I finished writing a short piece yesterday on Greece running out of time and then looked at Drudge Report and saw a couple of stories on Greece.

In particular, shares in Greek banks are hitting all-time lows and the rumors are picking up that the European Union may let Greece sink.  Perhaps they are finally going to stop throwing away good money.

I checked the 10-year yield for Greek government bonds and, as of this writing, the yield is over 13%.  It is about double what it was a year ago.

Interest rates had spiked back in 2011 and 2012 to really high levels (above 30%) with fear of a default.  Then Germany and the rest of the EU came to the rescue and bailed out the Greek government.  Things calmed down and interest rates went back down.

Germany’s 10-year yield is nearing zero and Switzerland’s 10-year yield is in negative territory.  Even Italy and Spain have low yields.

Since Greece is still tied to the euro, at least for now, we can assume the high interest rates are not an inflation premium.  Instead, they are a default premium.  The market sees virtually no risk of default for German bonds.  But the risk premium for Greek debt is going higher quickly, as it should.

We may see the Greek 10-year yield spike even more over the coming days as more people anticipate a default.  I’m guessing no readers here are invested in Greek debt (hopefully), but it is still an interesting story to watch.

When the EU finally quits bailing out Greece and Greece leaves the EU, it will be interesting to see the ramifications.  Will other countries follow close behind?  Will the euro strengthen or weaken?  What will Greece look like and will it see some kind of hyperinflation eventually with its own currency?

As shaky as the American economy is, Americans should be thankful to not live in Western Europe or Japan.  The U.S. is still far less of a welfare state than most other places in the world.

We can’t forget that Greece is still a major news item in the financial world.  It may not be getting a lot of attention at this moment, but it will be back in the spotlight shortly.

It is looking as though the Greek government will run out of money sometime in mid-May.  It won’t be able to pay the interest on its debts.

The European Union can continue to kick the can by lending even more money to Greece, but it will just be flushing more money down the drain.

There was an article on Yahoo Finance titled “It’s time to stop worrying about Greece defaulting”.  Perhaps this is the financial press coming to grips with the inevitable.

The article states: “Greece will be better off if it rebuffs the tough austerity measures demanded as a condition of two bailouts by European authorities.”

This is what is not understood, or is being purposely portrayed incorrectly.  If Greece defaults on its debts, then the EU so-called austerity for Greece will look like nothing.  If Greece defaults on its debts and nobody is willing to lend the government any money for a while, then they will see some true austerity.

The government won’t just be defaulting on its debt, but also many of the promises it has made to Greeks.  It will mean busted pensions and massive layoffs.  It is the only long-term solution, unless the EU (mostly Germany) wants to bail out Greeks indefinitely.

Be ready for more fireworks in the next few weeks.  We will see if the proverbial can gets kicked again or if this is the end of the line.

The price of gold has been hanging around the $1,200 mark for a while now.  Perhaps a Greek default will finally put some movement into the price of the yellow metal.

The latest CPI numbers are in for March 2015.  They show an increase of 0.2%, whether or not you include food and energy.

The price of oil has stabilized for now, or even gone up a bit, so this plays something of a role here.

The year-over-year CPI now stands at -0.1%.  But if you take out food and energy, it is at 1.8%.

The median CPI gives a better picture of overall price inflation.  It has stood at 2.2% for the last 6 months.  You can see that this number is far less volatile.  It takes out the big swings of items such as oil (or those things directly correlated to oil).

Overall, the CPI numbers are still relatively tame when you consider that the Fed has basically quintupled the adjusted monetary base since late 2008.  But much of this money went into bank reserves and the demand for money remains high.

I believe that with the Fed’s current tight monetary policy (its latest round of QE ended about 5 months ago), there is a considerably high risk of recession.  And even though the Fed is threatening to raise the federal funds rate, the market rate of interest for longer-term bonds has stayed low or even gone down.  The 10-year yield is under 2% as of this writing.

As long as the CPI numbers do not jump up dramatically, then a recession looks to be a more immediate threat than anything else.  We won’t see higher interest rates until we see higher price inflation numbers come in.

I still think the big story right now is China.  It is a country of 1.3 billion people with a massive real estate bubble and now a massive stock market bubble.  If the Chinese central planners have been able to prop up these bubbles for this long, then who knows how long the U.S. stock bubble will last?

China is in far bigger trouble than the U.S., yet they have managed to keep the game going.  I don’t think it is going to last much longer, but it really is amazing how many years it has gone on.

Perhaps a Chinese bust will lead the world into something of a global depression.  I know the U.S. has been somewhat immune to the weak economies of the rest of the world in the past, but the U.S. has its own major dislocations that will shake out.

This may sound pessimistic, but it is just the reality at this point.  You really need to prepare and put yourself in a good position for when things do get rough.  I think the biggest threat is the Fed’s next reaction and how much it returns to more monetary inflation.  But that will come after the initial downturn.

Technology and productivity in many sectors will continue to grow, despite a bad economy.  But we should be prepared for some rough economic times ahead.

The CPI numbers are indicating that a recession is a more immediate threat than price inflation.  If this outlook changes, then I will be sure to provide updated information.

I recently wrote an article about worldwide low interest rates.  This is just an update to that piece.

The German 10-year yield has hit 0.1%.  We are not talking about 90-day treasuries here.  We are talking about turning over your money for a 10 year period in order to earn one-tenth of a percent of interest per year, which is effectively almost nothing.

In Switzerland, the yield on the 10-year has been in negative territory.  It has been as low as -.25%.  That is a minus sign.  You can turn over your money to the Swiss government for 10 years and pay a quarter of a percent of interest.

I really have no idea how this would work.  Do you actually have to write a check for the interest “payments” or do they just deduct the interest that you owe when you get your principal amount back after 10 years?

This sounds absolutely ridiculous and it really is.  This is the world that central banking has brought us.  Normally we think of higher rates because of inflation, but central bank buying can drive down rates in certain circumstances.

Right now, I believe there is a lot of fear and that is the biggest reason for low interest rates.  Money demand is high.  Velocity is low.  Money is not changing hands quickly because people are scared.

As I said before, if I lived in Greece, I might consider buying a German bond to earn essentially nothing.  I might even consider buying a Swiss bond and paying a small amount for the safety.  My first preference would be to accumulate some gold if I had a relatively safe place to store it.  But the last thing I would want to do is keep money in a bank in Greece.

One other reason for low, or even negative, interest rates is diversifying out of currencies.  This logic doesn’t hold up as well for German and other European debt, but it definitely holds up for Swiss debt and the negative interest rates.

If you use the euro or any other currency and you want to diversify, it might make some sense to buy Swiss debt.  You convert your money into francs and buy the debt, paying a small fee, which is the negative interest rate.  When it is time to get your money back, if the franc has appreciated against your usual currency, then you will be better off when you convert it back, at least as compared to having kept it in your faster depreciating currency.

Again, I would prefer to buy gold, as it acts as a better hedge anyway, but that is not always a viable option for some people.  In addition, some people just want further diversification.

I have one last question on this topic.  If you buy a bond with negative interest rates, do you get to write this off as a loss on your taxes?

The U.S. has had its share of bubbles in the economy.  There was the stock bubble (technology in particular) in the late 1990s.  There was the housing bubble of the early to mid 2000s.

You could even say that there was an oil bubble that has popped.  You could even say it has happened twice for oil in less than a 10-year period.

While the U.S. has seen its share of bubbles, which I largely attribute to the Federal Reserve, at least the bubbles have popped at different times.

China may not get so lucky.  I have known for several years about the real estate bubble in China.  They have built ghost cities that could house a million people or more, yet they sit virtually empty.

It seemed the real estate sector was starting to cool, but the central bank in China keeps trying to prolong the inevitable.  And in doing this, not only has it allowed the real estate bubble to stay alive for now, it has also spawned a stock bubble.

The Shanghai Stock Exchange Composite Index has doubled over the last year.  It is up over 25% year to date.  It sat under 2,500 just back in November 2014 and has now exploded past the 4,000 mark.  This is basically a parabolic rise.

These things don’t usually end well.  This could be the final part of the boom phase.  I am amazed it has lasted this long, but sometimes things take time to shake out, especially when you have a determined central bank.

China could very easily experience a stock market crash and a housing bust simultaneously.  This isn’t going to be pretty.  It will be China’s first modern-day recession, unless you count most of the 20th century as one giant recession.

There will be ramifications for Americans.  The Chinese might actually stop buying up U.S. government debt, which I would actually view as a good thing for the long term.  It would stop subsidizing Washington’s spending.

I believe the U.S. may have its own stock bubble, but it is nothing compared to China at this point.  Watch China closely, as it could get very interesting, very fast.

I just watched a 60 Minutes piece on the former Duke lacrosse head coach, Mike Pressler, who resigned 9 years ago during rape allegations against 3 of his players.

He was a scapegoat at the time and he is put in a very different light today in this 60 Minutes piece than what was being said 9 years ago.

The case itself is frustrating because 3 players were accused of rape and much of the media and many activists had already convicted the three young men before most of the facts were out, let alone their actual day in court.

This is why we don’t live in a democracy and should never want to live in a democracy.  If mob rule had had its way back then, then the three young men would have never stood a chance.

It is a relief in one sense that most of the truth eventually came out and the three accused people were acquitted by the truth.  But we can’t take for granted how horrible of an episode this must have been (and still is) for them and their friends and family.

It is also frustrating in that the criminal accuser and the prosecutor, Michael Nifong, were not held more accountable for their crimes.  If you are purposely lying in an attempt to imprison people, then doesn’t it seem just that the liars should themselves be imprisoned?

Nifong was disbarred, but should have been sent to prison, or at least paid major restitution to the three young men, who turned out to be the actual victims.

Crystal Mangum, the woman who accused them of raping her, did not serve prison time.  Instead, she got a book deal.  She ended up in prison in 2013 when she was found guilty of killing her boyfriend.

But the 60 Minutes story focused on Mike Pressler, who resigned as head coach after the allegations were made and during major protests.  He says that he was given an ultimatum of resigning or being fired.  If I had been in his position, I would have told them to fire me.

I thought it was foolish at the time.  Nearly everyone was rushing to judgment and I thought at the time that the allegations might not be true.  When you see an unruly mob of people in the streets, this is often a sign that they have their story backwards.  Mobs of people and intelligence don’t often go together, but there are exceptions.

But even if the allegations were true, I thought it was ridiculous that the head coach be fired or that he resign.  Why is he responsible?  What about the professors of the classes that the guys were in?  What about the athletic director and the Duke president?  What about campus security?  Why was it just the head coach that was originally made a scapegoat?

In the interview, Pressler said that he believed his accused players at the time and thought they were innocent.  The 60 Minutes story talked about how loyal of a guy Pressler is.  But if that is the case, then why didn’t he stick up for his players in public at the time?  Why did he go into hiding?  He didn’t have to worry about keeping quiet for an official trial.

He could have stood in front of cameras and said that we shouldn’t rush to judgment.  He also could have defended himself and said that he is not ultimately the one responsible for their actions.

Would it have been a hard thing to do?  It probably would have.  But for me, I would think it would be harder to stay silent and let your reputation go downhill.  I would think it would be hard to let your players be crucified without a fair trial up to that point.

Pressler was another victim in all of this, but he also lost his opportunity to stand up for principle and what was right at the time because he was afraid of standing up to the mobs in the street.  He was afraid of the media.  I don’t really know this for sure, but that is my guess.

Sometimes you face situations in life that are difficult and almost seem unfair because you didn’t bring them on and didn’t ask for them.  This is what happened to Joe Paterno at Penn State and he ended up with a tainted reputation at the end of his life, and rightly so.

I am not putting Pressler on the same level as Paterno, but they are both cases of where you just have to sometimes stand up and do the right thing, even if it goes against the grain and even if it is a hard thing to do in the short run.

There are a lot of lessons to be learned from this story.

Frank Shostak of the Mises Institute has written a piece on how easy money drives the stock market.  He points out that history shows an increase in the money supply generally precedes a rise in the stock market.

Conversely, a decline in the growth of money generally precedes a drop in the stock market.  He goes back as far as the 1920s and uses the big stock crashes in American history to make his point.

At the end of his article, he suggests that the stock market (he uses the S&P 500) is highly vulnerable because of the fall in liquidity from June 2009 to June 2010.

As noted in Shostak’s article, there is usually a time lag, typically longer than a year, as it takes time for the change to filter through the system.  However, if he is marking June 2010 as the end of a big fall in liquidity, then a 6-year time lag seems awfully long.

But this ignores QE3, which was the Fed’s biggest and longest round of monetary inflation.  The Fed created about $1 trillion in 2013 alone and slowly wound it down in 2014.

We must remember that the Austrian Business Cycle Theory says that you do not necessarily have to have a declining money supply, or even a stable money supply to have a bust.  If the rate of growth is decreasing, this can be enough to expose the malinvestments and bring on a bust, or at least the popping of bubbles.

Even if the rate of inflation stays stable, say at 20%, you will eventually get a bust.  The only way to prevent the bust is by continually increasing the rate of the growth of money.  Eventually, this leads to hyperinflation, which is the biggest bust of all.

I believe that if the Fed had stabilized the monetary base a few years ago and kept it that way, thus having no QE3, then we would have already seen a major bust.  But QE3 was enough of an injection to stall the bust.  Of course, it will also make the bust worse when it eventually does come.

We must also remember that we have already seen oil fall to below $50 per barrel.  There has been a bust in the oil market, which just so happens to be good for most consumers.

Overall, I am in general agreement with Shostak that there is a stock bubble that has been fueled by the Fed.  With its current stable money policy, the bubble in stocks is quite vulnerable.

I advocate a permanent portfolio for a good portion of your investments, which will include 25% in stocks.  But outside of this, and perhaps a few speculative plays in mining stocks, I would avoid stocks right now.  If you are feeling particularly courageous, you might even consider a small short position at this point.

The Austrian Business Cycle Theory tells us that a bust is coming, unless the Fed decides to ramp up its digital printing press again, which seems unlikely right now.  I think a big downturn in stocks is more a question of when at this point.

As I write this, the 10-year yield for U.S. Treasuries is under 2%.  You can buy a 10-year bond and it will pay out less than 2% per year in interest, which probably doesn’t even keep up with inflation.  And who knows how high price inflation will be in 10 years when you get your last interest payment and your original principal back.

It is crazy though that the U.S. 10-year yield is higher than many other countries.  For example, Spain, Italy, and the U.K. all have 10-year rates that are lower.

In Japan, where the central bank is engaging in unprecedented monetary inflation, the 10-year yield for Japanese government debt is just 0.37%.  You can loan your money to the near-insolvent Japanese government, with all of its bloated debt, for the privilege of getting an interest payout of less than half a percent per year.

It is even worse in Germany, although slightly more understandable there.  The 10-year yield is just 0.16% as of this writing.  People in Europe are looking for safety and Germany is the least bad.  If I were in Greece with the threat of bank “bail-ins”, I would certainly consider putting some of my money into German debt, just for the possibility of getting a decent portion of it back.  It might be the best option available, especially if it is hard to buy and store gold.

This all represents fear.  People are looking for safety.  They don’t seem too concerned about inflation, even though central banks have been, or currently are, printing a lot of digital money.

I was surprised to see that David Stockman is predicting some kind of a deflationary situation to continue and get worse.  I agree with most of what he has to say, but I don’t think we are going to see any sustained deflation.  As Ben Bernanke once said, a determined central bank can always create positive price inflation.

Regardless of whether we ultimately see really high price inflation, it is important to realize that central bank inflation does great damage to the economy, even if it doesn’t show up in consumer prices.   It misallocates resources and hurts our living standards.  It misallocates savings and investments and causes less productivity in the future.

In terms of shorting the bond market, I still don’t think the time is right.  If we hit another recession, U.S. rates could easily go lower still. I don’t think we are going to see higher interest rates until we see a significant uptick in price inflation.  Right now, the CPI numbers are coming in too low.

Since there is little perceived threat of price inflation and there is almost no chance of default on U.S. government debt (in nominal terms), rates are staying low, even with the Fed’s current tight monetary policy.

There will probably be a day when shorting bonds will pay very well.  That day is not today or tomorrow.  It probably won’t be in 2015.

Every so often, I like to look at the adjusted monetary base.  It is really the one thing that the Fed most directly controls.  It is a reflection of monetary inflation, but not necessarily a reflection of money in circulation.

You can view the latest chart here.

The monetary base has been up and down a bit, but basically hanging around the 4 trillion dollar level.  There are always going to be little ups and downs because of maturing debt that needs to be rolled over.

The monetary base is consistent with Fed policy right now.  The Fed ended QE3, or whatever you want to call it, back at the end of October 2014.  It now has a policy of stable money, at least for now.

Meanwhile, excess reserves held by depository institutions have also seemed to level off.  The chart for excess reserves over the last 7 years has basically mimicked that of the monetary base.  They have gone up and leveled off in tandem.

This is why the monetary base is not an accurate reflection of the money in circulation.  Much of the new money created by the Fed over the last 7 years has not been lent out by banks.  It is sitting there “earning” 0.25% interest with the Fed.

This has helped keep a lid on price inflation.  If all of this new money had been lent by banks to the legal limit, then we likely would have seen an explosion in price inflation.

This is also a big reason on why the federal funds rate has meant little over the last several years.  Banks do not need to borrow overnight money if they are already above the mandated reserve requirements.

The federal funds rate also doesn’t matter much because it is not dictating Fed policy.  The Fed is now telling us directly in the FOMC statements if is expanding the monetary base.  Over the last 5 months, it has been the Fed’s policy to keep a level monetary base by just rolling over maturing debt.

I am a believer in the Austrian Business Cycle Theory.  When there is an artificial boom and the central bank does not continue to provide loose money, then it will eventually expose the malinvestments and lead to something of a bust.  So if the Fed keeps its current policy, then I do expect a recession to hit at some point.  I think a lower stock market will probably lead the way.

The most interesting aspect will be when we actually do hit the next bump in the road.  Will the Fed keep a tight money policy or will it go back to another round of QE?  My bet is on the latter.

If you are a libertarian, you should never cede the moral high ground.  That is one of the beauties about libertarianism, which hopefully most libertarians realize.  You have the moral high ground and pragmatism on your side.

If you are ever asked about libertarianism, you don’t necessarily have to try to convince the other person of your point of view.  Instead, just help them understand where you are coming from.  Imagine the following conversation.

Libertarian Guy (LG): Let’s say that your neighbor is really sick and needs money for an expensive surgery to help save him.  You go to another neighbor and ask if he can help out in providing any funds.  Do you agree that it is ok for you to ask your neighbor for some help?

Non-Libertarian Guy (NLG): Of course it is ok to ask.

LG: Good.  We agree on that point.  What happens if your neighbor refuses to help out with donating money?  Do you think it is ok if you take out a gun and demand that he help his other sick neighbor?

NLG:  Of course I don’t think it is ok.  It doesn’t matter if the other guy is sick.  You can’t just take out a gun and demand money.  That is violence and it would be a crime.

LG:  Good.  We completely agree on that point too.  Now let’s say that you get together the rest of your block and you hold a vote.  The majority of people on the block vote for you to take your gun and go back to that one neighbor’s house and demand some of his money to help the other sick neighbor.  Is it ok to use your gun since the majority of your block thinks it is ok?

NLG:  Well, I would hope that there wouldn’t be that many people who think that robbery is ok.  But, of course, it doesn’t matter what they say.  It doesn’t make it right.  You still can’t just go up and take the guy’s money at the point of a gun just because he doesn’t want to donate money.

LG:  Well, yet again, we agree.  We are in agreement in all of these points.  So you were wondering what makes me a libertarian.  I believe if the people on your block call you or themselves a state or a government, that it is still wrong to take the guy’s money at gunpoint.  That is the main difference between a libertarian and a non-libertarian.  Most non-libertarians live peacefully with others and wouldn’t dream of initiating force against others.  They just don’t apply this principle to the state.

End of Conversation

You can get into detailed issues about what constitutes the initiation of force and what constitutes self-defense.  You can get into details about how certain property rights are acquired and where property rights should and shouldn’t apply.  You can get into details about whether a state is legitimate if it only acts to protect people’s lives, liberty, and property.

But when you get down to it, the above example sums up what a libertarian is and isn’t.  Get agreements from non-libertarians on the above points and then point out the one simple, yet important, difference that makes you a libertarian.