The term “money” is generally defined as a medium of exchange. Sometimes you will see “store of wealth” added to the definition of money. One trait of money should be that it can be used as a store of wealth. But just because something is a good store of wealth doesn’t make it a good form of money.

In the United States, the U.S. dollar is the primary form of money. In fact, it is really the only money that is used.

Gold bugs often make the mistake of saying that gold is money, but this lacks accuracy. Gold has a long history of serving as money, and gold would likely still serve as money if not for the monopoly powers of the central government and central bank.

In a few countries, gold may serve as a secondary form of money. It has been used in Zimbabwe since the hyperinflation there, but so have dollars and euros.

In the U.S., the dollar is money because it is widely sought and widely accepted. You can walk into any store and use your dollars, whether in actual currency form or digital. You cannot walk into your local grocery store and pay with gold. They would look at you as if you were nuts. The same can be said for Bitcoin.

But just because the U.S. dollar reigns supreme right now, it doesn’t mean it will always be this way. It also doesn’t mean that it is the best investment.

When comparing the U.S. dollar with gold and Bitcoin, they all have their unique characteristics. You can invest accordingly.

Rosland Capital has put out a chart comparing these three assets based on 10 different traits. Partly based on this gold-backed IRA page, it shows how each asset rates according to each trait.

It is actually gold that dominates the comparison. This is why the marketplace has favored gold as a form of money for thousands of years. It is only in very recent history that central banks and fiat currencies have dominated.

The most important trait where the U.S. dollar dominates is spendability, as mentioned above. This is why the dollar is money and why it is in such high demand.

In terms of investing, the dollar rates at the bottom when it comes to scarcity. There is no technical limit on the number of dollars (or digits) in circulation. The Federal Reserve could decide tomorrow to create another one trillion dollars out of thin air. This is why the dollar has lost over 95% of its value over the last one hundred years.

So while the dollar is still highly desired for its spendability and its liquidity, it has actually not served as a good store of value over time. And the only reason it has ever been highly desired is because it has essentially been forced on us by legal tender laws and other laws.

Bitcoin scores better than the dollar in several categories, but it is certainly not money. Sure, there may be a very small number of online stores that will accept Bitcoin, but it is not widely accepted. In fact, you can randomly ask people on the street, and many will not have even heard of the digital currency. Also, when bitcoins are spent on a purchase, they are often converted back into dollars.

As an advocate of liberty, I can certainly appreciate Bitcoin and the whole idea of digital currencies. Any competition for the central banks is a positive development. However, most people do not understand Bitcoin if they even know what it is. And Bitcoin does not have the history or reliability that gold does.

While gold does not rank high in a few categories, some of these would be solved with widespread use, coupled with today’s technology. For example, gold does not rate high in security, portability, and divisibility, but this could easily be resolved in the marketplace. It is not hard to imagine having credit and debit cards with gold payments. It is not hard to imagine a currency that is backed by gold. It is not hard to imagine mixing small amounts of gold with cheaper metals for lower value coins. There are any number of possibilities with today’s technology.

The one area where gold still loses out to the dollar is in actually using it as money (referred to as spendability in the chart). This is a result of the government and central bank taking over and controlling the money we use. The Fed has only been around for just over a hundred years. The last link the dollar had to gold was cut off 45 years ago. Since that time, inflation has been horrendous.

It may seem that the price of gold is quite volatile, and it is when pricing it in dollars or any other fiat currency. But this is more of a reflection of the volatility of the currencies. The price of gold jumps around due to announcements from the Fed and other central banks, or from speculation from investors trying to guess what the Fed will do next. And like any other asset class, gold is subject to booms and busts induced by the Fed’s monetary policies.

In conclusion, gold is not in high demand for it to serve as money. If it is in high demand at all, it is because it serves as a good store of wealth. It is an insurance policy against a depreciating currency.

Gold may yet again serve as money for our society as people realize that central banks have destroyed their currencies. Until that time, it is still smart to hold some gold and gold-related investments, as the destruction of the dollar and other currencies will not stop.

The latest consumer price index (CPI) numbers were released, showing a slight uptick in August.  The CPI was up 0.2% in August, and it is up 1.1% from last year.

However, the all-important median CPI, which does not get a lot of attention, came in at 2.6% from last year.  This was the second month in a row at 2.6%.

To be sure, these are not big changes.  But the government’s statistics here are indicating a slight uptick.  And it is the trend we are looking for, because we know the overall rates are inaccurate.

The Fed ended its last round of monetary inflation (QE3) in October 2014.  It has been almost two years of a relatively flat monetary base.  Yet, consumer prices continue to move upwards, even if slightly.  This means that some of the Fed’s huge monetary inflation from 2008 to 2014 is still leaking out.

We have seen the price of oil come crashing down in the last couple of years, but that is the only major asset bubble that has crashed.  I don’t count the precious metals in here (silver and gold in particular) because they moved down several years ago, when the Fed was still inflating rapidly.

Is it possible that not everything will come crashing down at once?  Maybe it is possible that we could have a major correction in stocks without seeing the whole economy implode.  I don’t think this is likely, but it is possible.

The Fed likes its position right now because the consequences of its previous monetary inflation are not evident.  There are severe consequences in the form of misallocated resources, but they are not apparent in significantly higher consumer prices.

I have no idea what the Fed will do in its upcoming meeting on Wednesday.  The market really has no idea either.  It is almost a 50/50 bet at this point, which is rare going into a meeting.

If I had to guess, I don’t think the Fed will raise its target rate.  Call it an insurance policy against a Donald Trump presidency.  But we really can’t be sure.  You will want to pay attention on Wednesday afternoon.

Edward Snowden is petitioning the Obama administration for a pardon.  While I don’t give it a high probability, it is certainly worth trying on his part.  He has a better chance with Obama exiting than with the other major candidates, one of whom will take over as president.

If Obama were to grant a pardon to Snowden, it would push Obama up in my eyes slightly.  It can’t undo his crimes in office, particularly when dealing with foreign policy.  It doesn’t undo his interventions in Syria, Libya, Iraq, Afghanistan, Ukraine, and elsewhere.  It can’t bring back the lost lives and the destruction.  But at least it would be one good thing.

I believe that Snowden is basically home sick.  It is good for him (probably life saving) that Putin has granted him asylum in Russia. But Snowden misses the U.S. and wants to come home, despite knowing the crimes of the U.S. government.  He just doesn’t want to end up in a jail cell or worse.

There is a new movie coming out on the Snowden story.  It was made by Oliver Stone.  Perhaps it will help spread more sympathy for Snowden.  At this point, American public opinion is important for his cause.  He needs for more Americans to view him as a hero and not as a traitor.

I have written before that I can determine with high accuracy someone’s political persuasion just by asking two questions.

1. Do you believe that Snowden is a hero or a traitor?
2. Do you favor Obamacare, or some kind of nationalized healthcare system?

Someone who believes Snowden is a hero and who also is against Obamacare and nationalized healthcare is typically libertarian, or at least leans that way.  It is easy to see how the political conservatives and liberals will answer.  I refer to “liberal” as it is commonly used today.

For someone who favors nationalized healthcare and thinks Snowden is a traitor, that person is an authoritarian all the way around.

Hillary Clinton said that Snowden should have sought whistleblower status and gone through the appropriate channels, instead of releasing the classified documents.  Of course, this is a joke.  The appropriate channels are the same people committing and concealing the crimes.

It should be James Clapper (who also lied to Congress) and other NSA officials facing jail time.  It should be Obama and those others who have enabled this spying who should be labeled the traitors.

The crimes that Edward Snowden and Bradley (now Chelsea) Manning exposed resulted in them being punished, yet the actual people who committed the crimes they exposed get nothing.

Manning is in jail for up to 35 years.  Manning released information to Wikileaks, including this video of U.S. military personnel killing people in Iraq from a helicopter, acting like it is some kind of a video game.  So Manning exposes the murderers, yet it is he who goes to jail and is tortured.

Americans really need to get their priorities straight here.  These people are exposing the crimes of the U.S. government that are being committed against the American people (and Iraqis and others).  They are exposing the truth, yet they are being punished by the people who are being embarrassed over these truths.

Snowden did not release data from the NSA for any other reason than to expose the criminality of the agency.  He was acting as a truth teller for the American people.  The American people should be thanking him and coming to his defense.  Yet, many people think he is somehow a traitor.

Snowden did not have to do this.  He could have quit his job and said nothing, or he could have kept doing his work at the NSA.  Those were his only two other options.  There is no other option of being a whistleblower and not getting in trouble.  If you believe that was an option, I am sorry to say that you are being very naive about the situation.

I hope that Snowden is allowed to walk free one day again in the U.S. I hope that public opinion shifts to his side.  I hope that Obama finally gets something right after nearly 8 years and issues a pardon for him.

Free Edward Snowden.

It is amazing that I still hear the phrase, “Stocks always go up in the long term”, or something to that effect.  I even hear it from people who are otherwise rather savvy when it comes to the subject of money.

I suppose you have to define “long term”, but I would still have to quibble with this even if we are talking about decades.

In the U.S., stocks have historically gone up over time.  There is no question about this.  But even throughout the last century, there were a couple of periods where there were long downturns.

If you had bought the S&P 500 index at the top in 1929, you would have had to wait until 1954 to get back to where it was, with a lot of roller coaster action in between.

If you had bought that same index in 1968, you would have had to wait until 1979 to get back to about the same level.  But this is in nominal terms.  The 1970s saw horrendous price inflation in the double digits.  On an inflation-adjusted scale, you would have waited until the early 1990s.

But this is just the past.  As the SEC says, past performance does not necessarily predict future results.

It gets worse if you look at Japan.  The Nikkei hit almost 39,000 in 1989.  Today it is around 16,000 to 17,000.  For anyone who says that you can buy and hold stocks because they go up in the long run, have them tell that to a Japanese investor who bought shares in 1989.  It is now 27 years later and his investment is worth less than half of what he paid for it. How long is he supposed to wait?  40 years?

And let’s remember, we aren’t talking about some third-world country.  In the 1980s, many Americans thought the Japanese were going to take over the world, at least economically speaking.

I have no issue with people buying stocks, but it should be done with some understanding and realistic expectations.  If some 22 year old out of college wants to put his first $5,000 saved into the stock market, it isn’t a big deal.  Even if he loses all of it, he can easily recover.  Of course, for a 22 year old, he might be better off investing in himself with a good trade or a side business.

For someone with a substantial net worth, especially for someone who is older, I don’t think it is wise to have a large percentage in stocks.  Anything over 50% is extremely risky in my view.

This is why I advocate a permanent portfolio, or at least something that somewhat resembles it.  This is a portfolio that really will likely go up in the long run.  There are no guarantees in life, but you should at least search for things that have high probabilities.

In conclusion, stocks don’t always go up.  In a true free market, stocks probably wouldn’t go up because we would have a more stable money supply.  Stocks in general go up in price primarily because of monetary inflation.

In a true free market, people would buy stocks primarily for the dividends.  Some would go up and some would go down based on the expectations of future dividends.

But we do not live in this world now.  It is highly distorted by government and central bank policies.  Most people buy stocks for capital gains.  Still, they don’t always go up.  Just ask the Japanese.

Do you know about Aleppo?

It is a city in Syria that has been much of the face of the war and refugee crisis in Syria.

Gary Johnson appeared recently on “Morning Joe” on MSNBC.  Co-host Mike Barnicle asked Johnson, “What would you do if you were elected about Aleppo?”

Johnson responded, “About?”  After having it repeated, Johnson responded, “And what is Aleppo?”

Barnicle responded, “You’re kidding.”  He then explained that it is the epicenter of the refugee crisis in Syria.

After Johnson responded, he was pressed further on the fact that he was confused about the question.  Since then, some are saying that his lack of knowledge regarding this question disqualifies him from being president.

Now I have been a pretty harsh critic on Gary Johnson in this campaign cycle.  I wrote 10 reasons on why he is not a libertarian.  But this latest story is absolutely ridiculous.

It was meant as a “gotcha” question.  There is no reason the interviewer couldn’t have asked, “What would you do about the refugee crisis in Aleppo, Syria?”  This would have been a clear question.  And even if an interviewer assumes that the candidate will know what Aleppo is, he shouldn’t assume the listening audience knows.  This just shows a lack of clarity or a lack of character on the part of the MSNBC hosts.

Johnson’s response since then has been decent, although still not as strong as I think he could be.  He admits he was caught flat-footed and thought the co-host was using an acronym or something like that.

If I were Johnson, or working on his campaign staff, this is what I would say in response to this whole episode:

“The other day, I was asked about Aleppo and did not immediately understand what the interviewer was asking.  He was referring to a city in Syria.  Because I did not immediately recognize the name of the city in Syria, many people think this somehow disqualifies me from being president.

But knowing the name of a city which most Americans would not be able to locate on a map is not important to Americans or the people of Syria.  What is important is good judgement.

The only reason that there is war and a refugee crisis in Syria right now is because of the reckless policies of the U.S. government trying to interfere in the world.  The U.S. invaded and occupied Iraq, which led to a destabilization of the region.  Then the U.S. government tried to overthrow Assad in Syria and is still trying to do so to this day.  Hillary Clinton is directly responsible for these and other like policies of intervention, as are the Bush and Obama administrations, as well as many members of Congress.

Would you rather have a president who does not know the name of a city in Syria, or would you rather a president who uses corruption and poor judgement that results in the deaths of hundreds of thousands of people and the destruction of whole countries?

Would you rather have a president who uses sound judgement and promotes peace, or would your rather have a president that can memorize geography yet abuses power and shows little regard for human life?

These are the choices facing the American people.  Do you really think that most Americans care about knowing the name Aleppo?  They may care what is happening there, but only because the region has been destabilized by politicians using poor judgement and acting on behalf of their cronies instead of working on behalf of the American people.

If there are Americans out there who think that not knowing the name Aleppo disqualifies someone from being president, then that is their choice.  But the majority of Americans are more concerned about peace and prosperity than winning a quiz contest in world geography.  And if you are an American that supports peace and prosperity, then I am your choice.”

If Gary Johnson really wants to be a contender, he should not show weakness here.  He should attack all of those who have caused these problems in the first place.  If it weren’t for a massive interventionist U.S. foreign policy, there would likely be no crisis in Aleppo.

The European Central Bank (ECB) announced on Thursday that it would leave its target rates unchanged, while also standing pat on its monetary inflation.

The ECB is purchasing assets of 80 billion euros (about $90 billion) per month, which is expected to last at least through March 2017.  The ECB is trying to top the Federal Reserve’s QE3, which ended in October 2014.  At the peak of QE3, the Fed was buying $85 billion per month in assets.

In terms of quantitative easing by major central banks, Japan may be the biggest winner of them all.  As the Fed finished up QE3, the Bank of Japan ramped up its monetary inflation, buying 80 trillion yen per year.  This currently equates to around $780 billion per year.  This is lower than the Fed’s $1 trillion in 2014, but consider that Japan’s GDP is about one-quarter that of the United States.

Despite the ECB’s continued program of asset purchases (digital money printing), investors were disappointed that the central bank isn’t being more aggressive.  In a world of negative interest rates and massive monetary inflation, investors still want more.

The ECB is going to continue on its path.  If the economic conditions in Europe don’t improve, we can be rather sure that the ECB will continue its program beyond March of 2017.  Why would they announce it now when they can just wait until later?  It will be easier to find excuses later to continue the monetary inflation.

It is similar to the Fed’s strategy of raising the federal funds rate.  Fed officials keep saying it is on the table, but there is always a new excuse when the next time arrives.

Even though the Fed isn’t raising its target rate, other than the one quarter percent last December, it still has the sanest policy of all of the major central banks.  The Fed has actually kept the monetary base relatively stable for nearly two years now.

The economies in Japan and most of Western Europe are already far weaker than that of the United States.  The U.S. economy has a bigger chance of weakening in the short run because of central bank policy.  The relatively tight policy could expose the malinvestments from the previous Fed stimulus.

On the other hand, Japan and Europe could fall much harder.  They have copied the Fed’s insane policy from 2008 to 2014.  But the ECB and Bank of Japan have stepped it up beyond what most of us would have thought was possible.

The massive monetary inflation is unsustainable.  It may not seem like it now, but this cannot go on forever without seeing some serious consequences.  We will either see a scenario of massive price inflation, or we will see a big depression.  It could even be a combination of both for a while.

Americans should hope that Japan and Europe implode first.  As more Americans learn that the Fed is part of the problem and not the solution, we can hope that public pressure will prevent us from going down a path similar to Japan.

The inflation and debt in the U.S. have been massive, but it is still nothing compared to Japan.

Yes, you read that right.  And no, I have not gone off the deep end.

I am not supporting, endorsing, or voting for Hillary Clinton.  In fact, I think she is among the worst human beings on this planet.  She is a career criminal who should be locked up in a cell for the rest of her pitiful life.

So why would I even suggest a libertarian case for Hillary Clinton?

To be sure, I am not at all cheering for Hillary Clinton.  In fact, I am somewhat cheering for Donald Trump.  He is far from being a libertarian.  Trump is terrible on economic issues, especially dealing with trade.

However, I do appreciate the fact that Donald Trump has stared down political correctness and the entire rotten establishment.  If both the Bushes and Clintons despise Trump, then he must not be all bad.  He also said that the Iraq War was based on lies, yet still managed to get the Republican nomination.  I am not sure if anyone but Trump could have accomplished that feat.

Trump is a wildcard and we don’t know what we will get if he becomes president.  He could be the one chance for a major shift in foreign policy.  On the other hand, he does seem to have something of an authoritarian streak in him, which can be dangerous for liberty.

This had me thinking about the consequences of a Hillary Clinton presidency.  I think the worst aspect is just knowing that there are that many American voters willing to support her.

But if voter turnout is low for a presidential election, and third-party candidates get several percentage points of the vote, then it may not be such a great mandate for her.  Her husband (or should I say business partner) won the election in 1992 with just 43% of the vote.

There is no question that Hillary Clinton is a serial liar and a criminal.  She will be as corrupt as they come in the White House.  But the occupants of the White House have been corrupt for a long time now.

She scares me on foreign policy, which is the one major reason I hesitate in making any kind of case for her.  Still, I don’t think she will intentionally start any major wars (China or Russia), even though she is poking her stick at Putin in Russia.  I am not sure that even the military-industrial complex would want to see such a war.  She would likely continue with conflicts in the Middle East and elsewhere.

Aside from foreign policy, just imagine how inept and impotent Hillary would be as president.  She has ongoing scandals.  I see conservative sites running articles about the Clinton body count, which is all of the people associated with the Clintons who have mysteriously died.  You could take a survey of Americans, and it wouldn’t surprise me if nearly a quarter of the adult population thought she was involved in murdering people (foreign policy aside).

Imagine the constant investigations and inquiries with her as president, even with the establishment media mostly on her side.  Between classified emails and the Clinton Foundation, she would be under constant attack.  There are always new scandals appearing with the Clintons.

The majority of Americans would have little respect for the president, which I think is a good thing from a liberty perspective.  It means she would not have a mandate.

If the Republicans still control the House (which is likely), then she would not get through any major domestic items (like we saw with Obamacare).  To be sure, the government would still be spending and wasting trillions of dollars per year, but that would happen under a Trump presidency too.

Libertarians talk about withdrawing consent.  The only way to scale back big government is for the populace to withdraw their consent.  If Americans see the president as a liar and criminal, what better way is there to have a withdrawal of consent?

In addition, it is likely that we will see an economic downturn, if not soon, then almost certainly in the next 4 years.  Hillary Clinton can take the blame for this, or maybe try to blame Obama.  It gets a lot more difficult to blame the Republicans, even with a Republican majority in the Congress.  Americans tend to blame the party in the White House.

As an added bonus, if Hillary Clinton is president, then the investigations on her will continue.  We may actually get to see the day where she walks in chains to a jail cell.

Overall, a Hillary presidency would be a train wreck, which could actually be somewhat positive for our liberty.  She does not have the charm that Bill possessed.  She doesn’t have a likability factor at all.

In conclusion, there are no reasons for any libertarian to consider supporting Hillary Clinton in any way.  But if she is elected president, it may not be as bad for liberty as many think.  If her bad health doesn’t stop her, then American public opinion should.  More and more Americans view her (correctly) as a liar and a criminal.  This is a benefit to the cause of liberty.

The jobs report came out on Friday (September 2, 2016) and the numbers were worse than expected.

There were 151,000 new jobs added in August, but analysts were expecting 180,000.  Meanwhile, the official unemployment rate remained at 4.9%, while analysts were predicting a drop to 4.8%.

This sent U.S. stocks up and gold up.  So why are stocks soaring when the news is worse than expected?

In the bizarro world of central banking, bad news equals good news.  Since the economy is not as robust as expected, it means that the Fed is less likely to hike its target rate in its September meeting.  Therefore, stocks soar, as investors see rates remaining low for at least a little while longer.

The Fed comes up with an excuse not to raise the federal funds rate every time a new meeting approaches.  Fed officials and analysts in the establishment media have been talking about hiking rates for a couple of years now.  Yet, we have only seen one hike – in December 2015 – during this whole time.  Now we have to wonder whether there will be any hike at all in 2016.

I don’t think the Fed usually plays favorites during the election, as long as they are guaranteed to get an establishment figure.  The problem this time is that Donald Trump is a wildcard.  He is not approved by the establishment.  Therefore, it would not be surprising if Fed officials are strongly in favor of having Hillary Clinton as president over Trump.

This gives an incentive for the Fed to delay a rate hike, at least until after the election.  When the Fed hiked its target rate by one-quarter of a percent in December, stocks plunged in January.  Whether or not this was the cause, there is obvious uneasiness about the prospects of hiking the target rate, if nothing else for psychological reasons.

The Fed is not likely to risk a major stock market crash just prior to the election.  This would be highly beneficial to Trump.

The Federal Open Market Committee (FOMC) meets 8 times per year.  The next meeting is on September 21, when the next statement on monetary policy will be released.  There will be another meeting on November 2, just before the election.

We should not expect any announcement of Fed rate hikes in the next two meetings.  They will find excuses.  They will run with the latest bad news.  Stock investors are now in a situation of liking bad news.  This does not bode well for the economy.

If you live by the sword, you die by the sword, or so the saying goes (or a variant of it).  Perhaps more true is this: If you live by the central bank, you die by the central bank.

This may be something that stock investors should pay attention to.

Zero Hedge recently ran an article discussing Deutsche Bank’s calculation of how much the S&P 500’s value is due to central banks. The conclusion is that central bank policy is responsible for about 40% of the total value of the S&P.

Therefore, if this is true, a return to normal would result in a massive drop in the index to somewhere around 1,400.  It is currently close to 2,200.

The article gets a bit technical and really focuses on interest rates.  It is true that low yields can help drive up stock prices, as people look for higher yields.  The low yields drive people into taking bigger risks than they otherwise would.

My only issue with this is that central banks are not currently driving the low interest rates, or at least not directly.  It is the Federal Reserve’s prior policies that are largely responsible, but its actions today (or lack of actions) are not directly driving the low rates.

QE3 ended in October 2014 – almost 2 years ago.  The Fed has not been buying government debt except for rolling over maturing debt. Therefore, the Fed is not directly holding down interest rates.  It is private buyers or foreign central banks that are keeping rates low.

In fact, if the Fed “raises rates” – which means increasing the rate paid on bank reserves – it could actually lead to lower market rates.  It could drive more fear.  It could lead to investors seeking to lock in longer-term rates for fear of an economic slowdown.

I think the big factor here is the money supply.  The Fed increased the adjusted monetary base by a factor of almost 5 from 2008 to 2014.  While much of this money has been bottled up in bank reserves, it is inflationary nonetheless.  Just because we have not seen big consumer price inflation, it does not mean that we don’t have asset bubbles.

The Fed has had a tight money policy for almost two years, despite what you may hear from others.  The Austrian Business Cycle Theory tells us that this tightening will eventually expose the malinvestments from the previous artificial stimulus.

This should be the biggest concern right now for stock investors.  Maybe the really low yields have contributed to this stock rally lasting longer than it normally would.  But if it is unsustainable – which I believe it is without more monetary stimulus – then it will eventually turn.

In other words, unless the Fed fires up more QE or the banks start lending massive amounts of new money, then the stock market bull days are numbered.  Maybe it will hang on for another 6 months or a year, but extreme caution is recommended at this point.

The earnings, or lack of earnings, are not justifying these big rallies in stocks.

It is also interesting to note that stocks live off of monetary inflation in the first place, especially over the long run.  In a world without any significant inflation, the broad stock markets generally wouldn’t go up much, if at all.  People would own stocks for dividends.   Individual stocks would go up and down, but the overall market would not trend up, at least in nominal terms.  People would buy index funds for the purpose of dividends and increasing purchasing power.

Stocks have lived off of central bank inflation for the last 7 years.  They are going to die from the central bank’s tight money (which is the correct policy).

If stocks crash, then we can expect the Fed to step in and start its digital printing press again.  Then we can start the whole cycle all over again.  It seems to get more extreme each time.

Pensions paid for by the government are practically bankrupting this country.  It is happening at the federal level, the state level, and the local level.

On the federal level, it is Medicare and Social Security.  The unfunded liabilities may be $200 trillion or more.  It is not possible for the government to meet these “obligations”.  Pensions for government workers are significant, but small in comparison to the promises made to everyone.

On the state and local levels, the problem is with pensions for government workers.  Politicians have made promises in many cases that just aren’t possible to be kept.  It is easy to promise a nice pension to someone 20 years down the line when someone else will have to manage the finances.  We are now 20 years down the line, and it is a major strain on government budgets.

We have already seen major cities such as Detroit and Stockton go into bankruptcy.  Pensions played a major role, and they will continue to play a major role in future bankruptcies of other cities.

In the business community, defined benefit pensions are becoming a thing of the past.  It is understandable.  They are an actuarial nightmare.  If someone retires at age 60 and lives until the age of 105, a company will be stuck paying out money to this person for 45 years.  How can you even plan for this, even with good actuaries?

Most companies are moving (or have moved) to a defined contribution system.  The most common is the 401k plan.  The company will typically match employee contributions up to a certain amount.  The company pays now and does not have to make calculations for the future.  The company doesn’t have to worry about how long people will live and what interest rates will be.

Employees, for the most part, miss the defined benefit plans.  This is guaranteed money (or at least it is supposed to be).  It makes planning for the future easier.  Someone with a generous defined benefit pension can typically be more aggressive with other money saved for retirement.

Employers are shifting the risk from them to the employees.  It makes business sense.  Unfortunately, governments have been slow to catch on.  It involves unions and politics.

To be sure, there are still major problems with private sector pensions.  This is why General Motors should have gone through bankruptcy in 2008.  It would have if not for the federal bailouts.  It is hard to sell cars profitably when each car costs thousands of dollars worth of pensions for retired employees.

For local governments, it is often the police and fire departments that add up to the majority of the unfunded liabilities.  Many people are sympathetic to these professions because they see them as public servants.  They see them as heroes in many cases.  They see them as having dangerous jobs.

I do not feel this same way.  I could have sympathy for police officers and firefighters who are struggling to get by with their family.  But I also have sympathy for all of the non-government workers who are struggling to get by while being forced to pay for these extravagant pensions.  And most of the non-government workers struggling to get by won’t have these cushy pensions.

This is just another problem when you don’t allow markets to be free.  I am not even making an anarcho-capitalist case here.  It is obvious that it would be easy to have private or voluntary fire departments.  They could easily be coordinated through your homeowners insurance.

But even if the police and firefighters are government workers, they should not be getting these massive pensions at everyone else’s expense.  It is ridiculous when you see someone work for 25 years and then retire at the age of 50 with at least half his salary for the rest of his life.

There is no reason that these should not be defined contribution plans, similar to 401k plans.  It should be pay as you go, instead of making promises into the distant future.  Voters should insist on this.  There are many people with dangerous jobs (construction workers, lumberjacks) who don’t get pensions.

I think we are going to reach a tipping point where the voters tell their representatives to renege on their promises.  They may not put it in these terms, but they will refuse tax increases.  Most of America is struggling today, and they aren’t going to feel much sympathy for those who are enjoying lush retirements at their expense.

We will see more bankruptcies in the future.  It will be mostly local at first.  We may eventually see pension restructuring at the state level.  Last but not least (because of the Federal Reserve) will be the federal government.  There will be promises broken.  You should prepare for this accordingly.