Although the latest banking crisis seems to have some similarities with the financial crisis in 2008, there are some notable differences as well.

One big difference is that we have high consumer price inflation right now that wasn’t the case in 2008. This is probably the big story because the Fed is in a position that makes it more difficult to give unlimited bailouts.

The Fed has already reignited QE, or whatever you want to call it. The balance sheet expanded by hundreds of billions of dollars in March despite its policy of not rolling over $95 billion per month in maturing debt.

We’ll see if the Fed’s balance sheet starts declining again, but it just shows that things can change very quickly. Even if it does start declining again, we could get hit with another bank failure and another Fed bailout at any time.

So while the Fed seemed committed to fighting price inflation (that it created), it seems to be more committed to bailing out bank depositors.

The Fed Takes Away the High

While there is much responsibility to go around, it is hard not to blame the Fed as the primary culprit of the shaky banking system. The Fed’s boom/ bust policies, with wild swings in interest rates, has caused this problem.

The real problem is having any central bank or central authority with a monopoly over the supply of money. But stepping into our statist world of central banking, the Fed has still done far more damage than what could have been. If the Fed hadn’t been so crazy lowering interest rates to near zero and massively creating new money out of thin air, then we wouldn’t be where we are now.

There are many consequences to the loose money. It distorts the economy in many ways. It misallocates resources, and it encourages spending over saving. The consequence that is noticeable – rising consumer prices – finally showed up in 2022. Now the Fed is forced to deal with it.

So now we have gone from near-zero interest rates to interest rates at 3% or 4% or higher.

Why SVB Failed

In 2008, banks and other financial institutions started failing largely because of an implosion of the housing bubble. The financial institutions had stupidly made loans to many people that would not be able to meet the monthly payment obligations.

In addition, they made many loans with very low down payments, so house buyers had very little equity going into the deal.

Of course, this was all fueled by the Fed’s easy money policy before that, but the financial institutions are still partially to blame.

When housing prices started falling, many homeowners were underwater in their mortgage. The house they owned was worth less than the mortgage. So they decided to make a smart financial decision and not pay the mortgage. You can argue whether or not this is the moral thing to do, but it did make financial sense.

The banks were stuck with loans where people were defaulting. This was a large part of the bank failures.

In the case of Silicon Valley Bank (SVB), they weren’t giving out crazy loans to homeowners. They were giving out crazy loans to the government.

Yes, that’s right. The big risky asset that sunk SVB was buying government bonds.

Someone looking at SVB’s financial statements could have easily determined that the bank was being rather conservative with depositor money.

In fact, according to this article by Simon Black, SVB had $173 billion in customer deposits but only had $74 billion in (non-government) loans as of December 31 of last year.

In our world of fractional-reserve lending, this is actually quite conservative.

A majority of depositor money at SVB was put in U.S. government bonds. And that is what sunk the bank.

The Risky Asset

We don’t normally think of government bonds as risky. One of the big risks with any asset like this is inflation. You lend out money and then get paid back in depreciating dollars.

But that’s not the problem with what happened here with SVB.

If you need to sell a government bond, then the value will depend on the current interest rate as compared to the interest rate on the bond.

SVB likely bought most of these bonds when rates were near zero. When interest rates rise, the value of the bond goes down if you need to sell it before maturity.

It makes me think that the people running the show at SVB were more stupid than reckless. They didn’t match up their time horizons.

They were buying longer-term government bonds, like 10-year bonds. But the depositors didn’t have to wait for 10 years to get their money back. They could demand their money at any time. So there was a mismatch.

If SVB had just purchased 1-month or 3-month securities instead of 10-year securities, the bank probably would have been fine. Even if there had been a good mix, it might have been fine.

If you buy a 1-month Treasury bill, you get the whole balance back in one month. If rates have gone up during that time, you can buy another one at a higher rate. If SVB had done this, it likely would have been fine even if there was an unexpected increase in the number of depositors demanding their money.

A Lesson for the Individual Investor

This is why it is so important to be diversified. Even for individuals with a longer time horizon, you can’t predict the future and should have some diversification.

If you buy a longer-term bond, it may lose value if you sell it early, especially if interest rates go higher.

You could hold the bond until maturity, and this seems risk free. But then you have the risk of inflation. When you get your principal amount back at maturity, how much purchasing power will be lost?

If you hold it for 10 years and price inflation is at 7% per year, then your initial investment will have about half the purchasing power from 10 years ago.

Bonds are useful as a hedge against deflation and a depression. They can serve a purpose in a portfolio like the permanent portfolio.

But as we have seen with SVB, U.S. government bonds can be a highly risky asset on their own.

The upcoming presidential primaries will be nothing short of interesting. Some libertarians will say that they are all the same and that it doesn’t really matter who is elected president because they are all controlled by the deep state.

In the past, this was mostly true. As Gary North used to write, it is CFR Team A vs. CFR Team B. That is the Council on Foreign Relations. You could also say Establishment Candidate A vs. Establishment Candidate B.

In 2004, we had George W. Bush against John Kerry in the general election. They are both part of Skull and Bones, a small elitist group out of Yale. It doesn’t get more establishment than that.

Maybe Donald Trump really is controlled by the establishment. He didn’t seem to overturn any major deep state policies while in office for four years. Trump couldn’t even wind down some wars that he seemed to want to end. His own administration got in his way. When Trump tried to pull troops out of Syria, the people he hired stepped in and assured us that we weren’t really pulling out of Syria.

Still, Trump’s rhetoric is one that doesn’t show signs of him being embedded with the establishment. He may hire the wrong people and take the wrong position on some issues, but it is easy to recognize that there is at least something different about Trump.

A Different Slate of Candidates

Following politics can be depressing for a libertarian. It seems as though the worst person wins more often than not. And most times, it really doesn’t matter that much, as the only choices are really bad choices.

Now maybe it’s just the rhetoric, but there is something different this time around. There is definitely an anti government or anti establishment wave of public opinion.

Even if the candidates are completely lying to us, which I don’t think is the case, they at least feel the need to use rhetoric that is anti establishment.

There are a lot of interesting people who are running or possibly running for president beyond Donald Trump and Ron DeSantis.

Dave Smith is likely running for the Libertarian Party nomination, which in itself will make a general election far more interesting. He will find ways to get exposure through alternative media, and he will bring up issues like war and the Fed in a way that Trump would not.

On the Democratic Party side, there is talk of Robert F. Kennedy Jr. running. Sure, he would be smeared as “anti-vax”, but it would be great if he were able to get into a debate with Biden or whoever the establishment favorite is. I highly doubt Kennedy has any chance of getting the nomination from this pitiful and evil party. Much of the party just dutifully obey the orders of their masters.

There are certainly issues where liberty-minded people may not agree with Kennedy, but at least he is honest and courageous. Those are the two most important traits in taking on the establishment.

On the Republican side, there are establishment candidates or possible candidates like Nikki Haley and Mike Pence. Luckily, these evil people are likely going nowhere.

We, of course, have Trump and possibly DeSantis running, who are the favorites. But another interesting person is Vivek Ramaswamy. It’s hard to know where he stands on foreign policy, but he has been attacking the Federal Reserve and saying we need to abolish the Department of Education (music to a libertarian’s ear).

Restoring My Faith in Mankind

If Dave Smith is the LP nominee, and Vivek Ramaswamy is the Republican nominee, and Robert Kennedy Jr. is the Democratic nominee, my optimism for the future will rise to nearly 100%. This would really restore my faith in mankind.

Even if two out of three are the nominees and the other one gets good traction, I will consider it a win.

Out of the three, Dave Smith has the best chance of being the nominee because the party is so small and it is the hardcore people who really get to decide. The LP nomination happens at the national convention as opposed to state primaries.

So right off the bat, this is great news because Dave Smith is a hardcore and principled libertarian who knows how to present the message well. (He will reach even more people when he cleans up his mouth for a general audience).

Ramaswamy may be looking for a VP slot under Trump, but his message is still important. He will force a conversation, at least to a certain degree, about the Fed and other issues. While he isn’t as great as Ron Paul, his presence will likely be similar to that of Ron Paul in the 2007/2008 and 2011/2012 elections.

I have far less optimism with Kennedy running as a Democrat. It’s not because he doesn’t have a lot of valuable things to say. It is because the party and their obedient media will attempt to censor him. They will just try to pretend that he doesn’t exist. And when they feel compelled to acknowledge his existence, they will smear him. It’s hard to say if they will be successful in keeping him off the debate stage.

Vivek’s Take on DeSantis

The big wildcard for me is Ron DeSantis. I voted for him in the last governor race because he was one of the least bad governors on COVID.

DeSantis did lock down Florida in April 2020. Luckily, he got smart and got some courage and quickly reversed course while most of the rest of the country was still in isolation (i.e., under totalitarian orders).

I have a concern that DeSantis is too politically brilliant. So I don’t always know if I’m being played. It’s nice that DeSantis takes on the “woke” crowd, but this doesn’t really do much for me or anyone else if he is president.

Just because you can speak boldly against the “woke” crowd, it doesn’t really mean you are taking on the establishment. It doesn’t mean you are taking on the military-industrial complex. It doesn’t mean that you are taking on the so-called intelligence agencies. It doesn’t mean you are taking on the Fed or the Department of Education.

I don’t want DeSantis – if he were president – to stop transgender story hour for kindergarteners. I want him to abolish the Department of Education.

Vivek Ramaswamy did an interview with Candace Owens, and she asked him about his thoughts on Trump and DeSantis. Vivek is somewhat complimentary of both of them, but he doesn’t have faith that they can get the job done as president. He is actually a bit harsher towards DeSantis.

Now, again, Vivek may be setting himself as a possible Trump running mate, but I think his criticism of DeSantis is fair, and Candace Owens agreed with him.

Vivek said that DeSantis actually doesn’t have enough courage and implies he is too scripted and rehearsed. When DeSantis addressed the news that Trump may be arrested, DeSantis cleverly kept referring to the “Soros-backed District Attorney (DA)”. He repeated it several times.

But it was a bit too clever for me. It was a brilliant political statement, which is exactly the problem. I don’t know if he is just telling conservatives what they want to hear.

Conclusion

There are things I like and hate about Trump. This has been the case for a while now.

I generally like Kennedy and Ramaswamy. I don’t exactly know where they stand on foreign policy, but I like that they will bring up issues that the establishment does not want to talk about.

I am unclear on DeSantis and how good or bad he would be as president. We need to hear more of what a DeSantis foreign policy would look like, and then we’ll have to judge if we can take him seriously.

Dave Smith will be a great LP candidate and help spread the message of liberty far and wide. He just needs to start making videos that I can send to my mother.

Overall, despite the depressing state of the world in many areas, it is encouraging that we have different voices that will help to change the conversation in America. It isn’t simply CFR Team A against CFR Team B anymore.

The FOMC released its latest monetary policy statement. The Fed is hiking its target rate by 25 basis points. It was not completely certain this time around with the new banking crisis. It was possible that the Fed could have paused its rate hikes.

In the second paragraph of the statement, it states: “The U.S. banking system is sound and resilient.”

That is the howler of the year right there. If you ever want to understand the term gaslighting, that is it right there.

The Fed might just as well say: “It’s ok, citizens. We just hit a minor bump in the road. Never mind the inverted yield curve. Never mind price inflation. Never mind the failing banks. Unemployment is low and the economy is looking good. We just need to tweak a few things.”

In Jerome Powell’s press conference, he assured us that the balance sheet expansion was just temporary.

Monetary Inflation – Two Steps Forward, One Tiny Step Back

If you look at the Implementation Note from the statement, there are a couple of key bullet points that stayed the same.

The Fed will continue to roll over Treasury securities exceeding $60 billion per month and mortgage-backed securities exceeding $35 billion per month.

This means that the Fed will not roll over $95 billion per month. So the maturing debt will come off the balance sheet. The balance sheet – the base money supply – should be going down by about $95 billion per month.

But in the previous two weeks in the midst of a banking crisis, the Fed added about $300 billion to its balance sheet. So it negated over three months worth of balance sheet reduction in a matter of a couple of weeks.

So it’s real nice of the Fed to fight price inflation by draining its balance sheet by not rolling over some maturing debt, but they are adding new debt to the balance sheet in some other form.

What kind of a game is this? Does it make a difference if you don’t roll over $95 billion in maturing debt but then just add $300 billion in new debt? It would be the same thing as rolling over all of the maturing debt and just adding an additional $205 billion this month.

But don’t worry, the U.S. banking system is sound and resilient.

Resiliency with a Money Making Machine

Maybe it’s not wrong to refer to the banking system as sound and resilient. Anything can be sound and resilient with nearly unlimited funds.

The primary goal of the Federal Reserve isn’t low unemployment and price stability. The primary goal is to act as a lender of last resort to the major banks. March 2023 has demonstrated that well. (Its other main goal is to fund the deficits from Congress.)

The Fed is not exactly bailing out the banks that are failing in this case. They seem to be letting the people running the banks off the hook, but the banks will likely technically go bankrupt. But the Fed is bailing out the depositors.

They are also implicitly bailing out the entire banking system by giving assurance that they will do anything necessary to stop major bank runs.

So if a bank looks shaky, depositors are far less likely to make a run on the bank, knowing that the Fed is there. The “Fed put” isn’t on the stock market. The “Fed put” is on the banking system. It encourages bad banking practices to continue.

Tight Money or Loose Money?

While the Fed has expanded its balance sheet in recent weeks, it just hiked its target federal funds rate by 25 basis points.

There is a major disconnect there. Prior to 2008, the Fed generally controlled its balance sheet by raising or lowering its target rate. A higher rate generally correlates with a stable or declining money supply.

It’s not likely that the Fed can continue this practice easily. This may have been the last rate hike for a long while. Maybe we’ll see one more 25 basis point hike at the next meeting if things stay relatively calm.

Regardless of the Fed’s rate hike, the balance sheet has expanded again. It is difficult to fight price inflation when you are expanding the money supply.

We could go in either direction at this point. It could be a major recession, or it could be higher price inflation. It’s possible that we will get both.

I believe we are in a new financial crisis. It may or may not be similar to 2008. As with most events in history, you will find similar characteristics with past events.

I have been a long-time proponent of having a permanent portfolio. This is designed to protect your wealth in any economic environment. There are no guarantees in life, but this is the closest thing I’ve found to protecting wealth in virtually any environment.

If there is an all-out nuclear war, then no investment strategy is going to do you any good unless you have a bunker and a lot of food. I am talking about the common economic environments of inflation, deflation, prosperity, and recession.

While a permanent portfolio is generally conservative, it doesn’t mean you can’t have risky investments. But these should be outside of your permanent portfolio. Your permanent portfolio is for the money you can’t afford to easily lose.

So the big question is: Will the permanent portfolio hold up with what is coming in 2023?

A Financial Crisis or a Monetary Crisis

One problem is that we don’t even know how this will play out. It looks like a financial crisis with banks failing, but we know that the Federal Reserve and other central banks have the capability of bailing out banks (or bailing out depositors) by creating new money out of thin air.

If the Fed chooses to continue bailing out depositors, then it might lose its grip on its supposed fight against inflation. In other words, if the Fed has to create new money to “solve” a banking crisis, it creates a new crisis.

It then becomes a monetary crisis where you start to worry more about the purchasing power of your dollars. Your dollars are safe in the bank in terms of their quantity, but their value quickly diminishes.

Will we see something resembling more of a depression with failing banks and depositors losing money (in excess of what is covered by the FDIC)? Or will we see massive price inflation or even something closer to hyperinflation?

The Point of the Permanent Portfolio

The whole point of the permanent portfolio is that we can’t predict the future with any certainty. It is designed to protect your wealth no matter what crazy decision a bunch of Fed officials make.

If the next bank failure comes and the Fed decides not to come to the rescue, maybe we will see a financial crisis greater than 2008. We may see a depression with price inflation coming down. In fact, even if there are bailouts, there still may be some kind of depression.

In late 2008, stocks fell hard. This could easily happen again. It could happen to an even greater degree.

Maybe the Fed’s bailout of Silicon Valley Bank is the new norm. Maybe all quantitative tightening is over and we will see price inflation go higher than it was last year. Stocks still may fall, or they may start an upward trajectory as happened in the spring of 2009.

We just don’t know. All four investments in the permanent portfolio – stocks, bonds, gold and cash – are at the whims of central bankers and the billions of people that make up the world economy. They could go in any direction. But there is a good chance that at least one of them will do well in the coming year or so.

What About Interest Rates?

Since the permanent portfolio is somewhat conservative, then why not just invest in Treasury bills that are paying close to 5%?

In some cases, this may make sense. If you are saving to buy a house in one year, then it probably makes sense to put your savings in a Treasury bill. But even here, we have to be a little bit careful.

The permanent portfolio is wonderfully designed, especially with its gold portion, to protect your wealth against inflation.

If you are saving for the longer run, then you want to get returns above inflation. In the short run, you really just need to concern yourself with hyperinflation, which hopefully never comes.

If you invest in shorter-term Treasury bills right now, you are still lagging behind inflation. Again, this may be a good strategy if you have a shorter-term purpose for the money.

But for the long run, you are going to lose purchasing power. Even with higher interest rates today, they are lagging behind price inflation. If price inflation goes to 10% from here, it is going to take a little while for interest rates to catch up.

Also, since the start of the banking issues becoming apparent, interest rates have gone down. This has been good for bond holders. But if you have all of your money in Treasury bills, the rates will be lower when it is time to roll them over.

So I generally don’t think Treasury bills are a good substitute for the permanent portfolio, even at this stage.

Buy Low, Sell High

One of the features of the permanent portfolio is that when you rebalance, you are selling assets that have risen in price, and you are buying assets that have fallen in price (or not gone up as much as the others).

Sometimes this can seem to hurt you in the short run because you miss out on the big runs in certain assets. But you will still have 25% exposure while taking the gains off the table. So you don’t have to think about when to buy and sell, as long as you stay disciplined and rebalance according to your own schedule.

(The mutual fund PRPFX, while not an exact replica, is a good substitute for setting up your own permanent portfolio. The great thing about PRPFX is that it takes away any temptation from you in terms of rebalancing or not rebalancing your portfolio.)

Personally, I tend to think stocks are the biggest risk category right now. I would actually prefer bonds at this point with the threat of a major recession coming (if it’s not already here).

However, in terms of the permanent portfolio, I don’t need to speculate. I can just follow the formula. I can speculate outside of the permanent portfolio by not owning stocks or even by shorting stocks.

Sleep at Night

Sometimes I call it the sleep-at-night portfolio. I don’t want to constantly be worried about my investments. I take interest in the financial markets because it is interesting to me, but I’m not panicked about a stock market crash, or Bitcoin falling, or interest rates spiking, or whatever.

I am well diversified, so I know that I am not going to have wild swings like some other people do.

Just because we are on the verge of another financial crisis, I am not worried about changing my general investment strategy. In other words, I can sleep at night, at least in terms of not worrying about my investment portfolio.

Welcome to the financial crisis of 2023. We’ll find out how much we’ve learned since 2008.

Apparently the Federal Reserve has learned almost nothing, unless the people there are trying to cause economic chaos.

To be sure, most of the problems we have today are a result of previous Fed monetary policy. A lot of people are talking about the Fed’s hike of interest rates causing these bank problems. But the damage was done before that.

The Fed kept a mostly loose monetary policy from 2008 until 2022. The hike in rates over the last year was just to get interest rates somewhere close to normal. The Fed was essentially forced to hike rates because price inflation was getting out of control.

Now the Fed is left with the dilemma of fighting price inflation (that it caused) or bailing out the financial system. So far, it is trying to have it both ways.

The Balance Sheet Pivot Has Begun

Take a look at this chart of the Fed’s balance sheet. This one is updated on Wednesdays.

The numbers are in. The Fed's balance sheet increased by nearly $300 billion last week. pic.twitter.com/OPVD9cQ1LP

— Lyn Alden (@LynAldenContact) March 16, 2023

https://fred.stlouisfed.org/series/RESPPANWW

The total assets have gone up by about $300 billion from where it was a couple of weeks ago. This completely contradicts previous FOMC statements where they are supposed to be draining off assets by not rolling over some maturing assets.

To put it simply, the Fed is back to monetary inflation. Yet, it is still anticipated that the Fed could hike its target rate by 25 basis points next week. Any talk of 50 basis points is out the window now.

It would not be at all surprising if the Fed doesn’t hike rates at all in the next meeting or for the rest of the year. But it is interesting that it could possibly hike its target rate while simultaneously engaging in more monetary inflation.

This is perhaps one area where the Fed has indeed learned something. It has learned new tricks in deceiving the public.

Watching the Next Statement

The Fed is set to release its next monetary policy statement on March 22, 2023. Everyone will be talking about interest rates as usual.

Let’s see if the statement says anything about the Fed’s balance sheet. This is the base money supply. This is ultimately what determines the purchasing power of our dollars.

Peter Schiff has been predicting higher price inflation. He thinks the numbers have only come down temporarily, and they haven’t come down all that much.

I have had my doubts. I keep saying that if we hit a hard recession, then consumer demand will go down and we may see the rate of price inflation come down.

But we haven’t even officially hit a recession yet and the Fed is already creating new money out of thin air. Does anyone really believe this is a one-time bailout?

I have been saying that the Fed will keep a tight money policy, but that there are a couple of exceptions to this rule. To quote a post I wrote from February 1, 2023, “The Fed will not reverse course until price inflation is way down or until the bond market or major financial institutions need bailing out.”

Well, we are now at the point of bailing out major financial institutions. The major depositors at Silicon Valley Bank are getting bailed out. The rest of the banking sector is getting bailed out by the Fed’s messaging that it will intervene.

I’m not sure what number of quantitative easing we are on now, going back to 2008. Maybe this is QE5.

You can call it whatever you want, but the Fed is back in monetary inflation mode for now.

The Silicon Valley Bank (SVB) has failed, so the government has promised to step in and make depositors whole.

You can blame the bank’s failure on rising interests, bad loans, or some other economic bogeyman, but it was really just a case of a company taking on too much risk.

I would say it was bad decision making, but I’m not sure that is the case. The executives will run off with their millions of dollars that were already pocketed. They had all of the upside with the profit, but they don’t seem to have much of the downside.

The government doesn’t appear to actually be bailing out the bank’s executives, but I doubt they will have to pay back any past money that was made.

The only ones left holding the bag are the shareholders who will see most of the valuation of their stock shares go to zero.

Of course, there is one more group left holding the bag, and that is the general public.

Taxpayers or Dollar Holders

Joe Biden stepped in and assured the country that there was no need to panic and that the government and central bank have everything under control.

I thought Biden was going to order all bank employees to get another jab of mRNA to protect the health of the industry, but maybe that will be next week.

Anyway, Biden said that the taxpayers won’t be on the hook for this bailout. But how is that possible?

The only other possibility is that the Federal Reserve will create money out of thin air to take care of the bank depositors. But I thought the Fed was busy fighting inflation.

Maybe the Fed can take care of this bailout without significantly expanding its balance sheet. The problem is what to do when the next bank fails. How can you fight inflation when you are creating inflation?

So maybe the American taxpayers won’t technically pay for this, but most of those same people hold dollars and buy things in dollars. So their purchasing power will just decline at an even faster pace than before.

Leftist Cronyism?

It is truly hard to say if this bailout would have happened if it had been outside of Silicon Valley or New York City or Washington DC.

If the People’s Bank of Alabama (I have no idea if this exists) had declared insolvency, would the government have bailed out the depositors beyond the FDIC limit?

Maybe the government is really trying to prevent a cascade of banks failing. So much for their regulations and stress tests that came about after the last financial crisis.

But it is rather convenient that the main clientele of the bank were Silicon Valley companies. You wonder how many of these companies had a direct line to the White House.

It’s been reported that over 85% of the deposits were not FDIC insured. Apparently they were beyond the $250,000 limit.

In a sane world, only the FDIC-insured deposits would have been protected. It’s not to say that all of the other money would be gone. It’s just that the company and its assets would be liquidated and only a certain percentage would be paid for the remaining deposits.

Of course, in a really sane world, we wouldn’t have an FDIC and we would have financial institutions that wouldn’t be lured in to taking these ridiculous risks.

Is the FDIC Limit Gone?

A big question that remains is if the FDIC limit is gone. Is the FDIC now insuring all deposits without a limit?

If that is not the case, then this really was a case of pure cronyism. The government and Fed are bailing out this bank because of who the depositors are.

Otherwise, we now have an FDIC that is insuring every individual and company for every dollar, no matter how many millions or billions they have.

The FDIC can only cover a tiny percentage of the total deposits as it is, but the Fed can create any amount of money that it wants. So the Fed is the real backstop. Again, the problem is that the Fed is trying to fight inflation while having to create inflation for bailouts.

The Next Fed Move

The Fed is supposed to hike its target interest rate by 25 or 50 basis points at its next FOMC meeting. The next meeting is scheduled to conclude on March 22.

Apparently the Fed will still hike its rate, but a lot can change in the next week. We see how quickly things can develop.

It seems like everything just floats along despite all of the problems. Then it just all of a sudden changes.

My best guess is that the Fed will hike by 25 basis points at the next meeting, but again, who knows what will happen in the coming days?

I don’t think most people should worry about a bank failure. Most people are covered by the FDIC, and I don’t think the FDIC and the Fed will not cover anyone, because that would truly set off a panic.

The big worry is that the Fed is going to have to ramp up the printing presses (in a digital sense) again. If this happens, then consumer price inflation is not coming down any time soon.

This would also be a signal to the gold market. I think gold is already starting to look a lot better to a lot of people. If nothing else, it adds an element of some relative safety to one’s portfolio.

This is going to be a wild ride. If you are in the stock market, you are highly vulnerable. Even if the Fed ramps up monetary inflation again, it is far from certain that stocks will go up.

In August 2022, I wrote “an argument for not paying extra on your mortgage“. I would like to expand on this a bit.

I generally fall into the conservative camp when it comes to money management and investing. I haven’t always been this way. But even when I was younger, I would still throw some extra money towards my mortgage.

I now have a ridiculously low mortgage rate at 2%, which is fixed. It is so low that it just doesn’t make sense to pay it down. Maybe if we had a deflationary depression and I had a bunch of money laying around, I would consider it then.

Even during more regular times with lower price inflation, I hear many financial talking heads recommend to never pay down the mortgage in most cases. They think you can do something better with your money.

In other words, they are arguing that you can get a better rate of return on the money that you would have used to pay down or pay off your mortgage. And maybe you can get a better rate. The question is: Will you get a better rate?

Guaranteed Return

I have heard the argument for a long time now that if you have a relatively low interest rate on your mortgage, then just take any money you would use to pay down the mortgage and invest it in the stock market. You will supposedly get a better return over time.

But this may or may not be true. And that’s really the whole point. If you have a mortgage rate of 4%, then you will likely have to get a return of 5% or more to come out ahead if it isn’t in a tax-sheltered account like a Roth IRA. If your money is in a regular brokerage account, then you will owe taxes on gains and dividends.

Even aside from taxes, you will still have to get a 4% return on stocks to break even as compared to paying down the mortgage with a 4% interest rate.

Historically, the U.S. stock market has returned higher than a 4% return over time. The problem is that we aren’t living in history. We are living now, and we are planning for the future.

Talk to someone in Japan who invested in Japanese stocks in 1989 and is still down today, even in nominal terms.

The point is that if you pay down the mortgage with a 4% interest rate, you are effectively getting a 4% tax-free return on your money. There is no guarantee you will get that with stocks. In fact, you might even lose money in the stock market.

Inflation Doesn’t Matter, Returns Matter

I keep hearing that it doesn’t make sense to pay down low-interest debt in today’s environment of higher inflation (price inflation). But I want it to be clear that it isn’t rising consumer prices that matter in this decision.

If you have $100,000 sitting in the bank earning 1% interest and losing 8% annually to price inflation, then you are better off taking the money and paying off a $100,000 mortgage with a 4% interest rate, or even a 2% interest rate rather than have it sit in the bank.

The key is that this isn’t your only option. You could buy assets that have a near 100% guarantee such as Treasury bills.

With higher interest rates today, you can actually get a decent nominal return in Treasury bills, and you can also look at Treasury Inflation-Protected Securities (TIPS).

If you can get a higher return after taxes that is nearly guaranteed, then this makes more sense than paying down your mortgage.

The important point is that the price inflation rate doesn’t really matter in this calculation. What matters is the rates of return you can get. It isn’t the rates of return you might be able to get. It is the returns you can get with a near guarantee.

If you are considering paying down your mortgage, the whole point is that you are getting the guarantee of not having to pay that interest.

Other Factors

There are many other factors to consider when paying down your mortgage. The person with $100,000 in the bank earning 1% may have good reasons to keep that money there.

It is important for most people to have an emergency fund and to have some liquidity. This is certainly a valid reason for keeping money in the bank and getting a low return.

Sometimes people want liquidity for more than an emergency expense too. Sometimes there are opportunities in business or investments that may come up. All of this should be considered.

There are many reasons for and against paying down a mortgage, and many of them are personal.

But you shouldn’t opt to never pay down your mortgage just because the rate of price inflation is high. The interest rates are what really matter. Sure, they tend to be higher with higher price inflation, but don’t confuse the two.

The U.S. Department of Energy has said with “low confidence” that COVID-19 originated in a lab. In other words, the lab leak theory may be correct. So all of the people called crackpot conspiracy theorists a couple of years ago may have been correct.

It’s not clear why the Department of Energy is weighing in on the origins of COVID, but it is obviously one of many arms of the U.S. government. Why would they be releasing such a statement now if it was meant to be released? Is it to prepare us for what might come out later?

If COVID did indeed originate in a lab, then why would it be much of a reach to theorize that it may have been intentionally leaked instead of being an accident? Of course, even if the release was an accident, it is hard to call it an accident when it was human beings engineering a virus.

It’s possible that the U.S. government is putting this out there as a distraction. It is also possible that it is to make China look like the bad guy. The problem is that it is implicating elements of the U.S. government as mass murderers.

Who Funded Wuhan?

Just because the lab was in China, it doesn’t mean it was solely the Chinese responsible for it all. In fact, it looks like Dr. Fauci and the NIH actually funded the so-called gain-of-function research.

Even though such research had been blocked previously, Fauci just went through some third parties and did the research overseas. But it was still American taxpayer money funding it.

Even if the virus wasn’t intentionally leaked, it was still in existence because of the work of Fauci and the NIH.

It is Fauci himself who has said that millions of people have died from the virus. I might contend that this number is overstated and that some of the deaths are from hospital mistreatment, which also comes from Fauci. But there is little question there has been widespread death and destruction, especially with the lockdowns and vaccines.

So at the very least, if some government agencies think that the virus was leaked from a lab, shouldn’t that lead to more investigations? Shouldn’t that ultimately lead to prosecutions of government officials, including Fauci? Unfortunately, “should” is different than “will”.

Genocide

Even if the virus was leaked unintentionally, there should still be prosecutions.

If you get into a car accident and kill someone, you may be charged with manslaughter even if you weren’t drinking or driving particularly recklessly. If you just made an unintentional mistake, you can be charged.

But this is much worse than that here, and it is on a much grander scale. These people were funding research to make viruses more virulent and more deadly. I don’t know if irony is the right word here, but it is hard to overlook that the reason for gain-of-function research is supposedly to prevent pandemics. But the gain-of-function research is what led to the whole COVID disaster in the first place.

If Fauci did indeed fund some of this research, even if indirectly – and all accounts look like that is the case – then he is partially responsible for all of the COVID deaths and all of the death and destruction as a result of bad policies supposedly due to COVID.

When you tally it all up, this easily fits the definition of a genocide. Maybe there is a gentler word if it was done unintentionally, but it is still mass murder. And it is hard to say it was unintentional when Fauci and company were breaking the law and concealing their activity.

Also, if this were unintentional, then what about the coverup? And if things were unintentional or there were “just mistakes made” with COVID, then the power elite would have actually done something right along the way. Just about every single major thing that was done was harmful to the general population.

Conclusion

I don’t know why the government is all of a sudden admitting that it may have been a lab leak after all. I suppose they count on the American people having a short memory, which is usually the case.

They are also counting on people not getting too upset over this notion. That may or may not be the case.

I suspect that anyone paying close attention to this story from the Department of Energy and thinking through the implications are already on the side of knowing that the government has been lying all along.

So maybe this doesn’t change anything. At the same time, it is one more piece of the COVID fake narrative to fall.

I can’t say for certain that COVID came from a lab. There’s not much I can say for certain. But it is an important question, and one that should be asked. So why were the people who were floating this possibility a couple of years ago smeared and censored?

Sometimes the coverup is worse than the crime. In this situation, I don’t think that’s the case because the crime looks to be something along the lines of genocide. I wonder if anyone will ever be brought to justice for it.

We typically associate higher unemployment with hard economic times. Right now, the unemployment rate is very low, so does that reason that the economy is strong?

First, we have to distinguish between correlation and cause and effect. Higher unemployment doesn’t cause the economy to be bad. Perhaps a bad economy can cause higher unemployment, but even here we have to be careful with the details.

Another mistake that feeds into this is that the economy is weak when we are in a recession, and the economy is at least relatively strong when we aren’t in a recession. But a recession is a correction from previous mistakes. It is a process of correcting the allocation of resources.

A recession is just when the worst of the pain is typically felt because of the adjustment that is occurring. But the mistakes were already made, mostly with central bank policy and government policies/ spending overall. In fact, if the government and central bank do not intervene much, the recession is the healing process.

Reallocating Resources, Including Labor

Part of having a correction and reallocation of resources towards consumer demand is having higher unemployment. This is because work is shifting to areas of greater productivity and away from activities that are unsustainable.

Let’s say that food prices are skyrocketing in an artificial boom phase while people are getting swimming pools put in their backyards. When the recession arrives, the price for pools (the labor and materials) goes way down due to far less consumer demand. People aren’t buying luxury goods and services as they were during the boom time.

Yet, food prices may not be going down as much or at all. People still need to eat, and you can only make so many substitutions in terms of food. So the market is sending a signal that we need fewer pools and more food. The people who were building pools need to go work for food production companies and grocery stores.

To be sure, we live in a world with a high division of labor. So the exact people who are no longer in demand for installing pools do not have to be the same people who go into the food production business. But the wages will start to reflect where workers are needed.

In the transition, no matter how it shakes out, there will be higher unemployment as people shift to other jobs. So it is especially painful for those who have to change jobs and are left unemployed in between.

Today’s Job Market and Wages

The reason the low unemployment rate right now is not indicative of a strong economy is because wages are not keeping up with price inflation.

Some people don’t trust the government’s statistics on unemployment, but I think the trend is close enough. Most people who want a job today can get a job. It just may not be the job they want or at the wage they desire.

So the unemployment is low, but wages aren’t keeping up. And it is deceptive because of the inflation game. You may be getting a 5% annual raise at work, but that means that your salary is actually declining because you owe taxes on that money, and it is below the rate of price inflation, even according to the government’s own statistics.

The fact that unemployment is low does not tell us how strong the economy is. The one positive aspect is that it means the labor market is clearing. In other words, any interventions by the state are not enough to cause significant unemployment.

It’s interesting that the inflation created by the government/ Federal Reserve actually negates much of the harm from minimum wage laws.

Even if there were no minimum wage laws, most people would be getting paid at or above the current minimum wage anyway at this time. This is why the labor market is clearing. And to be sure, it is good in this one sense. It is better for people to be working than not working, no matter the conditions of the overall economy.

But the low unemployment rate doesn’t mean that living standards aren’t declining. Since real wages are going down, people are not able to maintain their same lifestyle without saving less or going into debt.

A Recession Ahead?

It looks likely that there will be a recession in 2023 or 2024. The yield curve is highly inverted, which is the best indicator.

If and when we get a hard recession, the unemployment rate is likely to increase. It is possible it may not be as bad as in other recessions even if the recession itself is as bad or worse.

The key is that wages have to be flexible for adjustment. There is always a demand for labor at some price. It’s just a question of how low that price (the wage) will go.

From an individual standpoint, the best thing most people can do to prepare for a recession is to secure their employment to the best extent possible. If you have marketable skills that are in high demand, then there is less to worry about. But it still doesn’t mean that your salary might not go down.

If price inflation continues higher, then perhaps nominal wages will just stay about the same as part of the adjustment. This would be a drop in real wages to the extent there is price inflation. But most people would rather take a pay cut than lose their job. At least they have options.

In conclusion, don’t let the low unemployment rate fool you. Real wages are still going down, and the unemployment picture could change quickly with a recession.