There is always a question about whether it is financially smart to borrow money for certain things.  Most people think that borrowing money for a house (taking a mortgage) is acceptable.  While even this can be bad for some people, I think taking on a mortgage is fine as long as it is done wisely.  It should be a fixed rate loan in most cases (yes, there are exceptions) and the payments should be manageable.  There are too many people who find out what they can qualify for and then find a house for that price.  But in most cases, you should be finding a house that is priced well under what you qualify for.

Cars are a tough one.  Some people say that you should always pay cash.  But unfortunately, this is not realistic for some people (probably a good majority of people).  Even a decent used car might cost $10,000 these days and most people don’t have that kind of money lying around.

Having a car is a tool.  Most people need a car to drive to work, go shopping, etc.  So if you need a car and you don’t have the money, then there is not much choice but to take out a loan.  Again, this should be done wisely.  You don’t need all of the bells and whistles on your car.  You just need something safe that will get you from A to B.  You probably need air conditioning and heat.

The key point is that if you don’t have the money to buy a car outright, then you should be limiting what you get.  If you buy new, then it should be to keep the car for a minimum of 10 years, but hopefully longer.  And it should be a reasonable price.  If you are paying $30,000 for a new car and you have to take out a loan, then I think you are not making a wise decision.  You should simply be buying a much cheaper car.

After this, there is not much that I would recommend borrowing money for.  Obviously, if there is an emergency (medical, unexpected house expense, etc.), then you have to do what you have to do.  Hopefully you are in a good situation though, where you have an emergency fund set up.

I am not against using credit cards, as long as you pay the balance off each month.  Credit cards are convenient and can be very useful if used wisely.  The key thing is that you don’t pay any interest.  In fact, if you use a credit card, you should be getting some kind of cash back or rewards.

It would be an interesting study on how much the average American pays in interest every year.  If you include mortgage payments, I’m guessing the average American pays well over half a million dollars in interest during his lifetime.  While leverage can be useful if used in a smart way, it mostly makes people poorer.  If you are constantly paying interest to lenders, it is hard to get rich yourself.

You want interest to work in your favor with compounding interest.  Unfortunately, most Americans have this in reverse and are paying out the interest instead of collecting it.

I am hesitant to comment on financial markets based on just a few days of moves, even if they are big moves.  A few days up or down do not necessarily make a trend.

With that said, it is interesting to observe what has happened in the markets over the last week or so.  The stock market has done poorly.  Bonds have also done poorly, as the 10-year yield is getting within striking distance of 3% as of this writing.  You can’t always believe the headlines, but many are speculating that the recent down days for stocks and bonds is over fear of the Fed’s possible “tapering” of its monetary inflation.

The problem here is that gold has been doing well recently.  While this could certainly change quickly, the price of gold (in terms of dollars) is nearing $1,400 per ounce.  While this is obviously still well off its all-time highs, it has bounced up from its recent lows.

So if stocks and bonds are down due to fears over the Fed reducing its easy monetary policy (the understatement of the century), then why hasn’t gold gone down too?  Perhaps the simple explanation is that gold was not being propped up as much as stocks and bonds from the Fed’s “quantitative easing”.  You could say that stocks and bonds are bubbles.

Regardless, it looks as though gold is breaking any correlation it had with stocks.  One of the reasons that some financial advisors recommend gold for a portfolio (although usually too low of a percentage) is because gold and stocks are not highly correlated.  If stocks do poorly, the hope is that gold will soften the blow.

However, in the last several years, gold and stocks have actually been somewhat correlated.  They were going up together prior to 2008 and they went down together with the crash of 2008.  They also bounced back together.  It was only in the last year or so that gold pulled back while stocks made new all-time highs, at least in nominal terms.  And now it seems that they have really divorced themselves, as gold rises in the face of falling stocks, even if temporarily.

This is particularly interesting because much of the talk in the investment world has been revolving around the Fed’s monetary policy.  If the Fed’s monetary inflation were the sole source of investments doing well, then you would expect gold and stocks to be more highly correlated at this time.

It is always important to remember that investment markets don’t have to be rational.  Demand is made up of millions of people making decisions.  For some reason, in this round of quantitative easing, the newly created money has found its way into stocks.  There has been no bubble in gold.

It is also important to remember that things can change quickly as we have seen in the last couple of weeks.  All of a sudden, gold is showing signs of life, while stocks are struggling.  Again, this isn’t to say that it will continue this way for sure.  But maybe this is the early sign of a newly recharged bull market in gold that will see new all-time highs.

On August 16, Yahoo! Finance ran an article titled “Ben Bernanke’s Huge Gift to Taxpayers“.  It was written by Rick Newman.  It was the headline article at one point during the day.  Later in the day, it was nowhere to be found, at least on the main Yahoo! Finance page.  Perhaps it was because of the hundreds of comments by the non-experts who embarrassed the writer and Yahoo! Finance for publishing such garbage.

The article starts out saying, “Critics of the Federal Reserve often accuse it of printing money.  What they may not realize is that the Fed has been printing profits, too.”

About the only good thing I can say about this piece is that the author essentially admits that the Fed is creating money out of thin air.  You usually can’t even get this basic admission from most of the establishment.  The author says “printing money”, but it is really “creating digits”.  But the point is still essentially the same.

The articles says, “The Federal Reserve earned nearly $90 billion in 2012, after accounting for all its expenses.  If the Fed were a corporation, its chairman, Ben Bernanke, would be the most celebrated CEO in the world, sitting atop annual profits more than twice what Apple and Exxon earn.”

I like the author’s use of the term “earned”, as if Bernanke and the Fed actually produced anything to “earn” this money.

The author praises Bernanke saying he would be “the most celebrated CEO in the world”.  I think any CEO who had the power to artificially create almost endless money out of thin air would be very “profitable”.  All you have to do is enter some digits into the computer and, bang, there are your profits.  It is not as if Bernanke actually has to produce iPhones or gas refineries.

The article continues further down saying, “Even if the Fed ends QE in 2014, as many analysts expect, it will retain an enlarged asset portfolio for years, since it will sell assets slowly or perhaps even hold on to many of those bonds until they mature.  By 2025, the Fed’s total profits under QE will amount to about $820 billion, the Fed researchers estimate, or $315 billion more than under the counterfactual scenario.”  It goes on to say, “All the Fed’s profits go to the Treasury, and that’s real money that lowers the federal deficit and helps reduce the need for tax increases.”

I really don’t like to be rude to people, but this guy Rick Newman is either a complete moron or he thinks is audience is full of complete morons.  I have little tolerance for people like this.  It is not as if he is talking at the water cooler at work and spouting off some information that he knows little about.  He is a columnist for a major website and the things he is saying are simply moronic.

Yes, the Fed’s “profits” go back to the Treasury.  Where does he think most of these so-called profits come from?  They come from the Treasury.  It is nothing but an accounting gimmick.

The Fed buys government bonds with money created out of thin air.  This allows the Treasury to spend more and run up deficits without depending on other investors as much.  The Treasury has to pay interest on the debt that it issues.  Therefore, the Treasury makes interest payments to the Fed for the government debt being held by the Fed.  Voila!  There is your “profits”.

The Treasury makes these interest payments either with tax money collected or more debt issued.  So these magical “profits” that this guy is talking about is either coming in the form of taxpayer money or newly created money (which devalues the money held by everyone else, which is essentially like a hidden tax).

The only other “profits” being collected by the Fed are from mortgage-backed securities that it has obtained from bailing out the banks.

So here we have this guy who wants us to celebrate Ben Bernanke for massive monetary inflation and to believe that this is a “huge gift to taxpayers”.  This guy is a complete joke.  My optimism lies in the fact that most of the comments below the article are from people who saw right through this guy and made it known that he is a fraud.

Most financial advisors will recommend that you have an emergency fund.  This could be for anything unexpected such as a job loss or major expenses like medical bills or home repairs.  If you are saving money to purchase a new car, this would not count as part of an emergency fund.  You are expecting to buy a new car.  It is not being set aside for an “emergency”.

I have seen advisors recommend anywhere from 3 months of living expenses to 9 months of living expenses.  In this economy, perhaps it should be even more.  But it is important to emphasize that each individual’s situation is different.

If you are a 25-year old single male who makes $12 per hour and shares an apartment with two roommates, then a 9 month emergency fund is probably not necessary.  Such an individual could probably find another job for something close to what he currently earns.  And if his expenses are expected to stay low, then a smaller emergency fund would likely suffice.

This isn’t to say that such an individual should stop saving.  You need to save for retirement and future expenses.  The 25-year old may want to purchase a house.  Saving for a down payment would not be part of an emergency fund.  But I see no reason that the person could not purchase a house (assuming it is affordable) if he had only a 6 month emergency fund as opposed to a 9 month emergency fund.

On the other hand, someone who earns $50,000 per year and supports a wife and children would probably want at least a 9 month emergency fund.  It would not be a good idea to make other major purchases until that money is set aside.

I think there are also some gray areas in terms of what would be part of an emergency fund.  Cash (technically digits) in a bank account is the obvious.  It is liquid.  Paying extra on your mortgage each month is about the opposite.  It is not liquid at all, unless you are planning to sell your house or take out cash from a refinance.  A 401k plan is another example of money that is not liquid, particularly if you are still employed with the same firm that holds your plan.  You will not likely be able to access it unless you leave the company.

If you are in a situation where you need a 9 month emergency fund, here is my recommendation.  Get 3 months of living expenses into the bank, either in a checking account, savings account, or money market fund.  This is your most liquid money.  For the other 6 months, I think it is acceptable to have investments that may not be liquid in one day, but is relatively easy to access in a short period of time.  These could be investments in gold and silver (the physical metals).  It could be stocks, mutual funds, and ETFs that are outside of a 401k plan.  It could even be investments inside a Roth IRA, as you can at least withdraw your principal contributions without a penalty.  But you should also account for any volatility that may take place in your investments.

In conclusion, I think it makes sense to have an emergency fund.  This should be for unexpected expenses.  It does not all have to be cash in the bank, but it should be relatively easy to access in case you need it.  Each individual and family situation is different, so you should adjust according to your own needs.

Lew Rockwell ran a piece by James Altucher on using a checklist when buying a house.  Some of his items are meant to be comical, although most of them are valid points to consider.  Altucher has written several times in the past about buying a house.  He is against it, although some of it may stem from his own experience of having a house and going bankrupt.

I am a big advocate of buying investment residential real estate, if you are in the right position.  You should be in a good location where the local government is not too overbearing.  You should have cash reserves for unexpected expenses and vacancies.  You also need to make sure that the math makes sense.  You should not buy for appreciation.  You should buy for positive cash flow.  Any appreciation you get should be icing on the cake.

I view things a little differently when it comes to your primary residence.  I am not completely against buying as Altucher is, but I think he has many valid points to consider.

First, it is important to realize that a house is a consumer good.  It happens to be a consumer good that is a necessity in life, just like food.  You need shelter and I’m guessing most people don’t want to live in a tent.  But nonetheless, a house is a consumer good when you are “consuming” it, as opposed to renting it out.

Therefore, anything you purchase that is above your basic needs is really excess.  I am not against having more than you need.  But it is important to realize that you are not buying an investment.  You are buying something to enjoy.  You might pay more for a house for a safer area, for better schools, for a better location, for more space, for a bigger yard, for a swimming pool, or any number of other things.  And they are all valid reasons.  But again, just realize that these are things you want, not things you need.

The best financial time of my life was right after college.  I was in a three-bedroom apartment with two roommates.  I had the smallest room and I shared a bathroom with one of the other guys.  My rent was the cheapest.  My portion was just under $300 per month.  I then contributed for cable, telephone, and electricity.  That was split three ways.  My living expenses were really cheap and I was able to save a lot of money, despite having a low salary at the time.  I did not have to worry about any repairs.  I also didn’t have to worry about mowing a lawn.

I think the biggest problem with home ownership is that people underestimate the costs.  They look at their monthly mortgage payments and don’t consider most of the other things.  Here are just a few things to consider and it is far from an exhaustive list:

• Homeowners insurance
• Termite bonds
• Lawn maintenance
• Association fees
• Property taxes
• Repairs for plumbing, air conditioning, roof, sprinkler system, blinds, flooring, etc.
• Maintenance for air conditioning, garage door, sprinkler system, dryer vent, gutters, etc. (if you skip this, then expect higher costs for the repairs above)
• Higher costs of electricity and water
• Possibly higher commuting costs if you move further away from your job
• Spending more money on upgrades and appliances

Many people are worried that we are going to have socialized medicine in the U.S.  Unfortunately, I don’t think most of these people understand that our current system is far from capitalist.  There are still certain elements of the free market in medicine today, but overall, the system if far closer to fascism and socialism than it is to capitalism.

I want to point out just some of the reasons for the high cost of medical care today.  They all have to do with government in some way.  This could include state, local, or federal government.  This is nothing close to an exhausted list.  These are just a few of the major reasons for the high cost of medical care, which oftentimes coincide with an overall lower quality of medical care.

1. There are state laws that prevent buying health insurance across state lines, unlike car insurance or homeowners insurance.
2. Employers can deduct health insurance expenses.  Individuals cannot deduct medical expenses in many cases on individual tax returns.  There is a government incentive to have health insurance tied to your employer.
3. Medicare is socialized medicine for senior citizens.
4. Medicaid is socialized medicine for poor people.
5. Patent laws make pharmaceutical drugs vastly more expensive than they would otherwise be.
6. You must obtain a permission slip (a prescription) to get certain drugs from a pharmacy.  You cannot be trusted as an adult to make decisions.  A small percentage of the population might abuse this freedom, therefore we all have to suffer.
7. You must have a government license to be a doctor, even though many nurses and other people would be qualified enough to give certain medical advice.
8. Drug companies spend tens of millions of dollars, or more, getting drugs approved by the FDA.  This keeps many drugs from ever being discovered.  It keeps potentially life-saving medicine out of the market.
9. The government makes it illegal to use marijuana, even for medical purposes in most places.  This is a potentially low-cost drug with a vast number of benefits.
10. State laws mandate insurance to cover certain things.  You may have to pay for insurance against certain things like pregnancy or drug rehab, even if you don’t plan on getting pregnant or using drugs.
11. Companies that sell vitamins and supplements are not legally allowed to advertise the medical benefits of their products.
12. The government makes up a food pyramid that gives good ratings to high-carb foods, while criticizing foods high in saturated fats.  People use margarine instead of butter (as just one example), at the government’s advice.  Is this one of the reasons for the high epidemic in chronic illnesses in America?
13. There are thousands of regulations which doctors must follow, causing extremely high administrative costs.
14. The politicians are bought and paid for by the pharmaceutical industry, as well as the insurance industry.  It is no surprise that the government tries to push expensive drugs, expensive tests, and expensive treatments.
15. Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA) only exist because we have a federal income tax.  At least with an HSA, you can carry over your money from year to year.  FSAs are absolutely foolish (although I certainly don’t blame people for using them).  It is a good example of unintended consequences encouraged by the government.  If you have an FSA where you must use it or lose it in that calendar year, then it actually encourages you to incur more medical expenses before the year is over.

Japan is thought of as a place with intelligent and highly educated people.  But they sure have some people who are really stupid when it comes to economics.

After Japan was devastated from World War II, the country turned to the free market and the people working in a free market system created a lot of wealth in a short period of time.  The same could be said for Germany.  It is amazing how fast these two countries recovered after the war that left so much death and destruction.  They both became two of the wealthiest countries in the world.

In the 1980’s, some Americans started to fear that Japan was going to take over, whatever that means.  They were afraid because the Japanese could sell inexpensive electronics.  Even as a child, I didn’t understand the hysteria.  Some company from Japan wants to sell me a really cheap television and I am supposed to get upset about this?  Imagine the outrage if they were giving away televisions for free.

Unfortunately, the last several decades has seen Japan turn away from the free market economics that led to its very prosperity.  The government has essentially adopted a policy of mercantilism, where it cares more about its exporting business than the standard of living of Japanese citizens.

The debt-to-GDP in Japan is ridiculously high.  It is well over 200%, far higher than any industrial nation on the planet.  Yet many Japanese investors stupidly buy government debt.  Actually, I guess the stupid ones will be those who don’t sell it before a default or massive interest rate increases.  Even with foolish investors buying government debt, it still cannot be sustained forever.

When it comes to holding U.S. government debt, Japan competes with China.  As of May 2013, Japan held over $1.1 trillion in U.S. treasury debt.  Just like China, the Japanese people are providing a temporary subsidy to the American consumer.

Back in April, the Bank of Japan promised to compete with the Fed by creating massive new amounts of money out of thin air.  This goes back to its mercantilism.  The Japanese central bank said it will double the country’s money supply, creating $1.4 trillion in new money.

Japan also has an aging population with massive unfunded liabilities.

You can take almost every problem that is in America and it seems to be magnified in Japan.  I think it is a good idea to watch what happens there, as it could be a precursor of what takes place in the U.S.

I try not to generalize too often because each individual stands on his or her own merits.  But as a whole, I really do believe that the Japanese people are smarter and more hardworking than Americans.  Again, this is only a generalization.  But I would probably give an edge to Americans when it comes to creativity and entrepreneurship.

Unfortunately, it seems that an even larger majority of Japanese people (as compared to Americans) do not understand basic economics.  If they did, there is no way the Japanese government and central bank would be able to get away with what it has.  Just like every other government and central bank in the world, the Japanese government and Bank of Japan are sucking away the production of the Japanese people.  The people suffer with a far lower standard of living than would otherwise be the case.  I hope Japan can find the free market economics that was discovered after World War II and return to being a prosperous country.

Most things don’t move in a straight line.  Even in a bull market with stocks, there will still be down days.

For someone trying to improve at golf, it is easier to go from a 20 handicap (shoots 20 over par) to a 10 handicap, than for someone trying to go from a 10 handicap to being a scratch golfer (shooting par).  Each player is trying to improve by 10 shots, but it takes a lot more detail, fine tuning, and innate ability to go from a 10 handicap to being a scratch golfer.  Even while improving, people plateau.

I use this as an analogy in discussing liberty.  Of course, liberty is even more complicated.  While it is dependent upon what the government does, most people don’t realize that the government will only do what is allowed by the people.

In a society with democratic institutions, the government will rarely be any better than what is tolerated by the people.  In most cases, politicians will get away with whatever they can.  They aren’t really bound down by constitutions and laws.  They are bound down by public opinion.

The only conceivable way of achieving greater liberty and maintaining it is if public opinion changes.  People must view the state as an institution that isn’t needed, or at least is needed far less than what we currently get.  This doesn’t have to include everyone, but it will likely have to include a majority of the people.  It’s not to say that a majority have to be activists, but that a majority of people must be willing to follow the small minority who are preaching and actively promoting liberty.

Just like the golfer trying to improve his game, it will not be a straight line towards greater liberty.  Most libertarians think we are getting worse.  In terms of government action, they may be correct.  But in terms of public opinion, I think there is no question that things are improving.  But there will be certain plateau points where it seems that things are not improving.  Some events may even set the libertarian movement back a bit.  But as long as there are more steps forward than steps back, then greater liberty will be achieved.

There are a lot of factors going into a changing public opinion.  I think the last two Ron Paul presidential campaigns opened a lot of eyes for people who had never been exposed to a real libertarian message before.  Of course, another major factor has been the internet and social media.  The rapidly declining price of technology has made communication wide open to most people.  It is much easier to spread the truth and expose people to a diversity of opinions.

In addition, this has all come at a time where the government continues to overstep its bounds.  Obama just went on the Tonight Show with Jay Leno and said that the government is not spying on Americans.  This was a blatant lie and I think it was obvious to many people.  Why is Obama so worried about Edward Snowden then?  Snowden provided the evidence that Americans should fear their own government.  It is one more piece of news that makes the federal government lose legitimacy with the American people.

There are so many scandals coming out of DC right now that it is hard to keep up with them all.  Meanwhile, Americans continue to grow more tired of war and interventionism, along with a struggling economy at home.

In conclusion, we may be nearing a perfect storm for the liberty movement.  Instead of looking at each new government boondoggle as a loss of liberty, look at it as one more thing that damages the government’s legitimacy.  I think we will see greater liberty in the next few decades.  But remember that it won’t happen in a straight line.  There will be ups and downs.

There is a lot of confusion about interest rates and the direction they will go, particularly if the Fed “tapers” its so-called quantitative easing.  While I am uncertain myself about which way interest rates will go, I want to point out a few things so that you can avoid making wrong assumptions.

Some investors think that interest rates will go up when the Fed stops, or even slows down, buying government debt.  In a vacuum, this is a rational thought.  If the Fed, the biggest buyer of bonds, stops buying government bonds, then this should make bond prices go down, if all else stays the same.  Lower bond prices mean higher interest rates.

But the key phrase is “if all else stays the same”.  If the Fed slows down or stops its monetary inflation, this will likely strengthen the dollar and lead to a recession.  The demand for money will likely rise.  People will seek safety and will look to lock in guaranteed returns.  In other words, investors are more likely to buy bonds, thus possibly offsetting (or more) the Fed’s lack of buying at that point.

On the flip side, many investors assume that rates will stay low or go down if the Fed keeps up its quantitative easing (monetary inflation).  It is possible the Fed could even increase its bond buying program.  When there was discussion of tapering back in June, the 10-year yield went up.  So it would make sense that the 10-year yield would go back down if the Fed keeps up its bond buying or even increases it.

But again, this is only if “all else stays the same”.  I think the idea of rates staying low if the Fed continues its monetary inflation is a solid prediction, as long as the perceived threat of price inflation is low.  But if investors start to worry about being paid back in a depreciating currency, then they will start to demand a higher premium.  Investors are not likely going to buy a 10-year bond at 2.5% if they think there will be price inflation of 4% (although this is not impossible if a 1.5% loss per year is the best they think they can do given the inflation).

So if fears of price inflation pick up because the Fed keeps creating new money out of thin air, then it is possible that interest rates could rise to reflect the inflation premium.  It is important to remember that interest rates were going higher and higher in the late 1970’s, even while the Fed continued to buy government debt.  But there was also high price inflation during this time, which made investors demand a higher interest rate.

I write all of this not to make any predictions, but just to caution people about different possibilities.  Some people think they can’t go wrong in shorting bonds (betting on higher interest rates).  But it is not inevitable that interest rates have to go higher, particularly in the short term.  There are several factors that have to be considered and the Fed’s bond buying is just one of those factors.