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.

The U.S. federal government spent about $6.1 trillion in fiscal year 2023.  There are about 340 million people in the United States.  There are about 131 million households.

That means that each household, on average, paid about $46,500 towards federal spending just in the last year.  This doesn’t include state and local government spending, which accounts for most of the spending when it comes to roads, police, firefighters, and schools.  Even though these don’t have to be funded by any government, these are things that actually matter to people.

Are you and your family getting $46,500 per year in benefits out of the federal government?

Sure, some of this money does go back into our pockets.  For some people, it might be directly, such as with Social Security.  For others, maybe they consider the small amount the federal government “contributes” to the government schools as important.

Harry Browne liked to ask the question: Would you be willing to give up your favorite government programs in exchange for never having to pay income taxes again?

We are in a situation now where the majority of the money spent by the federal government isn’t even coming from income taxes.  There are payroll taxes, which are really just a different bucket of income taxes.  There are corporate taxes.  There are capital gains taxes.  There are many different types of excise taxes.

Worst of all is the debt/ inflation tax.  The government “only” collected about $4.4 trillion in “revenue” in the fiscal year.  So, nearly $1.7 trillion was just borrowed.  But this isn’t free money.  This money has to come from somewhere.  It is $1.7 trillion that is drained from the private sector and spent by the government.

Would You Give Up Your Favorite Government Program?

I’d like to rephrase Harry Browne’s original question.  Are you getting $46,000 in benefits for you and your family from Washington DC?  Would you be willing to give up your favorite government programs for that amount?  Would you be willing to give them up for just half that amount?

Some people will scream national security.  Some people will scream about Social Security and healthcare.  If the government just spent half as much, say $3 trillion, that would still get you a lot of Medicare, Social Security, and defense.  But you wouldn’t be able to fund Ukraine and run an empire overseas.  You wouldn’t be able to have millions of bureaucrats like Dr. Fauci doing virus research and climate change research and handing out electric vehicle credits.

We could scale back the so-called entitlement programs and just have an actual defensive military.  If that cost $3 trillion, then you could at least save about $23,000 for you and your family every year.

Status Quo Bias

This is a situation where people adjust their thinking and behavior to the new status quo.  The federal budget just goes up nearly every year from the previous year.  We think it is just normal for the government to have its hand in everything.

If you compare 2023 America to the America before 1913 and the income tax and Federal Reserve, the difference is stark.  While the U.S. government had its overseas interventions then, it wasn’t running an empire overseas.  It wasn’t involved in a massive welfare state at home.  Most taxes were paid at a local level, and the overall burden of taxation was a fraction of what it is now.

If the U.S. budget were cut in half overnight, there would be a period of adjustment, especially for those who are so dependent on federal spending.  But after the initial shock, we would see a prosperity that is unimaginable.

Imagine

Somehow, we still see increases in production and great increases in technology in spite of massive government taxation and interference.  Imagine what would be if the federal government were drastically scaled back.  People would be wealthy beyond their wildest dreams in a relatively short amount of time.

Just imagine if you had an extra $20,000 (tax free) in your pocket this year.  Would you pay down some debt?  Would you donate to charity?  Would you save it for a nice vacation?  Would you help fund your retirement account?  Would you upgrade your house?  Maybe it would be a combination of several of these things.

Now imagine that you have that extra $20,000 every single year after this.  Just think of the possibilities.

The American people are getting the short end of the stick from their government.  If the American people free themselves from the chains of Washington DC, they would be far wealthier than they could imagine.

Aside from the prospects of a new world war, there has been much political drama lately.  Even though we are getting close to primary season for the next presidential election, the drama recently has been in the House of Representatives.

When then Speaker of the House, Kevin McCarthy, cut a deal for the budget, Matt Gaetz and a handful of other representatives rebelled and forced McCarthy out of his position.  We went several weeks without a Speaker of the House, yet the American people somehow survived.

Thomas Massie, the most libertarian member of Congress, did not vote to remove McCarthy as speaker, questioning whether it was really worth it.  He also worried that things could actually be worse with someone different, which is always a reality in politics.

Still, while I have much respect for Massie, I disagreed with his take on this issue at the time.  The system is already so broken and corrupt that we shouldn’t worry too much about disturbing it.  McCarthy was, and still is, an establishment guy.  The only reason he ever did anything that seemed to oppose the establishment was because of pressure from people like Gaetz.  There is also much pressure from the Republican electorate, in general, outside of Washington DC.

After going through many candidates and votes, the Republicans in DC have finally settled on Mike Johnson.  It is someone that I was not familiar with, and most people outside of Congress and his district probably didn’t know much about him, if they had even heard of him.

Speaker Mike Johnson

From the little I have learned about Mike Johnson in the last couple of days, he is evidently a conservative.  From a libertarian standpoint, this can be both good and bad.  Johnson’s home district is in Louisiana, and he is quite religious.

I have no problem with Johnson being a devout Christian who wears his religion on his sleeve.  The problem is that most politicians who do this end up being a disaster.  Ron Paul is a Christian, but he never wore his religion on his sleeve.  It is deeply personal to him, but he generally didn’t bring it into his political statements.

The other major issue as it relates to religion is that, unfortunately, most politicians who claim to be deeply Christian are the biggest warmongers in existence.  The politicians who constantly express their Christianity have no issue with the mass bombing of innocent civilians, as long as the “good guys” are doing it in the name of self-defense and democracy.

So it is no surprise that one of Johnson’s first acts as speaker was to support the U.S. government’s involvement in supporting the state of Israel.  In Washington speak, supporting Israel doesn’t mean praying for the Israelis or just issuing statements in moral support.  It means providing money and weapons to the Israeli government.  It means justifying the mass bombing of Palestinians.  It could even possibly mean American troops in the region.

Of course, Johnson’s support for Israel (meaning the bombing campaign by the Israeli government) is supported by most members of Congress.  Thomas Massie is the only one questioning U.S. involvement from a libertarian perspective.

The Good News

There are positive aspects about Mike Johnson taking the position that is second in line for the presidency behind the illustrious Kamala Harris.

When Johnson isn’t helping to send money to fight overseas wars, he is somewhat of a fiscal conservative, at least compared to other politicians in DC.  He initially supported funding for Ukraine, but then voted against every subsequent round of funding.

Johnson supported not certifying the presidential election in 2020.  You might see that as good or bad, but it is significant in the sense that he isn’t just going along with the deep state.  He isn’t going to help the establishment by spreading phony stories about Russian interference.

Maybe every move Johnson makes is for political reasons, but that is actually good news.  Even if he isn’t genuine in his rhetoric, he feels the need to say the things he says because of public opinion, or at least public opinion within the Republican Party and his home district.

Public Opinion – Making a Difference

Some libertarians just blow off all news out of Washington DC saying that all of the politicians are the same.  In this case, there are some people who say that having a new speaker means nothing and it is just politics.

And they may be right in the sense that Mike Johnson is probably just another politician who cares more about his own power than he does about the American people.

But we shouldn’t confuse this with a lack of progress and assume that nothing is changing.  Some libertarians, including myself, say that you can’t gain long-term liberty by electing the “right people”.  It requires changing the hearts and minds of the American people.

But if Mike Johnson changed his position on funding Ukraine to satisfy public opinion, then that means we are making progress.  Even if Johnson is lying about every position he takes, we should celebrate when he takes the pro liberty position on an issue.  It means that public opinion has shifted towards greater liberty and is having an impact.

In conclusion, even though Mike Johnson is probably not much better than Kevin McCarthy or any other previous speaker, he is at least more rhetorically on the side of liberty with many issues compared to previous people.  It means that public opinion does matter.

And if Johnson ends up being really terrible, especially on budget issues, there is no preventing Matt Gaetz and others in Congress from removing him as speaker.  This pressure alone should make a difference and provide us some hope that greater liberty in the future is possible.

When I report on the consumer price index (CPI), I often say that it is likely understated.  It is impossible to get an accurate number when it comes to consumer price inflation because there are so many variables.

Products and services change constantly, and the supply and demand for those goods and services also changes constantly.  The size and quality can change.  The amount used by consumers changes, and not just because of price.  There are also government regulations and taxes that can impact prices.  Also, different people consume different things.

If one person makes a living driving around, then the price of gas will impact this person disproportionately.  For someone who works at home and doesn’t drive much, then the price of gas doesn’t matter much, at least not directly.

There are also issues of weighting.  One of my criticisms of the CPI is that it doesn’t seem to capture the importance of certain goods and services.  For example, insurance costs have risen quite a bit.  One of the few things that has actually gone down in price is certain electronics.

Let’s say the price of car insurance has gone up 10% over the last year.  Meanwhile, the price of televisions has gone down by 10%.  But I haven’t purchased a big new television in 13 years.  And if I do purchase one, it will be for under $1,000 and will probably last me another 13 years.

I have to pay for car insurance every 6 months.  For some people, maybe their policy renews once per year.  The car insurance is more expensive than a television, and it is an ongoing expense.  So to compare these two items is impossible.  You can see the problem with the index.

It is still useful to attempt to measure price inflation.  The government statistics are useful to look at the trend.  Even if they are understated, the trend tells us a lot as long as nothing drastic changes in the makeup of the calculation.

Overestimating Price Inflation

Some Austrian school economists and libertarians like to cite Shadow Government Statistics (shadowstats.com), which estimates consumer price inflation supposedly using the same methodology as what the government used in the past.

I believe there is little basis to rely on these numbers, and they seem wildly high.

If you look at a chart posted at the website of the consumer price inflation using a 1980-based alternate, you can see that price inflation using the ShadowStats method was around 10% since 2008.  There are some years higher and some years lower, but most years are near the 10% line with the exception of the last couple of years, which are much higher.

To say that we have had roughly 10% price inflation annually for the last 15 years is to make a statement that seems wildly contradictory to what most people see in their daily lives.

The Rule of 72

The Rule of 72 is used for investing.  You can take the number 72 and divide it by the interest rate (or investment return).  The result is the approximate time in years it takes to double your money.  So if you have an investment rate of return of 8%, then it would take about 9 years for your investment to double at that rate, assuming all returns are reinvested.

The same formula can work for price inflation.  If prices are going up at about 10% per year, then prices will double after about 7.2 years.  If prices double again in another 7.2 years, then that means they have more than quadrupled in 15 years.

You can also do this with a calculator or and Excel spreadsheet.  Start with $100 and multiply it by 1.1.  Do that 15 times.  After 15 years, $100 becomes $417.

Compounding interest works well for wealth building.  It unfortunately also applies to price inflation.  Your price inflation this year is on top of the price inflation from last year.

Have Your Prices Quadrupled Since 2008?

There are some major areas in life that have definitely more than doubled in price.  Car insurance and homeowners insurance are two areas where some people have seen a more than doubling in the last 15 years.  Medical care costs for some people have more than doubled.  There are certain food items that have probably doubled in the last 15 years.

I can’t think of much, if anything, that has quadrupled.  Housing prices haven’t quadrupled in most areas.  Rent hasn’t quadrupled.  I buy eggs a lot, and they have gone up a lot in price.  But they are not four times as much as they were in 2008.

Therefore, I can safely conclude that we should ignore the ShadowStats website.  Maybe it is an interesting website and has some good insights about protecting against inflation.  But for any claims it makes against government inflation statistics, it is also wildly unrealistic.  Prices are not four times higher for most things than they were 15 years ago.  Most things are nowhere near that.

It is good to question government statistics, but we have to be careful in the alternatives as well.

The 10-year yield briefly hit the 5% mark.  It is the first time it has been this high since 2007.  And we know what happened after 2007.

The higher yields across the board are positive for those who want a safe vehicle to park their cash.  You can actually earn a positive real rate of return if you use the CPI as a measure.  The yields are currently higher than the official consumer price inflation rate, which is just below 4%.

The higher yields are also needed to help bring down price inflation.  The Fed created this mess by creating trillions of dollars in new money and forcing interest rates to near zero.  We are all now paying for this “free” money.  You have to wonder how many people would give back some of those direct checks handed out by the federal government a few years ago in exchange for lower prices at the grocery store.

Many Americans received checks multiple times in 2020 and 2021.  But those were relatively short-lived.  Most people go to the grocery store every week, and those high prices aren’t going away.  If anything, they are still rising, even if at a slower pace.

While higher food prices have hit virtually all Americans, there is a much bigger disparity when it comes to shelter.  Rents have gone higher.  The cost of owning a home has gone higher, even for those who already bought a house and locked in an interest rate on the mortgage.  Repairs, maintenance, insurance, and property taxes have gone up for most people.

But there is no question that those who don’t own a property (or didn’t until recently) are getting hit the hardest with higher housing prices in most areas, along with much higher interest rates.

The Cost of a Mortgage

Mortgage interest rates are closely tied to the 10-year yield.  So it is no surprise that mortgage rates have also gone up.  This week, the typical rate on a 30-year fixed rate mortgage hit 8%.  They went as low as about 3% just a couple of years ago.

As noted by Kelly Evans of CNBC, the mortgage payment on a $400,000 house with 20% down has gone up by about $1,000 from a couple of years ago.

It's official.

8% mortgage rates.

$400k house with 20% down costs $1000 more per month now than it did two years ago. @DianaOlick @CNBC pic.twitter.com/jnmDqpTaux

— Kelly Evans (@KellyCNBC) October 18, 2023

It is quite a stunning difference, especially for middle class America.  A $320,000 loan (80% of $400,000) at 8% is $2,348 per month.  A $320,000 loan at 3% is $1,349.

That is not only a difference of about $1,000, but it is about 74% higher.  And the sad thing is that a $400,000 house in some big cities won’t get you much.

This is why it is unsustainable.  Something has to give.  If rates don’t come down soon, then housing prices will.  They may come down anyway even if rates do drop from here.

Even though many houses are being kept off the market because people are keeping their low fixed interest rate, there is still going to be some activity with housing.  Some people die.  Some people have to move for a job.  Some people just want to move.  And there are always buyers out there at some price.

Most average Americans can’t afford a typical house these days given their income and the higher interest rates.  Even in the example above, that assumed a 20% down payment.  Most people don’t have $80,000 or anything close to it unless they are selling another house.

This is why so many young adults are living with their parents or renting apartments with roommates.  There is absolutely nothing wrong with this, and in fact I encourage people to have roommates when they are young in order to save money.  But at some point, people want to move out and be on their own.  It is becoming exceedingly difficult to do so in today’s world with an average income, or even an income that is a little bit better than average.

Will a Recession Help?

Recessions are quite painful.  They are like the hangover after a night of drinking.  The best solution to a hangover is to not drink so much the night before.  The drinking makes the hangover inevitable.

We actually need a recession because it is a correction of the previous malinvestment.  Resources need to be reallocated in accordance with consumer demand.  This is painful because unemployment can go up as different jobs need to be filled.  It is also painful because many asset prices deflate.  This could include housing.

If you are someone in your 20s and currently rent, you should be cheering on a recession (quietly).  You need a major drop in housing prices in order to enter the market, if that is what you wish to do.  It will also be an opportunity to buy investment assets at a discount, or at least a lot lower than where they currently sit.  Of course, this could be an opportunity for someone of any age.

Just as higher yields/ interest rates hurt some people and help some people, so too does a recession.  If you are not in heavy debt, have some cash on the sidelines, and are looking to buy assets, then a recession could actually be quite beneficial.  If you are heavy in debt and don’t have much money, then a recession could be quite devastating, or at least very uncomfortable for your standard of living.

When something bad happens, especially involving anything both emotional and political, it is nice to take a deep breath and think things through.

There is no shortage of opinions out there when it comes to the latest Israeli/ Palestinian conflict.  Maybe that’s not even the correct way to describe the conflict, but it’s certainly the way it is being widely portrayed.

There is a saying that the first casualty in war is truth.  There have certainly been many pieces of propaganda and outright lies coming from all sides in this latest conflict.

It all “started” on October 7, 2023 when a group of Hamas militants attacked the Israelis, took over an Israeli military base, captured hostages, and killed many innocent people.  The number of people killed that day is estimated to be well over 1,000.

Of course, the world didn’t start on October 7^th, and this conflict between the Jews of Israel and the Palestinians did not start on October 7^th.  This may have brought it to another level, but conflict and violence goes back many decades.  Maybe it is more accurate to say centuries, but it at least goes back to the formation of Israel in 1948.

Regarding the attack on October 7^th, the first notable thing is just how “successful” the attack was from the perspective of the terrorists (and the term terrorist does seem to be an accurate use of the term in this situation).

The Israeli government is supposed to have one of the best (if not the best) intelligence agencies in existence.  They are supposed to be very sophisticated.  The Israeli government is supposed to have superior military defense.  Yet, a bunch of guys with paragliders flew over a wall and issued a violent and deadly attack.

How could the Israeli government not have had warning of an impending attack?  And once it started, how could they have been so slow to defend against it?

Either elements of the Israeli government knew this attack was going to happen and allowed it to happen, or else the Israeli government is completely inept.  Pick your choice, but you really have to come to one of those two conclusions.  There doesn’t seem to be a third innocent option.

Israel’s 9/11 – In More Ways Than One

We are hearing that this was Israel’s version of 9/11.  As a percentage of their population, it is worse than 9/11 was for the United States.

The comparison to 9/11 is apt, but not just because of a surprise terrorist attack that caused a lot of death.  There are many other similarities.  As mentioned above, it was either known it would happen, or it was a complete failure of government to prevent it.

If you believe that two airplanes destroyed three skyscrapers in New York City on 9/11, then you are in the camp that the government is just incompetent.  If you believe that explosives helped bring down those buildings, then you can only conclude that it was an inside job.  So, you either have an evil government or an incompetent government, or some combination of the two.

Unfortunately, the comparison with 9/11 goes much farther.  These were both emotional events, and rightly so.  The problem is that people immediately seek revenge, but the revenge is often misguided.  The revenge isn’t necessarily against those who perpetrated the actual act of terror.

The U.S. government ended up killing a much greater number of people in Afghanistan than were killed in the U.S. on 9/11.  If you include Iraq (because 9/11 was partially used as a selling point for invading Iraq in 2003), then the numbers are even more disproportionate.

Even if you agree with “an eye for an eye”, it still wouldn’t apply if the U.S. government killed 3,000 people in Afghanistan for the almost 3,000 who died on 9/11.  The problem is that it is somebody else’s eye.  Most of the people killed in Afghanistan had absolutely nothing to do with 9/11.

And so it goes in Israel and the Gaza strip.  Most of the Palestinians who have died and will die from Israeli bombs had nothing to do with the attacks on Israel.  Maybe a lot of them secretly cheered for it or sympathized with those committing the acts, but they didn’t do it.

The Israeli State

Let’s remember (or learn) several facts about the Israeli government.

First, it was the Israeli government, including Benjamin Netanyahu, that helped create and encourage Hamas in order to give opposition to the Palestinian Liberation Organization (PLO).  The U.S. government likely helped fund the creation of Hamas.  You could say this is another similarity with 9/11 in the U.S., where the U.S. government helped fund Osama Bin Laden back in the day.

An American may find a lot more in common with an Israeli Jew than a Muslim in the Middle East.  Still, this doesn’t make the state somehow good.  Just as there are many evil people in the U.S. government, there are evil people in the Israeli government who seek power and only pretend to care about the citizenry.

There is strict gun control in Israel.  How do you think Hamas was able rip people from their homes without much of a fight?  If Hamas had landed in rural Alabama, or even in suburban Georgia, how far do you think they would have gotten?

Apparently, many Jews in Israel did not learn the right lessons from Germany of the 1930s.  They thought because they lived under a Jewish state that they were safe.  But the Jewish state disarmed them in a similar way to Hitler.  The lesson wasn’t to live disarmed under a government that favored your religion.  The lesson should have been to not be disarmed.

And before we get to how the Israeli government treats the people in Gaza, let’s recall how the Israeli government treated the Jews in Israel during COVID hysteria.  They were under strict lockdowns and vaccine mandates.

So just as Americans shouldn’t forget what was done to them by their own government, the Israelis should also not forget.  A tyrannical regime does not all of a sudden become good just because you were attacked by outsiders.

Radical Viewpoints

It is frustrating watching reports on the establishment news outlets in the U.S. because it seems that most people who get the attention are on one “side” or the other.  You will see people protesting the treatment of Palestinians while saying things like, “the Israelis had it coming”.

Maybe the attacks were somewhat predictable.  You could say it was a form of blowback and that it wasn’t surprising.  But it isn’t correct to say that “they” had it coming.  Most of the people who got killed that day never had a hand in killing Palestinians or were directly responsible for treating them like second-class citizens.

Then you have the other side, where American politicians and media pundits are saying things like, “Israel must respond quickly and forcefully to these attacks.”  Or you get the even more extreme people like Nikki Haley and Lindsey Graham who are ready to attack Iran and have Israel commit genocide against the Palestinians.

While more Americans tend to fall in the pro-Israel camp, the media likes to put out these extreme viewpoints to stir up more emotions and for people to turn over their consent to the state.

Unfortunately, what you rarely hear are people advocating for caution and peace.  It’s like there is no “side” just for advocating peace and not killing innocent people.

The Conditions for Blowback

It doesn’t matter if you take a side.  It doesn’t matter your religion.  It doesn’t matter your understanding of history and which group you think is at fault or more at fault.  You can still recognize that the Palestinians in Gaza are treated like second-class citizens by the Israeli state.

The people in Gaza are treated like prisoners to a large degree.  They are barricaded in by a wall.  With the latest conflict, the Israelis have shut off power to Gaza and stopped shipments of food and medicine.  Just the fact that Israel has the power to do this without blowing up any electrical plants should tell you a lot.

Maybe you think that the Palestinians are animals and are therefore treated like animals.  But when you cage an animal and don’t treat the animal well, the animal will react if given a chance.

The Palestinians are human beings.  Most of them aren’t terrorists.  Like most other people, they want to live their lives according to their own values.  They want to have freedom to do what they want to do as long as they don’t harm others.

Most Americans couldn’t understand on 9/11/2001 why people would kill themselves just to damage some buildings and kill innocent people.  The state told us that the terrorists hated us for our freedom.  But the American people are largely ignorant of the crimes committed by their own government, or they don’t follow through the implications of the foreign policy.

If your friends and family are on the receiving end of U.S. bomb strikes, you can start to understand the anger and desperation.

The Palestinians are a desperate people.  They don’t have much of a life.  Yet, most of them don’t resort to becoming terrorists.  But it shouldn’t be surprising when a small number of them do.  It also shouldn’t be surprising that people who vow to enact revenge on the oppressors are given support by those who are being oppressed.

When you have a slave/ master type of relationship and the slave is not free to voluntarily leave, then it shouldn’t be surprising when there is blowback.  If the slave sits back and accepts his condition, then there is seeming peace.  It is when the slave becomes desperate and starts to resist that you might see violence.  It doesn’t mean that the slave should be violent towards anyone else other than the slaveholder, but it isn’t surprising to see violence when they are collective groups and one group acts as the slaves and one group acts as the slaveholders.

Back in the U.S.

This renewed intense conflict in the Middle East is happening just as public opinion was turning against continued funding for the conflict in Ukraine.

Unfortunately, the Republican base and MAGA group that had become better on foreign policy sank right back into its old ways as soon as Israel was attacked.  Many of the people who said that we need to stop sending money to Ukraine and to take care of America first all of a sudden flipped the script with Israel.  Now we have to do everything to support Israel, which basically means sending money and weapons, just the same as Ukraine.

It is disappointing but not surprising.  Fox News was already bad, but at least you could get a little variety of viewpoints there.  Now it is absolutely terrible.  It is as if we are back in 2001 after 9/11 or in 2003 with the Iraq War.

Some of the hardcore political leftists/ socialists understand the plight of the Palestinian people, but it is difficult to associate with these people.  And those who speak up often fail.  They make the same mistake on the other side.  Instead of just preaching for peace, they will say things like, “They had it coming.”  As if the people attending a music festival or lying in bed in their house had it coming and deserved death.

Some so-called libertarians have been bad on the issue as well, all of a sudden adopting a collectivist attitude.  They think the attack on Israel justifies blowing up innocent people in Gaza.

The only sensible things are coming from hardcore libertarians.  There are probably a few people out there who are preaching peace on both sides, but it either doesn’t get reported or it isn’t articulated well and has a slant to it.

There have been protests coming from both sides in the U.S. and many words have been exchanged by both sides.  Unfortunately, it is mostly pro Israel or pro Palestinian.  There are few demonstrators who are just demanding peace and liberty.

The good news is that this happens in the United States and it is mostly peaceful.  Even though many of the demonstrators are not advocating for peace, they are being peaceful themselves.  If these groups collided somewhere else, it probably wouldn’t be peaceful.

Still, coming from U.S. politicians and U.S. media, it is almost universal support for Israel.  This means support for Israel bombing the Palestinians.  When virtually everyone in the ruling elite are agreeing on something and you find yourself agreeing with them, you should check your own arguments and realize that something bad is happening.

A Libertarian View of Peace and Self-Defense

A lot of people have proclaimed that Israel has a right to defend itself.  The problem is, when this is spoken by most people about a country, it is a collectivist notion of self-defense.

When this is said, it typically means that Palestinians killed a bunch of Israelis, so Israel has the right to kill a bunch of Palestinians.

If Person A is trying to kill Person B, then Person A has a right to defend himself.

If Person A from Country A kills or tries to kill someone from Country B, it gives the right of Country B to defend itself from Person A from Country A, which could include killing person A from Country A.  But it doesn’t give the right to Country B to kill Persons B, C, and D from Country A.

This works both ways in the Israeli/ Palestinian conflict.

The only proper libertarian position is that violence is never acceptable unless it is in self-defense.  But it has to be in self-defense against those who are actually using violence at the other end.

If Hamas had only captured an Israeli military base and attacked military soldiers, there could be a legitimate debate on this and whether it should be classified as self-defense by Hamas and the Palestinians.  But the attack by Hamas killed many innocent people, which makes it unacceptable from a libertarian viewpoint.

If the Israeli government retaliated only against those who attacked or helped orchestrate the attacks against innocent people, then this would be legitimate self-defense.  But the Israeli state is dropping bombs and blowing up buildings, which kills innocent people.  This, too, is unacceptable.

(Many people refer to “women and children”, but the term “innocent people” is more accurate.  There are many innocent men who should not be targets just because they are men.)

The only long-term solution to this conflict has to be a libertarian solution.  The people of Israel need a drastically scaled back government that only uses violence in actual self-defense.  The Palestinians must be free to declare independence from Israel.  At the very least, they must be free to immigrate out of the prison that is Gaza.

This conflict goes back many decades.  There are Palestinians today who had parents and grandparents who may have had land seized from them many decades ago.  It becomes difficult to right these wrongs.  But if you allow them to be free going forward, then most of them will get over the recent wrongdoings in history at least enough to move forward and not promote the use of violence.

A peaceful coexistence with respect for property and self-governance is the only way to move forward with a chance for lasting peace.  The only thing we can do is to not condone any violence used against innocent people and to advocate for liberty.

The September 2023 CPI numbers came in a little higher than expected.  The CPI came in at 0.4% for the month.  The year-over-year number came in at 3.7%.

The median CPI was up 0.5% for September, while the median CPI year-over-year stands at 5.5%.

Consumer price inflation has cooled since last year, but it is still running well above the Fed’s made-up target of 2%.

Remember a few years ago the Fed came out with this nonsense that they would try to average 2% over time. They never gave a timeframe for this average, but it was an excuse to bring consumer price inflation above the 2% target while not worrying about slamming on the monetary brakes.

Now that we have been running way above 2% for a couple of years, is the Fed encouraging a rate below 2% in order to get a 2% average?  I haven’t heard any talk of this average ever since consumer prices shot way past that 2% target.

It’s interesting that there is still an inflation problem for the Fed.  If you look at something like car insurance premiums, it is hard to believe that consumer prices are “only” going up by 3.7% annually, even when taking into account some things that aren’t increasing much in price.

But aside from the issue of the CPI numbers being understated, the Fed is still struggling to get the official numbers down to 2%.  All that money created, especially since 2020, is not that easy to get rid of.  There are lag effects from the inflationary boom, and there are lag effects when it comes to the bust.

The Fed’s Balance Sheet

The Fed’s balance sheet finally fell below the $8 trillion mark.  This hasn’t been seen since 2021.  It is down about $1 trillion from its peak in March 2022.

There is going to be a big lag effect both ways.  The Fed is having trouble keeping price inflation under control because the more than doubling of the balance sheet since March 2020 is still running through the economy.  Now that the Fed has pulled away $1 trillion, it will take some time for that to be seen.

You can see it in the bond market where the yield curve has been inverted for the entire calendar year.  It has just started to flatten towards normal in the last few weeks with long-term bond yields going higher.

The Fed is still draining its balance sheet.

The Boom Turns Into Bust

If you study Mises and the Austrian Business Cycle Theory at all, then it is fairly easy to see the writing on the wall.  Mises said that you don’t even have to reduce the money supply to bring on a bust.  If you don’t continually accelerate the easy money, then the bust will eventually come anyway.

In this case, the Fed is reducing the supply of money, and it has been pushing up short-term interest rates.  The people at the Fed have to know that they are setting us up for a recession.

Without a total overhaul or removal of the central banking system, I think this is the best we can hope for.  The Fed already made its errors from 2008 to 2014, and again from 2020 until 2022.  The Fed Is essentially doing the right thing now, which is going to cause a recession.  The recession would eventually happen anyway, but the current Fed policies are almost guaranteeing it in the somewhat near future.

The Everything Bubble is going to pop.  It has started out slowly.  Housing prices have mostly held up in most areas of the country.  This has been helped by people not selling their houses because of a low fixed-rate mortgage.  But the high prices cannot be sustained in the long run, especially when housing is unaffordable for most of those who don’t already own.

The stock market has had a good year, but it has gotten rockier recently.  The recession that officially started in December 2007 (declared after the fact) didn’t become evident until the financial crisis hit in September 2008.  That was when stocks really got hit hard.

It is amazing how many financial analysts say that we may get a recession, or at least a softer economy, yet they aren’t yelling from the rooftops to sell your stocks.

The Next Fed Move

The next FOMC meeting is on October 31 and November 1.  The Fed probably won’t hike rates again on November 1, but it probably doesn’t matter much either way whether we get another 25-basis point hike.

The damage is already done.  The damage was already done in 2020.  There is no stopping this train wreck from happening.  It is just a question of when it will happen and how much damage can be prevented.  There is also the question of the reaction after.  We’ll see if the Fed goes back to 2008/ 2020 mode again as soon as the next crisis hits.

It will be more difficult to turn on the digital printing presses again to such a degree if consumer prices are still going up at 3% or more.  The Fed’s reaction to the next crisis will determine the best ways to protect your wealth and possibly even profit.

For now, expect the Fed to stay in tight money mode and for a recession to hit in 2024.  The bond market sees the recession ahead.  The stock market is ignoring it.

Robert Kennedy Jr. has made it official.  He is dropping out of the Democratic primaries and running for president as an independent.

It is somewhat rational given that the Democratic establishment is firmly against Kennedy.  In fact, they may be more scared of him becoming president than Donald Trump.  While Kennedy is not great with regard to foreign policy (see more commentary below), he is a major threat to the establishment and the military-industrial complex.

There was talk of Kennedy seeking the nomination of the Libertarian Party, but he probably realized that it wouldn’t be easy to get the nomination.  The principled libertarians in the party would have had to accept a non-libertarian as the nominee for strategic reasons.  Of course, this is what the LP has mostly done since 2008, but that was before the Mises Caucus took control of the party.

Kennedy has become much better on the issues from a libertarian standpoint, but he is not a libertarian yet.  It probably would have been difficult for his ego for someone with his stature to not win the nomination of a minor party.  The only reason it made sense for him is because the LP has ballot access in most states.  The LP candidate typically shows up on the ballot of every state, or at least most states, in presidential elections.

Getting on the ballot in 50 states is going to be a challenge for Kennedy.  He will have to dump resources just into that, whereas the two major parties have no issue with that.  (It is possible that Trump could have issues getting on all of the ballots, but that is because the establishment is trying to rig it against him.)

It will be interesting to see how much traction Kennedy gets.  He is obviously a major threat to the ruling elite because he dares to take on the deep state, the military-industrial complex, and the national security state.  It will get really interesting if he manages to get on to the debate stage with the nominees of the other two parties.

Cautiously Optimistic

While Kennedy has many good qualities and is refreshing in this time of chaos, we must remember that he is not a libertarian.  He is an old-school Democrat who still believes in the power of the state to do good.  If he became president, Kennedy would likely restore some sanity, although we should certainly expect the powers-that-be to cause chaos just as they did with Trump.

The lying liars of the ruling class might just make up the same stories with a different name.  They’ll say that Kennedy colluded with the Russians to steal the election, and a significant percentage of the American public will buy it.

The reason to be optimistic about Kennedy is because he is in the race.  He is questioning certain narratives.  He actually understands some of the history in Ukraine.  He understands that the U.S. government likely helped orchestrate a coup there in 2014.  He understands that the Ukrainian government was allowing the slaughter of ethnic Russians in the east, and he isn’t afraid to say it out loud.

So even if Kennedy doesn’t get elected, if he can reach people who don’t typically read alternative media, he can change opinions.  This is what matters most in the long run for liberty.

I understand that Kennedy has said some bad things in the past with regard to climate change and welfare in general.  I think he has gotten better on those issues.  Still, he isn’t a libertarian.

And for this reason, we need to be careful not to make him out better than he is.

Not a Non-Interventionist Foreign Policy

Since the attack on Israel by Hamas, Kennedy released a statement referring to it as “unprovoked”.  He also said that “we” need to do everything we can to help Israel.

Maybe I will write more about this in a future post, but his statement was inaccurate and, unfortunately, quite hawkish.  The term “unprovoked” has been used numerous times to describe Putin’s invasion of Ukraine.  It is a lot of things, but “unprovoked” is definitely not one of them.

The same goes for the situation in Israel.  There is never justification to attack innocent people, but that doesn’t make it unprovoked.  The Israeli government has killed and oppressed many Palestinians over the decades.  It wasn’t as if Israel was sitting there minding its own business until October 2023 when they were suddenly attacked.

Kennedy said that Israel has a right to self-defense, but unfortunately this has another meaning than actual self-defense when spoken by a politician about another country.  It is a collectivist version of self-defense.

The Israelis should have a right to defend themselves against those who are doing them harm.  But if they just drop bombs on the Palestinians and kill innocent people in return, that is not self-defense.  I fear that Kennedy is like the typical politician and is giving the Israeli government the green light for killing innocent people on “the other side”.

As Dave Smith recently pointed out in a tweet: “As the great @jeffdeist once told me: they all disappoint.”

The Politics of Kennedy as an Independent

The political ramifications of a Kennedy run are interesting.  In some ways, I would have preferred that he stayed as a Democrat to challenge Joe Biden.

There is a good chance the Democrats will dump Biden off the ticket.  They can do so at any time.  It is not Biden’s choice.  They can sink him in an instant if they want to.  They just want the person who can best beat Trump (and now Kennedy) and implement their chaotic and anti-civilization agenda.

If they dump Biden, they want to wait until closer to the convention.  They don’t want any debates with Kennedy there.  With Kennedy out of the running for the Democrats, they are more likely to get rid of Biden earlier if that is the preference of the ruling class.

Dave Smith has pointed out before that he likes that Tucker Carlson is a Republican and not a full-blown libertarian.  Carlson appeals to Republicans, but he makes them better on important issues like foreign policy.  If he was a hardcore libertarian, he would probably have less influence.

The same could be said for Kennedy as a Democrat.  Not all Democrats are zombies when it comes to politics.  There are some Democrats who are dissatisfied with Biden and the current state of the Democratic Party.  Kennedy can appeal to those people and make them better.  Maybe he can still do it as an independent, but it isn’t clear.

Some have suggested that having Kennedy run as an independent will help Trump get elected.  I think a lot of people are quietly reassessing this picture.

Let’s say that it is Trump vs. Biden vs. Kennedy.  If it isn’t Biden, it will be some other establishment Democrat like Gavin Newsom.  Kennedy and Trump are both seen as anti-establishment, even if it isn’t completely true.  They are anti-establishment compared to whoever the Democrats put up.

It isn’t hard to imagine that Kennedy will siphon more votes away from Trump than Biden.  It is quite possible we could see a scenario similar to 1992, except Kennedy may do even better than Ross Perot.

It is easy to see Trump getting 30% of the vote, Kennedy getting 30% of the vote, and Biden getting near 40%.  Biden would win, even though the anti-establishment candidates got 60% of the vote.

This isn’t a criticism of Kennedy running as an independent, and I am certainly not telling anyone the best strategy going forward.  I will likely support Michael Rectenwald, but my vote is another matter.  The next year really will make for some incredible political theater.  It is a scary time, but there is also hope that people are revolting against the status quo.

What is more amazing?

-That the Fed can keep creating more bubbles while barely getting over the last one?

-Or that people keep falling for the same tricks?

We are in the second major housing bubble this century, and we aren’t even a quarter of the way through this century.

The last housing bubble started in the early 2000s, or some might argue the late 1990s.  It peaked around 2006 or 2007.  The slow decline turned into a much faster decline when the financial crisis hit in 2008.  The housing market bottomed out around 2011.

If you bought a house in the United States in the 2010 to 2012 timeframe, you probably got a really good deal, at least compared to today’s standards.  It was also a time of relatively low interest rates, so you could get a low-interest mortgage with your low-priced house.

Now here we are.  It’s about 16 years since the peak of the last housing bubble.  It is only about a dozen years since the bottom of the last housing bust.  Yet, here we are again.

From One Bubble to Another

It surprised me that there was a stock market bubble in the mid 2000s.  The Nasdaq tech bubble should have been fresh in everyone’s memory except the very young.  It’s almost as if it hadn’t happened.

The tech bubble happened in the 1990s and peaked in early 2000.  Then stocks tumbled for the next two and a half years.  While all of the major stock indexes fell, the Nasdaq was the hardest hit, falling nearly 80%.  That really is a situation where the term “crash” is appropriate.

With the recession in 2001, coupled with the 9/11 attacks, the Greenspan Fed went to work creating new money and lowering interest rates.  The stock market went from bearish to bullish quickly.  It took only a few years to be back in bubble territory and then the financial crisis in 2008 sent stocks down again.  It didn’t take that long.

Compared to the stock market bubbles, maybe the real estate bubble makes a little more sense.  It is obviously driven heavily by interest rates, and it has taken longer to build up.  It also makes some rational sense to buy property in an environment of persistent inflation.

Whether you define inflation as an increase in the money supply or an increase in prices, it still makes sense to not hold dollars that are becoming less valuable over time.  If you lock in a fixed-rate mortgage, that payment will become smaller in real inflation-adjusted terms over time.  In 30 years, your last mortgage payment might be the equivalent of a nice dinner.

The Perfect Interest Rate Storm

The Fed has been faced with inflation over the last couple of years (that it created), and it has been aggressively hiking its overnight lending rate (the federal funds rate).  This has resulted in short-term interest rates going a lot higher.  Long-term rates have gone higher too, but just not as much.  This is why we still have an inverted yield curve.

The yield curve has started to flatten, which, if anything, just means that a recession is closer.  But the yield curve is flattening because longer-term rates are going higher.  The 10-year yield, which is highly correlated with mortgage rates, is nearing 5%.

A typical 30-year mortgage now has a rate around 7.5 to 8%.  A 15-year fixed rate mortgage is around 7%.

In early 2021, you could get a 30-year fixed rate mortgage for around 3%.

This is a dramatic difference, especially with housing prices at high levels.  It is one thing to have a 4% or 5% difference when taking out a $100,000 loan.  It is quite another when it is a loan for a half million dollars, which is a typical middle-class house in many areas today.

A loan amount of $500,000 for 30 years at 3% will result in a monthly payment (principal and interest) of $2,108.

That same loan at a rate of 8% will result in a monthly payment of $3,669.

If rates ever hit 10% for mortgages, that will be double the monthly payment as compared to 3%.

In other words, if someone buys the same $500,000 house with zero money down today, they would be paying about $1,400 to $1,500 more per month than if they had bought about 3 years ago.

Yet, in most cases, that same house is actually more expensive today than it was 3 years ago without even considering mortgage rates.

The Bust Will Come

You would have to be desperate to buy in this market, but there are some people who really are desperate. There might be a very tiny fraction who can buy a house without a mortgage, but we know that is rare in today’s world.

Some new buyers are probably hoping that rates will go back down so that they can refinance within the next few years.  But so far, that hasn’t happened.  Rates keep going higher.

People who own a property with a low fixed-rate loan do not want to sell because they have such a low rate. This keeps inventory off the market, which is probably the main reason that prices have not come down much.

But it gets to a point where housing is unaffordable for the average middle class American.  We are at that point now.  The median income can’t buy the median house, especially at today’s rates.

Something will have to give.  It will either be prices or rates, or possibly both.

Rates could conceivably come down significantly with the onset of a recession.  But if a hard recession is the reason for rates going down, it probably means that asset prices will be falling hard too.

Unless the Fed goes back to a policy of very easy money, we are going to see a housing bust.

We’ll see what happens after that.  Maybe the Fed will lower rates and create more money out of thin air to save us from their last bubble and bust.  And then we can start the process all over again.

When will the Fed learn?  The answer is: probably never.  The interests of the central bankers are not the same as the average American.  That’s why people need to learn not to get wrapped up in the Fed’s bubbles.

For the month of September 2023, the yield curve has flattened a bit from its severe inversion.  The long-term yields, notably the 10-year yield and 30-year yield, went up significantly, while the shorter-term yields barely moved.

The 10-year yield started at 4.18% on September 1.  It ended the month at 4.59%.

The 30-year yield started the month at 4.29%.  It ended the month at 4.73%.

So the yield curve is less inverted than before.  Some might see this as good news.  If an inverted yield is a predictor of a recession, shouldn’t it be good news that the yield curve is flattening and may soon return to normal?

A History Lesson

Let’s look at what happened prior to the financial crisis of 2008.  The yield curve was inverted at the beginning of 2007.  On January 2, 2007, the 3-month yield stood at 5.07%.  The 10-year and 30-year yields were 4.68% and 4.79%, respectively.

The 3-month yield finally fell below the long-term yields in May 2007.  The yield curve was normal for 2008, or at least normal in the sense that there was no inversion between the 3-month yield against the 10-year and 30-year yields.

The financial crisis did not hit crisis stage until September 2008.  That’s when the Fed dropped its target rate to near zero and started going ballistic with its money creation.  This was the beginning of QE1.  The Fed’s balance sheet was less than $1 trillion going into September 2008.  Ah, the good old days.

The recession officially began in December 2007.  But for most of 2008, most people didn’t know we were in a recession.  Housing prices had started to come down, and there were certainly many indications of economic problems.  But the major crisis didn’t become evident until September.  The backdating of the recession happened after the worst of the damage.

It took about 7 months (May to December 2007) from when the yield curve uninverted to the time of the start of the official recession.  It took about 16 months from the time the yield curve normalized to when the worst of the financial crisis hit.

Does that put some things into perspective of where we are now?  If you compare to then, we are still in early 2007.

This Time is Different

There is the famous saying that, “This time is different.”

I happen to agree here.  This time is different.  It is different because the yield curve has been inverted to a much greater degree in 2023 than it was in 2006/ 2007.

We still haven’t gone back to flat yet.  With the long-term yields rising, it seems we may finally get there soon enough.  There is still a ways to go though.  Even if the yield curve goes to “normal” by the end of the calendar year, that means we might not start a recession until around June or July of 2024.  And the worst of the crisis might not become evident until well into 2025.

I have predicted that we are likely going to be in a recession by the 2024 presidential election in November.  The only thing that isn’t clear is if everyone will know that we are in a recession.

A lot of people feel the pain now and are experiencing their own personal recession with lower real (inflation-adjusted) wages.  But the statistics still tell us that the economy is growing.

Conclusion

Even if the yield curve continues to flatten and eventually normalizes, it doesn’t mean we are out of the woods.  It doesn’t mean that we have avoided a recession.  It actually means that the recession is closer.  It is common for the yield curve to normalize before the recession begins.

If you hear anyone tout this as good news, be sure to ignore them.  The bond market is signaling a major recession ahead.  It is just a question of how soon at this point.