On Friday, December 11, 2015, stocks took a tumble.  The Dow was down over 300 points on the day.  The S&P 500 was down nearly 2%.  Gold ticked up slightly.

The most interesting thing of note is what happened to bonds.  The yield on the 10-year Treasury fell to 2.12%.  It had been at almost 2.3% at the beginning of the week and even as high as 2.24% in the previous 24 hours.

We can never count on one day as a microcosm of what will happen, but this trend has been fairly consistent.  When stocks drop big, government bonds tend to do well.

The Fed is widely expected to raise interest rates this week, although it has found excuses up until now.  But when we say “interest rates”, the Fed would really just be raising its federal funds rate.  The only way to do this is to increase the interest paid on bank reserves.

Here is the problem though.  If the Fed raises its key rate, it will curtail further lending by banks, at least on the margin.  This could be slightly deflationary, even though the Fed’s balance sheet is staying the same.  Less bank lending will mean a slight reversal in the fractional reserve lending process.

The Fed has already been in tight money mode for a year.  The end of QE3 was announced at the end of October of 2014.  If we believe the Austrian Business Cycle Theory – and we should – then we are likely to see something of a bust if there are no other drastic changes from here.

The longer we move away from QE3 without any additional monetary inflation, the closer we move to a recession.  If the Fed hikes its key rate, which results in even less bank lending, this should just speed up the process.

Many analysts are worried about a higher federal funds rate because it will lead to higher market rates.  This would mean a higher cost of borrowing, including higher mortgage rates.

But the real threat is that the previous artificial boom gets exposed and it leads to a bust.  The lack of monetary inflation will inevitably expose the misallocated resources.  Even continued monetary inflation would eventually result in a bust, but it can be dragged out longer.

If we hit a recession though, then yields – at least on U.S. government debt – are likely to go down.  In other words, a hike by the Fed may actually result in lower market interest rates.

Most libertarians are not big fans of buying U.S. government debt, often for more than one reason.  When you buy U.S. government debt, it is not a good hedge against inflation.  It is quite the opposite.

In addition, some libertarians don’t like to buy U.S. bonds just because they don’t like investing in anything having to do with the U.S. government.  This is understandable, but I don’t think we should let it cloud our logic.

It is ultimately a personal decision, but I don’t think it is immoral to buy U.S. government debt.  Congress is going to spend its money regardless of what you do.  They already force you to pay taxes that you cannot avoid without the threat of going to jail.

In terms of investing, many libertarians understandably do not trust the U.S. government and therefore do not view government bonds as a trustworthy investment.  But even though we don’t see it as a safe investment, it really only matters what others think.  If every other investor is running to bonds for safety, then the early buyers will make money.

So while owning U.S. government debt makes me nervous, not owning some makes me even more nervous.  The permanent portfolio recommends 25% in government bonds.  If there is anything to tweak, that would be it for me.  But given the current conditions and the higher probability of a recession hitting in 2016, long-term government bonds are an important piece to your investment portfolio.

There will come a day when interest rates finally go up significantly, but we are still not there yet.  There will be a time when shorting bonds will be highly profitable.  Now is not that time.

Just two days ago, I wrote a post on Donald Trump and his proposals to spy on mosques and to prohibit Muslims from entering the country.

I also compared these proposals to similar measures taken by the Nazis in Germany in the 1930s, before the concentration camps.

Perhaps the Nazi comparisons are overused, but it still makes a point.  I don’t think Trump wants to march Muslims off to concentration camps to be slaughtered, but he is still entering dangerous territory.

I understand why some libertarians like him and some hate him.  I have had some favorable things to say about him, especially in terms of upsetting the Republican establishment.  But he is playing politics with immigration, and Muslims in particular.

Actually, playing politics is the best case scenario.  If he really is that anti-Muslim, then maybe we should worry about concentration camps.  I think it is just politics though.

But every presidential administration sets a precedent for the next one.  If he whips the American people into even more of an anti-Muslim frenzy, who knows who will come along next and who knows what he or she will do.

I am surprised that some libertarians are actually seeming to defend Trump on his proposals to ban new Muslims from entering.  Sure, his proposals are less evil than someone who wants to nuke the Middle East or start another war, but they still shouldn’t be excused.

When I wrote my last post, I mentioned that Jews were disarmed in Nazi Germany.  I said, “Will Trump suggest that Muslims be disarmed?”  But I later found out that Trump is advocating something similar.  It isn’t specifically directed at Muslims, but it may as well be.

Trump said that he would look at the possibility of disarming people who appear on the government’s no-fly list.  We can probably guess that many of these people are Muslims.  We can be certain that most of them are innocent.

It took Marco Rubio of all people to point out that the no-fly list is filled with mistakes that often confuses people with the same name.

The government’s no-fly list is basically a secret.  When someone gets put on there, there is no trial in front of a jury.  There is no conviction of a crime.  It is a bunch of bureaucrats deciding who they want to put on there.  Maybe some of these people have agendas (doesn’t everyone?), and maybe some use it for revenge or to hamper political enemies.

What if Donald Trump ends up on a no-fly list?  Under his proposal, he would have to give up his guns.  Would his bodyguards have to do the same?

This is just another example of where Trump has dictator syndrome. He is not thinking about or concerning himself with the actual law or with justice.

I really liked Trump when he first entered the race because he shook things up a bit.  But he is quickly wearing on me.  He is getting more scary by the minute.

I understand that most of his opponents are really bad too.  They want to start wars and they have little regard for human life.  But that doesn’t excuse what Trump is saying now.  He is no friend of liberty.

As a side note to end, if Muslims are banned from entering the United States from the Middle East, can the Muslims in the Middle East ban the U.S. military and their drones from entering the Middle East?

Donald Trump is a different kind of candidate, which is why I have spent more time than usual in writing about him. I have had good things and bad things to say about him. That is significant because I don’t usually have much good to say about anyone running for political office.

There are occasional exceptions, such as Ron Paul. Actually, he is about the only exception for someone belonging to one of the two major parties.

As I’ve pointed out in the past, Trump is very far from libertarian, but there are some things for libertarians to like about him. He seems less belligerent when it comes to foreign policy. He is not afraid to be different and say different things. He is not politically correct. He can’t easily be bought by the establishment, which is bugging the big players. It is just fun to watch the establishment people so worried because they have someone on their hands who they can’t fully control.

With that said, Trump has really stepped over the line recently for me. There is a fine line between political incorrectness and collectivist and authoritarian thinking.

With the recent mass shootings/ bombings in Paris, and more recently in the U.S., Trump has been increasing his rhetoric against Muslims. I believe Trump is playing to a silent majority – or at least a large minority – but he is really treading in dangerous territory.

First he suggested that the U.S. government should target mosques for surveillance. Of course, with the NSA, they may already be doing that, unless they are just focusing on all of the anti-government types who might expose the lies and crimes of bureaucrats and politicians in high places.

Now, Trump is saying that Muslims should be prevented from entering the United States. He is playing off of the fears against terrorism that have been built up by the media.

To target Muslims is absolutely ridiculous, in more ways than one. The U.S. government has killed literally hundreds of thousands of Muslims over the last decade alone. The number may be in the millions. The wars in the Middle East alone have certainly upended the lives of several millions of people, including Muslims, Christians, and others.

But when 14 people die in a shooting in the U.S. by two Muslims, then a large percentage of the American people are really angry and want revenge against an entire country or an entire religion. Just because two evil people committed murder, does that justify assuming everyone of that same religion is evil? Does it justify the mass murder of innocent people overseas because they look similar or they pray to the same God?

For most Americans, I really hope it is just a matter of ignorance of history and politics. I hope there aren’t that many evil Americans out there. I don’t think that is the case.

Meanwhile, I have to hear the likes of Sean Hannity and his followers say things like, “Obama is afraid to use the words ‘Islamic terrorism’ or ‘radical Islam’. How are we supposed to confront something he won’t even identify?” This is just such stupid rhetoric, I can’t even begin to explain how much it bugs me.

How about we talk about “radical Christians” who continually advocate more war and don’t seem to care at all about millions of innocent people dying at the hands of the wars that they push for?

Back to this whole deal about fighting terrorism, the whole thing is actually silly if it weren’t so serious. Statistically speaking, there should be almost no money spent on fighting terrorism because of the astronomically low probabilities. If the U.S. government stopped bombing and occupying other countries, the odds would just drop that much more.

Almost 100 people a day die on average on the U.S. roads. If you are going to spend a trillion dollars fighting terrorism, wouldn’t it be better spent on roll cages for all cars? I’m not saying it is the best use of resources, but at least it would make us safer.

And if you want to talk about political incorrectness, why is Trump just going after Muslims? There are murders ever day in the inner cities of the U.S. The black population commits a hugely disproportionate number of violent crimes, including murder, as compared to the rest of the population as a percentage. In fact, the black population commits far more murders than the Muslim population in the United States as a percentage.

Is Trump going to suggest that we increase surveillance on the black community? Or is he going to suggest that we put them in internment camps? We know the answer to that. He is not that politically incorrect. That might actually cost him votes, and rightly so.

To be clear, I don’t believe the government should do anything to the black community to solve the problem of violent crime. If the government is going to do anything, it should be to get out of the way – just like terrorism. The government should stop the drug war, get rid of minimum wage laws, and stop incentivizing a culture of welfare.

The point is that it is absolutely wrong to punish a group of people for individual behavior, whether it is Muslims, blacks, or any other group. This is collectivist thinking and that is what Trump is doing.

There was a story discussing Trump and his channeling of Franklin Roosevelt. Trump actually cited F.D.R. as an excuse for his proposed ban on Muslims entering the country. He said that F.D.R. set up internment camps for Japanese-Americans.

In other words, he is excusing his own policies based on an argument from authority. “Just because F.D.R. did it, then it must be ok.” If any state ever tries to secede from the union, then the president can just kill 600,000 people and say that it is ok because that is what Abe Lincoln did.

The internment of Japanese-Americans during World War II was an atrocity. It is amazing how many Republicans and Democrats revere F.D.R. I try to remind “progressives” of what Roosevelt actually did. You can’t get much worse than that on civil liberties.

I hate to invoke the Nazi-Germany argument here, as we know it is too frequently used. Still, I think it is worth consideration.

The Jews weren’t just marched off to concentration camps one day by Hitler and his henchmen. It was a long build up. They were disarmed. (Will Trump suggest that Muslims be disarmed?) They were tracked. (Does that sound familiar?) There was a lot of anti-Jewish rhetoric by politicians.

This all eventually led to them being marched off to concentration camps – for their own safety of course. This was a process. Hitler never stood up and said he was going to kill millions of Jews.

I am not accusing Trump of wanting to send Muslims to concentration camps to kill them. I am accusing him of engaging in similar tactics and rhetoric as the Nazis used in Germany, just on a different group of people.

Maybe Trump is just playing to the crowd to get the Republican nomination. It is still disgraceful to me. It is also a shame that so many people buy into his rhetoric on this subject. There are things to admire about Trump, but his collectivist thinking here is not one of them.

I am starting to sound like an old broken record in talking about the American middle class. I am sensing big problems that most others are not willing to talk about.

The problem is that the average American family is struggling financially. The bigger problem is that they aren’t quite sure why they are struggling financially.

They listen to reports about how unemployment is down and the economy is improving, even if it isn’t as fast as what was hoped for. I really think that many American families are wondering why they are struggling. But they are not openly talking about it because they don’t recognize that this problem is so widespread.

The economic numbers don’t give us that great of a big picture unless we really know how to interpret them. In fact, not only are they misleading, but they often indicate the opposite of what we are led to believe.

Think back to around 2005 or 2006. It was boom time in the United States. We were near the peak of the housing bubble, but not many people called it a housing bubble. They called it a housing boom, which didn’t imply a popping as is the case with a bubble.

There were some renters who stayed on the sidelines. They probably questioned their own wisdom. They probably wondered how all of these other people were affording nice new homes. The answer is that they weren’t “affording” them.

What wasn’t reported in the headlines back then was the grinding day-to-day struggles of many of those who had recently purchased a house. They could barely keep up with their bills. They saw a large portion of their income go towards their mortgage and the high property taxes that went along with the high housing “values”. Meanwhile, their other bills didn’t go away.

So you had the minority renters sitting there quietly thinking, “why am I such an idiot?” “Why did I miss the boat on this one?”

Then you also had the homeowners boasting of their great savvy in buying a house (or multiple properties). Meanwhile, they sat there quietly wondering where all of their money was going. They probably wondered how everyone else was affording to pay their mortgage.

Once the whole thing imploded, particularly in the fall of 2008, the picture became clearer. The other homeowners were not able to afford their lifestyle either with housing prices so high. It also became clear to those who had stayed renters that perhaps they weren’t idiots after all. It turns out that more people should have remained as renters and been proud of it.

Our Situation Today

There might be a slight bit more openness today, but I still don’t think the extent of the problems are being openly discussed. And as I said above, most middle class families can’t really articulate what the problem is.

I believe this is why Donald Trump and Bernie Sanders have done unexpectedly well in the polls, regardless of what the votes ultimately show. They are tapping into the discontent of the American middle class. Their solutions may be terrible (Sanders more so than Trump), but at least they are acknowledging a major problem.

I think most of the politicians really are just out of touch with the American people. That is why they are not tapping into their feelings. Most of these politicians are well off, financially speaking, and they do not understand the setbacks of an unexpected repair bill that costs $500.

Ironically, aside from Sanders, the only other politicians who has been in this race that could possibly relate is Scott Walker. He is supposedly in debt, and we aren’t just talking about his campaign. He was (probably still is) paying credit card debt and student loan debt for his kids. But Walker did not understand this issue of the struggling middle class and he failed to tap into it. His campaign was a disaster and he went down in flames. He was the first major candidate to drop out.

We hear statistics about the unemployment rate improving, and I have no doubt that it has. I think it is somewhat misleading because we don’t know how many people stopped looking for work just because the options weren’t what they wanted.

But I am not even really talking about the unemployed here. I am talking about families where there is at least one person working. However, even families with two working parents are struggling a lot in many cases. There are families making six-figure incomes (before taxes of course) who are still finding it a struggle. I’m not saying they can’t put food on the table or fulfill their basic needs, but I am saying that beyond this is a struggle.

How is a family with two kids, making a median income of just over $50,000 per year, getting by? I think the answer is – barely.

Real wages (meaning wages adjusted for inflation) have been relatively flat for decades. Supposedly, real wages have been increasing a little lately, but I don’t believe it at all.

I think the consumer price inflation numbers are highly misleading. The two biggest areas where we are misled are taxes and healthcare. When we talk of taxes, it isn’t just income taxes. It is everything, including payroll taxes, corporate taxes, capital gains taxes, sales taxes, excise taxes, tariffs, and so much more. There are hidden taxes in almost everything. We even have to take into account the debt that is promised to be paid for by future taxes. It misallocates capital today and makes us poorer today.

The other factor, healthcare, is certainly getting some headlines, but still probably not enough. Is the CPI data really taking into account all of the increases that the average family is seeing?

While premiums are going up at 20% or 30% or more for many people, their health insurance plans are also changing. Many more people are going into plans that cover less or are high deductible plans. Now don’t get me wrong here, because I don’t mind the high deductible plans. They actually more closely resemble what insurance is supposed to be about. They also help in keeping costs and usage in check, as consumers actually have to think about whether it is worth it to go to the doctor or to buy some expensive medication.

Still, the point is that these plans are covering less and less, while the premiums go higher and higher. I don’t believe the consumer price index is fully taking into account the extent of healthcare costs being imposed on families (and “imposed” is the right word here). I also don’t believe it is accounting for the extent to which these plans have decreased in quality, which means higher out-of-pocket costs.

Also, it is important to recognize that if health insurance premiums are going up at 20% per year, there is a compounding effect. Over a ten year timeframe, at 20% per year, premiums would be three times as much.

To sum it all up, Americans are taking it on the chin financially. Sure, it is better in the U.S. than most other places, but that doesn’t mean we should expect or accept this struggle.

The ones who are struggling don’t want to openly admit it because they don’t understand that most everyone else is feeling the same way. They don’t understand how they can be making just as much money as before – or perhaps even more – yet finding it a struggle to keep up.

Meanwhile, the politicians are too oblivious to tap into this sentiment.

This is why there is going to be a correction. When things are unsustainable, as the housing bubble was a decade ago, then they come to a stop and reverse. We are currently in unsustainable times. It shouldn’t be this hard.

The solution is a correction in the economy and a significant decrease in taxes, government spending, and government regulation. This is what the average American middle class family needs, whether they realize it or not.

Thursday, December 3, 2015 was a rocky day in the financial markets. Things just keep getting more bizarre.

The euro skyrocketed upwards on news that the ECB cut its deposit rate down .1%. It now stands at -0.3%. In case you are wondering, that is a negative sign. But in our crazy world of negative interest rates, investors were actually expecting a bigger cut. They were also hoping for more money creation.

The euro was up a lot, the dollar was down, stocks were down, and interest rates were up. The yield on the 10-year Treasury rose substantially to 2.33%, which was about a 7% increase over the previous day’s close.

Meanwhile, Janet Yellen was testifying in front of Congress, as investors prepare for a likely rate hike in a couple of weeks.

It will be a token rate hike of no more than 0.25%. It is also not that big of a deal because it is not dictating monetary policy. The Fed could start another round of QE while raising rates at the same time.

The only rate the Fed can directly control at this point is the rate it pays banks for their reserves. This rate has been set at 0.25% for the last 7 years. If the Fed hikes this rate as expected, the banks can get some more “free” money. It will matter in one sense. Banks will curtail lending on the margin even more.

The Fed is likely going to trigger a recession. Fed officials may know this and they don’t want to take the blame for it. But it is also hard for them to back out of their promise to raise rates at this point.

Every time the Fed is supposed to raise rates, an excuse is made up to delay it. Falling stock markets, trouble in China, etc. are always there for an excuse.

Maybe the Fed will surprise everyone and come up with another excuse to delay raising its key rate. With the 10-year yield spiking up, maybe the Fed will not raise rates by using the excuse that market rates are going up. Would this make any sense? In today’s world, it might make enough sense for them to try it.

I am not convinced that a Fed rate hike will lead to higher market rates down the road. It has already been priced in to a large degree.

We must remember that the Fed had three big rounds of so-called quantitative easing. It ended its biggest round – QE3 – just over a year ago. The monetary base has been relatively flat since then. And now the Fed is supposed to raise the rate it pays on bank reserves, thus reducing loans on the margin.

If you follow the Austrian Business Cycle Theory – or just common sense and general logic – then it is not hard to imagine that we may see a significant economic downturn. The Fed and the government have misallocated resources on a grand scale over the last 7 years. They never let the previous misallocations fully adjust. These misallocations are going to be exposed and we will be in for another correction.

If that happens as I expect, then market interest rates will likely go down as investors seek safety (in their eyes).

If you are not prepared for a recession, you should get prepared. The timing is virtually impossible to predict, but there are a lot of signs pointing in that direction right now.

Cash will be king. When the Fed starts inflating again, that status will move to gold.

Donald Trump’s candidacy for president of the United States has been somewhat unique.  It is not unique in the same sense as Ron Paul’s campaigns, but there are a few similarities.

There is obviously a tide of discontent in the nation as several outsiders have made a splash.  Bernie Sanders and Donald Trump have both done surprisingly well.  Although Sanders is a sitting U.S. senator, he is still something of an outsider in the sense that he is not in favor with the establishment.

These two candidates have tapped into the discontent.  While I think their proposed solutions are way off base for the most part, they are acknowledging that major problems exist.  Americans don’t want to be told that everything is fine when they know that everything is not fine.

I have seen a wide range of reaction from libertarians on the Trump candidacy.  I would like to clarify my own positions and present a libertarian perspective.

While Trump is nothing close to being a libertarian, there are certain positions that can be encouraging for libertarians.

The most divisive thing about Trump is his politically incorrect rhetoric.  I think this is divisive even amongst libertarians.  In my opinion, some of the things he says are stupid and childish.  He sometimes sounds like a third-grader calling another kid names.  In addition, there are a few things Trump has said and done that really probably are offensive.

With that said, I think Trump’ political incorrectness is one of the most refreshing things about him.  He is not anti-women as many accuse.  He insults men at about the same rate as women.  The bottom line is that Trump attacks others after he himself has been attacked.  Perhaps it is childish and immature, but his “victims” are usually the ones who started it.

I just get so tired of listening to politicians mince their words.  They are so afraid to say anything that might offend someone.  They don’t want the wrath of the establishment and the mainstream media.  For this, Trump is a nice change.

Another nice thing to say is that Trump cannot be bought, or at least not easily.  This bugs the establishment to no end.  So although Trump ultimately takes many establishment positions, the establishment still hates him because the elites feel they cannot fully control him.

Trump has also been decent on foreign policy some of the time.  He is not afraid to call the Iraq War exactly what it is – a complete disaster.  It is nice that we have come far enough where he can say this in a Republican race and he is not instantly disqualified.

Trump has also been decent when it comes to dealing with Russia.  Of course, compared to the other Republican candidates, that is not hard.  He says we should let Putin defeat ISIS if they want to take on that role.  He says we should talk to Putin and deal with him in a civilized manner.  In other words, Trump does not want to provoke a war with Russia.

Unfortunately, Trump is quick to contradict himself and talk big about dropping bombs and defeating other countries.

On economics, Trump is terrible for the most part.  His tax plan may be one of the best of the candidates out there, but again, that isn’t saying much.  He is terrible on free trade and he offers little in the way of specific spending cuts.

In terms of civil liberties, I get quite concerned as a libertarian.  While I like some of Trump’s political incorrectness, I don’t like it in terms of his collectivist thinking with foreigners, and even Muslims.

This country has a blemish (one of many) for setting up internment camps for Japanese-Americans during World War II.  This was the wonderful (note the sarcasm) F.D.R. who did this.  This is the guy hailed by so-called progressives, and even many conservatives.  If something similar were to happen again – say, to Muslims – then Trump would be just the kind of guy to implement it.

And that is the main problem with Trump.  He shows occasional streaks of being a major authoritarian.  We just don’t know what we are going to get if he gets in the White House.

From what I have heard and seen, Trump actually seems like a gentleman, despite his public battles.  He may be less corrupt and less deceptive than most of the others.  It is hard to imagine that Trump could be any worse than a Hillary Clinton, or Jeb Bush, or Marco Rubio, or even Ben Carson.  At this point, Trump actually seems far less likely to start another major war.

As a libertarian, I will not support Trump with any money or any votes.  Still, I think he has been good so far in terms of shaking things up.  It is nice to see the establishment worry, and it is nice to see political correctness take a step back.

If Trump actually makes it to the White House, I really don’t know what to expect.

Happy Thanksgiving to all of my readers.

I write this blog from a libertarian perspective and I don’t hesitate in continually criticizing the U.S. government.  But I have to make a clear distinction between country and government.

While there are a lot of things to be critical of, I am also quick to acknowledge the great things we enjoy in the United States in today’s world.

I say that we live in contradictory times.  Due to government spending, government regulation, and Federal Reserve inflation, times are tough.  In terms of meeting basic needs, the 1950s generation may have had it better than us today.

But I would not want to trade places with someone in the 1950s.  It might be a little harder to pay our bills, but we enjoy enormous wealth and choices that did not exist at that time.  They didn’t even have microwave ovens then.  They certainly didn’t have computers or cell phones.  Some people had television, but it was rarely more than one per household.  You had your choice of a couple of channels, which you could change by getting up off the couch and going up to the tv.

I think Thanksgiving is a time that we should be thankful for what we have because we don’t do it enough.  We need to acknowledge the good things we have in life.  This definitely includes friends and family, but it also includes our material wealth that makes our lives easier.  We don’t have to go out and work on a farm for 12 hours a day and still have to worry about surviving.

While I think we need a lot more liberty, it doesn’t mean we can’t be thankful for what we do have.  And at least we aren’t living in some poor country, or worse, a war-torn country.  The U.S. government is always at war, but most of it is happening elsewhere.

I try to remind fellow libertarians not to be grouchy all the time.  Other people will not want to be around you.  Be a happy libertarian.  You can still defend your principles seriously while maintaining a positive attitude.

Enjoy your time with friends and family, and find your own freedom.

As Black Friday (the day after Thanksgiving) approaches, we will get to hear all of the economic analysis surrounding this one day, along with expectations of the rest of the Christmas shopping season.

We will hear reports about whether sales are as strong as expected.  We will hear about whether consumers are spending more or less than last year.  We will hear about whether consumer spending will lead to a stronger overall economy.

Along with all of this, we will hear some really bad economic analysis.

How many times do I have to hear that two-thirds of the U.S. economy is based on consumer spending?

The so-called professionals can talk about this as much as they want, but it doesn’t change the reality.  Spending does not help economic growth or lead to economic growth no matter how often the Keynesian economists say it.

Actually, it isn’t just the hardcore Keynesian economists that believe this.  Unfortunately, most people believe this major economic fallacy.

Consumer spending does not cause economic growth.  If you can understand this one point, you are ahead of 99% of the population.

A society gets richer based on production.  To be clear, this must be production in accordance with consumer demand.  Production does no good if people do not want the things that are being produced.

This is why government spending is so wasteful.  Even if politicians were noble in their attempts to better society, it is impossible for them to do so through government spending.  There is no way anyone can know what other people want.  The only way is to let the market process work and for people to vote with their money.

The government could set up a program to have Apple produce 250 million iPads so that every American adult could own one.  This would be “production”, but it would be a massive misallocation of resources.  The problem is that not everyone wants an iPad.  The people who really want one probably already own one.

Some people may want an iPad but don’t buy one because it is not a high enough priority on their list of wants and needs.  If your air conditioner isn’t working in the middle of summer and you have to pay to get it fixed, this is likely going to be a higher priority for most people over buying a new iPad.  Only a free market can properly allocate resources in accordance with consumer demand.

We hear so often about the supposed need for government to encourage consumer spending.  But consumer spending does not drive economic growth any more than eating vegetables makes more vegetables grow out of the ground.

Consumer spending can be a reflection of production.  It can also be a reflection of consumer sentiment and whether people feel the need to save more money.  But we should never confuse cause and effect.  We should never confuse correlation with causation.

Spending does not drive overall production.  In a free market, consumer spending can direct resources into certain sectors.  If a lot of people are buying iPads, then Apple may choose to direct more resources towards making more iPads in anticipation that the demand will continue.

But here is the key fact that must always be acknowledged.  You can only consume what has first been produced.  It is impossible to consume something that hasn’t been produced.

If people wanting to spend money is all it took for economic growth, then why would the United States be so much richer than many other countries on the planet?  Do people not think that those living in Ethiopia or Cambodia want more?  I’m sure that most Ethiopians would like to have a big screen television, a smartphone, and a nice new car.  Do they just need to spend more to get all of this stuff?

When it is put in those terms, it is easier to see the ridiculousness of the argument.  Wanting things does not make them appear.  Buying things does not automatically make us richer.  It is the savings and capital investment that lead to increased production that makes us richer.

Think about consumer spending for a family.  If you look at consumer spending only, it can tell you something about a family, but it is a very incomplete picture.

Imagine two families that each spend $100,000 per year.  If you knew this fact alone, it doesn’t tell you that much.  It does tell you that they are probably relatively rich by world standards.  The families are probably not from a third-world country.  They are likely to be making an income that is at least close to the amount they are spending.

But maybe one family earns $95,000 per year and is going deeper into debt.  This family has no savings and the interest payments on the credit cards keep building.  This spending is unsustainable.

Maybe the other family earns $150,000 after taxes and is saving $50,000 per year.  Maybe they already have a net worth over a million dollars.  This family will get to a point where they can live off of their assets and not worry about working any more.  Or they can increase their consumption well beyond $100,000 per year.

We certainly would never say that a family is rich because they are spending $100,000 per year.  It might be one sign that they are potentially well off, but that is about all that can be said.

Spending does not lead to economic growth.  It is more of a reflection of past productivity.  It is also impacted by expectations for future productivity.

If sales on Black Friday are higher than expected, maybe it is an indication that we will not have a recession in the near future.  It doesn’t really tell us if economic growth is strong or not though.  Maybe people are spending based on credit card debt.  Maybe they are spending based on expectations of a higher income in the future. Maybe some are spending money based on prior savings.

The same can be said if Black Friday and overall holiday sales are lower than expected.  It might indicate a coming recession, as more people are being conservative with their money.  Many people may be trying to pay down debt or save up more emergency money.

In some ways, decreased sales has a positive aspect.  It means more people are likely being responsible with their money.  It hopefully means that some people are saving money for a rainy day instead of spending it all on Christmas gifts.

That is the problem with looking at spending though.  We don’t know if the spending is depleting resources or if there is still adequate saving occurring even with the spending.

It is ultimately savings and capital investment that leads to greater productivity and a higher standard of living.  If greater productivity leads to greater consumption, then that is the reward for people in a society.  They can consume what has been produced, because you can only consume what is first produced.  Even Santa Claus can only deliver gifts that have been produced.

There are many debates that occur within the libertarian movement.  There are arguments between minarchists, anarchists, and constitutionalists.  There are never-ending arguments over tactics.  There are debates over seemingly small issues.

Abortion can be a contentious debate, but I think most libertarians have actually come to accept both sides on this.  It is not an argument over the non-aggression principle.  It is really an argument over when life begins and when a person becomes a person with rights.

Those who are “pro-life” typically believe that life begins at conception.  Therefore, it makes sense that they believe abortion is murder.  Those who are “pro-choice” typically don’t believe that life begins at conception, or at least don’t recognize the fetus as a person with rights.  Therefore, it makes sense that they believe it should be a woman’s right to choose.  There are certainly varying positions on the subject, but most libertarians have really come to grips with the subject in that most at least respect most opposing views.

There is one issue though where the same can’t be said.  The issue of immigration is front and center now and libertarian opinion varies greatly on this.  And while many will respect the people on the other side of the issue, they really don’t respect the position at all.  We know this is a difficult issue just because it is so hard for libertarians to agree.

And we are not just talking about all self-identified libertarians.  After all, Glenn Beck has referred to himself as a libertarian even though he is nowhere close.  I am talking about hardcore libertarians, most of whom believe in voluntarism or some form of the non-aggression principle.

This debate really hit home for me this week when I saw a complete difference of opinion from two of my favorite and most respected libertarians.  They are Lew Rockwell (of LewRockwell.com and the Mises Institute) and Jim Babka (of DownsizeDC.org).

Rockwell published a piece called “Open Borders: A Libertarian Reappraisal“.  It was based on a talk that he delivered at a Mises Institute event.

As the title suggests, Rockwell considers the idea of open borders to not be a libertarian solution.  He suggests the immigration debate should revolve around private property rights.  On this, I don’t think he would get a lot of disagreement from hardcore libertarians, although I can’t be sure.

It is more interesting when Rockwell addresses the issue of access to public roads, public transportation, public buildings, etc.  He basically says that taxpayers are the true owners of the public property.  This is probably the more controversial point with libertarians in his piece.  He also suggests decentralization, which is of course hard for any libertarian to argue with.

Jim Babka responded to Lew Rockwell’s piece.  Babka’s piece was published by Students for Liberty.  He asked Rockwell if he wanted to publish it on his site, but Rockwell politely declined.  Babka said he understands, and it is understandable that Rockwell doesn’t want to get into a big debate about it on his great website.

Babka takes issue with the claim that public spaces are really private property.  He takes issue with Rockwell for referring to “forced association” for property owners.

It is hard for me to do justice to both pieces and I would encourage people to read both sides.

I think Babka’s most powerful argument is where he wrote the following:

“This new, forced association principle clashes with the ZAP.  To stop aliens who are walking, job seeking, purchasing, and house renting, there will be cases where someone must be prepared to shoot them. Who, amongst the libertarians, is willing to pull the first trigger?”

When Babka refers to the ZAP, he is referring to the zero-aggression principle.  This is by far his most powerful argument because that is always the dilemma libertarians face.  If you believe in some law, are you prepared to shoot somebody who violates it?

I have used this argument before when talking about laws that would require banks to engage in 100% reserve requirements.  If banks are openly lending via fractional reserves and making voluntary contracts with other parties, who is going to step in with a gun to tell them they can’t do this?  Are you going to point the gun at the banker or the person depositing the money?

It is possible to have laws and penalties that don’t require the use of a gun, but we don’t need to get into that issue here.

In terms of immigration, if you want someone out of the country, then you are basically going to have to use force.  It becomes even trickier if the person is not on “public property”.

What if I invite someone from a foreign land to stay at my house?  Are there libertarians who would advocate that the government police bust down my door to capture the immigrant who is here illegally?  Or will he only be kidnapped once he steps foot on a public sidewalk or road?

There could be legitimate answers to these questions, but I feel the need to ask them.  For me, they have not been satisfactorily answered.

Even on the immigration issue, there is far more common ground between most libertarians than what they might realize.  The major debate arises because we don’t live in a libertarian society.  It is like trying to have a debate over whether there should be prayer in the public schools.  How can you even take a position if you don’t believe in government schools?

If the U.S. government did not have an interventionist foreign policy, then this would likely end most threats of terrorism from overseas.  We can’t be 100% safe, but that includes the people who already live here.

Another major factor is welfare.  Many people – libertarians included – criticize immigration because so many people come here and collect welfare benefits.  Of course, in a libertarian society, there would be no government-financed welfare.  All welfare would be voluntary.

I have found it funny for a long time now how Americans get so worked up over welfare going to immigrants.  Why don’t they get so worked up about Americans on welfare?

If welfare actually worked and helped people in the long run (which it doesn’t), then I would think that immigrants might be more justified in getting welfare.  Someone born and raised in the United States has a lot more opportunity than some Mexican from a poor rural village.  Who would be more deserving of welfare if anyone is deserving of it?

Of course, a third issue – which plays a major role in this debate – is that government simply owns too much.  If we didn’t have all of this government-owned land, government roads, government buildings, etc., then it would be much easier to resolve on the basis of private property rights.

Libertarians can keep debating the immigration issue, but I don’t think it will have a lot of impact one way or another.  I have seen too many anti-immigration arguments based on utilitarian arguments though.  I have been hearing too many libertarians saying that more immigration will lead to less liberty in the future and that is why we need to oppose it.  But if that is the case, then you could just as easily say that about almost anything.  “We can’t legalize the use of cocaine because all of the drug addicts will keep us from having a more libertarian society.”  I hope you see my point here.

Libertarians must stay united on the most important questions of foreign policy and government welfare and government ownership.  If we move in a more libertarian direction on these issues, then the immigration “problem” will not be so much of a problem any more.

When it comes to the overall economic picture, sometimes it is a good idea to take a step back and look at the big picture.

I am a firm believer in the Austrian Business Cycle Theory.  You can call it whatever you want, but when a central bank creates money out of thin air and releases it into the economy, it has its consequences.

It may not mean significantly higher prices right away – or at all if judging by recent history – but it misallocates resources.  It translates into capital going into certain sectors than it otherwise would have.  It means that production is lower in terms of meeting consumer demand.

With loose money usually comes lower interest rates.  This policy is especially bad because it discourages savings and encourages more debt.  Interest rates are an important mechanism (price) in our world, as they basically tell us the price of money.  When there is a shortage of savings, higher interest rates will draw people into saving more.  The free market is self-correcting.

The problem is when the central bank and government distort interest rates.  It sends false signals, which can contribute to the artificial booms and the subsequent busts.  Artificially low interest rates mean less savings, even if more saving is needed in the economy.

One thing we know from the Austrian Business Cycle Theory that can help us with predicting the economy and helping us with our investments is that loose money and artificially low interest rates will cause unsustainable bubbles/ booms that eventually go bust.

The Fed (or any central bank) does not need to stop its loose monetary policies in order to bring on a bust.  At some point, a bust becomes inevitable unless the central bank continues to accelerate its rate of money creation.  If the central bank keeps accelerating its monetary inflation, then you will eventually end up with hyperinflation and a bust that is far worse than any other.

So what is the status of our present situation?

Since there are billions of moving parts in the economy, we can’t know precisely what has happened and where we are.  But we can still take a look at the big picture.

Since the fall of 2008 (the word “fall” has two meanings here), the Fed has increased the adjusted monetary base by five times.  In normal circumstances, one would expect this to cause massive price inflation.  But in our crazy economic world of the last decade, most of this newly created money went into bank reserves, thus helping keep a lid on price inflation.

While the federal funds rate still sits near zero, the Fed’s monetary policy has actually been tight for about a year now.  It was just over a year ago that the Fed announced the end of its latest round of quantitative easing.  This was the end of QE3.

Under normal circumstances, we should expect a recession to be coming soon.  The Fed has stopped the flow of new money, so there should be an inevitable bust.  The problem we face is figuring out how big and when.

The massive excess reserves built up by banks makes this much trickier than in the past.  If banks continue relatively tight lending (at least compared to a decade ago), then a recession may be close at hand.

But what if the banks start lending out more money?  All of a sudden, this cancels out the Fed’s tight monetary policy.  It could actually mean inflation while the Fed sits on its hands.  It would be inflation via fractional reserve lending.

In this sense, the Fed’s interest rate policy is somewhat important.  If the Fed does raise interest rates, it can only feasibly do so by increasing the rate it pays on bank reserves.  If it does this, then this will just encourage banks to keep a lot of money locked up in reserves.

For this reason, I tend to lean more towards seeing a recession within the next year rather than later.  That is with the assumption that the Fed does raise the federal funds rate, even if gradually, and it also assumes that the Fed doesn’t start another round of quantitative easing.

We have already seen a bust in the oil bubble over the last year and a half.  Remember that the price went from about $100 to $40 in a relatively short time period.

I think the most vulnerable bubble now is in stocks.  But in some ways, I don’t really care too much about stocks.  I care about stocks more as an indicator than I actually care about stock valuations.

What matters most to most people is the employment picture.  If we hit a recession, unemployment is likely to rise again.  Wages are likely to go down.

It is important to remember that corrections are needed when the damage has already been done.  I can see that the American middle class is struggling tremendously.  Wages are not keeping up with expenses.  This in itself points to a necessary correction.

Recessions (corrections) hurt because some people lose their jobs.  But the unemployment is a result of the previous misallocation of resources.  The correction is needed to put those resources to their proper uses.  The correction also has the benefit of lowering expenses for most people.

We will keep an eye on what the Fed is doing.  More importantly, we will keep an eye on what the banks are doing.  If the Fed keeps monetary policy tight and the banks do not expand lending, then we should expect a recession in the somewhat near future.

Still, we can’t time the Austrian Business Cycle Theory.  Sometimes these things take time to unravel.  It takes a while for the mistakes to be realized by the marketplace.