I believe there are two major threats facing the American economy, both now and in the future.  One is the unfunded liabilities, which by some estimates is now over $200 trillion.  This will be solved through default.  It is hard to say how this default will take place, but it will be mostly older people who feel it the worst, since most of the unfunded liabilities are in the form of Medicare, Social Security, and government pensions.  While this will be a painful process, there is a solution, even if it isn’t exactly ideal.

The other major threat facing America is the banking system.  It is highly regulated.  There is essentially a cartel.  There is no free market.  The Federal Reserve and the FDIC are the biggest problems as they create a giant moral hazard in which the big banks reap major profits during the good times and then get bailed out during bad times.  It is corporatism at its worst.

The banks were majorly bailed out in 2008.  It is still questionable just how solvent the major banks are today.  It is always hard to say because of the presence of the Fed and the FDIC.  If those entities didn’t exist and there were a true free market in banking, then insolvent banks wouldn’t last long.  They would have to be far more responsible or face bankruptcy.

This is an extremely difficult subject for libertarians.  If I had the opportunity to eliminate the federal Department of Education tomorrow, I would do it instantly.  While it wouldn’t be pain free, it wouldn’t be devastating for anyone, except perhaps the bureaucrats working there.  I could say the same thing about many federal programs.  They could be eliminated almost immediately without having any widespread devastating impact on the whole economy.  I can’t say the same thing for the FDIC.

While most Americans opposed the bailouts in 2008, Americans would have been far more upset if they had gone to their local ATM and not been able to withdraw funds.  It would have been even worse if they couldn’t write checks or use debit cards.  I understand how fragile the banking system is right now and how dependent the whole economy is on the current system.

I have my ideas on what a libertarian society should look like.  There should be a free market in banking and money.  The marketplace should determine the money used.  It would probably pick gold.  It might be more than one thing.  Regardless, that is for the market to decide.  If banks are honest about their fractional reserve lending, then I don’t think it should be illegal.  I have written about this before.  But they would be on their own, with no bailouts.  I don’t believe we would see much fractional reserve lending in a true free market environment.

The big question is how we get from here to there.  How do we phase out the FDIC and the Fed?  It surprises me how little I see this discussed in the libertarian community.  I think it is a difficult subject for libertarians because it almost takes some form of central planning to get away from the central planning.  It is hard just for me to say that as a libertarian.

Jeffrey Herbener presented testimony before the Subcommittee on Domestic Monetary Policy and Technology Committee on Financial Services back in May 2012.  If you go to the latter part of his written testimony titled “Monetary Reform”, you can read his idea on how to reform the system.

In short, Herbener advocates getting to a system where the primary step “is to turn FRNs into 100-percent-reserve redemption claims for gold coins.”  He continues, “The other step along this path to a market monetary system is to establish a 100 percent reserve of money against bank-issued fiduciary media.”  He goes on to advocate that banks would need to build their cash reserves up to 100 percent of their checkable deposits (which would be much easier to do now since banks have accumulated massive excess reserves).

Assuming that the Fed holds the gold that it says it does, this could then be used to back up the existing cash in the banking system.  Herbener calculates that the redemption ratio would be $4,207 per ounce of gold.

I give Herbener great credit for at least trying to lay out some sort of solution.  Most libertarians can not offer any serious ideas on how to get out of the current mess without creating total havoc.  I think Herbener is somewhere along the right track.

Herbener says, “Once this transition was accomplished, the government should permit private production of money and money certificates according to the general laws of commerce.”  I would amend this slightly and say, “why wait?”  I think private competition should be allowed at any time, whether it is in banking or money production.

I would like to build on Herbener’s suggestions slightly and say that we should repeal legal tender laws as soon as possible and we should allow free banking as soon as possible as well.  To get out of the current mess, I think any bank should be able to get away from government regulation and control, so long as they agree to not be insured under the FDIC.  While I’m not a fan of government regulation, I think all banks currently insured under the FDIC should be subject to oversight and be required to increase their reserves to 100 percent, until such time as the FDIC is fully abolished.  If they don’t like the rules, then they can get out from under them and no longer be insured by the FDIC.

I think we need to phase out the FDIC and I think Herbener has a plan that is a great starting point for this discussion.  I only wish that more libertarians would have the courage to study and address the issue.  The government and the bankers have made a mess and we need to find a way to get out of it without causing a total collapse of the financial system.  We need libertarian solutions to achieve libertarian goals.

Gold had been trading in a narrow range for several months.  It was almost boring to watch.  It was actually quite amazing to see such a lack of volatility.

Things have started to change this week.  Gold has had a good week, going above $1,670 today.  Is this a renewal of the bull market or just a tease for gold bulls?

I continue to say that much will depend on the actions of the Federal Reserve and the overall direction of the economy.  If we sink back into a deep recession, I wouldn’t expect gold to do too well.  However, if that triggers a massive new round of money creation by the Fed, then we could see new all-time highs coming for gold.

Gold was already going up a bit when minutes were released on Wednesday from the last FOMC meeting.  Many analysts interpreted the Fed’s comments to mean that QE3 would be announced at their next meeting in September.  I don’t know if they are just reading it how they want it to be, or if this is a good analysis.  Perhaps they are trying for something similar to the self-fulfilling prophecy method.  In this case, they are predicting easing by the Fed so that the Fed feels compelled to do something and not let the market down.

I still have my doubts about QE3 being imminent.  The Fed has been very tight since the end of QE2.  I am not sure why it is holding back, but I suspect that the banking establishment does have some understanding that there are negative consequences to massive money creation.  Perhaps they are fearful that price inflation will get out of control quickly.  Perhaps they feel that the major banks are in dire straights and that the next QE needs to be saved to bail out the banks, instead of bailing out the stock market.

This makes the future gold price highly dependent on the actions of the FOMC at the next meeting.  If a massive new QE program is announced, then expect new highs from gold.  In fact, it would not surprise me to see it pass $2,000 on such news.  If the Fed disappoints the Keynesians out there and doesn’t do much of anything, then it makes the situation much more uncertain.  I wouldn’t necessarily bet against gold in such a scenario, but I wouldn’t be counting on a huge spike in the near term either.

Your investing strategy should stay the same, regardless of the short-term movements in the gold price and the stock market.  If you set up a permanent portfolio and forget about it (except to rebalance once in a while), then you don’t need to worry much.

If you are looking to accumulate gold, then it is hard to say if you missed a good buying opportunity just now.  But if you have been procrastinating, then don’t wait any longer.  Just buy and forget about it.  You shouldn’t worry about the short-term price swings.

I really believe that the next few years will be quite interesting.  There is going to be a massive correction of all of this malinvestment at some point.  I expect volatility in the gold price to pick up quite substantially.  Perhaps this week was the beginning of the next wild ride.

I like to pick on the Republican establishment.  It’s not that I like the Democratic Party establishment or think they are any less evil.  The Democrats lie about being against war and standing up for civil liberties.  But the Republican Party has this reputation of being for smaller government.  While this may be true for some of the Republican voters, it is certainly not true for most of the Republican politicians and the establishment guys.

The Republican voters who truly believe in smaller government who continue to vote for Republican politicians are being duped.  They are suckers.  Most of us go through this.  But it really amazes me when I meet someone who is older and been around for a long time.  It reminds me of the quote attributed to Einstein that the definition of insanity is doing the same thing over and over again and expecting different results.  It is insanity to vote for the typical Republican politician and expect to get smaller government.

There is always an excuse coming from Republicans on why the government doesn’t get smaller.  They will say they need the presidency.  Then when there is a Republican president and government continues to grow, they will say they need the Congress.  Then when they get the Congress and the presidency at the same time, they will say they need a supermajority in the Senate.  It is never enough.

Even if the Republicans had a supermajority in the Senate, a majority in the House, and the presidency, government still wouldn’t get smaller.  Then they would blame it on a few so-called RINOs (Republican In Name Only) who are too moderate.  Then they would say that the Republicans just couldn’t possibly shrink the government or else the media would accuse them of doing all sorts of horrible things.

Well, if this is the case, then what is the point of ever electing a Republican?  It certainly isn’t to shrink government.  It isn’t to get government to stay the same size.  The only legitimate argument that could be made is that it slows down the Democrats.  But this only works when there is a Republican Congress and a Democratic president.  Otherwise, it is a disaster.

As I’ve said before, there are two people in American history who have signed legislation to mandate the purchase of health insurance or else face a penalty.  It just so happens that those two individuals are the two major candidates for president this year.

As the saying goes, if you get them asking the wrong questions, you don’t have to worry about the answers.  The same goes for voting.  If either candidate is acceptable to the establishment, then the establishment doesn’t have to worry about who wins.

Even if Romney wins, the Republicans will continue to make excuses on why government can’t get smaller.

The Republicans have failed miserably.  Just by having a majority in Congress, they could dramatically shrink the federal government.  All expenditures are supposed to be approved by a majority in the House.  The Republicans could propose a dramatically smaller budget and refuse to pass anything bigger.  They could refuse to raise the debt ceiling, which would force automatic cuts that would be immediate and dramatic.

I know, the Republicans can’t do this though, because otherwise the media would make them look bad. Good excuse.  I suppose they will keep making the same excuses as long as the suckers keep voting for them.

In 2002, Ben Bernanke, prior to becoming chairman of the Federal Reserve, gave a speech.  It earned him the nickname of Helicopter Ben.  In one portion of Bernanke’s speech, he had this to say:

“Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

Bernanke was exactly correct on this point.  Bernanke has been wrong on a lot of things, but he is being brutally honest in the above quote.

The reason I bring this up is because it astounds me just how many people don’t understand this point.  I realize that Paris Hilton probably doesn’t understand this (although you never know).  I realize that your average high school student doesn’t understand this.  Even the average man on the street doesn’t fully understand this.  But it simply amazes me that there are people who spend many hours studying monetary policy and even people who devote their careers to the subject, and yet don’t understand that the Fed can inflate at any time.

There is a difference between predicting what is likely to happen and what can happen.  For this post, I am not battling against those predicting what is likely to happen.  There are some people who think we are headed for a deflationary depression, and sooner rather than later.  This is their prediction and they have their reasons.  Some of those reasons are valid.

Then there are some people who are also predicting deflation because they say it can’t be stopped.  They say that the Fed is trapped and that it can’t cause any more inflation.

If you ever hear someone say that the Fed can’t inflate, then make sure you don’t take any more words seriously that come out of the person’s mouth.  Whether they are talking about monetary inflation or price inflation, it is simply wrong with today’s central bank and fiat money system.

As Bernanke said, the Fed has a printing press or its electronic equivalent.  It can cause price inflation just by threatening to increase the money supply, if the threat is taken seriously.  The Fed can always create more money out of thin air, which means it can always create positive inflation.  (The word “positive” there should not be taken as “good”.)

The Fed can buy anything it wants at any time.  Its only limits are hyperinflation where they destroy the money, or a rebellion from the people.  Barring those two things, the Fed can always create new money.

The Fed does not even have to buy government debt, although that alone is enough to cause price inflation.  The Fed can buy mortgage securities.  The Fed can buy debt from other governments.  The Fed can buy stocks.  The Fed can buy real estate.  The Fed can buy candy bars if it wants to.

The point is that the Fed can buy anything and when it buys something, it creates money out of thin air to do it.  The Fed can buy a stack of candy bars from a bank (the intermediary) and it will create digits on the bank’s account to show the increase in money.  Digits are even easier to create than paper money.  Someone literally just has to type the numbers on a keyboard.

In conclusion, the Fed can create money out of thin air at any time.  It can do this on a huge scale to force price inflation, even when the demand for money is seemingly high.  Don’t listen to anyone who says that it is impossible for the Fed to create positive inflation.  Helicopter Ben was right on this one.

I try my best to stay up to date with the political scene, the economic scene, and the financial scene.  They are all related.  I read some things that I can barely find anything to agree with.  Most of this comes from the so-called mainstream media.  I also read other libertarian authors.  I learn far more there, even if I find places where I disagree.

One thing I find that is common is that it is hard to get good advice for someone who simply doesn’t have a lot of money.  I will read articles or blogs by libertarian authors (or at least people who have somewhat of an understanding of the free market) and they oftentimes offer some pretty good advice.  The problem is that the advice is geared towards individuals with a high net worth.

I read suggestions about how to prepare for a coming financial armageddon or some other disaster.  I see suggestions like buying a safe property in a foreign country, opening a foreign bank account, or having gold stored overseas.  Again, the problem is that this is geared towards the rich.  You often need substantial minimums to do any of these and this would be after keeping some liquid assets available to you now.

Even buying an investment property in your own area requires some money, although this is far more realistic for many people.

If you have a few million dollars to your name, then you probably should consider some of this advice like buying a property in another country and storing some financial assets elsewhere.  But realistically, this is not the case for most people.  The large majority of people are not millionaires.  The average American probably doesn’t even have a 6 figure net worth, and most of those who do, have it in real estate or retirement accounts.

If you are like most Americans and simply do not have a lot of money to invest, then I encourage you to take baby steps.  Don’t be intimidated and do nothing.  Save money where you can.  Keep some in a savings account for emergencies.  Take a little and buy some precious metals.  If you can save $100 per month, you can buy about 3 one-ounce silver coins right now.  If you do that every other month, it will add up after a while.

I am also an advocate of buying extra supplies.  This is good preparation in the case of an unexpected emergency.  If there is a weather disaster or some other unforeseen disaster, then you will have that extra bottled water, toilet paper, etc.

In addition, buying extra supplies is a good inflation hedge.  You are buying extra things now before they go up in price.  It is unlikely that prices will go down and you will lose from it.

It is easy to accumulate extra things you need over time.  The next time you make a trip to Walmart (or wherever you shop that is relatively inexpensive), pick up a few extra things, particularly if they are on sale.  This could include things like paper towel, toothpaste, shampoo, razor blades, bottled water, toilet paper, and even some food items.  Just make sure they are things that you will use and make sure they have a long shelf life.  As long as you have some extra storage space in your home, then this is really easy to do.  The worst case scenario is that prices don’t go up and you use the stuff.  (Actually that is probably the best case scenario.)  It is not like you are going to miss that .02% return that you get in your savings account right now.

The point is that virtually everyone can take action steps to accumulate wealth and hedge against trouble ahead.  Even if you are only able to save a very small amount each month, it is still better than nothing.  Don’t just throw up your hands and say that it is impossible.  If you can just buy one silver coin per month, that is better than many other people are doing.  You have to start somewhere.

I recently wrote a piece about Paul Ryan and the problem of unfunded liabilities.  I don’t think any of Ryan’s proposals will solve anything in the long term because he is not proposing any serious cuts.  However, it is interesting that this important subject is getting some widespread attention.

In my piece, I said that Laurence Kotlikoff, now an economics professor, has calculated the unfunded liabilities (government promises) at over $200 trillion.  This is probably the most significant issue facing America right now, as many people just entering retirement or getting close to what they think is retirement are simply unprepared.  They will be relying on the government and the government simply will not have the funds to pay for all of its promises.

I believe the other major issue facing this country is the banking system.  Due to all of the prior creations of entities like the Federal Reserve and the FDIC, and all of the regulations in the industry, there is an unprecedented misallocation of resources due to the moral hazard.  The Fed and the FDIC always stand ready to bail out the banks and it has made the major banks reckless.  This is why they had to be bailed out in 2008, but unfortunately, it is questionable whether any of the major banks could be considered solvent now.  The only reason they can be considered solvent is because of the backing of the Fed and FDIC.

So the banking system and the massive unfunded liabilities are the two major threats to this country when it comes to anything financial.  I think the biggest threat stemming from these two subjects is hyperinflation.  I hear many libertarians and/ or Austrian school followers predicting hyperinflation.  I’m not sure if they understand the implications of their prediction.

Hyperinflation in the U.S. would be the most devastating scenario.  We live in an extremely high division of labor society.  Most people cannot grow their own food, make their own clothes, or find natural treatments for health ailments.  Most people cannot even fix a shingle on their roof.

In a hyperinflation situation, we are talking about a major breakdown in society.  If there are no substitutes for the dollar, then people will stop going to work and the trucks will stop delivering food to the grocery stores.  That is why it is so important to have alternative currencies or money available.  When hyperinflation hit Zimbabwe, the people there could at least use gold and U.S. dollars.

While it would be possible for the marketplace to adjust (meaning people), the U.S. government holds a monopoly on the use of legal tender, which is the U.S. dollar.  It makes it very difficult for other forms of money to compete when you are almost essentially forced to use dollars.

So hyperinflation is by far the biggest threat facing this country.  We would much prefer a depression.  I don’t think the Fed is likely to go to hyperinflation.  Perhaps we will see high price inflation like we saw in the 1970’s, but just like that time, I think the Fed would stop creating money to save the dollar, if necessary.  I think the Fed will keep creating money out of thin air to save the major banks, but there will come a point that the Fed will stop buying government debt.  This will force Congress to cut spending.

While I am an adamant opponent of the Fed, there is a situation that could be worse than having the Fed.  If Congress were to take over the Fed and take control over issuing new money and buying government debt, then I think hyperinflation becomes a more realistic scenario.

For this, the whole subject of auditing the Fed scares me a little.  Ron Paul has been a great opponent of the Fed.  He has been a great advocate for less secrecy and more transparency.  I do worry though when his supporters really get into the one piece about auditing the Fed.  While the Fed should certainly be held accountable (even though it shouldn’t exist at all), I don’t want there to be an excuse for Congress to take over from the Fed.

Ron Paul supporters who clamor for an audit of the Fed need to be careful what they wish for.  I understand their motivation.  They believe they are close to actually winning a victory in terms of legislation.  And I’m sure that a full audit of the Fed would reveal some appalling things.  However, every libertarian supporter of auditing the Fed needs to add a disclaimer every time he clamors for an audit.  He needs to say that he wants an audit of the Fed, but under no circumstances should the Congress ever take over full control of the monetary system.  Regardless, I think it is better to advocate a repeal of the legal tender laws.

Congress taking over the Fed is our biggest threat.  That could lead to hyperinflation and a complete breakdown in our civilization.  I believe clamoring for an audit of the Fed may actually make this more likely.  There is a reason that Ron Paul wrote a book called “End the Fed” and not one called “Audit the Fed”.

Libertarians should continue to speak out against the Fed and central banking in general.  But we should also make it clear that the monetary system should be left to the free market.  We do not want Congress (or the presidency) directly controlling monetary policy.  It would be disastrous.

A few people get in at the bottom of a market.  Some of it is luck and some of it is skill.  Some people see opportunities where others don’t and they take them.  Some people bought gold in the year 2000 at under $300 per ounce when most others were not interested.  You could even say the same thing about stocks in 2009 after they had crashed down.

I believe the housing market presents a real opportunity for some people right now.  Investing in real estate isn’t for everyone, but I believe there are too many people who are not taking advantage of the current situation of low interest rates and low prices.

Housing in some parts of the U.S. is down by 50% or more from the peak about 6 years ago.  I find it funny when someone says that you would be a fool to buy housing now when there are still a lot of bank-owned properties and prices could go down more.  I will only listen to someone saying this if he was saying the same thing 6 or 7 years ago.  In fact, if someone is a fool now for buying a house, that means someone who bought 6 years ago was twice the fool, so the person saying this should have been saying it vociferously back then.

I believe the housing market in some areas right now is presenting a real opportunity.  With that said, I think you need some saved money to seize the opportunity.  If you barely have any money to your name, it will be hard for you to get a loan.  You also need a bit of a cushion for anything that may go wrong and for the time it takes you to get it rented (assuming investment real estate).

Some people object because they don’t want to be a landlord.  This is understandable, but it is also one of the reasons it presents an opportunity, because others are thinking the same.  However, it is easy today to find a management company that will manage your property for a fee of around 10% per month of the rent.

Another objection, particularly by libertarians, is that there is an uncertainty about property taxes.  While there are no guarantees, it is unlikely you will see property taxes go up dramatically right now in most areas when people are being squeezed.  Local governments are being forced to cut back, unlike the federal government.  As long as your location is not already highly taxed, like New York City or Los Angeles, then I don’t think this needs to be a big concern.

Again, the main barrier is money.  If you have a good down payment of about 25%, money for closing costs, and some more for a cushion, then you are in good shape to look.

The one thing I would warn about is old houses and old condos.  You don’t want a big assessment with a condo.  You also don’t want major repairs with an old house.  It is preferable to buy something newer.

Run the numbers in your area.  Assume you can get a loan for the full price, even though you won’t.  Then add in taxes, insurance, and association fees.  Can you still get positive cash flow each month?  If so, then you probably have a good deal.  If you then put 25% down, then your cash flow will be that much better.

There are a lot of factors to consider, but I believe that investing in residential real estate is a great opportunity in many areas of the country right now.  If you have the money, you should consider it.

Lew Rockwell has posted a nice piece on his website about voting, or perhaps I should say not voting.  He says that voting does not change the situation.  He says that not voting “makes them [politicians], just on the margin, a bit more fearful that they are ruling us without our consent.”

Ironically, Rockwell departs a little bit from his icon, Murray Rothbard.  Rothbard, even as an anarchist, was not afraid to ally himself with others, including politicians.  He saw nothing wrong with supporting the lesser of two evils, as long as it was a move towards liberty, or at least less tyranny.  Rothbard was willing to use the system, even if he disagreed with it.

Just to be clear, if Rockwell is disagreeing with Rothbard on this point, it is only a disagreement about strategy.  It is not a disagreement about where we should be going.

I take the middle ground between their positions, if that is possible.  Like Rothbard, I do not see any contradiction in voting, even if you are a radical libertarian.  The act of voting is not violating a libertarian principle of advocating the initiation of force.  I suppose someone could argue that counting the ballot might be a government expense, but this money was already extracted anyway.

If the act of voting can help move us closer to liberty, then I am all for it.  However, like Rockwell, I don’t see that it will change the situation in this presidential election.  (In my opinion, if Rothbard were alive today, I highly doubt he would be supporting Romney or Obama.)

If I am going to vote in any election, it can’t just be voting for the lesser of evils.  I will only vote for principled libertarians.  There are few people in Congress I would vote for.  I would vote for Ron Paul. I might vote for Justin Amash.  If I lived in Kentucky, it would have been a tough choice on whether to vote for Rand Paul.  If I lived in Kentucky and had a choice to vote for Rand Paul now, based on what I know, I probably wouldn’t vote for him.

The main reason I would vote for libertarians is so that they could spread the gospel.  Ron Paul has not been a great Congressman because he has affected legislation.  He has been great because he has educated millions of people.

I don’t trust people running for political office unless they can prove to me otherwise.  I won’t vote for someone who is pandering, unless he is a really good panderer on behalf of liberty.  I want to see consistency.  I want to see specifics offered in the way of dramatic spending cuts.  This goes for the presidential election, congressional elections, and even local elections.

I have not decided what I will do this November.  The one thing I am certain of is that I won’t be voting for Romney or Obama.  I am debating between 4 choices at this point:

1) Vote for Gary Johnson.
2) Vote for Ron Paul (as a write-in candidate).
3) Stay home.
4) Get a ballot and turn it in blank.

There is a strategy behind number 4.  It is different than staying home.  I don’t want to not vote and have people interpret that as apathy.  I am not apathetic.  I care about what the government does in that I want it to do much less.  If I drive to my voting place and get a ballot and turn it in blank, there is no mistaking that for apathy.  Some might call it stupid, but they can’t say that I didn’t care.

I think “none of the above” (NOTA) should be an option on every ballot.  Since that is not listed, then turning in a blank ballot is the next best thing.  If anyone else has a better idea, I’d love to hear it.

In yesterday’s post, I wrote about Paul Ryan and the massive unfunded liabilities of the U.S. government.  While I think Ryan is for big government, it is interesting that he is being portrayed as a government cutter.  While Ryan’s proposals have not advocated any actual cuts in overall spending (even his proposed budgets increase spending), there are discussions about Medicare and Social Security (called “entitlements” for some reason) and possible reform.

At the end of my post yesterday, I wrote that there is a coming divide in America in the next decade and that I will make a prediction as to which side will prevail.

The coming divide will be between generations.  Generally speaking, it will be between young and old.  The young side will be taking the more pro-liberty side.  The old side will be taking the more pro-government side.

As I stated yesterday, there are actually some estimates that the unfunded liabilities now exceed $200 trillion.  The biggest portions of this number belongs to Medicare, Social Security, and government pensions.  Out of those three, Medicare is by far the biggest.  The large majority of those unfunded liabilities (government promises for the future) are for older people.

The U.S. government is setting up the economy for a train wreck.  We are headed over a cliff at a high speed and there may be no way to stop.  Someone is going to get hurt.  The question is, who will get hurt the most?

Eventually, Congress will hit a brick wall.  Social Security has already begun to run a deficit.  More is being paid out than taken in from payroll taxes.  The difference has to be made up from the budget.  This means more debt monetization.  It means that spending will continue to increase until it can’t any longer.

The day of reckoning will come when the Federal Reserve has to stop buying government debt.  There will come a day when interest rates go up and price inflation is high.  If that day doesn’t come, then the Fed will be sitting on its hands out of fear of those things.  Either way, there will come a time when the Fed has to stop creating money out of thin air.  I don’t think the Fed will go to hyperinflation and destroy the whole economy.  Instead, it will stop buying government debt and Congress will have to figure something out.

Congress will be faced with choices.  Voters will be mad, no matter what.  Voters want free lunches.  They want lower taxes with their free lunch.  When the Fed can’t print more money, then free lunches will have to go away.

That is why the American empire will probably fall first.  When given a choice, Americans will tell the politicians to stop fighting wars overseas.  They will prefer that to increased taxes or domestic spending cuts.

While cutting military spending can make a big difference, it won’t be enough.  More will have to be cut.  Some politicians will propose tax increases.  They will be geared towards high income earners, but they may also go after the middle class.  Either way, they won’t work.  Increased tax rates don’t necessarily lead to an increase in government tax collections.

I don’t think it will get to this point anyway.  I am waiting for the first serious politician to stand up and say, “If you vote for me, I will cut Medicare and Social Security benefits for seniors.  I will cut taxes for workers.  People should not have to work harder and longer and struggle to raise their families while older people are taking vacations and playing golf.”  It will be a turning point when that politician actually gets elected.

This will not happen in south Florida.  It also won’t happen in Los Angeles or San Francisco.  But I believe something like this will happen.  It will send shockwaves everywhere.  All of a sudden, there is a message sent to aspiring politicians across the land that you can threaten to take away Medicare and Social Security and not be destroyed in the voting booth.

It hasn’t happened yet because senior citizens vote in large numbers.  But if the economy gets bad enough, more young people will pay attention, as they are already starting.  The younger generation is not going to continue to pay higher taxes into Social Security and Medicare knowing that they won’t be receiving anything comparable in return, if anything at all.

While I don’t think that all Social Security and Medicare will be eliminated, I believe that major changes are coming.  It is inevitable.  The age to collect will go up.  The benefits may get cut, even for people in their 80’s.  Perhaps it will be done by eliminating a cost-of-living adjustment.  The checks will stay the same and they will buy less and less.

I’m not sure how this whole thing will take shape.  I don’t know if it will be divided along party lines or if it will be split.  If it does divide along party lines, I would expect that the Republican Party would represent the younger generation and the Democratic Party would represent the older generation.

Politicians will do almost anything to get elected.  If it becomes popular to take away granny’s Social Security check, then so be it.  Politicians won’t put it in those terms, but they will make it clear that the young people will not see their taxes go up.

I believe the young people will finally get with the program and start to vote based on their pocketbook.  The young side will mostly prevail.  If you are over 65 right now, you may or may not be ok.  Your biggest threat is inflation.  If you are in your 50’s, you will probably get stiffed.  I don’t see any way that you will retire in your 60’s while depending on the government for your retirement income.

Changes are coming.  There is no way that things can keep going on the way they are now.  Plan your future accordingly.

In my last post, I was highly critical of Paul Ryan and his abysmal record, particularly when Bush was president.  However, it is not his support of big government that has been receiving the most attention in the last few days since the announcement that he would be running as Romney’s vice president.  The most attention has gone to Ryan’s proposals to reduce the budget deficits (not the overall debt), in particular by making changes to Medicare and Social Security.

This so happens to coincide with another story that is not being discussed as much.  Economist Laurence Kotlikoff has warned of the coming fiscal calamity.  While I don’t agree with all of his solutions, he makes some valid points.  Kotlikoff writes, “Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt.”

Kotlikoff is referring to the unfunded liabilities of the U.S. government.  This really is an astounding number.  There is no way for me to verify if his estimates are even close.  It would take me several days to study the subject and analyze the data enough just to come up with a ballpark figure.  But I’m not seeing anything that disputes his numbers.

It was a few years ago that I first saw an estimate of unfunded liabilities that exceeded $100 trillion.  When I first saw the number, I didn’t think it could be right.  But the more I look at this issue and the more estimates I see, the numbers were probably a good guess and I’m guessing that Kotlikoff’s numbers may be just as good now.

The unfunded liabilities are all of the promises that the government has made, yet not funded.  Social Security is a big one.  The biggest one is Medicare.  The ironic thing is that several trillion dollars of those unfunded liabilities is from the Medicare prescription drug program that Paul Ryan supported.

I think it is important to realize the enormity and importance of these numbers, but at the same time, it is not the end of the world.

Most Americans understand there is a problem.  They can sense it.  They understand there is a debt problem.  Still, most don’t understand many details and they don’t understand the changes that are coming.  I hear younger people joke that Social Security won’t be there when they retire.  They may or may not believe it.  I’m not sure that people in their 40’s and 50’s understand that they are in trouble too.  In fact, almost everyone is going to suffer from this in some way.  Even if someone who is currently 75 keeps receiving the same Social Security checks, what are the chances that the purchasing power won’t decline?

The good news about the unfunded liabilities is that they are not like bonds.  They are not a legal obligation to pay someone (even though the government could default on bonds too).  The government can simply change the rules at any time and break previous promises.  In fact, that is exactly what should be done.

The government could pass a law tomorrow that raises the retirement age (the age to collect Social Security and Medicare benefits) to 75 years old.  With the stroke of a pen, they can eliminate tens of trillions of unfunded liabilities right there.  Sure, it will mean misery for many people as they are forced to return to the workforce, but I’m just pointing out that it is not the end of the world.  Anyway, anyone can retire whenever they want if they don’t want to depend on the government.

Paul Ryan has been assuring people in the last couple of days that he does not support any changes for those who are already 55 or older.  What?  That is a major portion of the baby boomers.  If there are no changes made to someone who is currently 56 years old, they could end up collecting for 30 plus years in retirement if they live long enough.

In other words, Paul Ryan’s plan, while perhaps a better start than most other politicians in DC, does little to close the fiscal gap.

Radical changes are coming, one way or another.  Congress will eventually be forced to cut back.  There are going to be battles on who gets cut the most.  The sooner the problems get addressed, the less devastating the effects will be in the future.  Unfortunately, there is no immediate sign of anything being fixed.

Tomorrow, I will discuss the major divide that is coming to America in the next decade.  I will also make a prediction on which side will prevail.

UPDATE: In the post above, I mistakenly linked to an article from 2010.  Here is a link to the most current article.  Kotlikoff is actually saying that the unfunded liabilities are now $222 trillion.