CNBC ran an article (linked via Drudge) referring to the $2 trillion underground economy.  The article actually starts off saying, “The growing underground economy may be helping to prevent the real economy form sinking further, according to analysts.”

Americans typically don’t give a lot of thought to the underground economy.  Perhaps they may think of drugs or prostitution.  Perhaps they may think of other countries.  It is easy to imagine a marketplace in India where people are bartering for items or little shops on the side of the road.  But with mega-corporations like Apple and Walmart, Americans don’t think of their own country as having a huge underground economy.

Yet the underground economy is all around us.  Whenever someone babysits their neighbor’s kids, do you think most people would report that as income to the IRS?  What about mowing lawns or shoveling snow?  And this is just the tip of the iceberg.

The underground economy is undoubtedly much bigger today with the internet.  Just think of a website like Craigslist.  There are millions of people transacting, most of whom are not reporting sales or income to the various governments at all levels.

While many in the anti-Obama camp like to point out that unemployment statistics are false because they don’t include many people who have given up looking for work (and they are certainly correct in pointing this out), you could also argue the other way and say that there are some people who are working who are not reporting it.

I know some people who are collecting unemployment or disability and will not find a “regular” job because they don’t want their so-called benefits cut off.  It is actually a rational choice they are making (regardless of whether you think it is moral).  It isn’t even a matter of finding a job that pays more than your government checks.  You could be getting government checks that total $25,000 per year, yet be able to find a job for $30,000 per year.  But would it be worth it to work 40 hours per week just to make an extra $5,000 per year?

The person in this example can simply find some underground work on Craigslist.  He could help people move their furniture, mow lawns, babysit, shovel snow, paint houses, etc.  If he can earn $1,000 per month doing this, while still collecting $25,000 per year from his government checks, he will be making far more than if he worked a regular job.  He also gets to work far less and also avoid paying taxes on the money he does earn.

I suppose some people may look down on the underground economy with the above example.  But the problem in that example is not the underground economy.  The problem is our massive welfare state that encourages disability and unemployment.

I think in most cases, the underground economy is a positive thing.  The bad thing about it is the simple fact that it is so big because the government is so big.  Imagine if there were no income tax.  Imagine if small businesses did not have onerous regulations to follow.  Imagine if all acts between consenting adults were legal.  If we didn’t have big government, we wouldn’t have a big underground economy.

About a year before World War II ended, delegates from 44 nations met in Bretton Woods, New Hamphsire.  Out of this came the Bretton Woods system, which refers to the agreed upon monetary system.  It essentially was the beginning of the U.S. dollar becoming the world’s reserve currency.  While the Federal Reserve had been established in 1913 and Roosevelt outlawed most gold holdings in 1933, the Bretton Woods system still maintained an international gold standard.  Foreign governments could redeem U.S. dollars into gold.

In 1971, Richard Nixon formally terminated the U.S. dollar’s convertibility.  He officially closed the gold window.  This was the final nail in the coffin of the gold standard.  So amongst the libertarian and hard-money groups, Nixon takes most of the blame for ending the last vestiges of the gold standard.

While Nixon was certainly president at the time, and while he was the one who made the announcement, is it really Nixon who should take the blame?  I see Nixon as just another politician.  I am not sure that it would have mattered who had been president during that time.  You could have taken any statist president from the 20th century (which was most or all of them) and they probably would have done the exact same thing as Nixon.  It was inevitable that the system would fail.

The U.S. government and central bank were presiding over a fiat currency, while at the same time promising to redeem it for gold (at least for foreign governments).  In the 1960’s, the president of France, Charles de Gaulle, called the U.S. government’s bluff and began exchanging dollars for gold.  There was no possible way for this to last, unless the Fed had been willing to withdraw huge sums of money from the economy.  This would have meant massive deflation and massive cuts in government spending, something that was not going to happen.

By 1971, Nixon had no choice but to default.  If the U.S. had kept paying out gold, the vaults would have been emptied out.  There had simply been too much prior monetary inflation to redeem at the fixed price of $35 per ounce.  The whole Bretton Woods system was destined to fail from the start.

So while Nixon was the person who presided over the final closing of the gold window, it is hard to put the full blame on him.  Nixon was a statist and a crook to be sure.  But the system would have come to an end under almost any president, unless the president was willing to take a radical system of deflating the money supply and drastically cutting the budget.  Of course, even if that had been the case, then Bretton Woods still likely would have come to an end for different reasons.

This is really what happens with many things in politics.  One president gets the blame (or credit) for something that was inevitable anyway.  I suppose that the upcoming president (probably the next one) who has to make deep cuts to Social Security and Medicare will take a huge hit in popularity and will be blamed for pulling the rug out from under senior citizens.  But it is already baked into the cake.  The programs are simply unsustainable in their current form.  Something will have to change.  There is going to be some kind of a default.  This will probably start off as means testing (not giving Social Security payments to the rich) and raising the government’s retirement age.  Again, this is inevitable because of the system that was set up and because of the reckless politicians of the past who spent all of the surplus money.

It is always easy to make one guy out to be a villain.  He or she probably is a villain, just like Nixon was.  But it doesn’t solve anything when it is the whole system that is bad.  It wouldn’t have mattered who was president in 1971.  The Bretton Woods system was going to fail.  It won’t matter who the next president is.  The so-called entitlement programs are going to be cut.

There is currently a push in Congress to pass a bill that would allow states to collect sales taxes from online sales.  While it is not inevitable at this point that it will pass, it is looking more and more likely that something will get through.

There was a poll on Yahoo Finance that asked the following:

“The Senate is considering a bill that would allow states to collect taxes on online purchases.  Should there be an internet sales tax?”

As I write this, the answers were as follows:

10% answered, “Yes, states need the income.”
28% answered, “Yes, it levels the field for brick & mortar stores.”
43% answered, “No, zero tax is part of the e-commerce appeal.”
19% answered, “No, it will hurt small online businesses.”

Of course, this is not a scientific survey or sample.  But it does give us an idea of where the American people stand on this issue.  For the 10% who say that the states need the income, they are almost completely hopeless.  They are so far gone that I do not even try to speak to them.

For the 28% who are in favor of an internet sales tax because it would level the playing field, I have some hope for.  They are wrong, but their reasoning is a little bit understandable.  It is true that it is not exactly fair the way things are right now.  Online stores have an advantage over physical stores that have to collect sales taxes for everyone who buys.  But this is no reason to punish the online stores.  If they want to advocate fairness, then how about reducing or repealing sales taxes for the physical stores.

Having to pick just one answer, I would pick with the plurality here, although I also could concur that online taxes will hurt small online businesses.  But it is good to know that a majority at least voted against having the tax.  I suspect that a poll with a valid sample would show something similar.

Unfortunately, I don’t know if this will be enough to stop it.  It will depend on how strong of an opinion the slight majority holds.  If people are irate and start emailing and calling their so-called representatives, then it may actually stop it from passing.

If Congress does pass it, I have no doubt that Obama will sign it.  Obama and his fellow Democratic politicians like to talk about helping the poor, but most of them are simply lying.  They don’t care about the lower class or the middle class.  If they can pass another tax, they will do it.  (This isn’t to say that Republican politicians care about the poor.  It is just that their rhetoric about it is not as strong.)

One time a couple of years ago I attended a presentation given on the so-called Fair Tax (which I don’t agree with because it doesn’t do anything to cut government).  After the presentation, a few of us (mostly libertarians) were having a discussion with the guy that presented.  The subject of an internet sales tax came up.  The guy assumed that we would be in favor of it.  I am not sure why he was surprised, given that most of us were not keen on the idea of a national sales tax.

On the other hand, I think most of us were surprised that he so heavily favored a national sales tax.  I suppose I was a little naive in thinking that he at least somewhat favored free markets.  But that really clinched it for me that most hardcore Fair Tax supporters are really statists.  They don’t really want to see a big reduction in government.  They just want to try to make it more “fair” in how we are getting ripped off.

This is typical Republican conservatism.  Most Republicans will say that it is unfair that almost half of adult Americans do not pay any federal income tax.  Their solution is that everyone should have to pay something.  My solution and the solution of most libertarians is that nobody should have to pay federal income taxes at all.

In conclusion, I don’t know if the American people will be strong enough to oppose an internet sales tax.  The federal and state governments are desperate for more money right now and they are trying everything they can.  It is all going to come crashing down on them.  In the meantime, I hope that I can keep buying things online without paying sales taxes in most cases.

I have never really understood this.  Even before I was a hardcore libertarian, I could not understand how so many people could be against capitalism and for socialism.  It has been obvious to me since I was a child.  Foreign policy wasn’t always as obvious to me, as I soaked up the establishment opinions when I was young.

In regards to economic matters though, it doesn’t even matter if you don’t really understand any theories or concepts.  All you have to do is look around the world.  The places with economies that are relatively free market, like Hong Kong and Singapore for example, are generally rich countries.  There are poor people everywhere in this world, but there is no question that countries like this are far wealthier and even poor people are far better off and have far more opportunity.

Meanwhile, places that practice heavy socialism are poor.  There may be a few elite at the top who have a lot of money, but it is a very small percentage of the overall population.  There is not much in the way of a middle class.  Why does some poor guy living in a mud hut in India keep supporting the welfare state that has enslaved him and made him poor?  He obviously doesn’t know better.  But doesn’t the idea credited to Einstein ever take hold about the definition of insanity being doing the same thing over and over again and expecting different results?  When people keep electing these socialist politicians to supposedly take care of the poor and they never see any significant improvement in their own lives or poverty in general, wouldn’t they ever stop and think that maybe they should try something different?

Of course, perhaps it is even more foolish for a person living in a capitalist country who supports socialistic policies.  At least people in the U.S. and other relatively free market economies have access to information.  The guy in a mud hut in India may not have internet access.  Most people in the U.S. and other relatively rich countries do.

It is also funny how people promote these socialistic policies and yet it is a complete contradiction to their own life.  Of course, this is obvious with the Hollywood crowd, but I even see it with middle class people.  They are completely inconsistent in that they advocate policies against property rights, yet they always want to maintain their own property rights.  Their ideal world does not make any sense and there is no way we could ever go that far.  Even the Soviet Union had a little bit in the way of market pricing, either getting it from other countries or seeing it in the underground economy.

I frequently like to remind people of what Murray Rothbard and Etienne de la Boetie pointed out.  They said that all government rests on the consent of those being governed.  This is true with any form of government, but even more so in a place with relatively free elections and free speech.  If enough people realize that they are enslaved and wish to no longer be enslaved, then things can change overnight.  But it does take either a majority or a significant minority to effect such drastic change.

While the libertarian movement has not generated enough numbers to significantly reduce government, I think we are on the right track.  There are more libertarians today than there probably have been in the last one hundred years.  And today’s radical libertarians are very well-read and knowledgeable.  I would venture to say, because of the internet and the benefit of seeing more history, that today’s radical libertarians are more knowledgeable than the Founding Fathers of the United States.

Socialism is not inevitable.  I think as the government continues to wreck the economy and create more unsustainable inflation and debt, that more people will start to examine the situation.  When the government has to start defaulting on its previous promises, then people will be looking for answers.  That will be liberty’s big opportunity.

The topic of retirement accounts and the possibility of government confiscations has grown in popularity.  It is easy to understand why.  When people see what happened to the bank customers in Cyprus and they see their own government getting ever-more hungry for more tax money, it is easy to get paranoid about these things.  (Is it paranoia if it is true?)

I have written about this topic before and will probably continue to write about it in the future.  I think the U.S. government will certainly try some form of confiscation of retirement accounts.  This could include 401k plans, IRAs, pensions, and of course, the government’s own retirement plan of Social Security.  Actually, when it comes to government pensions and Social Security, this is a completely different subject.  There isn’t actually any money there and the only way they can be funded is through taxes, borrowing, money creation, or selling government assets.

For this post, I am mainly referring to 401k plans, IRAs, and possibly private pension plans.  In a sense, there is already confiscation, even if somewhat indirect.  If you withdraw from your retirement account before the government-approved age, then you will pay a 10% penalty on top of the income taxes that you owe.

Another interesting thing is that you can’t generally withdraw from your 401k workplace plan if you are still currently employed with the employer that sponsors your plan.  I have complained about this fact to others before.  I say, “this is my money and I should be able to do what I want with it.”  I point out that someone could be rich with their 401k plan, yet they might not have two dimes to rub together.  They could be struggling to pay their bills and meet their basic daily needs and yet have hundreds of thousands of dollars in a 401k plan.  And it isn’t always that easy to get a hardship withdrawal as the criteria can be very specific.

The reaction I get from people varies.  Some agree that people should be able to access their retirement accounts.  But you would be surprised how many will justify the current scenario.  They will say things such as, “well, it is supposed to be for your retirement.”  Thank you for being my babysitter in my life.  Are there any other decisions that you think should be made for me?  Should I get government approval for who I marry or where I go to dinner?

This is why such rules exist.  People do not have to expressly consent.  They just have to consent enough that they are not against it.  If someone doesn’t know or understand about a particular issue (and this could be on anything) or if they just don’t care, then the politicians will come down on the side of bigger government and more power for themselves almost every time, assuming that a majority of people are giving this tacit consent.

As far as retirement account confiscation, I think it will continue to be more subtle.  The government will not throw the frog into boiling water, unless it is just a test run.  They will warm the water up slowly on us frogs.  They may impose a bigger penalty for early withdrawal.  They may limit how much you can have in a retirement account.  They may start off with “government-guaranteed” mutual funds (or something like that).  They will be voluntary at first.

If there are further steps in retirement confiscation, they will likely be in baby steps.  You will probably have warning signs.  I doubt it will happen all at once.  I don’t think the government is likely to announce that it is simply confiscating 10% of everyone’s retirement account.  There would be too much backlash.  The politicians are really stupid if they do something like this, as they could face something of a revolution.

This will be an interesting issue to continue to follow.  You should be cautious if you contribute to, or have, a retirement account.  I used to be one of those people who thought it was stupid not to contribute.  I pointed out that it was free money from your employer if you could get a company match.  My opinions are far more mixed now, if not opposite.

As with everything else in your investment life, you should diversify.  I think it is ok to have a retirement account, but you should realize the risks are there for the government to get its hands on your money.  You should never contribute more than what it takes to get a company match.  But I think there are times when it doesn’t even make sense to get a company match.  You are locking up your money, particularly since you are working for the company and can’t withdraw anything.  If you find that you have more money in your retirement account than anywhere else, then it probably makes sense for you not to contribute any further.  You would be putting too many eggs in one basket.

As I said, there will probably be warning signs of a government confiscation.  It will come in baby steps.  You should be in a position to protect your money, even if it means withdrawing it early and taking a 10% hit.

With unemployment numbers high, there is a continual discussion about how to create jobs.  There are many factors for the high unemployment rate, and most of them have to do with government interference in the marketplace.  Minimum wage laws, other labor laws, regulations against business, taxes, and central bank inflation are just some of the major reasons for high unemployment.

In conclusion, job creation is not the ultimate goal.  Job creation should be handled by the demands of the free market.  Unemployment will decrease and production will increase, if and when government at all levels loosens its grip and reduces spending.

I recently saw an episode of Shark Tank.  One segment featured a young guy who had a great invention.  It was a lid (in various sizes) that fit over a common dinner plate.  It sealed in freshness and was easy to remove.  He already had his business up and running and had great potential.  The “sharks” also saw the great potential.

The guy came in and asked for $90,000 for a 5% share in his company.  Instead, he got offers of $900,000 for 30% and $1,000,000 for 25%.  Then things got really bad.  Something happened to the humble guy that walked in there.  He became really greedy, and not in a good way.  He supposedly came up with some figure in his head on what he wanted, but then he said he wouldn’t share it.  Eventually, he asked for $700,000 for a 5% share of his company.  (I am writing this by memory, so hopefully my numbers are accurate.)

He had increased his asking price almost 8 fold in the matter of 5 minutes.  This supposedly brilliant guy who came up with a great product was acting like a complete moron.  Four out of the five sharks bowed out, just because they couldn’t stand the guy and couldn’t trust him any longer.  I don’t blame them.  I would not want to work with or invest with someone that arrogant.  He ended up making a deal for $90,000 for an 8% stake.  He was lucky to get that much, if anything.  He could have had ten times that amount while still maintaining the majority stake in his company.

There are a couple of sayings that came to mind watching this:

“A bird in the hand is better than two in the bush.”

“If someone puts a million dollars in your hand, close it.”

That last saying could literally have applied to this guy.

It is good to watch things unfold like this.  The guy entered the room and appeared to be humble.  Then everyone was excited about his product and his company and started making strong offers.  That sunk the guy.  He became greedy.  He became arrogant.  He was out of touch with reality.  He should have had a firm idea in his head of what he would accept going into the room.  He was unprepared.

It almost reminds me of a real estate investor in 2006 who was on top of the world with $5 million in properties.  He refused to sell and take any profit.  He thought he was invincible.  Then his whole world came crashing down on him.

It is important to give yourself a reality check every once in a while, particularly when things seem to be going really well.  It applies in life and investing.  Sometimes it is a good idea to take some profits off the table.  And if someone puts a million dollars in your hand, just close it.

The move in gold was really unprecedented, unless you can remember back to the early 1980’s.  On Friday, April 12, gold went down significantly.  Its drop was approximately 5% in one day.  Then on Monday, April 15, gold fell by its second largest dollar amount ever, in the course of one day.  It was down almost 10%.  It fell about $140 per ounce in one day.

I am seeing a lot of stories on why this happened.  I think it could be any combination of the reasons I see.  One thing about observing the markets is that you can never really be certain on why something goes up or down in price.  Sometimes there are more obvious things like a Fed announcement or seeing a stock go up after its earnings are released.  But it always comes down to buyers and sellers.  It comes down to the number of buyers and sellers and where they are willing to meet on a price.  In the case of gold for these two days, there were apparently more people who wanted to sell than buy.  For the people who really wanted to get out of a long gold position, they had to come down in price.

There were rumors that the government of Cyprus was selling its gold reserves.  Then there were more rumors that other European countries like Italy would eventually have to do the same.

China came in with slightly lower growth than expected, fueling fears of a coming recession there (hence, less demand for gold).

I continue to believe that we will either see a relatively quick recovery in gold or we will see a deep recession.

If we see a recovery in gold, I don’t necessarily think it will happen in the matter of days.  We will probably see some more volatility, including down days.  We may yet see some new lows (for the last couple of years).  But I would expect to see the price going back up in the next few months.  If we hit July and prices are at or below where they are now, then watch out for a recession.

If the U.S. economy does fall back into recession, then it will be really scary for a libertarian who understands economics.  It means that the Fed’s monetary inflation of $85 billion per month ($1 trillion per year) is not enough to juice the economy.  That means that there is some major malinvestment that couldn’t even be propped up for a while longer with massive monetary pumping.

Even scarier is to think of what the Fed will do.  If we hit another deep recession and the official unemployment statistics get worse again, will Bernanke and company up the ante again?  Will they go for $2 trillion per year in monetary stimulus?

In this respect, gold should be a solid investment over the next few years.  We are likely to see higher price inflation expectations or massive monetary inflation by the Fed.  Perhaps we will get higher price inflation and still get more monetary inflation.  If the Fed thinks the economy is that shaky, we can only guess as to what steps it will take.

One last point that I think is important in all of this is that this is a good reminder of why it is important to have cash (or liquidity).  I am an advocate of the permanent portfolio as described in Harry Browne’s book Fail-Safe Investing.  I have suggested little tweaks if you don’t like holding such a high percentage in bonds.  But this huge drop in gold just shows how important it is to have that cash portion.  With gold down in price right now, it is actually a good time to be adding to your gold position.  If you don’t have any cash, then that is difficult to do.  It also serves to help balance out your portfolio to the allocated percentages.

The two big down days for gold were a good reminder that we can’t predict the future and that we must be prepared for all types of scenarios.  While you may think that gold has to go up, other people may have a different view.  You may lose out in the short run.  In order to claim victory in the long run, it is important to stay somewhat diversified.  This includes having cash or cash equivalents.

April 15, 2013 has been a crazy day.  I was originally going to write some thoughts about tax day.  Then gold went into freefall and I was going to write on that.  Then there were bombings at the Boston Marathon.  So I will just touch on each topic briefly and expand in future posts if necessary.  I will probably write more about the plunge in gold.

People tend not to take a step back with some perspective when a tragedy happens.  The bombings at the Boston Marathon is certainly a newsworthy event and is a tragedy for those involved.  But we have to wonder what kind of overreaction we will see (much like the school shooting in Connecticut).  Americans forget that this is a country of 300 million people.  There are about a hundred people who die every day on the roads in the U.S. alone.  Yet we don’t hear much about them.  But then when a bombing happens, all panic breaks loose.  Who knows what totalitarian step the government will take next?  How many more billions or trillions will be wasted?

These bombings in Boston don’t seem like a big professional job as we saw on September 11, 2001.  It could be a lone nut or a couple of nuts.  Maybe it was a Muslim terrorist.  Maybe it was an American with a certain gripe.

I am actually surprised how little we have seen in the way of terror attacks in the last 10 years.  The U.S. government has killed hundreds of thousands of people in Iraq, Afghanistan, Pakistan, other parts of the Middle East, and Africa.  There have to be a lot of friends and family members who are really ticked off.  It is actually shocking that we have not seen more blowback in the U.S.

As for tax day, I was just going to reinforce the point that we shouldn’t concentrate on taxes so much.  It is the total level of government spending where we should be concerned.  It doesn’t matter if the government spending is through taxation, borrowing, or monetary inflation.  It hurts our standard of living, regardless of how the money is obtained.

As for the plunge in gold, I am quite baffled.  It was down almost 10% in one day.  And this was after a 5% drop on Friday.  This was huge.  Before all of this happened, I had read from a couple of chart guys that sometimes gold corrects before it enters into a new bull market.  I don’t know if this is what they had in mind.  I am not a big chart guy for predicting the future, but it is interesting to see some of the historical trends.

Either we are going to see gold bounce back up or we are going to see a hardcore recession.  If we see a deep recession while the Fed is pumping in $85 billion per month, then I am more scared than you can imagine.  We are in for some very serious pain if that is the case.  And then we have to worry how much more the Fed is going to pump in.

I am going to discuss gold some more in the coming days.  I want to look at it in context with an overall portfolio of investments.  I also want to discuss the possibilities of what happens next.

April 15, 2013 was a crazy day.  Unfortunately, I think we are going to see some more crazy days ahead, particularly with the economy.