There is still a Keynesian fallacy that consumer spending drives the economy.  This incorrect line of thought is particularly prevalent around Christmas time.

After Black Friday and Cyber Monday are done, we will hear statistics about how great or how disappointing retail sales were.  If sales meet or exceed expectations, the talking points will be that the economy is still strong because the American consumer is spending money for the holidays.

There is a relationship between consumer spending and the economy.  There is a relationship between consumer spending and our overall living standards.  But we shouldn’t confuse a correlation with causation.  Strong consumer spending doesn’t cause us to have a good economy.  If anything, a good economy leads to strong consumer spending.

You Can’t Consume What Isn’t Produced

You can only consume what is first produced.  We can be sure that the people of Ghana or Bangladesh would love to be lining up at Best Buy to purchase the latest 70-inch television for only a few hundred dollars.  The problem is that most people living in these third-world countries simply can’t afford to buy a 70-inch television.  They are more worried about having clean water, a safe shelter, and food to eat for tomorrow.

The reason Americans, in general, are so wealthy as compared to many other people in the world is because Americans are more productive.  It’s not that Americans necessarily work harder and faster.  It’s that Americans have generations of savings and capital investment that make us more productive.

It isn’t so much technological advancements, although they certainly help.  But those technological advancements are available to anyone in the world.  The problem is that they can’t put them to good use.  You have to have the factories and equipment, along with the knowledge, in order to produce consumer goods.

There may be people in Bangladesh helping to produce televisions, but the capital investment is likely coming from the U.S. and other first-world countries.  The people in third-world countries don’t save a lot of money, and they invest very little, at least comparatively.  If you are worried about where your next meal is coming from, you aren’t going to invest in a factory to build electronics.

Savings and Production

Increases in production come from savings and investment.  When you produce something and don’t consumer something in an equal amount, then the difference is in savings.  This is measured in money.  You can produce any number of goods and services and sell them.  If you save some of the profits, then this can go into investment.  It can be used to build machinery or start a new business.  This is done in order to seek profit in the future by producing more.

It is hard to grasp in today’s world because so many people make their money by producing things that aren’t directly consumed.  An accountant or attorney may be helping a corporation, even though they aren’t the ones making the widgets, but it still may be a necessary function.

There are people who produce services too, which is a sign of a wealthy people.  When you think of athletes, actors, and singers who make a lot of money, it is hard to think that they are producing something.  But that is what they are doing, and they are sometimes producing this entertainment for millions of a people at a time.

The person serving you your food at a restaurant or making your coffee at Starbucks may not be directly producing the food, but it is still production that is meeting demand.  There are many things that Americans consume that are not necessities.  Again, this is a sign of a wealthy society.

Government Interference

The problem we have today is that the government (at all levels) interferes in the marketplace.  This is done through taxation, inflation, borrowing, and regulating.  Most government action discourages savings and investment.  It is actually amazing how much people are still able to save and invest in spite of government interference.  It is amazing that new businesses and innovations still come about as rapidly as they do.

The U.S. has built upon previous savings and investment from generations before for over 200 years.  Even the people in the late 1700s were building upon what was built before them.

If the government weren’t taxing and regulating us so much, we would have even more prosperity than what we have today.  It is actually unimaginable what we might have.

Still, even with the government at all levels taking nearly half of our money and misallocating it, most Americans are still able to go out to eat, go to Starbucks, own a smartphone and a big screen television, and go on vacations.  If some of these things aren’t your cup of tea, maybe you have something else where you spend money, even though you don’t necessarily “need” it.

The fact that Americans are spending as much money for Christmas gifts as in past years is almost meaningless.  This could be because consumers are doing well, but it is just as likely, at least in 2023, that it is because they just aren’t saving much money.  In some cases, people are buying Christmas gifts with debt and no ability to pay off the debt within the next month.

We actually want people to save money and spend less so that we can have greater production in the future. We don’t want to consume our capital, which could actually make us poorer in the future.

For the sake of the American economy and our future living standards, let’s hope that retail sales are down this Christmas season.

The people of Argentina have elected Javier Milei as the new president of the country.  Milei is sometimes described as a radical libertarian.  He has even described himself as an anarcho-capitalist and a follower of Murray Rothbard.

Milei won with about 56% of the vote, so it was quite decisive.  Argentina has been plagued with high unemployment and high inflation.  The price inflation there is reported to exceed 100% annually.

It shouldn’t be surprising that the people wanted a change, yet it still is a bit of a surprise.  When socialist governments create problems, they also create dependency.  There is much propaganda to tell people that we need even more socialism and government interference.  Unfortunately, history has shown that people often fall for it and continue to elect hyper interventionists.

Is Milei Really a Libertarian?

This is where the skeptic in me comes out.  Even though Milei has cited Rothbard and likes to rail against the central bank, I have strong doubts that he will govern as a libertarian.

Milei is an advocate of Bitcoin, but that should really play no role in politics other than keeping government out of it.  There certainly should be no monetary system based on Bitcoin unless it is chosen by the market.  Perhaps you could say the same thing about gold, but at least a gold standard, even if it is run by a government, has some basis of being derived by the marketplace.  Gold was chosen freely as a form of money for thousands of years.

Some libertarians have been skeptical, or even critical, that Milei may tie the Argentinian currency to the U.S. dollar.  I actually don’t think this would be a bad first step, because the U.S. dollar is a much sounder currency than the peso.  I don’t think libertarians should expect an abolishment of the central bank in Argentina, and certainly not right away.  There is a libertarian argument to made that it shouldn’t be abolished in just one step because of the chaos it would cause.

Of course, 100% or higher inflation causes utter chaos.  But there are contracts to be concerned about, and the best way to have a somewhat smooth transition to sound and free money is by allowing competition to take place.  Argentinians should be free to use pesos, dollars, gold, Bitcoin, or anything else they want to use for transactions.

In terms of policy positions, my biggest concern with Milei is his foreign policy.  He could probably fit in on the debate stage with the GOP (i.e., war hawk) candidates talking about Israel.  Hopefully Milei will serve as president of Argentina and not of Israel.

Perhaps the fortunate thing about the disaster that is the Argentinian economy is that the government doesn’t have a lot of money to spend on foreign interventions.  That is not yet the case with the United States.

Will Milei Have Courage?

Even if Milei is a fairly solid libertarian to start, there is going to be immense pressure from special interests, from foreign players, and from the establishment in general.  It is tough to stand up against this.

I can think of very few politicians who have mostly been able to stay principled for a long period of time.  There is Ron Paul.  He was in Congress, but never made it to the presidency.  I’d like to think that he would have stuck to his principles if he had become president, but you never know.  But that is what made Ron Paul so unique.  Most people actually believed that he would stick to his principles.

Boris Johnson was supposedly a reader of LewRockwell.com at one time.  I have no idea how true this is.  But he was a total disaster of a prime minister.  He is partially responsible for the war in Ukraine and killing any peace negotiations.

It is easy to be skeptical of anyone who reaches a position of high power.  In fact, it is right to be.  Power corrupts people quickly.  They want to be liked, and they want to maintain their power and prestige.

Even if Milei shows courage and sticks with his convictions, it will still be really difficult.  We all saw what happened to Donald Trump.  He was already smeared relentlessly by the establishment and its media up until the 2016 election.  After he was actually elected, they went after him with just about everything.  The deep state maintained control over every important area and agency.  This includes the FBI, the CIA, the Department of Justice, the military-industrial complex, the medical establishment, and the national security state.

So, while it’s nice that Milei seems to be really solid on economics, the biggest question is whether he will be able to take on the deep state.  Argentina is different from the United States, but there is deep state bureaucracy in every major government.

Reason for Optimism

The main reason I am cheering this election and am optimistic is for the simple fact that the Argentinians elected someone who was running on a somewhat radical libertarian message.  He is popular among the young voters, which is an even better sign.

Even if he isn’t successful in getting Argentina anywhere close to a libertarian society, I think things will move in that direction.  Even if Milei goes against his promises and is a disaster, it is still quite positive for the future of liberty.  It’s not like he was a libertarian while campaigning as something else.  Some might have voted for him as the lesser of two evils, but that means they saw the socialist candidate as the bigger evil.

I wouldn’t expect great things from Milei, but I do expect improvements.  And with the liberty movement alive and well in Argentina, there is great hope for the future there.

The latest consumer price index report came out for October 2023.  The numbers came in slightly below expectations, which drove stocks higher.

The CPI was flat for the month of October, while it was expected to rise 0.1%.  The year-over-year rate now stands at 3.2%.  Overall prices keep going higher, but at a slower pace than before.

The median CPI, which tends to be less volatile, was up 0.3% for October, while the year-over-year stands at 5.3%.

Again, price inflation is not coming down.  The rate is coming down.  Prices are going up at a slower pace than before.

The Bulls are Happy, For Now

U.S. stocks boomed on the news.  Stock investors tend to like inflation, so you may be wondering why this was taken as good news for stocks.  The reason all goes back to the Fed.

If price inflation is coming under control, then that means the Fed is less likely to hike its target federal funds rate.  It also means the Fed is more likely to stop its monetary deflation earlier.  So, investors are banking on a loose – or at least a less tight – monetary policy.

I think the stock bulls are right about the monetary policy going forward, but they are interpreting it wrong.  We will see a looser monetary policy as compared to now because the economy is going to go into a recession.  That may be putting it mildly.  With rates having gone up so fast, and with an inverted yield curve for 2023, we may be looking at a major financial crisis in the near future.  And if that happens, stock investors are going to get the loose monetary policy that they wanted.

The problem is that we will be in a financial crisis, or at least a bad recession.  This isn’t good for stocks.  It typically isn’t good for asset prices in general.  If the Fed is aggressive enough after the crash, then stocks could turn around.  But it won’t be before they take a major beating.

The Fed May Win Against Inflation, Temporarily

Price inflation is still above the Fed’s target of 2%.  They will ignore what they said a few years ago about trying to average 2% over time.  They never specified what time period, but shouldn’t that mean that we will go under 2% for a while to average out to 2%?  It was just over a year ago that price inflation topped 9% year-over-year.

We have seen short-term rates go above 5% along with a declining balance sheet.  This is all in the face of an inverted yield curve.

I think Americans are still suffering terribly from price inflation.  Car insurance prices are up nearly 20%, which tends to be a fairly big line item in most people’s budgets.  Wages are simply not keeping up with consumer prices.  The reason that some prices are starting to stabilize is simply because consumers don’t have the money to buy as much.  They have to prioritize their needs.  And with some needs, such as food, they find cheaper substitutes.

The Fed will be successful in bringing down the price inflation that it created (with the help of the federal government).  The problem is the next side effect (recession/ financial crisis).  Then the problem is the Fed’s reaction swinging the other way.  So, we may get back to much higher price inflation again, but not before we see major economic turmoil.

• Every single presidential candidate I’ve heard, outside of the Libertarian Party, has been bad on the conflict in Israel/ Gaza.  That includes RFK Jr., who has probably destroyed his campaign for taking the establishment position.  Since October 7^th, I haven’t seen or heard much from RFK Jr., probably because he hasn’t been making appearances on the podcasts/ shows that I listen to.  I have had far less enthusiasm for his campaign since that time.

• Vivek is the least bad on Israel.  He won’t admit that the Israeli state has done some bad things to innocent people in Gaza, but at least he says that the U.S. government should remain neutral.  He doesn’t want to stray too far from the establishment narrative on this one because he is running for Trump’s VP in 2024.

• I heard five presidential candidates from the Libertarian Party speak last month.  They all had their strengths and weaknesses, but I can say that they were all good, at least from what I heard, on the subject of foreign policy.  And this was after the October 7^th attacks in Israel.

• Trump’s nickname for Ron DeSanctimonious was never that good.  He should just go with Neocon Ron.

• I recently learned that there are only about 16.1 million Jews in the entire world.  Israel and the United States make up about 14 million of the Jewish population, although estimates vary.  It is incredible that there is so much controversy regarding a group of people that makes up just 0.2% of the world population.

• I understand that last comment can be taken in different ways.  It is incredible that such a small percentage can have such a big influence, especially in the political realm.  It is also incredible that Jews can exist given how much hatred there is towards them.

• I grew up in New York and had several Jewish friends.  I was a kid, so it meant little to me other than the fact that they celebrated different holidays.  I was mostly ignorant of happenings in the world, which is probably good.  I enjoyed playing sports and having fun.  I have little bias for or against Jewish people. As with any other group of people, there are good ones and bad ones.  I do have a bias against government, so I can recognize the crimes of the Israeli state.

• Public opinion is turning against Israel in a lot of ways.  More people are learning about the “open air prison” that is Gaza and the mistreatment of the Palestinians.  Even if you are the biggest fan of Israel and the Israeli state, you should be warning the Israeli state to tread lightly.

• Anyone who uses political arguments based on Scripture should be ignored or ostracized.  Saying that the Bible entitles a Jewish state is not a good argument.  It is even worse when it’s used to justify killing.  That means that there will never be peace when people use religion (Judaism, Christianity, Islam, or anything else) as justification for political acts.

• In Israel, Jews make up about 7 million people.  There are a little more than 2 million non-Jews in Israel.  The Palestinians include Christians.  Unfortunately, all three religions place high value on this little piece of land.  If religion weren’t involved, it should be easy to resolve all conflict.  The U.S. alone takes in about a million legal immigrants every year.  The number of illegal immigrants is even greater.  You would think that one group or another could find just about any place in the world to settle and live in relative peace.  The problem is that there are religious and cultural reasons for the conflict.

• I wonder how much the land itself means to Palestinians.  They feel that the property of their ancestors was unjustly taken.  Some of the Palestinians today have had property taken from them, and they are largely under the control of the Israeli state.  If Palestinians were given the opportunity to immigrate to the U.S. or some other first-world country, I wonder how many would take it.  Does the land itself mean that much to them?  Do they just want revenge against their oppressors?  Or would they be willing to essentially “let it go” if they were given an opportunity to live somewhere else with property and relative freedom?  I genuinely don’t know the answer to these questions.  Maybe it differs greatly for different people.  I suppose one could ask the same last question of Israeli Jews.

• As a libertarian, I am not advocating this, but the U.S. government could relocate every single Palestinian and give each one $10,000 as a one-time payment.  2 million people times $10,000 is $20 billion.  That’s the equivalent of less than 5 days of the U.S. deficit (not spending).  The government spends close to $20 billion every single day.  That one-time payment would be a lot cheaper than continually sending money to Israel and other countries to promote ongoing conflicts.  But the people spending the money aren’t trying to achieve peace, so this will never happen anyway.

• Regardless of where your sympathies lie, nothing good can come from more U.S. government intervention.

• Ron DeSantis wants to ban pro-Palestinian protests on college campuses.  I guess DeSantis only stands up for free speech when it is anti “woke” speech.  Aside from the free speech aspect, what is wrong with being pro Palestinian?  Surely not everyone at these protests are anti Jewish.

• I am pro Palestinian and pro Jews, at least for the innocent people.  In order to achieve peace, we need to criticize all who want violence.

• It is still hard to believe that the Israeli state did not know what was going to happen on October 7^th.  The “intelligence” there is completely inept, or else there were elements within the government that knew the attacks were going to happen.  Either way, it is a not a good look.

The third neocon debate for president was hosted by NBC News.  All of the candidates had great ideas to stop China, defend Israel, and involve America in the entire world.  For a second there, I thought it was a debate to be president of Israel

It makes it rather easy for someone like Donald Trump to step forward and say, “I care about Americans and what is happening in America.”  It’s not that Donald Trump is great, but he looks good when compared to these slithering war hawks.

Ron DeSantis

Ron DeSantis has gone full neocon now that Israel takes center stage.  He lacks charisma, but I don’t think that’s a reason to be against him other than strategy reasons.  But if DeSantis actually became president, I am now of the opinion that he would be bad news.  He wouldn’t be a fiscal conservative at all because he would be too busy sending troops and war planes all over the world.

Tim Scott

Tim Scott is also a war hawk.  Unfortunately for him, he is also a bore.  He speaks, and people fall asleep.  I’m not sure if he is in this race because he wants the VP slot, or if he actually thinks another voice for the American empire can win in this crowded field.  If Trump picks Scott as his running mate, I will definitely not vote for Trump.

Chris Christie

Chris Christie just falls flat on nearly everything.  It’s almost surprising that he was able to qualify for this debate.

Nikki Haley

Nikki Haley is the most evil of the candidates.  Her lust for blood comes out in virtually every issue and every response to a question.  It is actually possible that someone could be worse than Biden, and she is that possibility.

Vivek Ramaswamy

Vivek Ramaswamy wasn’t great, but he was far less bad than all of the other candidates on stage.  The so-called moderators showed their bias with him.  They were quick to shut him down whenever he challenged anyone.  Perhaps they didn’t like it near the beginning of the debate when Vivek said that NBC shared blame in promoting false stories such as the Russian collusion hoax.

(The shills at NBC assured us after the debate that it was a strong night for Nikki Haley and Ron DeSantis and had everything negative to say about Vivek.)

Vivek had what was likely a rehearsed line that was funny, but I’m not sure if it landed.  He referred to two people on the stage wearing three-inch heals.  Nikki Haley shot back at that, even though it was a far bigger shot at DeSantis.  This was based on a story last week that talked about DeSantis wearing high-heeled boots in order to appear taller.

Vivek also had to show his Israeli credentials, but he was definitely the least bad.  He called out the neoconservatives, even though, at times, he is borderline one himself.  I think Vivek reads the mood of the electorate better than the others, so he at least knows he has to sell a message of America first.

Summary

Once again, Donald Trump was the winner of the debate.  He made the right decision to not participate in these clown shows.  The only person Trump should consider as a running mate from the presidential race is Vivek.

Trump’s biggest flaw from his presidency is putting people in his administration who hate his guts.  If he puts any one of these candidates, besides Vivek, on the ticket, it will tell me right away that Trump learned nothing from his first term.

Trump will say some things about being friends with Israel and supporting their revenge against Hamas.  But I do think Trump will also make it clear that his number one priority is America.  It isn’t Israel.  It isn’t Ukraine.

The candidates on the debate stage all could have been wearing a “Make Israel Great Again” hat.  Most of the people watching the debate are worried about violence in their own community and the cost of eggs at the grocery store.  They may be sympathetic towards the innocent people in Israel, but they want someone who will represent the American people and their needs.

With the major boom in housing over the last decade, many long-term homeowners find themselves with significant home equity.  For many, it makes up the highest category of their net worth.

If you bought a house 10 years ago in 2013, you might have $200,000 or more in equity with an average house.  If you haven’t taken out any money already through refinancing and you bought the house with a significant down payment (say, 20%), then you may even have more than this in equity.

It would be realistic to have bought a house for $200,000 ten years ago with $40,000 down.  Now that house is worth over $400,000.  With the paydown of principal on the mortgage, you might have $300,000 in equity.

Some people see this as a waste because of opportunity costs.  The problem is: Compared to what?

Maybe there was arbitrage opportunity when mortgage rates were 3%, although it is still a significant risk.  Mortgage rates are now 7 to 8 percent.  In order to put this money to “work”, you would have to take out a loan for almost 8 percent.

You could also take a loan from your credit card company and invest the money in the stock market (or Bitcoin, or whatever).  You could make a return higher than the interest paid to your credit card company.  But you could also lose a lot of money.

Home Equity is Not Wasteful

Your home equity is not just money sitting there.  It is money that you are not borrowing to have an asset that you hopefully want to own.  With your home equity, it is money that is there to keep you from paying interest to a bank or some other financial institution.

It is easier to see that this money is working for you when you pay off your mortgage.  Your principal and interest will go to zero.  You will still have to pay insurance and property taxes if that is part of your monthly mortgage payment.

Let’s say that principal and interest is $1,000 per month.  When your mortgage is paid off, you will increase your monthly cash flow by $1,000.

If you never fully pay off your home loan because you sell the house, then you will get access to that money at that time, unless you opt to use it towards another house.

Your home equity is not a waste because it is “just sitting there”.  It is helping to reduce your monthly expenses now and in the future.

The Bubble Economy

There is more talk of these kinds of schemes in a bubble economy.  Of course, it is more possible in a bubble economy because more people tend to have significant home equity.

But even in rough times, there are people with significant home equity.  But it doesn’t cross their mind to take out a loan to invest the money because they see that most things have a negative return at that time.

When stocks and real estate are going higher, that’s when people become clever and think about taking out equity to invest.  Perhaps it’s better than using equity to take a vacation, but it is better to not tap into that equity unless you have some kind of very special opportunity cost.

If you are borrowing money to own the business of your dreams, then maybe you will have a case for taking on the risk.  But if you are taking out an additional loan to buy penny stocks, or even index funds, then you are probably going to get burned.

The bubble economy gets people to make irrational decisions because they think the good times are going to last.  They don’t think a prolonged bear market is going to happen.

When the bubble economy bursts, you don’t want to be in debt.  Any debt you do have, you want it to be at a relatively low interest rate, and you want it to be affordable compared to your monthly income and your other expenses.

It is never a good idea to borrow money out of your home equity, but it is especially bad to do in a bubble economy with higher interest rates.

The Federal Open Market Committee (FOMC) met this week and released its latest monetary policy statement.  The Federal Reserve’s target range for the federal funds rate will stay between 5.25% and 5.5%.  This is the second meeting in a row where the FOMC did not change its target rate.

While the Fed is hoping this is a Goldilocks scenario (not too hot, not too cold), this isn’t the case.  On the one hand, the Fed fears losing control of the dollar through higher price inflation.  This could ultimately also mean a loss of control over interest rates.

On the other hand, the Fed fears a major financial crisis.  The Fed doesn’t want a recession, but the people at the central bank probably wouldn’t mind an ordinary recession as long as the major banks stay solvent and the bond market doesn’t blow up.

If the Fed had hiked rates more, this would have been more tightening in the face of an inverted yield curve.  If the Fed had lowered rates – which nobody expected to happen – this would have risked much higher price inflation and a bigger blowup of asset markets.

Therefore, the Fed just kept things the same.  It will let the economy come to the Fed instead of bringing the Fed to the economy.  In other words, the Fed will just react to economic news.  It is always reacting to what is in the rearview mirror.

The Inevitable Recession

I think Fed officials understand that a recession is coming.  Even those in the financial media are talking about the possibility, and they almost never predict a recession.  But if you want to be a contrarian, don’t think that there won’t be a recession just because the financial media is talking about a recession.  The contrarian take is that the recession will be far worse than what they are talking about.

The yield curve has been mostly inverted for all of 2023.  It has recently started to somewhat flatten, although the long yields are still less than the short yields.  It just isn’t as much.  But the recession doesn’t typically happen until after the yield curve normalizes after being inverted.

I don’t think most people understand the potential of how bad this could be.  The government is spending over $6 trillion per year with massive annual deficits well over a trillion dollars.  This will continue to get worse with higher interest rates on the debt that is rolled over.  It will continue to get worse as the Fed is paying higher interest rates to banks for their reserves.

The stock market is still a massive bubble.  Housing prices are still astronomical, with mortgage rates near 8%.  This whole thing has the potential to blow wide open.  Throw in some insolvent banks due to the higher rates, and we could be looking at a financial crisis that is even worse than 2008.

Protect Wealth First

I am still an advocate of the permanent portfolio, or something similar.  If we hit a bad recession, rates may fall back to near zero and bonds may actually do well.

If the Fed is essentially forced to go back to easy money to save the banking system, then gold may finally skyrocket with more money creation.  There is always the possibility too that stocks may do well again in such an environment.

Of course, it is also important to have some cash or cash equivalents on the sidelines, as sometimes that is the only thing that holds up in the short run in a recession.  Plus, right now, you can actually earn a decent rate of return on short-term Treasury bills and cds.

If we do get a deep recession and the major asset bubbles pop, it will actually be an opportunity for some people with cash on the sidelines.  It will be an opportunity to buy assets at a steep discount when everyone else is fearful.  This is always easier said than done, but it is good to know going into it.

Warren Buffett said to be fearful when others are greedy and to be greedy only when others are fearful.  On this, I believe Buffett was correct.  But you have to believe this and think about this before the fear hits.