I recently wrote a post about the massive excess reserves that have been built up by the commercial banks.  The increase in excess reserves since 2008 has closely correlated the increase in the adjusted monetary base.  In response to that post, I received the following comment/ questions:

“If the banks are simply holding so much of the new money in reserves, what is the point of the Fed giving it to them?  To keep them solvent?”

I think the comment/ question is on the right track, but it is important to clarify what is happening.  Currently, the Fed is adding approximately $85 billion per month to the monetary base.  This consists of $40 billion in mortgage-backed securities and $45 billion in government bonds (longer-term).

The Fed’s purchasing of $40 billion per month in mortgage-backed securities is a bank bailout.  The banks are not netting $40 billion per month, but some percentage of that.  We cannot know the exact number because we don’t know the free market value of the securities that are being bought.  But we can be fairly certain that the Fed is buying the mortgage-backed securities for more than what they would be worth in the open market.

The Fed’s buying of mortgage-backed securities is not typical.  Prior to 2008, the Fed mainly purchased government debt.

The $45 billion per month that the Fed is buying in government debt must be understood.  The banks are not really being “given” this money.  Certain financial institutions act as brokers in selling government treasuries to the Fed.  They make a commission or some kind of fee on this.  In addition, the banks are being paid a quarter of one percent interest on their excess reserves.  In addition, these reserves do help capitalize the banks and make it less likely for bank runs to cause insolvency.

But I keep hearing this common theme that the Fed is “giving” money to the banks.  In the case of the mortgage-backed securities, this is probably true.  But in the case of the Fed buying government debt, it is not really the case.

When the Fed buys government debt, it is creating digital money out of thin air and this money is going to the government to spend.  The government can spend this money on virtually anything.  Money is fungible, so we can’t identify where specific monetary inflation is being spent.  It is all part of the government spending, whether it is on food stamps, Social Security checks, military equipment, salaries, or any number of other things.  But this new money ends up in the hands of individuals and corporations and most of this ends up in a bank account somewhere.

So it is important to understand that most of the money being held by banks, even the money in excess reserves, is somebody else’s money.  It is money deposited by an individual or some type of corporation (or I suppose a government).  The excess reserves simply means that this money is not being lent out.  It does not mean it is “owned” by the banks.  It is money that is available to the depositors who deposited it.

So to answer the questions above, I think keeping the banks solvent is certainly one of the major reasons for the massive monetary inflation.  And with the banks building up their excess reserves, this has helped to prevent severe price inflation.  But it is important to know that just because excess reserves are going up, it does not mean that the banks are being “given” this money.  It is other people’s money.  The banks are being given money when the Fed buys mortgage-backed securities that would be worth less in the open market.  When the Fed buys government debt, it is not directly giving money to the banks, but it is helping to keep them solvent.

I am often astonished at the number of people who are sympathetic to the liberty movement who also advocate for their own enslavement.  There are many people who aren’t libertarians, yet they have libertarian leanings or are strongly libertarian on some issues.  This applies to those who are strongly anti-war (yet favor centralized economic planning) and those who are strongly anti-tax (yet favor a military empire).

I was reminded of this today when I read an interview of Gerald Celente by Anthony Wile of the Daily Bell.  There is no question that Celente has some libertarian rhetoric and he is quite popular among many libertarians.  He certainly is anti-establishment in many cases, which differentiates him from the typical talking head on television.

In the interview, Celente was asked if austerity works.  He replied, “Yeah, it works great.  It’s a proven success.  It drives the people into poverty and makes the bankers richer.  It works perfectly, exactly as planned.  The banks made bad bets and the public was forced to pay for them.”

Celente goes on to say, “Governments have cut workers pensions and benefits, raised the retirement age until after you’re dead but the banks have done just fine.  They’re thriving and the 1% keeps getting richer.  So it worked just the way they intended it to work.”

I don’t really like the term “austerity” because people are defining it differently.  I am sympathetic to Celente’s response in terms of the banks being bailed out.  But I don’t know how anyone can define this as “austerity”.  I find it peculiar that he is complaining about cuts in pensions and benefits.  In the context of bailing out the banks, I kind of get it.  But it is not the way that I would have explained it.

Where does the government get the money to pay pensions and benefits that Celente is talking about?  It doesn’t come from the Tooth Fairy.  There isn’t a special fund set aside from previous contributions (sorry, no lock box).  In places like Greece, there are people collecting big government pensions at the age of 50.  This is part of the reason that the country is in so much trouble.  Does Celente think this should continue?  Actually, it doesn’t matter, because it is impossible to continue.  There simply aren’t enough funds to make good on the all of the previous government promises.

I feel like I am in this awkward position when I have to discuss people who are liberty oriented in some ways, yet advocate policies that will continue to enslave us.  I would rather be rude to someone like Bush, Obama, or Clinton (either one).  We know they are statists.  I don’t care if I insult them.

On the one hand, I don’t want to insult or be rude to someone like Gerald Celente.  In some areas, he is on our side.  He is far better than the average guy out there.  But on the other hand, I want to make sure that libertarians or potential libertarians do not fall for all of the rhetoric.  Some of the policies he is advocating are not good and I want it to be known.  This is why I have written not-so-nice things about Rand Paul in the past.  He is by far the best senator in DC, but I want people to be aware of his shortcomings and the fact that he is not like is father.  Rand Paul is not always a friend to liberty.

In conclusion, I will keep criticizing specific policy proposals and philosophies that are at odds with liberty, even if it is coming from someone who is sympathetic to the liberty movement.  It is important to recognize the shortcomings of these people or else people will continue to enslave themselves.  It is important to have principles and consistency.  We cannot advocate freedom in some areas while advocating government solutions in others.  It will only enslave us.  If we ask the government to do some things, it is going to try to do everything.

I see this subject discussed quite a bit.  People want to know good ways to teach their children about money.  It doesn’t matter whether they are homeschooled or not.  Responsible parents want to equip their kids to be responsible with their money, so as to set good habits for later on.  Perhaps the parents were not well taught and have been irresponsible in their own lives and want their children to be better. Perhaps others have always been responsible with money but just want to make sure their children learn the same good traits.

I am no expert in this subject, but I do have a few ideas on teaching children about money.

I don’t really like the idea of an allowance.  I prefer for a child to earn money.  It might be something simple like taking the garbage out, mopping the floor, or mowing the lawn.  Of course, the task should be within the ability of the child, depending on his age.  This doesn’t have to be a mandatory chore.  But there should be an income amount paid for each job done correctly and the child should know what the amounts are.

I do like the idea of the parents playing banker.  Offer an interest rate on your child’s savings.  You don’t have to be like the Fed and offer a quarter of a percent.  Make it fairly simple.  If the child saves 10 dollars, then he earns an extra dollar after one year.  Maybe you’ll want to make the reward even bigger, just to get the point across.  This is the beginning of learning compounding interest.  This is an important lesson for every older child to learn.

When it comes to saving and spending, don’t be too stingy on the spending side either.  It should really be the child’s choice, although you are providing incentive with interest payments.  Encourage the child to split his “income” between savings and spending.  Maybe he can spend 75% of whatever he earns, while setting aside 25%.

In some ways, the best way to teach your child to be responsible with money is just to teach him to be responsible in general.  Your habits in life will often reflect other more specific things, like how you handle your money.

To go along with this, it is important to teach your child to be future oriented.  This is perhaps the most important thing.  You want them to have a long-term view of the world.  You don’t always live in the moment.  You defer gratification so that you can have more later on.  This goes along with the idea of saving and compounding interest.

My last piece of advice (for now) is to try to teach your child the relationship between time and money. This can be difficult to do, but you have to show him that time is money.  There is nothing wrong with spending time watching television and playing video games, but he should understand that it is time he can’t use to do “jobs” around the house.  There are opportunity costs to entertainment.  There are trade-offs that must be made.

In conclusion, there is no exact science in teaching children about money.  But you can start with these things and remember to set a good example.  If you are always wanting to buy frivolous things (spontaneous purchases) because there is money burning a hole in your pocket, then you may end up passing this lesson down to your child.  If you show restraint and responsibility, he will be more likely to learn that.

I have seen this question come up before.  It is a good situation to be in.  There are some people who have done well and resisted the urge to spend.  They have saved enough money to where they could buy an investment property, or even multiple properties, without taking on a mortgage.

Every person’s situation is different.  But I want to run through a couple of examples and tell you what I would do in each particular situation.

Let’s say that someone has saved $100,000.  He wants to buy his first investment property.  He finds a place for $90,000.  With closing costs, most of his savings would be gone.  Should he pay cash (when we say cash, it really means digital money out of a checking account) for the property and own it outright?  Or should he take on a mortgage?

In this example, my recommendation is to take a mortgage, especially with the currently low interest rates.  He could use part of his savings to put down 20% or 25%, which would be enough to avoid mortgage insurance.  Assuming good credit, he should currently be able to get a 30-year loan at under 4% interest.  In this scenario, I think it would be unwise to drain all of his savings.  He may need extra money for an emergency or for repairs on his investment property.

Also, with this example, he could consider buying two or three investment properties, assuming he is getting positive cash flow.  It would still allow enough savings for emergencies and he could build back up his savings slowly with the additional positive cash flow.

For a second example, let’s say that someone has $500,000 in liquid savings.  Should he use this to buy investment properties or should he take out a mortgage?

For this second scenario, I would be more inclined to buy an investment property free and clear, assuming a price of $150,000 or lower.  It would instantly generate significant positive cash flow.  Of course, he should only buy it on the grounds that it still would have generated positive cash flow had he only put down 20%.

But what about multiple properties in this second example?  Maybe the guy could buy 4 investment properties free and clear with his $500,000.  Again, I would not recommend draining all of your liquid savings.

In addition, I think it is good to consider the implications of taking a mortgage or not taking a mortgage.  Taking on a mortgage is a hedge against inflation.  You pay off your fixed payment with depreciating money.  Paying for your property free and clear is more of a deflation hedge.  You are essentially doing the equivalent of locking in an interest rate, even if they are currently low.  It is just like taking a mortgage at 4% interest and then paying it all off.  It is a guaranteed 4% return.

For this reason, in the second example, I would recommend that the person split his money.  He might buy one property at $150,000 (or less) free and clear.  This is a deflation hedge.  He might use $100,000 towards a down payment on another two properties.  By taking on a fixed rate mortgage, this is more of an inflation hedge.

The one other consideration is taxes.  I don’t think you should let taxes keep you from paying off an investment property.  But if you have extra money and it is between paying off an investment property and paying off your primary residence, I think paying off your primary residence makes more sense in most cases.  Most people think of the benefits of the deduction of the interest paid on their primary residence.  But this only applies if you itemize.  For many married couples, they may not pay enough interest to itemize.  And you might be surprised, even if you do itemize, that your mortgage interest is not as big of a benefit as you think.

On the other hand, you can always deduct the interest you pay on an investment property and it doesn’t matter if you itemize.  This is a huge benefit.  So if it is between the two, I would pay down the mortgage on your primary residence before paying it down on an investment property.

In conclusion, each person’s scenario is different, but I generally recommend that you make it an ultimate goal to own some investment properties free and clear.  But you should not do this at the expense of draining all of your liquid savings.

Ben Bernanke is in his second term as chairman of the Federal Reserve.  He was nominated for his first term by George W. Bush.  He was nominated for his second term by Barack Obama.  Some call this continuity.  I call this the difference between Bush and Obama.  Their choice is the same when it comes to picking the most powerful guy in the world, at least when it comes to economic policy.

Bernanke’s second term will end on January 31, 2014.  As I write this, that is less than 9 months away. Most people assume that Obama will nominate him again if Bernanke chooses to stay.  The bigger question is whether Bernanke is willing to accept the position for a third term.

His decision will tell me a lot about the man.  I am always curious about politicians and whether they are corrupt and lying or just ignorant.  Sometimes it is a combination of both.  I am really not sure with Bernanke.  I don’t know if he believes the things that are coming out of his mouth.

I think his decision about whether to retire from the Fed will tell us a lot.  If he stays on as chairman, that tells me he doesn’t really know how bad the economy is.  He doesn’t understand that his policies have been mostly wrong.  He doesn’t understand that his artificial stimulus is going to come crashing down at some point.

On the other hand, if Bernanke announces his retirement, that will be a signal that he knows more than what he says.  Or, stated differently, he knows differently from what he says.  Or, stated differently still, he is a liar.  It means he has been playing the American people for a bunch of ignorant fools.  It means he knows that there is serious economic trouble up ahead and he doesn’t want to be involved in it or blamed for it.  It means he is getting out while he can.

It will also be interesting to watch if Bernanke does announce that he is not seeking a third term.  This could spook the markets for more than one reason.  Some will see it as I do that he knows there is trouble ahead and he is getting away from it.  Others will see it as a lack of continuity.  Others will see it as a possibility that the new chairman might pull the rug out from under investors and not continue with the massive monetary inflation.  There will be fear that the next chairman will not fly Bernanke’s helicopter.

Perhaps a Bernanke retirement announcement will be the catalyst for a new downturn.  There is trouble ahead and oftentimes it just takes one event to trigger everything.

This will be an interesting story to follow as we get closer to the end of 2013.

There is no free market in healthcare.  Instead of healthcare, we can also use the word medicine, which perhaps takes on a slightly different meaning.  Regardless, medical care in the U.S. is not free.  It is not even close.  We like to talk about socialized healthcare in other countries.  But we already have some form of socialized medicine in the U.S.  Perhaps it is more accurate to call it fascist medicine.

Everything is highly regulated, both at the federal and state levels.  Insurance companies are highly regulated.  There are license laws.  There are prescription requirements for certain drugs.  There are strict patent laws.  There is Medicare and Medicaid.  There are a number of other subsidies.  The lists of rules and regulations are so vast, it is hard to know where to begin.  And let’s not forget about Bushcare, the massive boondoggle to further socialize drugs.  Yet, at the same time, it is a windfall to the pharmaceutical companies.

Things in the U.S. are a lot different than they were in the 1950’s.  There was not a completely free market in medicine in the 50’s, but it was far more free than it is today.  Yet sick people weren’t left on the streets to die.  In fact, medical care was relatively cheap.  And the service was far better, with many doctors making house calls.

Today, it is a mess.  And now we have Obamacare to contend with.  Prices of medical care and health insurance keep going up, at a far faster pace than price inflation.  Meanwhile, the quality of care does not seem to be improving much, except in those few areas with significant technological advancements.  In some ways, medical care is actually declining.

I still question whether Obamacare will ever be fully implemented.  It is a complete mess.  I’m not sure there is any single individual on earth who understands the whole thing.  It is a nightmare for businesses.  It will keep some small businesses from growing, in fear that they will have to abide by Obamacare when they hit a certain threshold.  I’m just not sure if we will see certain provisions revised or repealed, or if we will see all of Obamacare repealed.

While there is not much room for the free market to innovate, there is a little room.  The free market usually finds a way to slip through the cracks.  We have seen what the free market can do when government involvement is more limited, such as in the technology industry.  I still have hope that we will see new innovations in delivering quality healthcare.

I can imagine entrepreneurs getting creative to skirt around the government bureaucracy.  I have heard the idea of parking cruise ships offshore in international waters and taking people by smaller boats out to the cruise ship clinic for medical care.  Then the doctors can practice freely, at least until the U.S. government tries to regulate that.

I can envision more doctors working on a cash basis.  Perhaps they will file for insurance.  But I can envision some doctors not even accepting insurance.  They will just have a flat fee schedule for visits and certain procedures.  They will allocate resources based on money, instead of based on time or political connections.  Things run much better when they are allocated based on price.

I think we will also see a revolution in holistic medicine.  With the internet, there are far more people today who are in to healthier eating and taking vitamins and supplements.  People will look to live healthier in order to avoid the disastrous medical care system.  I can also envision more people looking to alternative medicine from what is offered in the mainstream.  There is an epidemic of chronic diseases and most doctors just want to treat the symptoms.  They tend not to look at the overall picture and it is not often that a doctor will recommend natural treatments such as diet, exercise, and supplements.

I really don’t know how everything is going to play out.  But it is going to be a continual competition between the government bureaucracy and the free market.  While modern medicine is mostly a disaster compared to where it should be, I do have hope that the market will make some great strides.  Maybe one day we can enjoy a boom in the medical industry similar to what we have enjoyed with technology.  Maybe we will actually see prices going down while quality is going up.

Violence cannot solve problems.  This works both ways.  Those who promote government violence (and really, most of what the government does involves violence or the threat of violence) to solve problems will never find the solutions they are looking for.  In turn, anyone who thinks violence against the government is an answer to keeping the government at bay is completely wrong.

There was an article recently that was linked by Drudge Report.  It cites a poll in which 29% of registered voters think that an armed revolution might be necessary in the the next few years in order to protect our liberties.  While I can see where the wording of the question with the word “might” could lead to more affirmative responses, it is still an unexpectedly high number.  I’m also guessing that most of those who agreed are probably more liberty minded, although it would not surprise me if some of them were simply Obama haters.  (I use the term Obama hater here to describe someone who hates Obama, but who does not hate, or even endorses, George W. Bush, despite the similarity in their policies.)

When it comes down to it, violence is not necessary to keep the government from infringing further on our liberties.  In fact, it would be completely counterproductive.

As I’ve written so often, government can only exist with the consent of the governed.  It is not that the general population has to endorse particular candidates or even like the way the government is being run.  But the general population must accept the system they are under.  Many people may gripe about certain politicians or about how poorly certain government programs are run, but most of these same people accept the system that they live under.

If a substantial number of people all of a sudden did not even support the system of government in place, then it would become more and more difficult for that government to exist.  It would quickly lose legitimacy.  If that were the case, violence would likely be completely unnecessary.

If there simply weren’t a large enough group of people denying their consent, then using violence would do no good.  It would make the large majority just despise the small minority that much more and would solidify the government’s grip.

I always like to say that you could take every single member of Congress, along with the president and his cabinet, and make them disappear and it would not really make much of a difference in the long run.  All of the new people coming in would simply take over from where the others left off.  The power would attract corrupt individuals who seek to control others.  Unless public opinion changed, the seats would be filled by replacement sleaze balls.

So, once again, it all comes back to education.  If you want liberty to grow and government to shrink, then you have to spread the word.  You have to convince others that it would be beneficial for them to see less government and greater liberty.  You have to educate others on your moral principles against the initiation of violence and how we should apply the same principles to government.

As more and more people learn this message of liberty, then the rest will take care of itself.  The power-hungry politicians will lack support and lack legitimacy.  These are just a few individuals amongst a nation of over 300 million people.  If 150 million people want radically smaller government, then it will happen.  It won’t even require an election.  In fact, if just 50 million people want radically smaller government and another 50 to 100 million don’t care that much, then that will still probably be enough to tip the scales.

We don’t need a majority, but we need a bigger minority than what we have right now.  Our numbers are growing, but we still have a long way to go.

I recently read an article by Tom Woods where he hit on a point that I have brought up in the past.  I think it deserves attention because it can really help in showing the contradictory beliefs of others.  It may help bring clarity to others.

In Woods’ article, he was discussing the Greenbackers.  Early in his piece, Woods points out their contradictory beliefs in regards to conspiracies.  He says the following:

“This naivete on the part of the Greenbackers is especially hard to believe since so many of them are 9/11 Truthers.  That means their position is this: we believe the U.S. government conspired to kill thousands of its own citizens in the interest of furthering its imperial ambitions, but we think they are the best people to trust with the creation of money.”

Of course, in the comments section, some guy says, “Did antiestablishmentarian Tom Woods just call the position of 911 truthers (the negation of the official establishment account) terminally naive?”  I don’t know if the person who made this comment was trying to be deceptive, just didn’t read carefully, or is truly dumb.

Woods was not at all arguing for or against a position of whether 9/11 was a conspiracy or an inside job.  He was simply pointing out the contradictory position of some Greenbackers.

While Woods’ article is specifically talking about Greenbackers, I think this contradiction holds with many, particularly on the radical left.  There are many on the left who just didn’t like George W. Bush and the way he did things.  They think the key is to have the “right” guy in office, such as Obama.  While this position is incomprehensible to me, it is not the group I am referring to in this discussion.

There are some on the more radical left who think the government was involved in 9/11.  There are others who just think that the government’s wars and drone bombings are immoral.  They consider this murder, and rightly so.  In this regard, many on the radical left find common ground with libertarians.

But there is a severe contradiction here, just as Woods pointed out with the Greenbackers.  Many on the left will accuse their own government of murdering innocent civilians, yet they want the very same people to provide free healthcare and better education.  Do you see a problem with this?

Can you imagine a Jewish person escaping a concentration camp in the early 1940’s in Germany and saying that he just wants Hitler to provide a social safety net with better healthcare for his citizens?

It doesn’t matter whether the leftist thinks that healthcare is a right.  It doesn’t matter if he thinks that the state should run the education system.  If he thinks that the politicians in charge are a bunch of murderers, why would he put them in charge of education and healthcare?  Does he think they all of a sudden turn into good people?

This is an absurd position and I believe it is important to point it out when you come across it.  While it may not teach a hardcore Democrat any economics, maybe it will at least let him see the major moral contradiction in his position.  Maybe it will show him that a little common sense needs to be followed.

The FOMC statement was released by the Federal Reserve today (May 1, 2013), drawing little attention from the media and the markets.

The Fed will keep buying $40 billion per month in mortgage-backed securities, which is nothing more than a bailout for the banks.  The Fed will also keep buying $45 billion per month in long-term treasuries.  This, coupled with reinvesting principal payments, will add about $85 billion per month to the monetary base.  If this stays on track, it will be about $1 trillion over the period of one year.

All of this debt buying by the Fed has kept interest rates down.  The 10-year yield continues to stay down, which has also kept mortgage rates low.  I expect this to hold for a while, either until the Fed changes its policy in a different direction or we start to see serious worries about future price inflation.

The votes for the current policy have not changed.  Just as what happened for the last statement, all FOMC voting members voted in favor of the statement, with the lone exception of Esther George.

It is interesting to compare the current FOMC statement with the prior FOMC statement.  They are very similar, with the main exception being one sentence in the fourth paragraph.  In the most current statement, there is the following addition:

“The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.”

So while we will likely get more of the same, the Fed may adjust its so-called quantitative easing program.  The Fed could reduce its buying if it sees higher inflation or a better economy returning.  Or, scarily enough, if the Fed sees more weakness in the economy, it could actually decide to increase its already astounding pace of creating new money out of thin air.

So while we are already in unprecedented territory, the Fed has actually left open the door for even greater monetary “stimulus”.  I really don’t think Bernanke and company know what they are doing.  This is new to everyone.  The Fed is really boxing itself into a corner.  We will know that imminent danger is ahead when price inflation starts ticking up.  The Fed will eventually have to choose between a severe recession and saving the dollar.

While I expect the Fed to eventually save the dollar and stop the digital printing presses, we can never be absolutely certain.