On June 15, 2013, I wrote a post about whole life insurance.  Robert Murphy, who is an advocate of the Infinite Banking Concept (IBC), responded to my critique.  In particular, he addressed the notion that buying whole life insurance is mixing two different goals.

In his post, Murphy used an analogy with real estate.  He asks the rhetorical question of whether buying a home is always a bad financial move because it is mixing goals.  Those two goals are investing in real estate and getting a place to live.

I don’t necessarily think that purchasing a house is a good analogy to purchasing whole life insurance, but I get his overall point.  Personally, I try to explain to people that a house is a consumer good if you are going to live in it.  If you are going to choose between living in a million dollar house on the beach or a $90,000 condo somewhere else, you would be better off financially if you bought the condo in most cases.  Or you might be better off renting.  Obviously this wouldn’t have been true if you bought in the year 2000 and sold it in 2006.  But generally speaking, you are better off paying less for a place to live, at least from a financial perspective, in most cases where there isn’t huge appreciation happening.

This isn’t to say that you should always look to buy a cheaper place to live in or to rent.  But you should buy something for the right reasons.  If you want a house on the beach and you can afford it, then maybe that is the best use of your money to bring you pleasure.  But it is not necessarily the best financial decision.  Many people stretch themselves to buy a place that has more space or is in a safer location, but it isn’t necessarily the best move in terms of money management.

Of course, there are many reasons to buy a house that wouldn’t apply to buying a whole life insurance policy.  In buying a house, you don’t have to worry about getting kicked out by a landlord.  You can make changes to the house according to your own desires.  You can also get a fixed payment, which would actually be a financial benefit to buying over renting.  Also, in certain times, you might be able to get mortgage payments (plus taxes) that are cheaper than you would pay for rent in a comparable place.

I do think there is one strong comparison between buying a house and buying whole life insurance.  I also think this is one of the few good reasons to buy a whole life policy.  Both are essentially forced savings plans. (I use the term “forced” in a way different from referring to government force.  This does not involve violence, as you are making a decision in which you are essentially forcing yourself to do something to avoid default.)

If you buy a house with a typical mortgage, then a small part of your payment each month is going to paying down the principal balance on your loan.  As time goes on, the amount that goes toward principal gets bigger and bigger.  Eventually, you will pay off your house and not have to worry about a mortgage payment any longer as long as you keep living there.  There are some older people who are terrible savers, yet have their house paid off.  They would probably have a net worth of close to zero if they had never bought a house.

When you buy whole life insurance, you are essentially forcing yourself to save money each month by directing it towards the policy.  It is easy to say that you should buy term insurance and invest the difference, but a lot of people do not have the self-discipline to set aside that extra money.  It can almost be seen as the equivalent of allowing too much withholding tax during the year so that you won’t owe any taxes when it comes time to file.  You give the government a loan just to make sure that you are not irresponsible with the money that should be earmarked for paying your taxes.

With all of that said, my biggest concern with whole life insurance is still that many people will get ripped off.  When people mix their goals in buying a house, they generally understand the numbers and they understand what they are doing (although we did see some bad judgement back in the days of the housing bubble).  I’m not sure that I can say the same for a whole life insurance policy.  This isn’t a sarcastic comment when I say that you almost need a PhD in economics just to understand everything in it.  It is conflating the goals of life insurance and investing and it makes it quite difficult to understand what kind of a benefit you are getting and how much your rate of return really is going to be.

For this reason, I would generally recommend that people stay away from whole life insurance, unless you are really thorough and you can understand the terms and the numbers without confusion.  So while I won’t make a claim that you are a complete idiot if you buy whole life insurance, I would caution most people to stay away from it unless you really understand what you are getting in to.  If there is any confusion on your part, you are probably getting ripped off.

In conclusion, I think most people are better off buying term life insurance.  Perhaps there are some good whole life policies that would be good for certain people.  But I fear that the people who would benefit the most, due to a lack of self-discipline, are also the people who would be least likely to understand the fine details.

Also, as a side note, just because I may have some disagreements with Robert Murphy and others on investment/ money management issues, it doesn’t mean that we disagree on libertarianism.  We can both push for a dramatically smaller state (or no state at all) and still have disagreements about money management.  Neither one of us would hold a gun to your head and tell you that you have to buy a certain type of insurance policy.

I was walking through Best Buy the other day, marveling at the technology.  Not only was I fascinated with the size and clarity of the televisions, I was also impressed at the prices.

I bought a 27-inch Sony television about 14 years ago.  I paid about $400 for it.  The thing was a beast.  For $400 today, you could buy at least a 39-inch television.  Perhaps you could do even better with a sale.  But you are also getting an HD tv that has a flat panel.  It would weigh a fraction of that Sony tv I bought 14 years ago.

So as far as televisions, you can get far more for your dollar today.  Prices are cheaper and the quality is far better.  And that is in the face of inflation over the last 14 years.  According to the BLS’s CPI inflation calculator, prices have risen by 40%.  So, on the conservative side, prices have gone up 40%, while prices of televisions have fallen dramatically, with far better quality.

Although there is no major industry that is not heavily regulated by the government, it is not surprising that electronics and technology are regulated far less than other industries.  Of course, Best Buy, Apple, and all of the other companies are subject to the same massive taxes and business regulations.  But aside from this, electronics are not heavily regulated relatively speaking.

Meanwhile, in industries that are heavily regulated, it is no surprise that prices rise at a fast pace (usually faster than the stated CPI) and the quality does not get much better.  In some cases, the quality even diminishes.  I speak of industries such as education and healthcare that are heavily regulated and funded by government at all levels.

Imagine if education were more like the electronics industry.  Imagine that we saw new innovations that allow children to learn better.  (Ironically, the one bright spot of education is coming from the advancement in technology.)  Imagine if prices went down, even in higher education.  Imagine being able to choose different levels of education and different styles of learning, while having price competition.

Healthcare and medicine have even more potential if given a relatively free market environment.  We wouldn’t have doctors all graduating with basically the same curriculum.  We would see competition and innovation.  We would see new technology advance quickly, while actually seeing a reduction in prices.  We would have doctors trying various techniques, with those most successful likely being rewarded the most.  We would see doctors actually trying to help their patients with things such as diet, instead of just throwing pills at patients to benefit the pharmaceutical industry.

In conclusion, we should advocate and hope for a more free market in every industry.  We should also hope for more price deflation.  Our standard of living has improved vastly with things like televisions, smartphones, tablets, and computers.  There is no reason that we should not also benefit from better products and cheaper prices in other industries.

The most significant financial story of the last week, and perhaps of the last month, is the rising interest rates.  The 10-year yield went up significantly on Friday, closing at about 2.71%.

To put this in perspective, this is still very low by historical standards.  It is still lower than it was just a few years ago.  It is far higher than its recent lows (around 1.5%).

I think the most relevant part of this story is largely symbolic up to this point.  Sure, interest rates have an effect on investments and savings and they certainly affect the mortgage rates.  But it is not as if we have seen a crash of the bond market or something else big.  I think the reaction (or lack of) by the defenders of the establishment is the biggest story right now.

I am not sure if the people at the Federal Reserve and their defenders understand how vulnerable the economy is right now.  I think those at the very top do understand, at least to some degree, that something isn’t right in the world.

When defenders of the free market warn about the extremely loose monetary policy of the last 5 years (at least in terms of the monetary base), defenders of the establishment will point to various things.  They will say that price inflation is low.  They will say that growth is picking up, but we just need more Fed stimulus to ensure a full recovery.  They will also cite statistics.  They will also say that the debt doesn’t matter, as long as we continue to grow.

When establishment economists make predictions, they often use certain assumptions for their predictions.  This includes a certain rate of growth for the economy, when in actuality they have no idea what it will be.  They also make assumptions about future interest rates.  The assumptions are typically that they will stay low.

The last few weeks have disrupted these assumptions.  If interest rates go up, it all of a sudden changes a lot of variables.  The Fed’s balance sheet goes down in value.  Interest payments on government debt will start to go up, particularly on newly issued debt.

I think the short-term upswing in interest rates will slow down.  It is not surprising that rates would go up after being at near all-time lows.  I don’t think we will see much higher rates until we see a pick up in price inflation.  Perhaps the rising interest rates are indicating a coming change in price inflation, but we can’t be certain.

The one thing that the last few weeks has shown with the rise in interest rates, is that there really is no free lunch here.  Defenders of the establishment think that we can just create trillions of dollars out of thin air and have interest rates near zero and not suffer any major consequences.  They promote the idea that there is a free lunch in the form of low interest rates.  But aside from the fact that this hurts savers and discourages savings, it also can’t last forever.

There is a giant misallocation of resources that needs to be corrected.  I would suspect that part of this correction would mean higher interest rates, although it is quite possible that it could be the opposite, depending on how long the Fed continues to inflate.  But the Fed should stop the digital printing presses and interest rates should be set by the marketplace.  As long as there is major interference from the Fed (and the government), then resources will continue to be used in ways that are not in accordance with consumer demand.  This means less productivity and an overall lower standard of living.

There are many radical libertarians (and I use that term as a compliment) who do not favor celebrating the 4th of July.  Since America is no longer a free country, they see no point in celebrating Independence Day.  They see it as phony.

I agree with the sentiment that America is not a free country.  It is not a land of liberty.  The government, at all levels, takes about half of our money.  Virtually every aspect of our lives is regulated.  And the American empire is all over the world, imposing its will all over the globe.  So America is not the land of the free.  Compared to North Korea, we are free.  But there is not a lot of freedom in the world today.

I don’t think it is a good strategy to act like Scrooge on the 4th of July.  It will probably just turn people off of your message, who want to enjoy some time off work with their friends and family.

Instead, I see it as an opportunity to educate those with an open mind.  You can gently remind people that Independence Day is really Secession Day.  The colonists seceded (declared independence) from Great Britain.  What Edward Snowden has done today is nothing compared to what the colonists did back in the 1770’s.  Snowden is not trying to overthrow the government or even lead a secession movement that I know of.  He is simply trying to point out criminal activity and wrongdoing inside the government.

The 4th of July is also a good time to point out that the taxes that the colonists did not like were a fraction of what we pay today.  Aside from slavery, the colonists, under the king, were a free people compared to what we are today.  The colonists rebelled for far less tyranny than what we suffer from today.

For radical libertarians, the 4th of July also offers an opportunity to speak about the Constitution.  Americans would be far better off if the federal government followed the Constitution under its original intent.  The size and scope of government would be a fraction of the size.  We would be far freer.  But with that said, the Constitution itself centralized power.  It replaced the Articles of Confederation, which left the national government with very little in the way of power.  So from that aspect, the Constitution took away our liberty.

I think it is also important to remember that America has never truly been free.  Every time in history has had some kind of violation of individual rights.  There was obviously the issue of slavery until the 1860’s, and there were still racial issues for far longer, imposed mainly by southern state governments.  And while there was certainly more economic freedom in the past, it has never been perfect.  There were high protective tariffs in the 1800’s.  There were regulations to favor those with government connections.  There has always been corruption.  But, we do have to admit that the welfare state and the American empire are far bigger today than at almost any other time in American history.

I hope you enjoy your July 4th, even with the realization that you don’t live in a free country.  But you still have the freedom to speak in most cases, so you should use that to speak to others with an open mind.  For the others, just let them be.

I was recently in a grocery store in a middle class neighborhood.  I had to go to the customer service desk.  I realized the other people in line were all waiting to buy lottery tickets.  Some of them were buying what seemed like a large number of lottery tickets.  It was far more than one or two.

I’m guessing some of these same people clamor for the government to protect them from terrorists.  Their odds of being struck by a terrorist are about the same as winning the lotto.  It is virtually zero.

For most of these people, this is their only hope for the future.  It is sad to see.  I’m sure most of them work hard for their money and yet they are squandering it on lotto tickets.  They are trying to hit a home run that will never come.  They know they have no hope of becoming wealthy unless they win the lotto.  It is a self-fulfilling prophecy.

It is actually a sad state of affairs in America right now.  And it is better in America than it is in Europe and parts of Asia.  The American middle class is struggling.  We have these new great technologies with smart phones, tablets, big screen televisions, and so on, yet, at the same time, living standards are declining in many ways.

Life is expensive.  This is the cost of big government in terms of government spending and government regulations.  It is at all levels of government, but particularly bad at the national level.  Health insurance and medical care are ridiculously expensive.  This is the cost of bureaucracy.  In real terms, wages are going down for many people.  And that is for the people who are fortunate enough to have jobs.

It is very difficult to save money these days.  How can you save money when the government is trying to take so much of it?  Americans are struggling to fund any kind of retirement, let alone build up enough of a cushion for an emergency account.  The majority of Americans are living paycheck to paycheck, or something close to it.

There is not a lot of hope and optimism in the air.  Perhaps there may be some young people out there entering adulthood who are looking to take on the world.  While I think it is great to see, I fear that many of these people will have their hopes shattered once they hit the real world.

Aside from technology, living standards may actually be declining for middle class America.  The only way to reverse this trend is to get big government off of our backs.  I hope that most Americans will soon realize that they are far poorer than they need to be.  They are the victims of an establishment that has tricked them into believing that they need big government to survive.  Yet, the opposite is true.

The only way we can achieve a society with greater liberty and less government is through education.  To be clear, this is not about formal education, but about people understanding the benefits and morality of a libertarian society.

The only way that a government can have significant power is if a majority of the people consent to it.  The people don’t have to go out and be cheerleaders for the state, but they have to at least be tolerant of the state.  Most people have gripes about the government in some fashion, but most will also admit that we need government.  And these are not just minarchists who think we need a government that only protects life and property and enforces contracts.  These are people who generally accept state-run education, Social Security, and various other government programs.

If a majority of people no longer consent to the state, then it will not last for long, regardless of elections.  In the U.S., there are over 300 million people.  There are only 535 members of Congress.  Even if we count all of the government employees, it is still a fraction of the total population.  And it is safe to say that a lot of government employees are not there because they love government but because they found a job that pays them money.

I think there has already been a shift in the thinking of many Americans.  I think it is for a combination of reasons.  The last two Ron Paul presidential campaigns and the internet are the biggest reasons.  Another contributing factor is the bad economy, coupled with long and wasteful wars.  With all of these things combined, there are more libertarians today than there probably ever have been in history.

The libertarian crowd is still small relative to the population.  There are not nearly enough people to drastically reduce the size and scope of government.  But the increasing numbers are having an effect, even if it is hard to see.  A good percentage of the new libertarian crowd is young adults.  They tend to have a more open mind, they get much of their news from the internet, and they can be influenced easier.  There are younger people I have met who turned into libertarians within months.

It is important to remember that most people will not be transformed overnight.  Most won’t even be transformed over the course of several months.  You never know what discussion or article or book might be a trigger for someone to open their mind and explore and start the journey.

I think it is important to not go for any home runs.  You are not likely to ever persuade someone to become a hardcore libertarian with one or two discussions.  The person may say he agrees with you, but you know deep down he does not feel as strongly about a certain issue as you do.

In most instances, the best you can hope for is to chip away at someone’s beliefs.  You have to remain consistent and principled in your own beliefs.  If you are having a discussion with someone and you don’t remain consistent, he will likely see it, whether he challenges you on it or not.  The best thing you can do is to make him think and make him want to do more research on his own time.  There are rarely instant conversions.

Even if you pull off a miracle and have an instant conversion with somebody, he will probably not be a very good representative of libertarian theory at that point.  He would still have to go through the education process.  If you have been reading libertarian literature for years now, there is probably a lot you take for granted.  Think about all of the brainwashing that must be reversed.  Think of all of the history lessons that must be retaught.  Think of all of the economics that must be corrected.

I have also suggested in the past that you don’t try to convert family members.  It is probably the hardest thing to do.  You will likely get frustrated.  Your family members know your faults and will likely see your political stance as a fault.  If a family member wants to argue about politics with you, the best way to convert the person may be to have them read a particular article or book.  At least they will see someone else as the authority on the matter and not you.

In conclusion, you can do your part in getting a more libertarian society by helping to educate others.  This doesn’t mean being pushy or getting into arguments.  It means helping people open their minds.  It means chipping away at their long-held belief that we need government.  You will not hit home runs.  You must take small steps and let each person take the journey on their own time.

The younger people in America (and this likely goes for many parts of the world) are getting ripped off.  They are being taken advantage of by the older people.  Older people know how to vote and influence their so-called representatives in Congress.  This isn’t to say that older people aren’t getting ripped off by the government too.  But as far as wealth being redistributed, after the government and the lobbyists, the older generation is next in line for the plunder.

It is hard to define the specific age groups.  Certainly anyone under 40 is getting ripped off.  I would venture to say that anyone under 50 is too.  Somebody who is 50 years old right now is probably not going to see Social Security and Medicare until at least the age of 70, and I even find that doubtful.

There is nothing in the Social Security trust fund except IOUs.  It is part of the national debt.  Even if those IOUs were good, there would still be a massive shortfall.  And then there is the other, even more massive unfunded liability, called Medicare.  There is no possible way that the program can be sustained anywhere close to its current form.

Working people have to pay taxes to fund wars, pay foreign dictators, provide subsidies to rich farmers, fund all of the bureaucrats who make their lives more difficult, and then pay for the retirement of tens of millions of people on top of it.  Meanwhile, all of the money that is taken from them as part of the payroll taxes is spent immediately.  None of it is saved.

I know of young people who are withdrawing money from their 401k plans because that is the only money they have in reserve.  Many people don’t even have this option because if their 401k plan is with their current employer, they likely cannot take any kind of a withdrawal.  The best you can do is to take a loan and pay yourself back.

Working people are taking on a huge burden.  They are barely scraping by.  It is very difficult to raise a family on a middle class income.  About the only major subsidy you get is for education and the schools are so bad that many parents (and rightly so in my opinion) don’t even use the government schools that they are forced to pay for.

Not only are working people just barely getting by, but they are finding it difficult to fund any kind of a retirement.  Most people are lucky to get a 401k, which is vulnerable not only to market fluctuations, but also the government trying to tax it more in the future.  The thought of retirement seems almost like a fantasy for most people who are under the age of 50.

Meanwhile, these same working people have to pay for senior citizens to play golf and travel.  Many seniors today have company pensions, which aren’t nearly as available to younger people today, except perhaps government workers.  Again, good luck with your 401k plan.

At some point, I think the workers are going to shrug.  It is not to say they will stop working or disappear a la John Galt.  I think the younger people in America are going to realize they are getting ripped off and they will take a stand.  They will no longer feel any sense of guilt or obligation to fund the retirement of the older generation.

At some point, there will be a congressman who stands up and says he is going to cut payroll taxes and lower the so-called benefits of Medicare and Social Security.  Others will see that this is not political suicide.  The younger people will start to demand this of their so-called representatives.  At some point, there will be a major shift.

The major divide in the future of America will not be between Republicans and Democrats.  It will be between young and old.  The young people will eventually get fed up with working hard and seeing few results.  They will get tired of seeing the older people living the good life at their expense, while they have little to look forward to.  The workers outnumber the retirees.  The workers will eventually figure this out and win.

There is a saying that a government big enough to give you everything you want is also big enough to take away everything you have.  In this particular case, we can modify that to say that a Federal Reserve that has a monetary policy to let the good times roll, will also have a monetary policy to bring on the crash.

After the FOMC released its statement on June 19 and Bernanke spoke, the markets were spooked.  Stocks, bonds, and commodities all took a nosedive.  That was last week.  This week, heads of the regional Fed banks are coming out to smooth things over.  The latest person was William Dudley, president of the Federal Reserve Bank of New York.

Dudley said, “If labor market conditions and the economy’s growth momentum were to be less favorable than in the FOMC’s outlook – and this is what has happened in recent years – I would expect that the asset purchases would continue at a higher pace for longer.”

The Dow finished the day up in triple digits.  The same thing happened the day before when the first quarter GDP numbers were revised downward.  It signaled that the economy is still struggling.  Investors liked this news because it meant that we would likely see more monetary inflation by the Fed.

We know that something isn’t right in the world when the stock market is going up because of bad news with the economy.  It seems like the whole thing is built up by the Fed.  But this also means that the whole thing will come crashing down one day, if and when the Fed halts, or even slows down, its digital money printing.

In the short term, I have no idea if stocks are going to go up or down.  It is anybody’s guess.  It is so highly dependent upon the decisions of the Federal Reserve and the establishment, that it almost doesn’t seem worth gambling on.  If you are going to own stocks, I would recommend that you either own specific stocks for specific reasons, or else you simply limit yourself to a 25% maximum as part of your permanent portfolio.

If we all of a sudden see a small spike in price inflation, we could quickly see interest rates go higher and stocks tumble.  So much of the stock market is built up by funny money right now, it is hard to trust it at all.  Specific words coming out of Bernanke’s mouth or other Fed officials can cause your investment portfolio to go up or down in wild swings.  There is something truly wrong when just a few individuals can speak and control the market of a country with over 300 million people.  In fact, it really affects the entire world.

In conclusion, I would be very careful about putting money in the stock market to speculate.  It is not always true that what goes up must come down.  But when it is built on artificial stimulus, it is likely to hold true.

Yesterday, I wrote about the permanent portfolio and how you should still stick to this methodology of investing, despite its relatively poor performance of late.  In this post, I want to offer some possible tweaks that may enhance the portfolio and allow you to sleep even better at night, knowing your money is as safe as it can be.

I have made this suggestion in the past and I want to reiterate it now, especially with interest rates having gone up in the last few weeks.  You don’t have to be a libertarian to invest in the permanent portfolio, but I find that most people who do subscribe to the advice tend to be libertarians.  I suppose it is because it was offered by Harry Browne, who himself was a great libertarian.  But beyond that, libertarians understand that monetary inflation is a major threat to their assets, so the 25% gold portion is appealing.  How many other portfolios will you find where the recommended gold holdings are at least 25%?

Right now, a lot of libertarians are scared about bonds.  There are certainly a lot of good reasons to be fearful of them.  There is a possibility of higher interest rates due to many factors, including inflation, the threat of default, and, as recently shown, the possibility of the Fed’s tapering of its buying of government bonds.  With a huge national debt and the possibility of higher price inflation in the future, there are definitely reasons to be bearish on bonds.

But at the same time, we can’t completely abandon bonds in the permanent portfolio.  They are there for a reason.  It is possible that Bernanke and company could decide tomorrow that it will stop all monetary inflation.  If that happens, we would likely see some kind of a recession/ depression, with the possibility of price deflation and lower interest rates.  While this is not highly likely, we really shouldn’t speculate to the point where we leave ourselves vulnerable.  There are less extreme scenarios where we could still see falling rates and rising bond prices.

So I recommend that if you have a home mortgage, you should consider paying down the loan.  While you won’t derive a huge benefit from falling interest rates as you would with owning bonds, you will still be locking in a rate of return that is equivalent to whatever the interest rate is on your home loan.  And you won’t have to pay taxes on your hidden gain.

This is a deflation hedge because you are locking in a rate of return.  If your home loan has an interest rate of 4%, then you will be locking in the equivalent of a 4% return.  If rates fall to 2%, then at least you will be getting a better “return” from paying down your mortgage than you would have if you kept it in cash or a cash equivalent.

I don’t recommend abandoning bonds entirely, no matter what you think is going to happen.  You still need some upside if a deflationary depression comes along.  Instead of having 25% in long-term bonds as the permanent portfolio calls for, you could have 12.5% in bonds and use the other 12.5% to pay down your mortgage.

This may not be a perfect strategy, but it is a way to diversify even a little bit more and you won’t have to worry as much about rising rates.

If you own a home and don’t have a mortgage, then you already have somewhat of a deflation hedge with that.  Because of that, you could lighten up the bond portion of your portfolio just a little bit.  Perhaps you could have just 15 to 20 percent in bonds instead.  This will depend on how much money you have and how much your house is worth.

If you rent and you don’t have the money for a down payment to buy a house, then you probably don’t have enough money to worry about the whole thing.  You should be concentrating more on saving money (earning more and cutting costs) than investing.

If you rent, yet have a decent net worth, then perhaps you should consider buying if you plan to stay in the area.  You could also consider buying an investment property, something that I advocate if you are in the right position to do so.  If your situation is such that you just can’t buy a house right now or you simply don’t want to, then it will probably be best to stick with something close to the 25% portion of bonds in your portfolio.

I am a strong advocate of investing a majority of your money in something similar to the permanent portfolio as described by Harry Browne in his book Fail-Safe Investing (also see Kindle version).  It is set up to withstand any kind of economic environment and to avoid the need to speculate.

After the FOMC’s statement on June 19, 2013 and Bernanke’s press conference, investment markets turned sour.  The stock market plunged, the bond market plunged, and the gold price plunged.  In other words, even if you were invested in the permanent portfolio, you took significant losses in the couple of days that followed.  75% of your investments took a hit, while the cash portion stays almost the same due to low interest rates.

While the permanent portfolio has not been a great performer as of late, I also don’t think it is time to abandon the strategy.  There are going to be days when all of the asset classes (except the cash portion) are highly correlated and some of those days will be on the down side.  There will even be short periods of time when they all do poorly.

Stock market investors who advocate a buy and hold strategy often say that we should be in it for the long term.  But the long term in the stock market could be decades.  If you had bought an index fund in the Japanese stock market 25 years ago, you would still be down.  While this example may seem unfair, it illustrates the power of the permanent portfolio in that it rarely has a negative return for longer than a year.

It is important to realize that there will be periods of losses, but these periods should not last a long period of time.  Harry Browne recognized this.  To quote his book, he said the following:

“Tight money is usually characterized by rising interest rates, which are bad for most investments.  The only attractive investment during a recession is cash.  And your cash holdings may not completely offset the losses that tight money may inflict on the rest of your portfolio.

“But tight money is by nature a temporary condition.  Unlike prosperity, inflation, or depression, it can’t go on indefinitely.  Either the economy adjusts to the new level of money and returns to prosperity, or the supply of money changes – leading to inflation or a full-scale deflation.”

He understood free market economics.  He understood that if there was a recession due to a tight monetary policy (or I suppose an expected tight monetary policy), then things would readjust and prosperity would eventually return, unless the central bank kept interfering.  Either way, you end up with prosperity, inflation, or a deflationary depression.  A recession cannot go on forever without turning into one of those other things, which are all covered in the portfolio.

So while I actually think that interest rates are likely to go back down in the near term, we don’t need to lose sleep over the possibility of continually rising interest rates.  This means we will either get higher inflation (and higher gold prices) or we will get a recession to clear out much of the malinvestment.

I’m guessing even Harry Browne could not have imagined that the Fed would be creating new money at a pace of $1 trillion per year.  But he did understand the various threats to your portfolio and developed something to help people avoid significant losses.  While the permanent portfolio is far from perfect, I am still waiting on someone to come up with something better.