I have shared my views before on buying residential real estate, both for investment purposes and for your primary residence.  I have been clear that when you buy a house to live in, you are buying it mainly as a consumer good, whether you like it or not.  You need a place to live and most people prefer to have certain luxuries that are available.  There is nothing wrong with that, but you shouldn’t fool yourself into thinking that buying a million dollar house on the golf course is a good investment.  It is possible it could turn out to be profitable, but for most people it will be more of an expense.

If you buy a house at a reasonable price and your expenses are roughly equal to what you would pay in rent, then I think you will not regret it.  This is assuming that you buy in a decent area and you buy a house in decent condition.

I think for many, buying a house is like a forced savings plan.  There are many people who simply are not disciplined enough to put away large sums of money.  It burns a hole in their pocket and they feel the need to spend it.  This is part of the reason that there are many people close to retirement age who have very little in savings.  Most of their income in retirement will come from Social Security and pensions.

The small bit of good news is that some of these retirees will have lower expenses due to having paid off their house.  While you still have to pay your property taxes, insurance, and repairs, along with all of your other expenses in life, at least the regular mortgage payment isn’t there.  You are living almost rent free.

So while millions of Americans have little discipline in saving any significant money, many of these same people will pay their mortgage every month.  Some may be really careless and take equity out of their house for whatever reason.  They keep extending the term on their loan and they will never be in a position to pay off the mortgage.

But there are still many who don’t take money out and only refinance to get a better rate.  At some point, the mortgage will be paid off, even if it takes a full 30 years.  Again, it is a forced savings plan, at least in the sense that it is one less expense to worry about.  It will help the cash flow situation and make the dream of a comfortable retirement a little less far fetched.

If you own a house and have a mortgage, I encourage you to set up some kind of an amortization schedule.  You can make your own on an Excel spreadsheet.  There are many websites (like this one) where you can type in your approximate figures  and get an amortization table.  You can even find some websites where you can see the difference if you make a one-time extra payment towards principal, or even if you pay a little extra each month.  The compounding effect really speeds things up.  You might even be able to find such a tool through the company that holds your mortgage.  You should at least be able to see how much is going towards the principal balance of your loan each month.

I encourage you to look at this amortization table once a month and see the principal amount that is being paid down each month.  It grows slightly each month, maybe by just a dollar.  If you make an extra payment, you can make it grow faster.  Even if your amount going towards principal is only $200 per month, that will add up to over $2,400 in a year from now.  The following year, the amount will be even bigger.  So month by month, year by year, you are slowly paying down that huge loan.  As long as you don’t refinance or take money out, then it will eventually be paid off.

While this does not offset the lack of discipline of many Americans in not saving, it does help some.  And it is a very powerful feeling when you can one day be truly debt free and own your house outright.

The coming days will be filled with news about a possible “government shutdown”.  The budget runs on a fiscal year that ends on September 30.  The Republicans are proposing a budget that does not include the funding of Obamacare.  Some of the Republicans are saying that they are willing to see a so-called government shutdown unless Obamacare is defunded and/ or repealed.

Unfortunately, this is not great news for libertarians, despite the rhetoric.  This is mostly politics as usual.  The so-called government shutdown will consist of denying visitors access to the Washington Monument, national parks, and some museums.  It may slow down a few processes.

There are a lot of things that a government shutdown does not entail.  It doesn’t mean that Social Security checks will stop going out.  It doesn’t mean that all wars will end and the military will come home.  It doesn’t mean that foreign dictators will stop getting U.S. tax dollars.  It doesn’t mean that federal school funding will shut down.  It doesn’t mean federal agents will stop arresting drug users.

In other words, this is nothing for a libertarian to get excited about.  I suppose it would be a positive thing if Obamacare is defunded, but this is not likely.  If Obamacare dies, it is because it is self-destructing under its own weight.  In the words of Nancy Pelosi, we are still waiting to find out what is in the legislation.

Of course, most of the Republicans are using Obamacare for political posturing, even if they happen to be right that Obamacare is an abomination.  Most Republican politicians want their own form of fascist/ socialist healthcare.  Most do not advocate a free market in medicine and health insurance.

After all of this, we will also be in for a debate about the national debt ceiling.  Obama is making these ridiculous speeches saying that we have to pay our bills.  But the government can still pay the bills without raising the debt ceiling.  It is just that the politicians would actually have to balance the budget going forward, which they do not want to do.  That would mean giving up on their foreign wars, their drug wars, their funding of dictators, their handouts to rich farmers, and a good portion of the welfare state.  It would also mean a change in so-called entitlements.

I have absolutely no doubt that the Republicans will fold on this too.  Of course, it is ultimately the responsibility of the American people.  While I think there has been a bit of a change in public opinion towards more liberty, it is still way too far away.  The American people say they care about the national debt, but most will not care that much, especially if there are scare stories about government shutdowns and terrorists under your bed.  They will tolerate more government debt, as long as their lifestyle is not taken down too dramatically.

I think there would be a few Republicans in Congress who would actually stay strong and refuse to vote for an increase in the debt ceiling.  But there are not nearly enough, and most will fold under public opinion.

I can only hope that one day the American people are so strong in their feelings of not raising the debt ceiling that politicians will actually fear for their jobs if they vote for another increase.  Until that day comes, or until we see much higher price inflation, then expect more of the same.  Expect the national debt to keep going up.

I have been doing several posts on the topic of monetary inflation.  Among other things, I have pointed out that inflation is bad for the economy because it misallocates resources, and I have also pointed out that inflation redistributes wealth.

Today, I want to focus on government spending.  Without the existence of a central bank (in this case, the Fed) and without a monopoly on money, the federal government would not be able to spend anywhere close to the amount that it currently does.

Since 2008, the government has been averaging deficits of about $1 trillion per year.  This would have been unheard of prior to 2008.  We were at a point where government debt was paying for about a third of the total budget, or more.  While not all of this debt is bought by the Fed, a sizable portion is.  Plus, the Fed is what has enabled the low interest rates on government bonds and the assurance that there will be no default, at least in nominal terms.

If the government and the Fed did not control the money supply, then the only way the government would be able to issue debt is by actually finding investors.  This could include foreign central banks as it does now.  But without the ability to create new money out of thin air, the issuance of debt would be limited to a large degree.  If the debt got too high, then investors (including foreign central banks and governments) would stop lending, worried that the U.S. government would not be able to meet its obligations.  At the very least, interest rates would rise to compensate for the risk.  So the debt would be self limiting.

This is the way it is for state governments and city governments.  They can issue debt, but they are very limited.  They cannot kick the can down the road as far.  The necessity of a balanced budget (or default) comes up much quicker.

If there were no monopoly on money and no Fed to create it out of thin air, then the U.S. government would look something like Detroit right now.  Actually, it never would have gotten to this point.  There is no way that the government would have been able to accumulate over $16 trillion in debt from private investors.  We would have seen a balanced budget, or something very close to it, a long time ago.  The government would have to fund itself on the current tax collections.

Of course, if the government couldn’t spend so much money, then a lot of problems would be solved.  Perhaps there never would have been a war in Iraq, along with many of the other wars.  Perhaps we wouldn’t see disastrous monstrosities like Obamacare and Bushcare (prescription drugs).  Perhaps we wouldn’t see billions of dollars being handed away to dictators in foreign countries.  The list could go on and on.

If the government were forced to spend, let’s say, $1 trillion less per year than it is spending now, then that would be $1 trillion less in misallocated resources.  It would be money that could be saved, invested, and put into consumer products and services that are actually in demand in the marketplace.

Monetary inflation is disastrous in so many ways.  It works hand in hand with big government.  The two feed off of each other.  If there were no Fed to print digital money and if money were left to the marketplace, then the government would at least be forced to balance its budget.  This would mean much lower spending and it would mean an overall higher standard of living for the American people.

With the Fed announcing that it will continue to keep its foot on the accelerator at a pace of approximately $85 billion per month, I have been focusing on the effects of monetary inflation.  In my most recent post, I stressed the point that monetary inflation’s most harmful effect is misallocating resources on a grand scale.  This includes discouraging the act of saving money.  This is what harms the overall economy the most, as it serves to eventually lower our standard of living.

Since the news broke that the Fed would continue its policy of expanding the monetary base by $85 billion per month, I have been hearing and reading analysts on what it means and the possible consequences.

There are some, even in the establishment, that will admit that there could be some negative consequences from continued monetary inflation.  Unfortunately, almost everyone gets it wrong, or at least misses the biggest consequences.

I have heard many references to the stock market, as if the worst thing that can happen from the Fed’s policy is that the stock market takes a nose dive.  This is actually what is concerning many analysts, even though most Americans don’t own individual stocks and most of the mutual fund ownership is in 401k plans.  It is not that I am dismissing the stock market or that it isn’t important.  But a future bust in the stock market is just the tip of the iceberg of the consequences from this disastrous Fed policy.

I have heard a few analysts discuss bonds and interest rates.  Some are worried that the Fed is doing too much to prop up interest rates and that it could mean trouble in the future in the form of spiking interest rates.  Some would rather see it more gradual and controlled.  Of course, if we end up in a severe recession, interest rates could go down even without the Fed’s buying of government debt.

I have even heard a few analysts on television at least allude to the possibility of rising prices.  This is certainly a real concern, even with the government CPI numbers relatively low at this point in time.

Now I am going to pick on my fellow libertarians.  There are some libertarians (perhaps I should say most libertarians) who will say that the consequences of this Fed policy will be in the form of higher consumer prices.  But this has been wrong up until now, even with the Fed’s massive expansion of the monetary base since 2008.  First, it doesn’t have to be consumer prices going up.  We have actually seen asset prices, such as stocks, going up far more than consumer prices.

Second, while rising prices are a concern and may be a consequence of the Fed’s monetary inflation, it doesn’t necessarily have to be.

So what is the major problem with all of this monetary inflation if price inflation stays in check?  The main problem, aside from the immorality of it all, is that it misallocates resources.  It directs resources into areas where it would not happen in a free market environment.  It also misallocates resources in the sense that it distorts savings and investment.

As I mentioned in a recent post, money is just a medium of exchange.  Creating money out of thin air, or destroying it, doesn’t in itself produce or destroy wealth.  But it does affect future productivity.  Production comes from savings and investment.  If the Fed’s monetary inflation reduces the amount of money being saved, then this will harm future wealth production.

The important point to take away here is that we will suffer consequences from this monetary inflation, regardless of what happens with consumer prices. We have already suffered from the monetary inflation of the last 5 years.  This doesn’t have to be in the form of higher prices.  If price inflation stays relatively low at 2% per year, but wages stay the same, then the average American will be getting approximately 2% poorer every year.  This becomes quite significant after a few years.

In conclusion, rising consumer prices is just one possible consequence of monetary inflation.  But the one certain consequence is that the average American’s standard of living will be lower than it otherwise would have been.

The long awaited FOMC announcement came and it didn’t disappoint investors.  The general consensus was that the Fed would begin to “taper” its purchases of assets, even if mildly.  Instead, the Fed will continue to increase the monetary base by $85 billion per month, which equals out to just over $1 trillion on an annual basis.

You can read the September 2013 statement here.

For comparison, you can read the July 2013 statement here.

Over the last several FOMC meetings, we have seen very little in the way of changes in the statements released.  In comparing some of them, they read almost word for word, with very slight changes.  While this latest statement was still similar, there was additional language added in justifying the continued asset purchases and to say that they will continue to assess the situation in terms of when to scale back.

The key part of the latest statement reads as follows:

“Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy.  However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.  Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.  The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.  Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.”

The statement did not mention that this would continue to bail out the banks.

As soon as this news hit the wire, stocks shot up.  Gold and bonds did even better.  It seemed that the only long position that did poorly after the announcement was the U.S. dollar.

I am not sure how long this whole thing can be sustained.  This policy is a total disaster.  I really believe that these policymakers are in over their heads at this point.  This continuation of massive monetary inflation means that wealth will continue to be redistributed.  It means that resources will continue to be misallocated.  It means bubbles and future busts.  It means a greater likelihood of high price inflation in the future.  It means that when the eventual recession/ depression does hit, it will be that much more painful.

I will continue to revisit this subject, as it seems that the whole economy is predicated on Fed policy at this point.  Unfortunately, almost everything the Fed is doing is wrong, at least for the average American.  We will be poorer because of this.

On the Mises Institute’s website, Frank Shostak has an article called “Can Quantitative Easing Lift Economic Growth?“.  He points out that there is no monetary pumping that can be beneficial for the economy.  Instead, monetary pumping hurts the economy as it “leads to the weakening of the wealth generation process”.

Shostak is right on the money (no pun intended) in his analysis of monetary inflation.  In his article, he states the following:

“Hence various studies that supposedly show that the Fed’s quantitative easing can grow the US economy are fallacious.  To suggest that monetary pumping can grow an economy implies that increases in the money supply will result in increases in the pool of real wealth.  This is however a fallacy since all that money does is serve as the medium of exchange.  It enables the exchange of the produce of one specialist for the produce of another specialist and nothing more.  If printing money could somehow generate wealth then world wide poverty would have been eliminated by now.”

This is an important point.  Money, in this case the U.S. dollar, is a medium of exchange.  By creating more money, we don’t get any more actual goods and services.  The creation of money also doesn’t actually destroy wealth in and of itself.  But as Shostak points out, it hurts the wealth generation process.

In other words, if the Fed creates another $1 trillion out of thin air tomorrow, this doesn’t actually destroy anything at that particular moment.  But it does hurt future production in a big way.  It redistributes wealth and it also misallocates resources.  The newly created money changes how resources are used.  We saw this back in the housing bubble when too many resources were diverted into the housing sector, as opposed to other consumer goods or savings and investment.

Monetary inflation distorts the economy.  It sends artificial signals that are not in accordance with market demand.  In the long run, it makes us poorer.  Even people who directly benefit from the initial monetary inflation (for example, investors or bankers) are usually hurt in the long run.  Everyone’s standard of living is affected in some way, as there is less production of goods and services that would be created absent the monetary inflation.

Many people, even free market thinkers, believe that the main problem with monetary inflation is that it causes prices to rise.  While monetary inflation does cause prices to be higher than they otherwise would have been (not necessarily higher though), money creation is detrimental in many other ways.  It redistributes wealth and it misallocates resources.  We have a lower standard of living because of monetary inflation by the Fed.  Unfortunately, it is a bad sign for our standard of living that the Fed continues to engage in massive monetary inflation.

Monday, September 16, 2013, was an interesting day in the markets.  I usually avoid discussing one-day market moves, unless something big happens.  But in this case, the interesting event is why the markets moved.

Lawrence Summers, a former Treasury secretary, withdrew himself as candidate as the next chairman of the Federal Reserve.  This led to a belief that the next chair of the Fed will likely be Janet Yellen, a true inflationist.  The markets responded.  Stocks were up big to open the day and interest rates went down. Bond buyers were optimistic that the Fed would continue to prop up the bond market with more quantitative easing (monetary inflation).

Summers was thought to be less of an inflation “dove”.  He is a Keynesian like most of the rest of them in the elitist club, but I suppose Yellen is more outspoken about her desire for massive monetary inflation.  Her and Paul Krugman could get along just fine.

In the grand scheme of things, I am not sure that the next Fed chair matters all that much.  I have already offered 3 reasons on why I think there will not be a long stop of quantitative easing any time soon.  I think as long as price inflation remains relatively low, then the Fed will keep propping things up with more funny money.

While I don’t think the next Fed chair matters much in terms of policy, it is still an interesting thing to watch.  Even more interesting is to see how the markets react.  Stocks and bonds really liked the news that Yellen has a good chance at getting the nomination.

What does this tell us about stocks?  It shows that much of the gains in stocks are taking place due to monetary policy.  As long as the market sees more monetary inflation in the future, then investors are willing to buy stocks.  The same goes for bonds, at least in the short term.  But it also means that stocks and bonds could come crashing down when a tightening of monetary policy seems more likely.

Ironically, stocks and bonds gave up much of their gains by the end of the trading day.  This was blamed on talk from Obama about the debt ceiling.  We can’t ever really be certain about why stocks and bonds rise and fall, other than the behavior of buyers and sellers.  Maybe the stock market retreated a bit with investors realizing that it doesn’t matter that much who the next Fed chair will be.  There was even a little talk at the end of the trading day that maybe Summers isn’t out of the running for sure.

In any case, it seems ridiculous that the stock market would shoot up because of the possibility of one particular individual getting appointed as Fed chair.  But that is the reality of the world we live in.  Until more people realize they are being ripped off by the central bankers and the politicians, then it will continue to go on in some manner.  This is why we have to pay attention to politics and central bank policy.  It has a great effect on our money and our investments.  It shouldn’t be this way, but that is the reality we have to deal with until things change.

Using my blog stats, I can see what people are searching for on the internet.  A popular search is for “401k confiscation”.  I have written about it before.  I think it will be tried by politicians in the U.S.  I am less sure that it will be successful.  In fact, I see a shifting of public opinion in the U.S.  I see more people leaning towards freedom in almost all areas.  This includes foreign policy, civil liberties, and economics.

There was recently news that the government in Poland is trying to reduce the government debt by seizing private pension funds.  Many see this as a preview of what is going to happen in the U.S.

I think the federal budget is going to become more and more of an issue.  It is going to get difficult to handle.  The federal government will not be able to continually run the massive deficits that we have seen over the last few years.  The American people will not tolerate a significant increase in taxes.  And I think the Fed will eventually be more limited in its power, as it seeks to avoid massive price inflation.  Eventually, the government is going to have to actually cut spending.

But the politicians are going to try every trick in their playbook.  I assume this will include retirement account confiscation.

I can’t be sure, but I have a prediction of what will happen.  It will be the people with government pensions who will take the hit.  This is how it should happen.  It is not as if there has been money set aside for government employee pensions.  It is just like Social Security.  It is full of IOUs.  So the only way to pay out government pensions in the future is by taxing people or borrowing even more.

If you are planning your retirement in the distant future based on a government pension, I would be careful.  This is not guaranteed, as many would have you believe.  The government has broken many promises before and it will happen again.  This includes federal, state, and local government pensions.  State and local pensions will probably depend a little more on the specific fiscal situation of that government.  There is little doubt that the federal government is the worst off.  The federal government has just been able to kick the can further down the road because of its digital printing press (the Fed).

On the other hand, I don’t think the government will be successful in confiscating 401k accounts.  Some politicians will try, but I believe there will be too much backlash.  That is at least what I hope for anyway.  Each 401k has a specific name on it.  It is tagged.  People will view this as outright theft, which they should.  The only 401k confiscation I see happening is what we see right now with the Fed devaluing your dollars.

Private pensions through companies will be a little trickier.  I don’t think the government will be successful in confiscating them in the U.S.  On the other hand, if they are not properly funded and there are defaults, we might not see a government bailout due to insufficient funds.  So there are no guarantees with anything, but I think private pensions will be safe from government hands.  I am just not sure how well funded they are.  It can be tricky, actuarially speaking.  What if people live a lot longer than was expected?

In conclusion, I am hoping that public opinion keeps retirement accounts safe from the government.  This, of course, would not include government pensions where taxes have to be collected in order to pay them out.  If you have a government pension that you are depending on, I would have a back up plan.  If you have a large 401k, you have a better chance of escaping the theft of the U.S. government.  However, even here, I would not put all of your eggs in your 401k basket.  Desperate politicians can do crazy things, even against a massive public outcry.

I recently wrote a post about frugality.  There was an article on a millionaire who is extremely frugal and I saw a lot of comments from people criticizing frugality.  Some were not just criticizing this one person, but criticizing the concept.  I pointed out that these people have a lower class mentality.  They cannot plan for the future.

One other thing I pointed out in that post is that most people are stuck in their jobs.  I asked, “How many people under the age of 65 do you know who could just quit their job at any time and be fine, financially speaking?”

For this post, I want to expand on this point.  I want to compare the lives of two people.  One person has accumulated a net worth of $500,000 and the second person has a net worth of $5,000.  These amounts do not include equity in their primary residence.  While their age doesn’t matter much, let’s say they are both 40 years old.  Let’s also say they make about the same income from their job, say around $65,000 per year.

There is a big difference in the amount of wealth these two people have built up.  The person with half a million dollars has 100 times the amount of money.  Their actual day-to-day lives may not seem that much different.  They may live in similar neighborhoods and drive similar cars.  They both get up early 5 days a week to go to work.

Yet there is a big difference between these two.  One difference is obviously their mentality.  The person with $500,000 to his name is future oriented.  While the second person will have some future orientation, he is much less so in a financial sense.  He does not see the need to save money.  He does not see the point in being frugal.  He figures retirement is a long way away anyway (and on this he is correct).  He figures he may as well enjoy life now and not worry about saving.

The guy with $500,000 cannot retire with his current lifestyle.  Perhaps he could go live in a remote area of Thailand and his money might last for the rest of his life.  But to keep his current lifestyle, half a million dollars will not last him for the rest of his life.

Yet there is still a big difference between these two people and it is not just that one will be able to retire earlier than the other (if the other is ever able to retire at all).  The guy with more wealth has far more flexibility in his life.

You could come up with any number of scenarios where the guy with much greater wealth will be at an advantage.  Let’s say some great once-in-a-lifetime opportunity comes up that requires him to leave his job.  The wealthier guy might be able to take the opportunity.  He could quit his job, knowing he has a cushion.  Or maybe he could just take a leave of absence.  The guy with only $5,000 to his name probably couldn’t even take a two-month leave of absence from his job.  He wouldn’t be able to pay his bills.

Maybe both guys get tired of their jobs and want to make a career switch.  But in order to make that switch, they will have to take a pay cut.  The wealthier guy can easily do it.  He already lives below his means and he has plenty of savings to soften the blow of a much smaller income.  The poor guy doesn’t  really have this option, unless he is willing to drastically reduce his standard of living, which is highly unlikely.

There are also other opportunities that may become available.  Maybe there is a great deal on the house next door.  Maybe you have a friend that has a great new business that needs capital (although I would caution you to be careful on this and to minimize your potential losses).  Maybe you have an opportunity to start your own business and need some cash in the bank to hold you over until you start increasing your profits.

The whole point is that building wealth offers you more freedom and flexibility in your life.  Money doesn’t guarantee you health or happiness.  But it can often allow you to take advantage of certain opportunities that you might otherwise have had to turn down.

My recommendation is that you have the mentality of the upper class.  You should plan for the future.  People who save some money are often happier than those who feel they have to spend everything they earn.  Money doesn’t buy you happiness, but having money in the bank can help with your happiness.  It can also help you get out of bad situations in many cases.