gas stations aren’t selling oil directly out of the ground.  Yet, when the worldwide price of oil goes up, we expect gas prices to go up. It makes sense.

Are some Austro-libertarians going to tell me this isn’t the case?  The cost of the inputs for the gasoline went up, and the consumer pays a higher price at the pump.  Why does this happen?

It’s possible consumers may cut back on driving or buy more fuel-efficient vehicles if the price rises enough.  But for the most part, people keep buying gasoline.  They pay the price that is listed at the pump.  So while the consumer is free to walk away and not buy gas for their car, most of them don’t.

So why don’t gas stations just charge more for gas if consumers aren’t willing to walk away? The answer is competition. It’s because the gas station across the street will take away all of your business if you raise prices too high.

But the gas station across the street can’t steel your business by continually lowering prices because there is a limit.  That limit is the cost of selling the gasoline.  A business might be willing to take a loss for a short time to gain new customers, but it is obviously not a sustainable business model to keep selling a product for a loss, unless you are more than gaining in another area.

Therefore, if the price of oil goes up, expect gasoline prices to go up.  If there are additional gasoline taxes imposed, expect the price to go up for the consumer.  If a tariff on oil were enacted, we should expect the same thing.

It is not clear-cut who ends up paying for tariffs or any other taxes and by how much.  We don’t know how exactly everything would have happened in the absence of such a tax.  There are many parties that end up paying, which can include shareholders, employees, and consumers.  Sometimes products that would have been sold just end up not being sold at all. We don’t know how many transactions simply don’t happen because of an added tax or some other cost.

There is no question though that consumers end up paying more because of taxes, which includes tariffs.  The consumer is always free to walk away (unless compelled by the government).  But it doesn’t mean that the consumer won’t pay more for something if there is an added tax on it.

The yield curve has somewhat inverted in 2019. Comparing the 3-month yield to the 10-year yield, there was an inversion on March 22, 2019 that lasted about a week. It slightly inverted again on May 13, 2019.  As I write this, the two yields are essentially the same.

An inverted yield curve is a precursor to recession.  In fact, it is maybe the only thing we can look at with reliability, as it hasn’t signaled a false positive, at least up until this point.  A recession will follow an inverted yield curve typically within 2 years or less.  The timing part is hard to get right.

As with so many things in economics, it is important to understand cause and effect.  An inverted yield curve is not causing a recession.  It is a warning for a recession.  Bond investors are buying more long-term government debt, thus pushing interest rates lower on that long-term debt.

Why would an investor buy a 10-year Treasury bond with a 2.4% yield when the investor could buy a 3-month or shorter Treasury bill for the same 2.4%?  After all, you are locking up your money for 10 years if you don’t sell the bond.

The reason is because the investor expects rates to go even lower in the future, which would drive the price of the bond higher.  He would rather lock in a rate at 2.4% and also lock up his money for 10 years rather than buy the short-term debt.  If we hit a recession, the yield on the short-term debt could go way down from 2.4%.  It could go to close to zero.  In our bizarre world of finance today, it could even go negative.  That is why an investor would want to lock in a rate for 10 years.  It is due to fear of lower rates in the future.

The bond market is the smart money, at least compared to the stock market.  This is a generality.  There are always buyers and sellers on both sides.  It’s just a question of what the latest price is, or what is happening on the margin.

The Fall of 2008

It is interesting to go back to 2006 to look at the yield curve.  The 10-year yield fell below the 3-month yield in February 2006.  In that same month, the 30-year yield actually fell before the 3-month yield. They were only briefly inverted and then went back to “normal” in March 2006.  The yields inverted again for much of 2006 and part of 2007.

But it is important to note that the official recession began in December 2007.  By that time, the yield curve was no longer inverted, as short-term rates had already started to fall quite a bit.

The financial crisis became evident in September 2008.  This is when it looked like financial Armageddon.  But this is just when things came to a head.  The problems were already there.  The housing bust had already started, and the recession had already started even if not everyone was aware of it yet.

Again, this just shows that the timing is impossible to predict.  But the inverted yield curve was quite accurate in predicting the recession of 2008, which technically started in 2007.

The 30-year yield inversion is even more dramatic than the 10-year yield.  Different people use different measures, but I don’t think that having the 30-year yield drop below the 3-month yield is a necessity for a recession.  It may or may not happen this time, although I suspect it will eventually invert.

The 10-Year Yield vs. the 30-Year Yield

The reason I don’t fully subscribe to just watching the 30-year yield is because it is just too far out there.  We have no idea what anything is going to look like in 20 or 30 years.  If you see a deep recession on the horizon, it doesn’t necessarily make sense to lock your money up for 30 years unless you think you can easily sell the bond at a much lower interest rate. Most of us don’t expect a Japan-like scenario where interest rates are low for decades.

If you think there will be a deep recession over the next few years followed by a period of higher price inflation, then a 30-year bond wouldn’t make sense.  Interest rates will go up once there is fear of price inflation.  Just look at what happened to interest rates in the 1970s.  Short-term and long-term rates went into double digits due to price inflation.

If a recession hit, then it is almost a guarantee at this point that the Fed will buy more U.S. government debt.  This would tend to drive rates down further.  But if the Fed creates so much monetary inflation that it turns into fear of expected higher price inflation, then this could ultimately drive interest rates higher.  It would likely take a little time for this to play out, but you can see why an investor might not want to buy a 30-year bond, even if the Fed is initially buying up debt.

For this reason, I don’t think the really long-term debt yields have to drop below the short-term yields to guarantee a recession.  For me, the drop in the 10-year yield is enough.  Bond investors are telling us that they would rather lock in this seemingly low rate for 10 years because they think it is headed lower. We should listen to the smart money and take this warning seriously.

Back on March 23, 2019, I wrote a post titled, “Special Alert: Recession Indicator Triggered”.  The yield on the 10-year bond fell below the yield for the 3-month note.  This held for about a week and then went back to “normal”.

The two key benchmarks briefly inverted again last week during intra-day trading, but the 3-month yield was lower again when trading closed for the day.  Now the yields have inverted again at close, which just adds confirmation of trouble ahead.

The official closing on May 13, 2019, according to the Treasury’s website, put the 10-year yield at 2.40% and the 3-month yield at 2.41%.  They are rounded off to the nearest one-hundredth of a percent. They are essentially the same, but still another official inversion.

This happened after Trump’s trade war with China blew up.  Trump stupidly hiked tariffs on Chinese products, so the Chinese government retaliated with their own stupid hike in tariffs.  It’s like if I shoot myself in the foot, and you retaliate by shooting yourself in the foot.

That analogy is not exactly correct though because the people hiking the tariffs aren’t the ones feeling it the most.  It is the consumers who live under the politicians’ rule.

Then again, although American consumers are suffering for Trump’s stupid tariffs, Trump is hurting himself too.  As I just wrote in a post last week, Trump is triggering a fall in the stock market, which might just coincide with a coming recession. I don’t think tariffs, while harmful, will actually cause a recession, but it doesn’t mean that others won’t see them as causing a recession.

So just as the Democratic presidential race is getting underway, Trump is hiking tariffs while we face a high likelihood of recession.  That doesn’t make it promising for Trump in 2020, and it is his own stupid fault.  He’ll be lucky enough if Pompeo and Bolton don’t start a war overseas, but he is still in trouble even if he can somehow contain them.  Trump doesn’t understand economics, and it may be his downfall.

Trump thinks of himself as this great negotiator.  And maybe he was when it came to real estate deals.  But working in government is a different ballgame. Negotiation in politics usually means pointing a gun at someone, and it doesn’t typically work out the way it is planned.

Trump thinks he can just bully the Chinese government to do what he wants.  He wants his “trade deal”.  If he really wanted a good trade deal, he would have just eliminated all tariffs on Chinese imports.  It would have been a great boost for the American consumer.  Instead, he makes it more of a struggle for middle class America.

The Next Recession

The latest yield curve inversion is confirmation for me.  I can’t guarantee a recession before November 2020 (the presidential election), but I give it a much greater than 50% chance of happening now. Even if Trump does get some kind of trade deal with China, I don’t think it’s going to matter.

The damage was already done before he took office.  He was foolish to brag about the great booming economy on his watch.  Now he will have to share in the blame.

I don’t think the establishment wants a recession, but you can sure bet they will be quick to blame Trump the minute it becomes evident.

Some people think the 2008 financial crisis was some kind of conspiracy amongst the powers-that-be. I have never thought this to be the case.  It is giving too much credit to the establishment.  They can orchestrate particular events such as coups.  They can make up stories about Trump conspiring with Russia, although they didn’t even do that very well.  But they can’t control an entire economy of 300 million people.

The Fed can change the money supply and manipulate interest rates, but there are limits.  The Austrian Business Cycle Theory is real. We can argue over little nuances with it, but the general theory is correct.  An artificial boom can’t last forever.  It doesn’t matter what the establishment conspires to do. They can’t change the laws of economics.

The media will not heavily criticize the economy until a recession is obvious.  Most of them know nothing of the yield curve. You may hear it on CNBC, but they are mostly cheerleaders for the economy.  You can bet that once the recession is evident that the media will be piling on to Trump hard.  They will pretend to be promoters of free trade and blame Trump’s tariffs if they have to.

If someone like Bernie Sanders gets elected, I’m not exactly sure what to expect.  He isn’t going to be some kind of radical socialist.  He is going to conform to the establishment for the most part.  Most of the spending from Congress is already spoken for, and the deficits are already huge.  But I think we will be most vulnerable at the beginning of a Sanders presidency, especially if we are in recession.  He may be able to push more of his welfare state agenda at that time.  It would be the same for someone like Biden, but probably to a lesser extent.

One thing I am certain about is that the Fed will start digitally printing money again. The only question is how much. There are going to be some bargains when things are down across the board, except for U.S. government bonds. It might finally be the time for a boom in commodities, including in the precious metals.

This is why it is good to have some cash on the sidelines.  You don’t want to be in stocks right now anyway, or at least not heavily.

All I know is that bond investors right now are accepting a lower interest rate to lock their money in for 10 years as they will take for 3 months or less.  This is a sign of fear.  The bond investors know better than the stock investors if history is any guide.

On August 15, 1971, Richard Nixon announced to the nation an end to the Bretton Woods agreement that was instituted around the end of World War 2.  This put an end to the last remnant of the gold standard for the U.S. dollar.

Gold, in most forms, had been illegal to be held by Americans since the authoritarian Franklin Roosevelt dictated so right upon taking office in 1933.  But despite this, and despite the creation of the Federal Reserve in 1913, gold could still be redeemed by foreign governments for their U.S. dollars.

Charles de Gaulle of France took advantage of this in the 1960s.  With the government’s “guns and butter” under Lyndon Johnson, the dollar was being inflated.  This is what happens when you are supporting a welfare state or a warfare state, and especially so when you are supporting both.

It presented a problem for the U.S. government that France was redeeming gold for dollars because the U.S. government would eventually run out of gold.  This is what happens when you print money.  You can’t maintain a gold standard unless you continually reduce the amount of gold that can be redeemed per dollar, but that wouldn’t be much of a gold standard.

Many people blame Nixon for completely abandoning the gold standard, which is fine.  Nixon really was a big government guy. When he announced the end of gold redeemability, he also announced wage and price controls.  He was not a free market guy.

Still, I don’t think things would have turned out much different if someone else had been president during this time.  Something had to change.  The government was going to run out of gold.  If it didn’t break the promise of exchanging gold for dollars, then it would have had to get the Fed to stop printing money, or perhaps even deflating the money supply.  This was not going to happen.

Monetary deflation only happened later in 1979 when there was double-digit price inflation and double-digit interest rates.  It is almost inconceivable in today’s world when the 10-year yield sits at about 2.5% and you can get a fixed mortgage rate around 4%.

Paul Volcker became chairman of the Federal Reserve in August 1979.  He almost immediately slammed on the monetary brakes.  He allowed interest rates to rise in accordance to market levels.  It led to back-to-back recessions in the early 1980s.  Some would say it was just one big recession.  It helped defeat Jimmy Carter, but Carter may have lost to Reagan anyway.

We are accustomed to the establishment cheering on money printing (or its electronic equivalent). But in 1979, I think Volcker’s deflation was quietly supported by the establishment.  It helped to save the dollar.  If the Fed had just kept its monetary inflation going, the dollar may have slipped into something close to hyperinflation.

Consumer Prices

If you go to the BLS website and calculate consumer price inflation, it tells us that prices have risen extraordinarily since 1971.  If you plug in a value of $100 in August 1971, that is equivalent to $626.34 today (April 2019).  For a period of less than 50 years, that is a lot of depreciation, especially considering that the U.S. dollar is the world’s reserve currency.  We aren’t Argentina or Venezuela.

Everything seems relatively calm right now in the financial markets.  Stocks have been a little volatile, but mostly up for the last decade.  The reported unemployment is low.  The federal deficits are incredibly high, especially for a period that is supposed to represent prosperity.  Yet, consumer price inflation, at least as reported by the government, is relatively low.

Warren Buffett does not think this is sustainable.  I don’t agree with Buffett on a lot of economic points, but on this one I do. His 95-year old business partner, Charlie Munger, is warning about using money printing to solve all of our problems.  He is pointing out that we can’t just print money like crazy without consequences.

I do not believe we are going to hit a point of hyperinflation, as some alarmists do. I don’t think it’s impossible, but I don’t think it’s likely.  The powers-that-be are not going to shoot themselves in their collective feet.  Hyperinflation would risk their own well-being.

With that said, I don’t think consumer price inflation, as measured by the government, is going to stay forever under 3%.  The median CPI has already been running at 2.8% annually.  I also don’t think the government statistics fully account for the increased cost of living for the average middle class American.  The decreasing price of electronics does not offset the massive increase in health insurance costs.

A good portion of the increased costs in healthcare is due to government regulation and interference, but monetary policy does have an impact too.  Regardless, no matter the cause, this is a real and substantial increase that most Americans have faced.

When the next recession hits, it is likely that the Fed will go back to a policy of monetary inflation.  I don’t know if it will be to the same degree as we saw beginning in the fall of 2008.

It is also questionable on what will happen in the economy.  Will we see a Japan-like scenario where consumer prices stay relatively tame and there is just an overall drag on the economy?  Or will it be more like 1970s America again where there is high price inflation, high interest rates, and periods of recession?  I tend to lean more to the latter, but we can’t be certain.

I think Japan will actually be something of a canary in the coalmine.  Japan has most of the same issues as the U.S., except they seem to be magnified.  The debt is higher, the spending is higher, and the monetary inflation is higher.  It’s just that the Japanese tend to be very obedient to their government.  They are so patriotic that some of them continue to buy the government’s debt, even at near zero or negative interest rates.

Most Americans are not going to buy U.S. government debt that pays a zero percent interest rate. They are more likely to buy gold or real estate.

It’s hard to say where this goes next, but Buffett and Munger are correct that the current situation is not sustainable.  Something has to give.

I am over Donald Trump.  I am still anti anti Trump, meaning that I view his worst enemies as some of the most despicable people on the planet.  This includes many of the people in his cabinet and his advisors, who pretend that they are on his side.  Believe me, people like Pompeo, Bolton, and even Pence, are not on Trump’s side unless he completely capitulates to all of their demands.

I didn’t vote for Trump, and I saw a lot of problems with his policy proposals.  I have long thought he is completely ignorant at best when it comes to economics.  He also has an authoritarian streak as part of his ego.

With that said, I do appreciate his disruption of the establishment.  He hasn’t drained the swamp, but he has certainly helped to expose the swamp for anyone who cares to look.  This includes the establishment media.

I held out a little hope that there would be more peace under Trump.  The best I can say for him so far is that he hasn’t yet started any new major wars.  He has continued the old wars, and he is on the verge of getting into a hot war with Venezuela and/or Iran.  The U.S. government has already enacted war against these countries to a certain extent in the form of sanctions.  There just hasn’t been any official shooting and bombing yet.

Although I don’t think Trump would have pushed for these conflicts on his own, he is still to blame for surrounding himself with many war hawks from the establishment.

If he can somehow avoid a major new war, he does have a decent chance for re-election.  Of course, there are a lot of variables.

Trump is loved by his base, and he is hated by his opponents.  It is a vitriolic hatred like never before.  Hatred is nothing new in politics, but there really does seem to be something special about Trump.  There is such a thing as Trump Derangement Syndrome (TDS).

I do not have TDS. You can oppose his policies without having TDS.  The people with TDS obsess over his petty tweets on Twitter.  They go along with made up stories about Russia. They really want to believe that Trump is a racist and that he hates women.  They really want to see Trump’s tax returns.  The list of pettiness goes on.

They mostly do not oppose Trump for his foreign interventions, or that is a secondary concern if they do.  They don’t oppose Trump for his massive spending and big government policies. If anything, they believe he is somehow doing the opposite, despite the facts in front of them.

It’s Still the Economy, Stupid

There is going to be a small number – maybe a few million – who will decide the 2020 presidential election.  They are the people who don’t necessarily love or hate Trump.  They are people who may or may not vote.  Sometimes it just comes down to which side is more enthusiastic.

As with every election, many people vote their pocketbook.  The economy matters to them because that is what impacts them most.  Even though the president doesn’t have near as much impact on the economy as given credit (or blame) for, this is typically the number one issue.

Trump has been taking credit for the supposed booming economy.  I don’t think it is booming.  The stock market is booming and unemployment is low for those looking for work, but it doesn’t reflect how people are doing.  Life is expensive.  Real wages do not seem to be keeping up with the cost of living, starting with health insurance premiums.  Trump and the Republicans did not repeal Obamacare.

Life is expensive because of government.  It is all of the regulations, the taxation, and the monetary inflation. Trump has made it worse with his tariffs, and now he is threatening to raise tariffs on Chinese products even more.  Because of this, we pay more for cars, appliances, and other consumer products than we otherwise would have.

But most people do not see it.  They do not realize that prices went up because of the tariffs.  They’ll blame greedy corporations, but they somehow miss the elephant in the room, which is the government.

However, Trump may not get off so easy with his stupid tariffs.  His boneheaded negotiations are costing us a lot of money, but he is taking the blame in another form.  When he announced he was considering raising the rate on tariffs, the stock market plummeted.  It was easy for the financial media to link his threat of tariffs with the falling stock market.

While I think tariffs are quite harmful to our living standards, I don’t think his tariffs will cause a recession.  However, if a recession just happens to occur as he is hiking tariffs, then Trump will get extra blame for it.

Most of the blame for a recession should be put on the Federal Reserve for its massive monetary expansion from 2008 to 2014.  This misallocated resources that will need to be corrected by the market. This is why it is appropriate to call a recession a correction.  Unfortunately, the Fed doesn’t typically allow the full correction to occur.

Trump can’t escape the Austrian Business Cycle Theory.  The yield curve already inverted once in 2019, and it is near inversion again.  But if we go into an obvious recession before November 2020, some people may be forgiving of Trump.  Not everyone will blame him.  That is why he is playing with fire with his tariffs.  If his tariffs coincide with a recession, it will put more blame on Trump, even if his tariffs didn’t directly cause the recession.

This is why his stupid tariffs may be his downfall.  He deserves to go down for many reasons.  Unfortunately, we aren’t going to like whoever replaces him.

I recently watched a series called Money Revealed.  It was a series of interviews with entrepreneurs in which they talked about money and the secrets to gaining wealth and success.  Most of the people have a favorable view of entrepreneurship and free markets.

The people being interviewed included Robert Kiyosaki (Rich Dad Poor Dad), Patrick Byrne (CEO of Overstock.com), and John Mackey (co-founder and CEO of Whole Foods), just to name a few.

There were many less well-known people too, and they offered great perspectives.  I particularly liked some of the contrarian aspects, such as whether it is wise to invest in a 401k plan, a topic I have touched on before.

In one particular interview, the person pointed out that you gain wealth by helping people.  In other words, your gain isn’t somebody else’s loss.  It is actually the opposite.   As long as you are helping people honestly and non-coercively, then the more you gain, the more you are helping people.

I watched most of the interviews, but they were available for free for only a short time. You can buy a package where you can have all of the videos, plus some bonus interviews.

There were definitely some common themes amongst the successful entrepreneurs.  This is typical in life though.  The paths are different, but the successful people tend to have certain characteristics, or they tend to do certain similar things, which are usually somewhat basic.  This is true with things outside of business too.

One common trait amongst entrepreneurs is that they aren’t afraid of failing.  But I say that with a caveat.  It is relatively speaking.  A successful entrepreneur may be afraid of failing to some degree, but they are more afraid of not doing something.  In other words, their fear of failing to be successful trumps any fear of failure in the short term.

Another common trait I see is that entrepreneurs push through the moments that are hard. No matter what kind of business you are in, you are going to hit roadblocks.  They will be frustrating.  The key is to find a way to get through (or around) the roadblocks.  You keep pushing when most everyone else would have quit.

Hard Decisions, Easy Life

In the very last bonus interview with Tucker Max, he said something to the effect that making hard decisions leads to an easier life, while making the easy decisions leads to a harder life.  In other words, sometimes you have to put in the time and effort up front in order to make things much easier on the back end.

This could be true with many things in life.  If you take the easy way out in parenting when your child is young, you may end up paying for it every single day thereafter.

It could be true with having a pet.  If you work hard and train your dog when he is a puppy, then you will more likely have a great dog that you can enjoy.  If you don’t put in some upfront work, then the dog will just always be getting into trouble and not listening.

And so it is with business.  If you build up your skills early on, they will compound.  It is like compounding interest on your money (which is another good example).  If you set up a business that generates income and doesn’t require as much of your attention once you put in the work, you can profit for a long time. You make the hard decisions (time and effort) early on, and your life will look comparably easy.

There are people who work 8 or more hours a day doing hard work.  Many of these same people will tell you that starting up a side business is too hard, or they just don’t have the time.  But if you step back and look at the big picture, what is really hard?  What’s hard is getting up every morning, 5 days a week, to go to a job that you don’t like for the next 40 years.  Now that is hard.

Learn the Real Lesson from These Teachers

When it comes to investing, I like to point out that Warren Buffett gives advice in doing the opposite of what he did to become wealthy.  Buffett says to invest in index funds and hold for a long time. Yet, he did just about the opposite in order to become the wealthiest investor on the planet.  He purposely picked specific companies to invest in where he saw great value and long-term growth potential.

In watching the Money Revealed episodes, I found a similar theme, except they weren’t telling people to do the opposite of what they did.  However, if you observe closely, many of them made their money in a different way than the message they were preaching.

In the first day of interviews, Robert Kiyosaki spoke about wealth, investing, real estate, etc.  It was good stuff. I know some people have been critical of Kiyosaki, saying that he is a phony.  His “rich dad” seems to be more of a montage of people he knew and experiences he had.  Regardless of what you think of him, most of what he says regarding wealth building is true and helpful.

But the bigger point I see is that Kiyosaki largely got wealthy because of what he taught.  It is the books he has written, and it is the seminars that are put on because of the popularity of his books and his brand. I certainly think real estate investments played a significant role in his wealth building, but it is his Rich Dad Poor Dad that is his bread and butter.

In another interview, there was a guy talking about investing using options.  And I’m sure he had some success in doing it. But he sells some kind of course to other people on how to make money using options.  My guess is that he has made more money from selling the course than actually investing in options.  Again, this is just a guess on my part.

To be clear, I am not being critical of these people at all.  I think the interviews were fantastic.  I just want others to understand how they truly made their money.  Sometimes the best lesson is not explicitly stated.  You have to reveal it yourself.

I also don’t want you to think that there is not valuable information in what they are teaching. There is a joke about infomercials selling wealth-building courses.  They will teach you how to get rich by selling a course in teaching others how to get rich.  There is some truth to it, but I don’t want you to think that everything like this is a scam. The people that sell these types of courses tend to be great marketers.  You can learn a great deal right there.  But even the information that is being sold is often quite valuable.

It is a good idea to listen to people who have made it, assuming that is where you want your life to go.  You should listen to the content, but you should also observe what they are doing (and have done) to make it big.

One other common characteristic amongst the great entrepreneurs: They are all great marketers.

The FOMC released its latest monetary policy statement.  As widely expected, the Fed left its target rate unchanged.  More specifically, it left the range the same for the federal funds rate at between 2.25% and 2.5%.

However, as has been the case for a while now, the news isn’t really with the federal funds rate. If you really want to find out what is going on, you have to look at the Implementation Note that accompanies the statement.

The Fed will actually lower the interest rate it pays to banks on their reserves by 0.05% to 2.35%.  The reason is to get the federal funds rate more in the middle of its target range.  The Fed has had a bit of a balancing act figuring out where the exact federal funds rate would settle as compared to the rate paid on bank reserves.

So even though the news says that the Fed kept rates the same, it actually just kept its target range the same.  It actually did lower the rate, albeit slightly, that it pays to banks for parking their deposits with the Fed.

The even bigger news – if you want to call it news since it seems to be more of a footnote from the financial media – is that the Fed is already tapering its balance sheet reduction.  Instead of allowing $30 billion per month in Treasury securities to expire, now it will only be $15 billion per month.  At least for right now, the mortgage-backed securities will continue to be drained off at $20 billion per month.

The Fed was supposed to have this policy of monetary deflation last for a while in order to drain down its bloated balance sheet from its unprecedented expansion from 2008 to 2014.  The Fed’s balance sheet barely got below $4 trillion, and it is already slowing down the deflation.

The crazy thing is that the market (i.e., stock investors) was actually slightly disappointed in the wording of the Fed’s stance on inflation because they used the word “transitory”.  Stocks went down supposedly because of this one word.  Since the Fed doesn’t see the supposed lack of inflation as persistent, investors now doubt whether there will be an official cut in rates before the end of the calendar year.

This is crazy because if you go back to 2018, the Fed was hiking rates, and it was expected the Fed would continue to hike rates through 2019.  Now the market is slightly disappointed because there may not be a rate cut this year.

Of course, that could change quickly.  The yield curve, as measured by the 3-month yield vs. the 10-year yield, inverted back in March for a brief time. It is now close to flat.  If the stock market starts to tank, or if there are any other signs of a possible recession on the horizon, it is obvious what the Fed will do.  It will start to lower its target rate, and it will quickly stop its policy of reducing its balance sheet.

In fact, it is a relatively safe bet that if a recession is happening, or even looks likely, that the Fed will start another round of digital money printing (also called quantitative easing).  This will be QE4, as QE3 ended back in 2014.

As to the whole discussion on inflation, meaning price inflation, it is unbelievable that the Fed sees this as low.  They say it is running below its 2% target.  This is based on the PCE measure that the Fed uses.  If you use the CPI or median CPI, it is near or above 2%.  If you look at housing or stocks, it is certainly above 2%.  If you look at health insurance premiums over the last 10 years, it is certainly above 2%.

You can get your flat screen television for less than what you would have paid 10 years ago, and it is a lot nicer too.  The bad news is that your health insurance premiums are like buying a couple of flat screen televisions every single month.

I don’t know what the next bubble will bring when the Fed starts QE4.  But we know that there is a lag effect.  The Fed will not be able to cover up the next bust with its money creation, just as it was unable to stop the financial crisis in 2008.