I hate to sound like a broken record on this subject (even though most of us don’t use records anymore), but the Chinese stock market is in a major bubble.

The real estate market has been in a massive bubble too, and for longer than I could have imagined.  For that reason, I am hesitant to call for an imminent downturn in Chinese stocks, especially since it is impossible to time these events anyway.  But I do foresee a major Chinese crash, whether it is in a week or a year from now.

I would be really shocked if these two bubbles both last for another two years or more.  The only way I could see this happening is if the Chinese central bank pumps even more money into the system at a greater pace than it already has.

The real estate market in China has seemed to cool a bit, but nothing close to a crash yet.  Meanwhile, the Chinese people have found themselves in the midst of a second bubble, whether they know it or not.

The Shanghai Composite Index just went over the 5,000 mark.  For some context, the 52-week low is barely over 2,000.  When a somewhat major stock market index goes up over 150% in less than a year, you know it is a bubble.  You know it is unsustainable.

This isn’t a post about shorting Chinese stocks, although that is certainly a possibility.  This is about the ramifications for the U.S. economy.

American consumers rely quite a bit on Chinese products, but there is more of a connection than this alone.  If there is a major recession in China, it would be hard to believe that this would not have some harmful effects on the U.S. economy.

The U.S. economy has its own misallocations.  U.S. stocks are likely in a bubble from the previous easy money policies of the Fed.  I don’t think real estate is in a nationwide bubble in the U.S., but certain areas such as Silicon Valley in California are likely in housing bubbles.

When Chinese stocks finally go into free fall, then don’t be surprised if U.S. stocks initially follow suit.  The bigger question mark is if U.S. stocks will just have a correction or a new bear market.

Watch China.  It is going to get interesting.

I am a strong advocate for having a permanent portfolio as part of your investment portfolio.  I recommend anywhere from 50 to 100 percent of your financial assets be put in a permanent portfolio setup.  This wouldn’t include any investment real estate.

The permanent portfolio was described by Harry Browne in his book Fail-Safe Investing.  You divide your portfolio up into 4 sections as follows:

• 25% stocks
• 25% long-term government bonds
• 25% cash or cash equivalents
• 25% gold

This portfolio is meant to weather any storm.  If there is an environment of high inflation, depression, or prosperity, then at least one category should pull up the rest.  Over time, you will find that it results in positive returns, especially with rebalancing.

The one environment where it tends not to do too well is when you have a recession or low growth, coupled with no or low price inflation.  In other words, the environment we have been in for the last 7 years is about the worst environment there is for the permanent portfolio, barring some major catastrophe.

While monetary inflation has been extremely high since 2008, price inflation has been low.  Gold has not done too well over the last few years and interest rates are extremely low.  You don’t get the dividends off of your cash and bond investments as you normally would.

This is why the permanent portfolio has been lackluster over the last several years.  It was great to have during the fall of 2008.  Although it went down briefly, it was far better than owning stocks, at least up until spring of 2009.

An alternative to the permanent portfolio setup is buying the Permanent Portfolio mutual fund.  The symbol is PRPFX.  I prefer the actual permanent portfolio, but PRPFX is easier to accomplish quickly.  And for people with 401k plans, sometimes it is a possibility.

I say that I recommend anywhere from 50 to 100 percent of your financial assets be put in some kind of permanent portfolio setup.  That is a big range.  Part of it depends on your appetite for risk.  If you are really risk averse, at least with your investments, then you should be closer to 100%.

Right now, I actually recommend that you be well above the 50% level.  The reason is that no investments look really appetizing right now.  If you know of a great stock that you think is going higher, or if you live in a town with cheap real estate that you think is going higher, then go for it.  But personally, I just don’t see a lot of opportunities right now in the things that I know well.

I think gold is going to see another bull run at some time, and I think that gold stocks are going to go up in a big way.  That is why I own some gold stocks now, in case things happen sooner than I expect.

But even with gold and gold stocks, I wouldn’t be surprised to see another downturn before things turn around.  If we hit another recession, then everything may take a temporary hit.

One mistake that many investors make is that they feel they always need to be in the game.  They feel they always need to be invested in something big.  But sometimes patience pays off, and I think patience is important right now.

There is nothing wrong with having most of your assets in a permanent portfolio, making minimal returns above the price inflation rate.

When a big event happens, you can get more aggressive.  It is better to wait for an opportunity that is more obvious.

For example, if the economy starts in a downturn and the Fed starts talking about another round of quantitative easing (monetary inflation), then I will probably start getting more into speculating in gold and gold stocks, outside of the permanent portfolio.  This is just one example.

Do not expect things to keep on going as they are.  The Fed has built up a lot of malinvestment.  Either the economy is going to get really rocky at some point, or the Fed is going to have to up the ante with more inflation.  It won’t be the status quo forever.

In the meantime, don’t be afraid to sit back and bide your time.  Opportunities will arise.  For now, I recommend that most of your assets be kept safe – or at least as safe a way that I know of – in a permanent portfolio.

A key section of the so-called Patriot Act has expired that was previously used as the basis for NSA spying.  I read the many headlines saying that you can now email, text, etc. without fear of the U.S. government spying on you.

But has the NSA really stopped spying?

Virtually everything the NSA does is unconstitutional, so in regards to the law, it doesn’t really mean much.  Is anyone really so naive as to think that the NSA workers just went to work on Monday morning and found something else to do with their time?  They shut down the computers and databases used to collect information and went on to something else?

The whole reason that Edward Snowden is living in Russia is because he blew the whistle on the NSA.  He proved to the world that the NSA was spying on almost anyone it wanted to, including Americans.  He proved that the NSA was not in the business of just catching terrorists, but in the business of mass data collection.

The NSA spies.  That is its purpose.  It is for more power and control for the state against the general population.

The law means nothing to the people at the NSA.  If it did, it never would have started spying in the first place.  It was already illegal, with or without the Patriot Act.  It will just use other provisions of the Patriot Act to justify its actions, if it even needs to justify its actions.  If the whole Patriot Act is repealed, it will find some other justification if needed.

The only way to stop NSA spying is by defunding the agency.  When the NSA workers stop getting their direct deposits, then they will not want to show up for work any longer.  They might have to find an honest job.  The funding has to stop for any guarantee that the spying will stop.

It is good that this latest story happened because it brought more awareness to the American people.  But it is highly doubtful that it has stopped, or even slowed down, the NSA spying.

As libertarians, we often hear about the erosion of liberty in the U.S. and the growth of big government.  However, this is not true across the board, and we should recognize the areas where we have gained liberty.

Technology is certainly helping in advancing liberty.  While technology can be used against us (think of the NSA) by the government, I believe there is a net benefit towards liberty overall.

Uber is threatening the taxi cab monopolies throughout the U.S. and elsewhere.  Email and other online communications are making the U.S. Post Office more obsolete by the day.  The easy and cheap access to information is destroying what is known as the mainstream media.

Another area in which we have gained liberty, but which has little to do with technology, is in the area of homeschooling.  While its legality was questioned up until around the 1980s, it is essentially legal everywhere in the U.S. today.

To be sure, the state laws vary, and some are better than others.  Some states enforce strict standards for homeschoolers while others have minimal requirements.

This is a great symbolism of liberty.  It means that you have the right to teach your kids how you want to teach them, and you have the choice not to hand them over to the state.

It is difficult to get accurate statistics on homeschooling in the U.S., but it is estimated that close to 2 million students are homeschooled now.  This would be just over 3% of the U.S. student population, which is quite significant considering it was barely legal just a few decades ago.

Homeschooling is like the internet.  Some people say that the government will make it illegal, but I say that the cat is already out of the bag.  Homeschooling parents are very passionate about what they do and their right to do it.  They tend to have a strong voice.

When a German family sought asylum in the U.S. for homeschooling their children, the homeschoolers in America got behind them.  The Home School Legal Defense Association (HSLDA) has become something of a force to be reckoned with.  It will get behind cases that threaten parents’ rights to homeschool.

I recently attended a homeschool graduation (for any kids in the state) and a homeschool convention.  You will find a lot of smart kids and a lot of diversity in terms of interests and aspirations.

There are many who still criticize or question homeschooling.  Some are just apologists for the state.  They think that the government should have priority over parents in raising children.

Others are just not familiar with homeschooling and question whether kids will get proper socialization.

In response to socialization, my first comment is that anyone who thinks this way should walk through a public (government) middle school in America and point out all of the kids who would be a good influence for others.  I’m not saying that there aren’t any, but I’m guessing most would not exactly be role models at that age.

Also, most kids have activities in sports, music, clubs, etc.  There is nothing preventing homeschooled kids from doing these things.  With the popularity of homeschooling rising, it is becoming more common to have homeschool groups, co-ops, etc.

Homeschooling is not legal everything.  It is illegal in Germany and Sweden for example.  The general populations there obviously believe that children are owned by the state.  I am glad I do not live in those places.

While liberty in the U.S. has been lost in some areas, schooling is not one of them.  With more online curriculums coming, homeschooling will only get more popular.  It is not just hardcore Christians homeschooling anymore.  It is becoming more widespread and more acceptable.  Libertarians should be thankful for this and recognize it as a gain.

I am a big fan of Ron Paul and have great appreciation for what he has done over the last several decades.  I don’t think highly of many politicians, and Ron Paul is often the one exception.

I generally believe that libertarians should stay away from politics.  You really aren’t going to change things politically by being politically involved.  The power runs too deep.  The only way to change things politically is by shifting public opinion.

The only reason Ron Paul was a success was because he used his platform as a congressman to spread his message.  He used it as an educational tool.  Even in his presidential runs, particularly the last two, he used these as a platform to tell people about his libertarian message.  He had little hope of actually winning in the primary.

If you are a libertarian going into politics, I hope it is for the purpose of spreading the message of liberty.  If it is to seek political change through your office, you will be really disappointed, or else really corrupted.

Ron Paul’s son, Rand Paul, is more of a politician.  I don’t know what his full intentions are at this point, but he is trying to play the political game.  He is certainly more knowledgable about the subject of liberty than the other 99 senators or any of the other major presidential candidates.

But this, in a way, just makes it that much more disappointing.  I think of Alan Greenspan who actually understands economics and central banking.  He sold out to the establishment as Fed chair.  I think of Colin Powell who sat there and lied in front of the U.N. about weapons of mass destruction.  He sold out in a major way.  In a sense, I am more mad at Colin Powell about the Iraq war than I am at Bush.

Rand Paul understands liberty, yet he is selling out.  Sure, he has done some positive things, including his latest stunt of opposing the NSA’s bulk collection of data.

However, he also stated recently that Edward Snowden should be in a jail cell.  Paul said, “Snowden and (James) Clapper should be in the same cell, talking about liberty and security.”

If Rand Paul truly believes that Snowden should be in jail for what he did, then Rand Paul is no friend to liberty.  If he is pandering to his audience, then he is dishonest and can’t be trusted.

I don’t know of anybody who has gotten into office and acted more libertarian than what they stated in their campaign.  It is usually the opposite.  Most candidates will talk a game about liberty and then be a proponent for big government policies as soon as in office.  George W. Bush campaigned on fiscal conservatism and a humble foreign policy in 2000, and we all know how that turned out for 8 years.

If you think Rand Paul will bring us in the right direction as president, you will be really disappointed.  He will be more in bed with the establishment if he actually gets the nomination, let alone the presidency.

I consider the issue of the Snowden leaks as something of a litmus test.  If someone thinks he should go to jail, then that person is generally anti-liberty.

I could ask someone two questions and get a pretty good idea of where they stand politically.  Should Edward Snowden go to jail for his actions?  Should the government get more involved in healthcare?

If you answer “no” to both, then you are libertarian or libertarian leaning.  A conservative will typically answer “yes” to the first one and “no” to the second.  A modern-day liberal will typically answer “no” to the first (but not always) and “yes” to the second.

An authoritarian will answer “yes” to both.

So Rand Paul is supposedly against the NSA spying, yet he thinks Snowden should go to jail for exposing the NSA’s criminality.  Does this make any sense?  Were there Germans in the 1940s who opposed the concentration camps but thought it was treasonous if anyone tried to expose what was happening?

If you are a libertarian, don’t waste your time on politics.  And don’t waste any time or money supporting Rand Paul.  He is not his father.

If Rand Paul were smart and actually wanted to play politics, he would be speaking a more libertarian message than what he is.  He is trying to play both sides, pleasing a libertarian element and pleasing the establishment.  Instead, he is displeasing both.

Right now, it seems that Republican candidates are entering the race by the boatload.  I can’t even keep up.  The only way Rand Paul can win is by differentiating himself.  This would mean giving a libertarian message.  Instead he is giving a lot of mixed messages.  If someone wants an establishment candidate, they can go to Jeb Bush or Scott Walker.

I originally thought about a year ago that Rand Paul might have a shot at the nomination.  I no longer think it is likely.  He is trying to play a political game and he is doing so horribly.  Don’t waste your time with Rand Paul.  He won’t win.  Even if he could win, you probably don’t want him there.  People would just blame all of the problems on his “libertarian politics”, even though his policies wouldn’t be libertarian at all.

I hope Rand Paul’s candidacy falls flat on its face.  I also hope the Libertarian Party puts up a real libertarian next year so that people will have some kind of a choice in the general election, if they want to vote at all.

I think the most bizarre story of the last week has to be the release of the titles of the books found in Osama bin Laden’s compound.  Many of these are U.S.-based, and they deal with political and economic issues.

I have a hard time to believe anything the U.S. government puts out in the way of information, particularly if it is coming from anything related to the FBI or CIA or “intelligence”.  In many cases, we later discover that not only was the information wrong that was put out there, but it was the opposite of correct.

I have always had my doubts about the story of Osama bin Laden’s killing.  I give it a better than 50/50 chance that he was actually killed that day, but the contradictory versions of the story make you wonder how things really went down.

In the case of this book information, I find it hard to believe that anyone could actually make this stuff up.  It is so bizarre that I’m not sure high level U.S. officials could make it up, but I could be wrong on that point.

Assuming that the information about the book list is true, it just shows some of the motivations and interests of Osama bin Laden.  I have not personally read any of the books on the list, but I have heard of a few of them.  And for most of the books, the titles alone can give you a pretty good idea of the topic at hand.

Was bin Laden really reading “Secrets of the Federal Reserve”?  Was he reading “Obama’s Wars”?

How about “Confessions of an Economic Hit Man”?  If the official stories are true, or at least somewhat close to true, then bin Laden is an economic hit man.  He sparked the war on terror, which has done more damage economically (not to speak of other liberty issues) than anything else.  The U.S. government has spent trillions of dollars on a war against a tactic.  For how much terrorism that actually exists, the war on terror is statistically insane.

Again, assuming the bin Laden reading list is true, it shows how much of a deep interest he had in political and economic matters.  He was a student of U.S. foreign policy.  It is more politics than religion.  It shows that his support for terrorist acts did not stem from religious fanaticism, rather of revenge.  As Ron Paul has said numerous times, it is a case of blowback.

If bin Laden was reading these books, he must have understood that some Americans do not support U.S. foreign policy.  If he understood this, would it have changed his position in attacking innocent people?

Osama bin Laden was an evil man, but there is also little question that he was well educated.  He came from a rich family.  He had a much greater understanding of foreign policy than any recent U.S. president.

Do you think Obama or George W. Bush had or has any kind of reading list like this?  Obama is not stupid, but I can bet that he is not that well educated, particularly in foreign policy.  If he is, then he is just as evil as bin Laden.

Bush is just stupid.  I know he became president, which means he could give a speech, although just barely.  He managed to get by, although just barely.  I can’t imagine Bush having read anything on bin Laden’s book shelf.

This is just a really bizarre story and I am not sure of what to make of it.  I am hoping to find more on this story as time goes on, perhaps from people who have read many of these books.

Most people paying attention know that China has a major real estate bubble.  I should clarify that most people outside of China know this.

I am not sure if the Chinese know it.  That is part of being in a bubble.  There is irrational exuberance.  Most of the people in the bubble do not realize it.  If they did realize it, then it would pop, unless everyone is just pretending to not know it and waiting for the next sucker to buy a property.

It is easier to see a bubble from the outside.  You can call it objectivity.  When you see ghost cities that could house a million people, you know there is something wrong.  You know there has been a severe misallocation of resources.

The most surprising thing for me is just how long it has gone on.  The Chinese central bank won’t relent on its money creation.  Instead of a property bust in China, we are first getting a second boom.  This one is in the stock market.

The Shanghai Composite Index closed above the 4,500 mark today.  As of today, its 52-week low is 2,011.  When something goes up well over 100% in less than a year – especially in a loose money environment – you know it isn’t going to end well.

I am writing on this topic more frequently because it is going to be big news when it happens.  We should all expect it, yet we generally ignore it.  Maybe the stock bubble will go on for years like the real estate bubble, but I highly doubt it.

I don’t know where this thing will end.  It is in a parabolic move right now.  The Chinese stock market is going up faster than the Nasdaq did in the late 1990s.

When things come crashing down, I am not sure to what extent it will impact the U.S. economy.  We can be certain that there will be some impact.  You might not expect it to have too big of an impact because Americans mostly import from China.  In other words, the Chinese would suffer a lot more from a U.S. recession than the other way around.

But there are two colossal bubbles in China and if they both come crashing down hard, it may spook investors globally.  I would be surprised if it didn’t.  And we have our own bubble problems in the U.S., particularly with stocks, although not near to the same extent as China.

We’ll keep watching what happens in China.  When the bubbles burst, it is going to impact investors in the U.S. and elsewhere.

There is certainly a lot to be thankful for in terms of living in the United States or any other first-world country.  It is also nice to live in the 21st century where there is not widespread famine and misery.  Most people don’t have to go hunting and gathering for their food each day.

We live in a kind of contradictory time.  Our living standards have never been higher in terms of technology and luxuries.  It doesn’t even compare to just 20 years ago.  Most people are walking around with smartphones that give them instant communication to the world, along with a video camera that fits in their pocket.

But in this same world of exponentially growing technology, we find struggles to pay for basic necessities.  People can afford smartphones, but they can barely afford health insurance and their grocery bill.

If it is a choice between a smartphone and food, I hope most would choose the food.  Most people aren’t starving, at least in the United States.  In a place such as Greece, it is actually becoming a problem.

I feel a similar euphoria now as how it was in the mid 2000s.  The stock market it booming.  Most people who want work are working, even if it isn’t for the wage they want.  Housing is not booming as much, but it is still relatively strong in many areas.

Just like the mid 2000s, I detect that people are struggling.  Most of my friends and relatives are middle class to upper middle class.  I don’t have any billionaire or deca-millionaire friends, at least that I know of.  Just from my general conversations, I find that people are tight on money and they can’t even really figure out why.

The consumer price index (CPI) has stayed relatively low in the face of major monetary inflation by the Fed.  As we know though, the CPI does not tell the whole story.  It can’t tell the whole story.  There is surely asset price inflation, especially in stocks.  But even for consumer goods, our basic needs tend to be the most expensive these days.

The obvious big expense is health insurance.  It isn’t just because of Obamacare, but that is part of it.  Most people are seeing double-digit price increases from year to year for their health insurance.  Meanwhile, their coverage tends to get worse.  The CPI has hedonic adjustments.  If you applied the same principle to health insurance, it would be going up at 40% per year in many cases because you are paying more while your coverage (the quality) is getting worse.

Food prices overall are not going up by double-digits, but they are probably going up by more than the stated CPI numbers.  Even if food prices are going up by 5% per year, this really hurts the average middle class family over the course of just a few compounding years, especially when people’s wages are barely going up 2% per year, if that.

The biggest expense for most people is the cost of government.  That is why so many families have two working parents.  One parent has to pay for all of the government taxes and regulations and inflation and debt.

When you factor in the spending (not just taxes) by government at all levels, the costs are enormous.  This does not include the cost of government regulations, which is impossible to determine, but obviously really significant.  Many Americans are working to pay half of their money over to some level of government in some form.

I know of many people who make a decent salary who are struggling.  I know of many families that make six figures and are barely able to save any money.  It may sound ridiculous, but when you throw a few kids into the equation and you add up all of the expenses, you don’t have to be a big spender to find yourself in this situation.

The point is this: Life today is really expensive.

The main reason it is expensive is because of big government at all levels, along with central bank monetary inflation.  Some recognize this more than others, but almost everyone suffers under it.

This reminds me of the housing bubble.  Everyone is supposed to be feeling good about the good times.  But secretly, people are struggling.  Most don’t want to admit it openly.  They don’t understand because the economy is supposed to be doing at least somewhat well again.  Yet they find it difficult to pay their bills each month without going into debt.

This is a government bubble.  It is going to pop because people simply can’t keep up with it.  It can’t go on forever.  Either government gets rolled back or we start declining in our living standards.  I think it will initially be the latter, but will eventually lead to the former.  Government will get rolled back when people start to openly suffer more.

I can find out more by talking to 10 middle class families in America than I could looking at all of the government statistics about GDP growth, inflation, unemployment, etc.  Those middle class families are struggling to keep up right now.  Money is a major stress and most of them don’t really know why they can’t get ahead.

The government bubble is going to pop.  I think it is going to be sooner than most realize.  It will initially come in the form of a recession or depression.  It will be the best of times and the worst of times.  It will be really hard for most people, but at least we may get some relief from big government as a result.

The term “malinvestment” is a phrase mostly used in the realm of Austrian school economics.  It was used by Ludwig von Mises.  It basically describes a misallocation of resources.

I would say that almost all central bank inflation and government spending is malinvestment.  Some people make the mistake of assuming that this is all completely wasteful spending, or that the Austrians are making this claim.

But malinvestment doesn’t necessarily mean total waste.  I would argue that some spending is completely wasteful, or even anti-productive to the economy.  In the latter case, war is a good example.  You would be better off, not only in terms of lives saved, but also in economic terms, of taking money spent on a war and instead using it to pay people to dig ditches and fill them in.

Some free market opponents will mischaracterize the term malinvestment and say that the government builds roads, infrastructure, etc.  But to say it is malinvestment is not to say that it is completely wasteful.  Sure, in most cases, you are better off with the road that the government built rather than having used the money to dig ditches for no good reason.

The government could also take our tax money (or use money created via inflation/ debt) to buy every single person in America a new television.  For a few people, this wouldn’t be a misallocation of resources.  If they hadn’t been taxed extra, they were still planning to buy a television anyway.

But for everyone else who would have done something else with the money, this is malinvestment.  It isn’t to say that they won’t use the new television.  They might even derive some enjoyment out of their new television.  But the point is that if they hadn’t been forced to pay for it, they would have done something else with their money.  Buying a new television was not the number one priority on their list.

When there is malinvestment, it makes us poorer than we otherwise would have been.  In the case of the government buying televisions for everyone, this money could have been put to better use.  Aside from the extra administrative fees of setting up such a program, we can’t ignore what each individual would have spent his or her money on instead.

While a new television would be nice for many, it just isn’t their top priority, and nobody should try to claim they know better than everyone else.  One family may have had medical bills to pay.  Another family may have wanted a weekend getaway vacation.  Another family may have wanted to add to their savings for a rainy day.  Another family may have needed new tires for their car.

This is the problem with central planning that is forced on everyone.  It not only redistributes wealth and inhibits production, but it misallocates resources.  It makes us poorer than we otherwise would have been.

In 2013, there were bank bail-ins in Cyprus.  This means that some depositors essentially had their money seized from them.  Ever since that time, there has been some speculation, at least on the web, that the same thing could happen in the United States.

This could easily happen in Greece any day now.  If I lived in Greece, I would not have my money in the banking system there if I could help it.  But Greeks use the euro, which is controlled by the European Central Bank.  They can’t create money out of thin air to bail out the banks there.  Only the ECB could do that.

In the U.S., I believe the chances of any kind of bank bail-in are extremely low.  You have your money indirectly confiscated on an almost continual basis because it loses its purchasing power because of the Fed’s monetary inflation.  But in terms of the nominal value of your deposits, the chance of a direct confiscation is almost nothing.

After the great fall of 2008, the Fed bailed out the banks, along with some other financial institutions.  The American people hated this, but it still happened anyway.  The American people would have hated it worse if there had been bank failures and the FDIC (backed by the Fed) refused to make depositors whole.

Then the Fed began buying mortgage-backed securities (MBS) as part of its quantitative easing programs.  It would create money out of thin air by buying U.S. government debt, along with the MBS.  But you can easily bet that the Fed was not paying the going market rate for the MBS.  It was paying the original value on them.

Let’s say a bank owns a whole bunch of mortgages that are originally worth $1 billion.  Then half of the mortgages go bad because people stop paying on them.  They essentially walk away from their upside down house.  Now that same group of mortgages is paying out half of what it was before.  Let’s say they are now worth $500 million.  Well, the Fed comes in and buys them for the original value of $1 billion, thus saving the bank.  It is essentially a bank bailout for $500 million in this example.

Of course, the Fed and the media described this process as an attempt to help keep mortgage rates down.  Perhaps it had that effect, but it was a bank bailout nonetheless.  But since most people don’t dive that deeply into the topic, or they simply don’t understand it, the Fed got away with a hidden bank bailout.

Now the subject of the day is the Fed possibly raising interest rates.  When you hear this, it is in reference to the federal funds rate, which is the overnight lending rate for banks.  For the last 6 and a half years, much of the new money created by the Fed has gone into excess reserves at the banks.  This has kept the federal funds rate near zero.  Since banks easily meet their reserve requirements, they typically have little need for overnight borrowing.

As economist Robert Murphy recently pointed out, the only way the Federal Reserve is going to raise the federal funds rate is by increasing the interest paid to banks for their reserves.  The Fed would have to sell too much in the way of assets in order to raise the federal funds rate.

Murphy gives an example of what will happen if the target rate goes to 3 percent.  Using the approximate current reserves of $2.4 trillion, the Fed would be paying out $72 billion per year to the banks.  This is money that would have been remitted back to the Treasury if not paid to the banks.

In other words, if the Fed does raise the federal funds rate as expected, it will just be a further bailout of the banks.

The first time the Fed bailed out the banks in 2008, it received a lot of criticism from the American people.  Since that time, it has used two other methods to bail out the banks – buying mortgage-backed securities through quantitative easing and paying interest on bank reserves.  These two other methods have yielded little criticism from the American public.

If the Fed can bail out the banks quietly with little criticism, why would we see a bank bail-in that could start something of a revolution?  The answer is, we won’t.  The Fed will keep quietly bailing out the banks and the American people will unknowingly accept it.