The topic of retirement accounts and the possibility of government confiscations has grown in popularity.  It is easy to understand why.  When people see what happened to the bank customers in Cyprus and they see their own government getting ever-more hungry for more tax money, it is easy to get paranoid about these things.  (Is it paranoia if it is true?)

I have written about this topic before and will probably continue to write about it in the future.  I think the U.S. government will certainly try some form of confiscation of retirement accounts.  This could include 401k plans, IRAs, pensions, and of course, the government’s own retirement plan of Social Security.  Actually, when it comes to government pensions and Social Security, this is a completely different subject.  There isn’t actually any money there and the only way they can be funded is through taxes, borrowing, money creation, or selling government assets.

For this post, I am mainly referring to 401k plans, IRAs, and possibly private pension plans.  In a sense, there is already confiscation, even if somewhat indirect.  If you withdraw from your retirement account before the government-approved age, then you will pay a 10% penalty on top of the income taxes that you owe.

Another interesting thing is that you can’t generally withdraw from your 401k workplace plan if you are still currently employed with the employer that sponsors your plan.  I have complained about this fact to others before.  I say, “this is my money and I should be able to do what I want with it.”  I point out that someone could be rich with their 401k plan, yet they might not have two dimes to rub together.  They could be struggling to pay their bills and meet their basic daily needs and yet have hundreds of thousands of dollars in a 401k plan.  And it isn’t always that easy to get a hardship withdrawal as the criteria can be very specific.

The reaction I get from people varies.  Some agree that people should be able to access their retirement accounts.  But you would be surprised how many will justify the current scenario.  They will say things such as, “well, it is supposed to be for your retirement.”  Thank you for being my babysitter in my life.  Are there any other decisions that you think should be made for me?  Should I get government approval for who I marry or where I go to dinner?

This is why such rules exist.  People do not have to expressly consent.  They just have to consent enough that they are not against it.  If someone doesn’t know or understand about a particular issue (and this could be on anything) or if they just don’t care, then the politicians will come down on the side of bigger government and more power for themselves almost every time, assuming that a majority of people are giving this tacit consent.

As far as retirement account confiscation, I think it will continue to be more subtle.  The government will not throw the frog into boiling water, unless it is just a test run.  They will warm the water up slowly on us frogs.  They may impose a bigger penalty for early withdrawal.  They may limit how much you can have in a retirement account.  They may start off with “government-guaranteed” mutual funds (or something like that).  They will be voluntary at first.

If there are further steps in retirement confiscation, they will likely be in baby steps.  You will probably have warning signs.  I doubt it will happen all at once.  I don’t think the government is likely to announce that it is simply confiscating 10% of everyone’s retirement account.  There would be too much backlash.  The politicians are really stupid if they do something like this, as they could face something of a revolution.

This will be an interesting issue to continue to follow.  You should be cautious if you contribute to, or have, a retirement account.  I used to be one of those people who thought it was stupid not to contribute.  I pointed out that it was free money from your employer if you could get a company match.  My opinions are far more mixed now, if not opposite.

As with everything else in your investment life, you should diversify.  I think it is ok to have a retirement account, but you should realize the risks are there for the government to get its hands on your money.  You should never contribute more than what it takes to get a company match.  But I think there are times when it doesn’t even make sense to get a company match.  You are locking up your money, particularly since you are working for the company and can’t withdraw anything.  If you find that you have more money in your retirement account than anywhere else, then it probably makes sense for you not to contribute any further.  You would be putting too many eggs in one basket.

As I said, there will probably be warning signs of a government confiscation.  It will come in baby steps.  You should be in a position to protect your money, even if it means withdrawing it early and taking a 10% hit.

With unemployment numbers high, there is a continual discussion about how to create jobs.  There are many factors for the high unemployment rate, and most of them have to do with government interference in the marketplace.  Minimum wage laws, other labor laws, regulations against business, taxes, and central bank inflation are just some of the major reasons for high unemployment.

In conclusion, job creation is not the ultimate goal.  Job creation should be handled by the demands of the free market.  Unemployment will decrease and production will increase, if and when government at all levels loosens its grip and reduces spending.

I recently saw an episode of Shark Tank.  One segment featured a young guy who had a great invention.  It was a lid (in various sizes) that fit over a common dinner plate.  It sealed in freshness and was easy to remove.  He already had his business up and running and had great potential.  The “sharks” also saw the great potential.

The guy came in and asked for $90,000 for a 5% share in his company.  Instead, he got offers of $900,000 for 30% and $1,000,000 for 25%.  Then things got really bad.  Something happened to the humble guy that walked in there.  He became really greedy, and not in a good way.  He supposedly came up with some figure in his head on what he wanted, but then he said he wouldn’t share it.  Eventually, he asked for $700,000 for a 5% share of his company.  (I am writing this by memory, so hopefully my numbers are accurate.)

He had increased his asking price almost 8 fold in the matter of 5 minutes.  This supposedly brilliant guy who came up with a great product was acting like a complete moron.  Four out of the five sharks bowed out, just because they couldn’t stand the guy and couldn’t trust him any longer.  I don’t blame them.  I would not want to work with or invest with someone that arrogant.  He ended up making a deal for $90,000 for an 8% stake.  He was lucky to get that much, if anything.  He could have had ten times that amount while still maintaining the majority stake in his company.

There are a couple of sayings that came to mind watching this:

“A bird in the hand is better than two in the bush.”

“If someone puts a million dollars in your hand, close it.”

That last saying could literally have applied to this guy.

It is good to watch things unfold like this.  The guy entered the room and appeared to be humble.  Then everyone was excited about his product and his company and started making strong offers.  That sunk the guy.  He became greedy.  He became arrogant.  He was out of touch with reality.  He should have had a firm idea in his head of what he would accept going into the room.  He was unprepared.

It almost reminds me of a real estate investor in 2006 who was on top of the world with $5 million in properties.  He refused to sell and take any profit.  He thought he was invincible.  Then his whole world came crashing down on him.

It is important to give yourself a reality check every once in a while, particularly when things seem to be going really well.  It applies in life and investing.  Sometimes it is a good idea to take some profits off the table.  And if someone puts a million dollars in your hand, just close it.

The move in gold was really unprecedented, unless you can remember back to the early 1980’s.  On Friday, April 12, gold went down significantly.  Its drop was approximately 5% in one day.  Then on Monday, April 15, gold fell by its second largest dollar amount ever, in the course of one day.  It was down almost 10%.  It fell about $140 per ounce in one day.

I am seeing a lot of stories on why this happened.  I think it could be any combination of the reasons I see.  One thing about observing the markets is that you can never really be certain on why something goes up or down in price.  Sometimes there are more obvious things like a Fed announcement or seeing a stock go up after its earnings are released.  But it always comes down to buyers and sellers.  It comes down to the number of buyers and sellers and where they are willing to meet on a price.  In the case of gold for these two days, there were apparently more people who wanted to sell than buy.  For the people who really wanted to get out of a long gold position, they had to come down in price.

There were rumors that the government of Cyprus was selling its gold reserves.  Then there were more rumors that other European countries like Italy would eventually have to do the same.

China came in with slightly lower growth than expected, fueling fears of a coming recession there (hence, less demand for gold).

I continue to believe that we will either see a relatively quick recovery in gold or we will see a deep recession.

If we see a recovery in gold, I don’t necessarily think it will happen in the matter of days.  We will probably see some more volatility, including down days.  We may yet see some new lows (for the last couple of years).  But I would expect to see the price going back up in the next few months.  If we hit July and prices are at or below where they are now, then watch out for a recession.

If the U.S. economy does fall back into recession, then it will be really scary for a libertarian who understands economics.  It means that the Fed’s monetary inflation of $85 billion per month ($1 trillion per year) is not enough to juice the economy.  That means that there is some major malinvestment that couldn’t even be propped up for a while longer with massive monetary pumping.

Even scarier is to think of what the Fed will do.  If we hit another deep recession and the official unemployment statistics get worse again, will Bernanke and company up the ante again?  Will they go for $2 trillion per year in monetary stimulus?

In this respect, gold should be a solid investment over the next few years.  We are likely to see higher price inflation expectations or massive monetary inflation by the Fed.  Perhaps we will get higher price inflation and still get more monetary inflation.  If the Fed thinks the economy is that shaky, we can only guess as to what steps it will take.

One last point that I think is important in all of this is that this is a good reminder of why it is important to have cash (or liquidity).  I am an advocate of the permanent portfolio as described in Harry Browne’s book Fail-Safe Investing.  I have suggested little tweaks if you don’t like holding such a high percentage in bonds.  But this huge drop in gold just shows how important it is to have that cash portion.  With gold down in price right now, it is actually a good time to be adding to your gold position.  If you don’t have any cash, then that is difficult to do.  It also serves to help balance out your portfolio to the allocated percentages.

The two big down days for gold were a good reminder that we can’t predict the future and that we must be prepared for all types of scenarios.  While you may think that gold has to go up, other people may have a different view.  You may lose out in the short run.  In order to claim victory in the long run, it is important to stay somewhat diversified.  This includes having cash or cash equivalents.

April 15, 2013 has been a crazy day.  I was originally going to write some thoughts about tax day.  Then gold went into freefall and I was going to write on that.  Then there were bombings at the Boston Marathon.  So I will just touch on each topic briefly and expand in future posts if necessary.  I will probably write more about the plunge in gold.

People tend not to take a step back with some perspective when a tragedy happens.  The bombings at the Boston Marathon is certainly a newsworthy event and is a tragedy for those involved.  But we have to wonder what kind of overreaction we will see (much like the school shooting in Connecticut).  Americans forget that this is a country of 300 million people.  There are about a hundred people who die every day on the roads in the U.S. alone.  Yet we don’t hear much about them.  But then when a bombing happens, all panic breaks loose.  Who knows what totalitarian step the government will take next?  How many more billions or trillions will be wasted?

These bombings in Boston don’t seem like a big professional job as we saw on September 11, 2001.  It could be a lone nut or a couple of nuts.  Maybe it was a Muslim terrorist.  Maybe it was an American with a certain gripe.

I am actually surprised how little we have seen in the way of terror attacks in the last 10 years.  The U.S. government has killed hundreds of thousands of people in Iraq, Afghanistan, Pakistan, other parts of the Middle East, and Africa.  There have to be a lot of friends and family members who are really ticked off.  It is actually shocking that we have not seen more blowback in the U.S.

As for tax day, I was just going to reinforce the point that we shouldn’t concentrate on taxes so much.  It is the total level of government spending where we should be concerned.  It doesn’t matter if the government spending is through taxation, borrowing, or monetary inflation.  It hurts our standard of living, regardless of how the money is obtained.

As for the plunge in gold, I am quite baffled.  It was down almost 10% in one day.  And this was after a 5% drop on Friday.  This was huge.  Before all of this happened, I had read from a couple of chart guys that sometimes gold corrects before it enters into a new bull market.  I don’t know if this is what they had in mind.  I am not a big chart guy for predicting the future, but it is interesting to see some of the historical trends.

Either we are going to see gold bounce back up or we are going to see a hardcore recession.  If we see a deep recession while the Fed is pumping in $85 billion per month, then I am more scared than you can imagine.  We are in for some very serious pain if that is the case.  And then we have to worry how much more the Fed is going to pump in.

I am going to discuss gold some more in the coming days.  I want to look at it in context with an overall portfolio of investments.  I also want to discuss the possibilities of what happens next.

April 15, 2013 was a crazy day.  Unfortunately, I think we are going to see some more crazy days ahead, particularly with the economy.

On Friday, April 12, 2013, the gold price (in terms of dollars) took a huge hit.  It was down over 5% on the day.  It closed well below the $1,500 per ounce level.  Is this a bearish sign for gold or is it a bearish sign for the U.S. economy?

The stock market didn’t do a lot on the same day, but it was noteworthy that the 10-year yield dropped down to 1.72%.

Some of the explanations for the big drop were that wholesale prices fell and that other reports were raising concerns about the economy.  Of course, I’m not sure why the gold market doesn’t react the way the stock market does with bad news.  If the economy is bad, that means the Fed will just keep creating more money out of thin air, which should ultimately be good for gold.

This seems to be an on-going tug-of-war between a recession on the one hand and the Fed’s inflation on the other.  Of course, both sides might lose and we may all end up in the mud pit in the middle.  We could end up with recessionary conditions, including high unemployment, coupled with high price inflation.

I was thinking that the Fed’s monetary policy would win out in the short run.  (It will never win out in the long run.  We will eventually get hyperinflation or a severe correction.)  The monetary base continues to increase at unprecedented levels.  With the huge rise in the stock market, I was thinking we were seeing another artificial boom and that it could last a little while.  But with the latest big correction in gold, I am closer to 50/50 now.

With the major correction in gold in one day, coupled with a decreasing yield on treasuries, a near-term recession is looking more likely.  I know that we already have recessionary conditions in many ways, but I am referring to an official recession.

I don’t underestimate the power of the Fed to prop things up in the short term.  Huge injections of monetary stimulus has its effects.  We have seen that with the stock market.  It might be enough to overcome an official recession in the near term.

I really think that things will become more clear over the next few months.  We may see a quick bounce back in gold and see the artificial boom resume.  If, on the other hand, gold keeps going down, I think it is a sign of a deeper recession in the near term.

But even with the latter scenario, that will just mean that Bernanke and the Fed will continue to be aggressive with its monetary policy.  This will be bullish for gold ultimately.  So either way, I would look at the drop in gold as a buying opportunity.  It is just a question of how long it will take to pay off.

This article was linked today via Drudge Report.  The author, Terrence Jeffrey, writes the following:

“…the combined spending of federal, state and local governments per American household actually exceeded the median household income for 2010, which is the latest year for which all relevant government data are available.”

The total spending for all levels of government combined in the U.S. for 2010 was nearly $6 trillion.  This came out to just over $50,000 for each household.  In the same year, the median household income was reported at just under $50,000.

This is a point that I have tried to hammer home in the past.  Government spending is the major problem in the economy.  Taxes are a symptom of that problem.  The spending levels are absurd when you look at it in these terms.  Anyone calling for any tax hikes cannot be taken seriously.  Anyone who is not calling for significant spending cuts cannot be taken seriously.

Obviously the level of taxation is not spread evenly.  It is not like some single mother on welfare living in an inner city is paying $50,000 per year.  But many people don’t understand that there are many taxes that hit the poor.  The income tax makes up just a fraction of the total government spending.  There are significant sales taxes, property taxes, excise taxes, payroll taxes, and many others that we don’t even think about.  There is also the hidden tax of inflation, which erodes the purchasing power of the dollar.  Even corporate taxes and employment taxes on employers hit the poor, even if indirectly.

On the other side, we know that rich people and high income earners (not always the same people) pay huge amounts in taxes.  You can be sure that the tax burden for rich people is far higher than the average $50,000 per household.  So this class warfare game that is played is a bunch of garbage.  It is an excuse to justify ever-more government spending.

And of course we know that the middle class is constantly taking it on the chin.

This is why our economy is struggling so much.  It is why unemployment is high.  It is why people are having trouble paying their bills, even for basic necessities.  It is why people have trouble finding jobs and are having to put up with harder working conditions.  It is why the mood of the country is generally down.

Government spending has to go down significantly.  Virtually all government spending is a misallocation of resources.  It discourages saving.  It makes us all poorer in the long run.

I believe there will be a reduction in spending eventually, particularly at the federal level.  It is just a question of how it will come about.  It looks like it will be done the hard way.  Congress will be forced to cut spending when the Fed refuses to buy more government debt.  The Fed will have to do this one day to save the dollar.

Paul Krugman (I hate to link to his articles, but here it is) recently said the following:

“debt does not directly impoverish us, because it’s money we owe to ourselves.  OK, some of it is money we owe to foreigners, but I’ve dealt with that part already.”

He actually is somewhat right in this one statement, if you ignore everything else he writes.  Of course, Krugman does get just about everything else wrong.  He uses the above statement to justify big deficits and big spending.  But I maintain that the big deficits are not so much the problem as the big spending.

Virtually all government spending is a misallocation of resources.  Some spending is more wasteful (or harmful) than other spending.  But most or all of it is malinvestment and it makes us poorer than we should be.

I recently read that Murray Rothbard said that government spending harms recoveries (from a previous artificial boom) because all government spending goes toward consumption.  That means that it reduces savings and savings is one of the necessary elements for recovery and new prosperity.  Since every dollar the government spends is consumption and not savings (although I’m not sure if I am completely on board with this), more government spending is harmful to savings and therefore harmful to recoveries.

The biggest reason the massive deficits are so bad is because it allows the government to spend vastly bigger amounts of money today.  If it weren’t for the Federal Reserve (and I suppose you could blame foreign governments like Japan and China too) buying government debt, then Congress would be forced to come closer to a balanced budget, probably through less spending.  So in this sense, deficits are really bad because it allows for massive government spending.

But Krugman is correct that much of the debt is owed to other Americans.  Some of it is also owed to foreigners as he noted.  Some of it is owed to the Federal Reserve.

But let’s take an individual American who holds a government bond.  (Actually, it wouldn’t matter much if the person were a foreigner, as the same concept would hold.  There would just be an additional step of exchanging currencies or importing or exporting goods or services.)  When the individual redeems the principal of the bond because it has matured, let’s say the government taxes the American people to pay the bondholder.  It is simply a transfer of wealth.  In a sense, there is still a misallocation of resources because people are being taxed.  But at least the money ends up back in an individual American’s hands.  That person can then use the resources as he pleases.  This may include saving the money.

So in this example, the government spending (repaying the bond) is not necessarily all consumption.  It hasn’t really consumed any resources other than the administrative costs of collecting the money and paying the money to the bondholder.  Other than that, it is a pure transfer of wealth.  But this is actually better for the economy than if the government had just spent the money building some monument or museum.  At least the money could then be saved and not consumed.

My whole point about this is that deficits and debt do not burden future generations in the sense that people think.  It hurts future generations in that there is less capital investment taking place today.  But future generations can also just repudiate the debt and be done with it.  The big harm is actually happening now.  The massive deficits are allowing massive government spending, which is severely harming the economy with major misallocations.

There would actually be less distortions if the government simply collected all of the money and then handed it back out, even if redistribution were taking place.  At least people could save more money and we might actually see some real economic growth taking place.

One of the great things about writing for a blog is that I get to see various statistics about my past posts. One thing I find interesting is how some people find my posts.  From looking at this data, I can see that Google searches about 401k and IRA confiscation are becoming more common.  It is a real concern for many Americans now, and even more so after the Cyprus banking debacle.  Virtually no assets are safe anymore.

So should we worry about the government trying to confiscate retirement accounts?  I have written about this before.  I definitely think the government will try.  And it is not just Obama or the Democrats.  I think it will be tried by almost any politician who thinks it can be done.  The bigger question is whether the government will succeed.

Obama is releasing his proposed budget this week.  I’m not sure how seriously it should be taken, but he is firing a shot across our bow.  A piece of his proposal involves limiting retirement accounts.

(By the way, I am not sure how something like this is part of a “budget”.  Isn’t a budget about what is going to be spent?  I guess Obama considers 401k and IRA contributions as government spending because it is depriving the government of money.  It is scary that this is how these politicians think.)

I don’t know the details of Obama’s proposal yet.  If it is something more interesting than what I think, maybe I will write more about it.  But for now, Obama and his minions are saying that $3,000,000 in retirement is enough.  As if he should decide what “enough” is.

Does this mean that people will not be able to contribute more once it hits this amount?  Does it mean that the account is not allowed to grow anymore?  You will already pay taxes on this money when it is taken out, unless it is a Roth IRA.  Will there be an additional tax on anything over 3 million dollars?

Regardless of what the proposal is, this is a first step.  They are trying to get their foot in the door by playing class warfare with something that seems fairly harmless.

But this is like every other government program.  It is putting the frog into a pot of water and turning up the heat slowly.  You don’t throw the frog into a boiling pot or he will jump out.  We see this with gun control.  The government is always trying to take seemingly modest steps like banning certain weapons or expanding background checks.  It is a slow progression to get where they want.

I think this is what we have to watch out for.  The government will not just sweep in and announce that it is taking a percentage of everyone’s retirement portfolio.  It will be done in much subtler ways.  It will be done in baby steps.  Obama is trying to take a baby step with his proposal.  We need to call everyone’s attention to what he is doing and the tactic he is using.

The income tax was put into effect in 1913 with the argument that it would only be a small tax on high income earners.  Within a few short years, it was high rates hitting the middle class.  We must draw a line in the sand at the beginning.  We can start by speaking loudly against any government proposal to go after retirement accounts.

It is here.  The Ron Paul Homeschool Curriculum.  They are already signing people up.  It will start on September 2, 2013.  I’m guessing there will be some bugs to work out at the beginning.  I’m also guessing that there will be a lot more material added as time goes on.

I can’t think of a better use for Ron Paul’s time and energy.  Actually, I don’t know how much time he really has to put into it.  It is being headed up by Gary North.  They will have teachers like Tom Woods, the great libertarian.  Tom Woods is one of the clearest thinkers I have read or heard.  It is good to have him on our side.

So maybe Ron Paul is just giving his name to this project.  I don’t know how much time he will put in overseeing the whole project.  Either way, as long as it is done well, it will be a great thing.

This really sums up Ron Paul’s life.  This whole project actually represents virtually everything that needs to be done for greater liberty.  It is quite symbolic in this way.

The Ron Paul homeschool curriculum does the following:

• It focuses on education, rather than politics.
• It takes a long-term view, instead of thinking we can push a magic button and achieve liberty overnight.
• It encourages parents to turn away from the state.  And what issue could be more important than their own children?
• It does not seek any subsidies from the state.
• It is a product being sold in the free market, where parents are willing to pay money in exchange for a service.  In this case, the service is a better education for their children.

These are just a few of the benefits of this project.  Ironically, as happens so often in the free market, part of it is free.  You can get the curriculum for kindergarten through 5th grade and you won’t have to pay anything.  This may be a gimmick to get people to try it.  It may result in more sales for the higher grades.  It may be to get parents to try it and spread the word to others.  Maybe it is just a free gift to the cause of liberty.  Or maybe the reasoning behind the free part is a combination of some or all of these things.

Does this matter?  Again, it is voluntary exchange.  Someone could use the program up until 5th grade and then stop.  They wouldn’t pay a dime.  There are free loaders in everything.  But how many people will realistically do this?  The price is not outrageous after that.  Any parent that homeschools their child until 5th grade is likely to sacrifice a small price each year to continue it, particularly if they like it and agree with the overall philosophy.

This is truly a grassroots project.  Imagine if they sign up 50,000 children.  Imagine if it is 100,000.  We could have a large group of children growing up with a free market education.  They won’t learn Keynesianism, except to learn that it is illogical.  They might learn some of the real history in America and the world.  They will learn that the government is not the answer to our problems.  They will learn to be responsible and to think independently.  This literally could help change the world.

We should learn from this project.  We don’t need to elect the “right” politicians.  We don’t need to change things overnight.  We need to take a long-term view and understand that we will get greater liberty as more people understand the benefits of liberty.  The Ron Paul Homeschool Curriculum will help tremendously.