I follow inflation closely.  I follow the Federal Reserve’s monetary inflation by following its balance sheet.  The Fed’s balance sheet exploded from 2008 to 2014.  It has exploded again since March 2020, and it continues to go higher.

I also follow consumer price inflation data.  I think it is understated, but it is still useful for looking at trends.  It also tells us what the financial powers-that-be are thinking, particularly the Fed.  If the CPI starts rising consistently at 5% or more per annum, then this will be significant. So far, it has not done this.

After the Fed started so-called quantitative easing (QE) in the fall of 2008, we have not seen massive increases in consumer prices.  Stocks, which don’t get measured in the CPI, may be the one major exception. Real estate is also booming in many areas, but that is a more recent phenomenon.

One of the major reasons that prices did not explode with the Fed’s balance sheet is because much of the newly created money went into excess reserves at the banks.  The Fed’s base money was not largely used for fractional-reserve lending.

When banks lend out money with fractional reserves, it effectively puts more money out there in circulation.  If you deposit $10,000 into your bank checking account and the bank loans out $9,000 of it, then you still have access to your $10,000 while someone else is using $9,000 of it.

Excess reserve requirements were eliminated in March 2020, which got little attention.  While it hasn’t seemed to have had much impact yet, we don’t know what impacts it will have in the future.

I have not typically paid as much attention to the Fed’s charts on money stock.  There are charts for M1 and M2.  I haven’t always found them to be reliable or in any way predictive of what’s to come.  Still, I don’t think they are irrelevant.

I am not going to go into the details of what makes up M1 and M2.  When I go to the charts, they say they are discontinued.  I don’t know what they will look like in a couple of months and whether they will be updated.

When I recently saw a chart of M1, I was shocked.  I know what the Fed’s balance sheet looks like.  I have followed that very closely for the last year, so I know the unprecedented monetary inflation taking place.

Still, we haven’t seen prices rise a lot according to the CPI numbers.  I definitely pay more for chicken at the grocery store than I did a year ago.  However, it is not like I am paying double the amount for groceries. The rise in my food bill is nowhere near the rise in the Fed’s balance sheet.

When things just kind of hum along, it is easy to get complacent.  There was an unprecedented rise in the base money supply after 2008.  Many people warned of severe price inflation, but it never really happened, at least for most things.  Even if you think the CPI numbers are understated, they aren’t understated that much.  We certainly haven’t been experiencing anything close to 10% annual price inflation, as a few hysterics claim.  If we had actually had 10% per annum price increases since 2008, then prices would be three to four times higher than what they were then.  This is not the case.

But just because the last period of massive monetary inflation (2008 to 2014) did not result in massive price inflation, it doesn’t mean that we are immune to it now.

Again, I am cautious in how much importance I put on government charts, especially the money stock.  I know there are many factors at play, including the velocity of money (the demand for money).

Looking at the M1 chart though is scary.  It did not spike up after 2008.  The rate of increase may have picked up, but there was never a major spike.

In 2011, the M1 money stock crossed the $2 trillion mark.  It crossed the $4 trillion mark in 2020.  So it took almost 9 years to double.  Ironically, it crossed that $4 trillion mark right around February 2020 and again at the beginning of March 2020, so it makes an easy starting point from when the hysteria began.

In February 2021, the M1 money stock passed the $18 trillion mark.  It has slightly retreated from there as of this writing.  It actually looks like a hockey stick.

To sum up, it took almost 9 years to double from 2011 to 2020.  Over the last year, it has more than quadrupled.

This is worrisome, to put it mildly.  It should be really worrisome to anyone who is on a fixed income.

Buy gold before it is too late.

“How easy it is to make people believe a lie, and [how] hard it is to undo that work again.” ~Mark Twain

Imagine a real-life Superman.  He has special powers that are able to help people.  He is not all-powerful, but he is able to use his extra powers for good.

Unfortunately, the evil Lex Luthor has stolen some of Superman’s powers.  He has also stolen Superman’s identity and looks just like him.  He is claiming to be Superman and ready to help spread goodwill on earth.

So there are two Supermans.  They are both claiming to be the real one.  One of them is the real Superman and the other is a liar.

The real Superman says that the other guy is really Lex Luthor and that he will do great damage to society, especially if the people believe him and give him power.

Lex Luthor, pretending to be Superman, says that he is the real Superman and that the other guy is an imposter.

Lex Luthor tells the people that he cares deeply about them.  He tells them that he will take care of them and protect them from danger.  He says that they should trust him for their own good.  He also promises to deliver great benefits to the human race as long as they obey him and stay united.

The real Superman makes no such promises.  He says he will do his best to help society where it is possible, but that his powers are limited in what he can do.  But he warns of following Lex Luthor, who is imposing as Superman. He says it would be very dangerous to give him any more power and that he will use it to do great harm.

The problem is, the majority of people believe Lex Luthor.  They say that he must be the real Superman because the other guy is not willing to promise great benefits to society.  He is not promising to keep everyone safe either.

Plus, there are many experts testifying to the fact that the Superman offering protection and great benefits is the person who should be trusted.  If all of the experts and the journalists on television say that this person is the one who should be trusted, then surely we should trust him and obey him.  We must obey him or else we risk giving the other Superman and his followers an outlet.  They are too dangerous and must not be listened to under any circumstances.

Unfortunately, Lex Luthor bought off some of the experts and journalists.  Once they took a stand on Lex being the real Superman, then the other experts and journalists easily followed.  They didn’t want to appear to be outside the mainstream. They didn’t want to be accused of not uniting.  They didn’t want to lose their status of expertise.

The followers of the real Superman are trying to get others to listen to them, but they are being shut out.  They are trying to do anything to get others to listen, but it is hard when other people don’t want to listen to any of the evidence.  If only others would look deeper into some of the evidence and give it some thought, they might start to realize that they have been duped.  They might start to realize that the person they think is Superman is really a villain trying to take advantage of them.

But in order for others to listen, they have to have an open mind.  If they display any evidence of an open mind or willing to listen to the other side, then they could be accused on not uniting and siding with the enemy.  They risk going against the experts.  It takes a little bit of courage to listen to the other side and examine the evidence on your own.

What do the followers of the real Superman do?  They are greatly concerned about giving too much power to any one person, especially someone who will use it to do great harm.  They are trying to warn others that the other Superman is a villain, but most of them won’t listen.

Should they continue to interact with the followers of Lex Luthor, even if those people are denigrating them?  Many of the followers of Lex are seemingly good people otherwise.  They are also otherwise intelligent people who just happened to be getting suckered on this one important thing.

Unfortunately, the followers of Lex Luthor are only enslaving themselves.  They are making their own lives far worse in the long run by believing his lies.  The other side is trying to tell them that they are being lied to, but they won’t listen.  The Lex followers are also doing great damage to the people who don’t believe Lex because they are imposing their ways on all of society.

The followers of the real Superman propose that both sides leave each other alone.  Each side can believe what they want to believe, but not impose on the other side.  But the Lex followers see this as a ploy.  They see it as breaking unity, which their leader has told them is very important.

The experts under Lex have also warned of many great dangers in this world, including foreign aliens and viruses.  We must all cooperate together and listen to the experts in order to keep everyone safe. Therefore, there is no room for dissent.  In fact, for those who do dissent, they are also threats to everyone’s safety.  If you try to claim that the leader is an imposter, you are acting as a domestic terrorist and may be subject to discipline.

With so many people believing that Lex Luthor is the good guy and acting in their best interests, what can the followers of the real Superman do?  They can keep trying to convince their friends (or former friends) that they are being duped.  At what point do they treat their former friends as enemies because they are doing great harm?  At what point do they stop giving the benefit of the doubt?  Sure, these people are being suckered, but at what point do supposedly good intentions no longer matter?  At what point are they no longer your friends?  At what point do you start to interact mainly with people who will listen to you and not put you down?

There is no clean answer to these questions, but they are questions that many are starting to ask.

With student loan debt continuing to go up in the United States, there are strong calls for the government to “solve the problem”.  The only way the government can solve this problem for people in student loan debt is to pay for some of it or forgive it, which would be at the expense of others.

I have even heard some supposed libertarians say that the government should get rid of all student debt.  They look at it in a similar fashion to defaulting on the government debt.  The problem is that it is reversed.

In order for the government to pay interest on its debt, let alone paying back principal, it has to extract this money from others through taxation, inflation, or more debt. The government does have some assets it could conceivably sell, but that would not fulfill all the promises. Plus, that idea is not exactly out on the table right now.

If someone pays money for government debt, then repayment of that loan can only happen by taking money from others.  Therefore, from a libertarian perspective, it is not a valid contract. Person A can’t legally loan money to Person B, with Person B’s promise to pay back the loan by stealing money from Person C.  If Person A entered into this contract and Person B can’t pay back the loan, it isn’t right for Person C to have to pay who was no part of the contract.  Person A should be the one out of the money.

Student loan debt is not the same thing.  It is people borrowing from lenders, which are often backed by the federal government.  If people don’t pay back these loans, it is the American taxpayer that gets stiffed.  The government lent out the taxpayer’s money, so to speak, so the American taxpayer should try to recover as much as possible.

I am open to other opinions on this matter, but that is the way I see it now.  I don’t think a proper libertarian position would entail allowing these loans to be waived.

The proper libertarian position is that the federal government should get out of the education business entirely.  This includes not subsidizing or in any way backing student loans.  It should be up to a bank or other lender whether they want to enter into a contract to loan money for college.

You hear these horror stories about people graduating with $200,000 in debt.  It’s fine for someone who is about to be a heart surgeon, but it doesn’t work for a sociology major who ends up working at Starbucks. This just tells you that there isn’t a free market.  If the lender were not backed by the government, then you wouldn’t see six-figure loans to people who are getting degrees that are not likely to produce above-average incomes.

If You Have Student Debt

If you currently have student debt, it is tempting to not pay it down because the government might bail you out.

I don’t think there is anything morally wrong with accepting such a bailout, especially if you are paying taxes.  I wouldn’t tell anyone to not accept Social Security payments either.  If you are a libertarian though, then you shouldn’t be advocating it.

If you have a suspension of student loan debt where you don’t have to pay right now, and interest doesn’t accrue, then I would suggest putting money aside as if you are paying. When interest starts to accrue again, then you can take this money and pay down some of the principal balance.

The other day, Biden was asked about relieving up to $50,000 in student debt, and he shot down the idea.  So it doesn’t look like anything major will happen.  If there is anything passed, I think it will be something like $10,000 in forgiveness.

It will really irritate people who just finished paying off student debt.  The word “fair” is thrown around a lot in our unfair world. In this case, it is easy to see why some people would think it is unfair, and they would be right to think that.

Anyway, if any student loan forgiveness is going to happen, it will happen in the next 23 months. Really, if it doesn’t happen in the next year, then it probably won’t happen.

So if you are looking at paying off or paying down the balance on your student loan debt, you may want to hold off on paying it all off just in case there is some government relief.

As long as the government is subsidizing student loans, it is going to distort the market and misallocate resources.  College is far more expensive than it would be without this, and you wouldn’t be hearing as many horror stories of people deep in debt who can’t pay it.

I’ve heard people suggest that if the government is going to forgive all student loan debt, then attached to the same legislation should be something that prohibits the government from backing any future student loans.  But we know this isn’t going to happen.  The politicians who are likely to forgive student debt are not interested in getting the government out of the education business.

Again, if there is any forgiveness, I don’t think it will exceed $10,000.  The government is spending recklessly right now, so this would just be one more thing.  It is like spending in the sense that they would be reducing money coming into the government, but it should not be equated with taxes.

If interest rates start to rise and consumer price inflation becomes a worry, then all bets will be off the table.  The government isn’t going to give up this revenue stream of debt repayment, since it owns a majority of the student loan debt.

As I write this, the price of Bitcoin is approximately $50,000, meaning $50,000 per bitcoin. I have no idea where it goes from here, just like I knew nothing about where it would go years ago.

In March 2020 when stocks started to get rocked, the price of Bitcoin also went down.  I thought it might be the end of Bitcoin’s run.  But when the Fed stepped in with trillions of dollars, stocks came roaring back, and Bitcoin has done the same.

I have known about Bitcoin for a long time.  I wish I had bought some back when I could have easily bought several bitcoins for not a lot of money.  It was a speculation then, and it is a speculation now.

I basically thought back then that Bitcoin is a sham.  My opinion hasn’t changed much except I with I had taken part in the upside of the sham.

Don’t get me wrong here.  I don’t necessarily think there is anything dishonest going on with Bitcoin.  As long as it is voluntary, then I have no problem with people buying and selling and trading it.  The price is whatever the marketplace determines it is.  It has value because consumers demand it.

I am also sympathetic to Bitcoin because it is seen as competition for the dollar.  Even though Bitcoin and other crypto currencies are really fiat currencies, at least they provide some competition in a market that desperately needs competition.  It also helps that the crypto community tends to be somewhat familiar with the Federal Reserve and how it destroys our purchasing power.

Money

Bitcoin is not money. The Bitcoin advocates can say it is money, but it is not.  Sure, a few places accept it as a form of payment, and Tesla may be the newest big player in town.  But you can’t walk into Walmart or your local grocery store and pay with Bitcoin. They would look at you like you’re nuts.

Of course, you could try paying with gold or silver and most cashiers probably wouldn’t accept it. You might get the occasional smart one who would take your silver coin and pay the cash necessary into the register, assuming that the silver coin is worth more than the amount owed.

Sure, Walmart could decide to start accepting Bitcoin as a form of payment.  My guess is that it would charge a slight premium, and the Bitcoin price would fluctuate wildly based on the current exchange value. In other words, the products on the shelves wouldn’t have Bitcoin prices on them.  They would still be priced in dollars.  You would just be able to pay in Bitcoin based on the exchange rate.  It is also likely that Walmart and other retailers would convert bitcoins received back into dollars rather quickly.

For this same reason, gold and silver aren’t really money either, or at least not in our current world.  However, they have a history of being used as money for thousands of years.  Plus, gold is still stored by central banks even though the currencies aren’t officially backed by gold.  Having gold in the vault provides some artificial backing and a form of reserves.  Gold could easily return as a form of money, whether it is with physical gold (and silver) or electronic forms.

The Problems

One of the reasons given by Bitcoin advocates for widespread use of Bitcoin is that it provides privacy.  First, not everyone wants privacy.  If I make a payment with a credit card and something happens such as receiving a faulty product, I can challenge the charge with my credit card company.  In this case, I actually want a trail.

Second, as with everything, the government could outlaw Bitcoin at any time.  I’m not saying they could get away with it if sentiment is strong against it, but in emergency economic times, when people are willing to give up their liberty (see the last 12 months), then the government might be able to get away with it.  I know some will say that people can continue using Bitcoin, but it doesn’t work that way.  If the government decrees that you will get 10 years in prison if you are found trading with Bitcoin, then you can be assured that most people will stop.

Aside from those things and other flaws, there is one other major problem with Bitcoin, and it will be a problem forever.  It is something that was made up on a computer.

I understand that the blockchain technology can and will be useful.  But Bitcoin itself is really just a bunch of digits in outer space.  There is only value right now because people are giving it value.  Sure, you could say that about anything, but anything that has been used as a form of money in history had some kind of value to it before being used as money.  That is even true of most speculative bubbles.  Even tulip bulbs in the Tulip mania had some kind of value.

Gold has all of the qualities of a good form of money.  It is divisible.  It is portable.  It is durable.  It is limited in its quantity.  It has a high value content for a small amount.

There are many things throughout history that have been used as money, but they typically fell short in one or more areas.  Eggs and cigarettes are not durable.  A living cow is not divisible (to keep it living).  It is also rather burdensome to take your cow to the store to pay for some clothing.  Milk could be used as money, but it doesn’t retain its store of value, as it will go bad in a couple of weeks.  This is why salt has been used as money to some extent in the past, as it doesn’t go bad.  But try paying for a new car in today’s world with hundreds of pounds of salt.

No matter what it is, it always goes back to gold and, to a lesser extent, silver.  This is why they became the primary forms of money for thousands of years.  The only way that governments and central banks were able to issue fiat currencies was to first issue the currencies backed by silver or gold and then to remove that backing over time.

When you compare gold to Bitcoin, there is one really major difference, and it isn’t just that gold has a physical presence.  It is that gold has value outside of being used as money or speculation. It had value before it became money.  It is used in industry, and it is used aesthetically, particularly for jewelry.

This is why gold will likely continue to have value no matter what.  Bitcoin is nothing.  It is a novel idea that someone made up on a computer screen. There have been thousands of more cryptos made up on a computer screen.  They provide no material value or information except what the next person is willing to pay for it.  And Bitcoin is only more valuable right now because it was the first player.

It is pure speculation, and it will continue to be pure speculation.  I don’t know if its next stop will be below $10,000 or above $100,000.  Either way, it could happen in the matter of days.  It could happen in hours.

If you are feeling lucky, you can speculate on it.  You may make a lot of money (i.e., be able to convert it back into U.S. dollars).  You may lose your money.  It is just a question of how many more people are coming up behind you to try to do the same thing. It is also a question of whether you know when to take your greed off the table.  Or as Kenny Rogers said, know when to hold ‘em, know when to fold ‘em, know when to walk away, and know when to run.

I don’t think Bitcoin is going to survive in the long run.  I’ll place my bets on the metals that have been around for thousands of years.  When Bitcoin eventually crashes, it is going to be hard.  A lot of people are going to be left holding digital versions of cow manure.

“If something cannot go on forever, it will stop.”  ~Herbert Stein

We are in the midst of an unprecedented stock bubble.  After almost a full year of various lockdowns and business restrictions, along with multi-trillion dollar deficits and higher unemployment, stocks are booming.

The stock boom would be almost ridiculous during a time of prosperity.  Given what has happened in the last year, it is beyond ridiculous.

The young adults who have taken their stimulus checks and started a Robinhood account are going to learn a hard lesson about bear markets, at least for the many who do not cash out while the going is good.

The stock bubble is built on Federal Reserve inflation.  The Fed’s balance sheet continues to explode. By the time March gets here, it will have close to doubled.

There is a disconnect between price inflation and the Fed’s balance sheet.  Likewise, there is a disconnect between price inflation and stocks.

The latest CPI numbers show the CPI in January 2021 rose at 0.3% over the previous month, and it rose 1.4% year-over-year. The more stable median CPI rose 2.1% year-over-year.

Perhaps these numbers are understated.  But they aren’t so understated as to not recognize a disconnect.  Stocks are going to the moon.  Real estate, especially in the suburbs, is mostly going up fast.  Consumer prices on everyday goods are not going up fast.

In the short time it took the Nasdaq to go from 10,000 to 14,000, I can tell you that my grocery bill did not go up by 40%.

Uneven Inflation

When the Fed creates money out of thin air, prices tend to go up.  In some cases, especially in today’s technological world, some prices go down.  Given the Fed’s inflation, they go down less than they otherwise would have.

There are other factors, particularly the velocity of money.  If people are not spending a lot (i.e., not bidding up prices), then this will tend to push prices down, or at least keep them from going up as fast as they would have.

When there is monetary inflation, it takes time to go through the economy.  A good analogy I read once was comparing it to pouring pitchers of molasses into a bathtub.  I believe it was Richard Maybury who wrote this.  He said that there are cones of molasses in certain spots that are much higher.  It takes time for it to flatten out.

So it is with price inflation.  Prices don’t rise simultaneously.  Over time, it tends to even out.  Some periods take longer than others.

Right now, there is a giant glob of molasses that represents stocks and real estate.  If the Fed keeps pouring massive amounts of molasses in the bathtub, then maybe the stocks and real estate won’t go down.  But the most likely scenario is that the Fed won’t be able to pour enough in fast enough to stop it from sinking to other areas.

Therefore, depending on how fast the Fed can pour its molasses (create money out of thin air), either stocks and real estate are likely to come down, or other consumer prices, especially necessities like food, are likely to go up in price.

This is why we have to diversify.  We don’t know which way this is going to go in the short run or the long run.  Will we see stocks crash?  Will we see other prices spike higher?  Will we see both and then a reversal of one or the other?

At some point, something has to give.  We are either going to get significantly higher price inflation, or we are going to get a major crash in stocks.  It is amazing that things have gone on this long.

However, I will keep in mind what Keynes supposedly said.  The market can stay irrational longer than you can stay solvent.

The market is already irrational.  Is the Nasdaq going to double over the course of a year, in one of the worst economic years ever in modern times?

I remember the exuberance of 1999 and 2007.  I remember the downfalls in 2000 and 2008.  2020 and 2021 will be memorable too.

I don’t know when the crash will happen, but it is going to be swift and hard when it does. And if the Fed starts pouring buckets of molasses to stop the deflating stock bubble, then we are likely going to see massive price inflation at some point.

The reason there is no flu this winter is because everyone is wearing masks.  The reason that there are so many cases of COVID is because there are too many irresponsible people not wearing masks.

When someone dies after testing positive for COVID, it is a COVID death.  If someone dies after getting vaccinated, it is a coincidence because they were already old or sick.

When BLM and Antifa protesters burn buildings and loot stores, it is social justice.  When Trump supporters enter the Capitol building, it is insurrection and a coup attempt.

When the U.S. government overthrows a foreign leader, it is spreading democracy.  If a foreign leader is overthrown who was loyal to the U.S. government, then it is subverting democracy.

When Google, Facebook, and Twitter censor people for their political views, they are private companies and can do whatever they want.  When a baker refuses to bake a cake for a gay couple’s wedding, it is a public business that must not discriminate.

If you are a big corporation, then you are deemed essential.  If you are a small business, then you may be deemed non-essential and forced to shut down or obey other government orders, even when they aren’t laws.

If you question the integrity of the 2020 election, then you are a conspiracy theorist and possibly inciting insurrection.  If you question the integrity of the 2016 election citing anonymous sources and a dossier from a Clinton associate, then you are a patriotic American and a strong advocate of keeping Russia out of our elections.

If you support Trump in any way, or if you question certain government directives, then you may be a domestic terrorist.  If you dutifully obey all of the commands handed down by Biden and the establishment, then you support unity.

If Dr. Fauci says something, then you should listen to him because he is a doctor and an expert. If any doctor, including an epidemiologist, suggests something contrary to establishment opinion, then the person is a quack and must be censored.

If you go out to eat or do anything fun in public, you want to kill grandma.  If you attend a BLM rally, then you strive for social justice, and the virus cannot be spread.

If you repeat something you heard from the establishment media, then you have the right to free speech.  If you say something contrary to the establishment media, then you are dangerous and must be censored.

Part of the “COVID relief” plan being pushed by the Biden team and the Democrats includes a provision to increase the federal minimum wage over the next several years. It would eventually hit $15 and then increase by the rate of inflation (as calculated by the government) after that.

If you follow free market economics, I don’t need to tell you that this is a bad thing.  All else being equal, a higher minimum wage will increase unemployment, particularly for those with fewer skills. This is assuming that the minimum wage is high enough to mean something.  A minimum wage of $2 per hour in the United States would have virtually no impact.

Having a minimum wage job doesn’t mean that an employer has to give a job to an employee.  It only means that the employer has to pay at least a certain amount in order to abide by the law ifthe employer hires someone.  In other words, a minimum wage doesn’t guarantee anyone a job.  It just guarantees a minimum wage if you can get a job.

It’s also interesting that a minimum wage can sometimes lead to worse working conditions.  An employer has to account for all costs, including benefits and working conditions.  If an employer is forced to pay more for someone than the market demands, then the employer may reduce other benefits or not provide as good of working conditions.

This is easier to see in third-world countries.  Think of a group of people working in a factory.  The employer can get air conditioning installed to make it cooler, but it would mean lower pay.  Most employees will not choose the lower pay, especially when they are barely able to afford food and clothes for their children.

Someone working in the United States may not realize that their pay is impacted based on better working conditions.  Employees in an office automatically assume they will be working at a comfortable temperature in a comfortable chair with reasonably pleasant surroundings. If some employer offered a dumpy office for a workplace but paid a little more, most people wouldn’t accept it.  They would work somewhere else.  An extra couple of dollars per day in pay wouldn’t be worth it because most Americans with a job can put food on the table and more.

One Size Fits All

A federal minimum wage is particularly bad, as it does not take into account differences between regions.  We live in a country of about 330 million people.  Does a $15 minimum wage mean the same thing in Silicon Valley as it does in rural Alabama?

Perhaps this is the Democrats way of thumbing their nose at the red states.  Maybe it is payback for Trump eliminating deductions for people living in high-cost and high-tax blue states.  It certainly would seem that a higher federal minimum wage will disproportionately hurt red states more than blue states.

Many people really do support this measure just because they are ignorant in economics.  They think wages can magically be raised through the law (i.e., government force).  Wages, as a whole, can only be raised through productivity.

A similar minimum wage measure was recently passed in Florida in the 2020 election.  The minimum wage will eventually be raised to 15 dollars per hour.

The interesting thing is that, in order for the amendment to pass, it needed at least 60% voter approval.  In 2020, Trump won the state of Florida.  This means that at least 20% of the people who voted for Trump also voted to massively hike the minimum wage, and this is based on the assumption that everyone who didn’t vote for Trump voted to hike the minimum wage.

Good News, Bad News

At this point, I don’t think that a $15 minimum wage will pass Congress.  The Senate is split 50-50.  They would probably need every Democrat to support it. There are a handful of senators from conservative states (not to be confused with conservative senators), who have to show some restraint to their constituents.  They would more likely support some kind of middle ground.  Maybe we’ll end up seeing something like a $12 minimum wage phased in over several years.

Even if a $15 federal minimum wage is passed, I have some good news, although it is probably very bad news in other ways.

I said that increasing the minimum wage will increase unemployment, all else being equal. Well, fortunately or unfortunately, not all else is equal.

The Federal Reserve has exploded its balance sheet by over $3 trillion in less than 12 months, and its stated goal is to continue to create new money by at least $120 billion per month for the foreseeable future.

While this is very bad economic policy, one bad policy may end up negating another bad policy. If monetary inflation continues to explode, and price inflation eventually follows to some degree, then the dollar will massively depreciate.

If prices double over the next five years, then the whole increase in the minimum wage is effectively nullified by Fed policy.

Even more, if a built-in cost of living increase is included once the minimum wage hits $15, then it will be reliant on the government’s statistics.  The government has a habit of understating price inflation figures, especially when they have to pay out Social Security checks based on this. So if price inflation is at 5% and the government says it’s at 3%, then the minimum wage will increase by 3%, which will actually be a reduction in real terms.

And the government will have difficulty coming in and saying their inflation numbers have been wrong, because it will just make Social Security recipients mad that they’ve been cheated.  When was the last time you heard a government official with any power say that the inflation rate is understated?

Congress could set the minimum wage to a cost-of-living adjustment right now, and I would see that as positive.  It makes it harder for them to come back in the future and change it while the minimum wage is slowly going down in real terms.

So while the Fed is wrecking the economy and making most everyone poorer in the long run, at least they are negating one bad policy coming out of Washington DC.  The minimum wage will become the depreciated wage.

The big story last week happened when a group of seemingly amateur investors (i.e., not part of the elite) bought up shares of GameStop (GME) and delivered huge losses for those shorting the stock.  It nearly bankrupted a big hedge fund (ironically named, since they didn’t hedge).

In the past, short sellers were often vilified.  I have been a defender of short sellers, or at least a defender of the process.  Short selling is a valid market mechanism that helps in price discovery.  If a stock, or anything else, is overvalued, it is better to have short sellers around to more correctly price it.

This time around, the establishment (i.e., the ruling class) had a conniption fit, but it wasn’t about the short sellers.  “How dare these young punks on Reddit try to manipulate the market and profit off of short sellers, including a major hedge fund?”

The statists of this world continually talk about the need for government regulation.  In this case, the market did a pretty good job of regulation.

I’m not saying these short sellers deserved to suffer huge losses, but they set themselves up for it.  There were supposedly more shorts than shares available.  Regardless, they were obviously over leveraged in their positions and a group of people pooled their money and corrected the situation.

Maybe this whole thing served as a good lesson for hedge fund managers, or really any investors. You need to be careful in overexposing yourself, especially in any one position.

Of course, big tech and all of the statists are outraged by what happened, while many libertarians, some conservatives, and even some hardcore leftists rejoice.  It is just another dividing line between the populists and the elitists.  In this case, the populists are coming down mostly in favor of the free market.

It is absurd for platforms like Robinhood (also ironically named, it seems) to ban trading of the stock just because some rich guys are suffering heavy losses due to their stupidity.  It is even more absurd for social media platforms to attempt to censor discussing these types of actions.

I don’t know what kind of regulations will come out of this whole thing, but at least for now, it seems like a victory for the little guy.  But we know that the establishment seeks revenge and then some.

The Silver Squeeze

On Friday, January 29, I heard rumors of a similar situation possibly taking place with silver. Some people in investor groups were advocating buying silver.  As they say, you buy the rumor and sell on the news.  Well, I should have bought on the rumor.

By Monday morning, February 1, the news hit the mainstream media and silver spiked even higher in price, along with some mining stocks.  The price retracted on Tuesday.  Where it goes from here, nobody knows.

It is interesting to contrast the difference between what happened to GameStop (a stock) and what could potentially happen to silver (a commodity).

I have been hearing forever that the silver market is manipulated.  It is typically silver perma-bulls saying this. They always say that it is a manipulated market and the price is going to skyrocket any day now because it is severely undervalued.  But it never seems to happen.  Silver is incredibly volatile.  It tends to move in tandem with gold, but with wilder swings.

Maybe there is manipulation (whatever that means) in the silver market.  But unless it is going to be corrected, then it isn’t much of an argument for buying.

The thing with silver, as with any commodity, is that you can actually buy the physical version. You can actually buy silver bars or coins.  When you buy a stock, you don’t take home a piece of the building where the company resides.

Much of the precious metals market, particularly in gold and silver, happens electronically. Most of the trading doesn’t actually involve silver and gold changing hands.  It is largely done in the futures market.

If there is a group effort to buy up physical silver, this could really disrupt the futures market and electronic trading.

Right now, when people trade futures, they don’t actually demand delivery of the good.  I’m not sure what happens if they do. Instead, they get the money for the value of the commodity.

It makes a little sense to go after the silver market.  It is obviously cheaper than gold.  And as far as I know, most central banks don’t hold silver, so it would be difficult for central banks to react to such a move.  If it were gold, the Fed could actually sell some gold into the open market (assuming they have some) and quickly shut down some relatively poor investors.

With silver, if a large enough group of people decide to start buying up silver, it really could cause a shortage, which means the price would rise quickly.

The one problem I see with this strategy is that many of these people are young and just want to buy with a push of a button on Robinhood or some other app.  Most of them probably aren’t going to pay a visit to their local coin dealer to buy some junk silver (which isn’t really junk).

It will be interesting to see if this run on silver has any legs.  And if it does, will gold follow?

I am a little concerned that it will call attention to the regulators (the busy bodies) and give them an excuse for government regulation.  I obviously don’t want to see higher taxes, trading restrictions, or an outright ban on precious metals.  If silver is going to go up in price, I would rather it be obvious that it is due to currency depreciation.

Of course, maybe the amateur traders will just expose that silver has been undervalued, especially when you see how much stocks have spiked from the Fed’s ultra easy money. But right now, the focus is on these investment groups pooling their money together to supposedly manipulate the market.

I am tired of the government and central bank manipulating the money supply and interest rates, but this is a core value for the ruling class.  I wonder if a group of investors on social media will start discussing how to expose the federal government and the Fed with their massive distortions and spending and debt.

If you think the ruling class is upset now with a nearly bankrupted hedge fund, wait until people start selling dollars en masse and dumping government bonds.