Obama has announced plans for stronger oversight of oil futures markets and is proposing an increase in funding for regulators.

So that has been the problem this whole time.  There hasn’t been enough government oversight of the financial markets.  Of course that must be the reason for high oil prices (please not sarcasm).

Obama has decided to continue being a demagogue.  If he isn’t a demagogue, then he is just plain stupid.  Perhaps he is both.

Obama said, “We can’t afford a situation where speculators artificially manipulate markets by buying up oil, creating the perception of a shortage and driving prices higher, only to flip the oil for a quick profit.”  He also said, “We can’t afford a situation where some speculators can reap millions, while millions of American families get the short end of the stick.”

What is his bigger bureaucracy of regulators going to do?  Are they going to prevent the futures market from working?

It is time for a good economic lesson here, something that Obama and his henchmen wouldn’t understand.  Speculators play a vital role in the marketplace.  They provide more accurate pricing and they actually smooth out bumps in pricing.

Let’s say that speculators think that there will be an increase in demand for oil in the near future.  Or perhaps they think there will be a war in Iran or some other event that will cause a shortage of oil.  Either way, let’s say that speculators think the price of oil will be going up in the near future.  In this case, the oil speculators will buy futures contracts that drive up the price of oil.

But the increase in the price of oil is a signal to the market.  It tells consumers to cut back on their usage. It also sends signals to suppliers.  If the suppliers think that prices will be much higher in the near future, then they may hold back on selling right now.  Or they may decide to extract oil from more expensive places.  With the higher price of oil, it may be worth it to extract more oil using more expensive procedures.

By raising the price of oil now, the speculators are doing others a favor.  They are signaling consumers to cut back now and they are signaling suppliers to increase their supplies for later.  If the speculators hadn’t been there to bid the prices up, then the oil prices would have been that much higher in the near future.  Instead, the speculators actually prevented a big spike in prices.  The process was more gradual and less severe because of the speculators.

If the speculators didn’t exist, then everyone would be guessing, almost constantly.  You could end up with a situation where the price all of a sudden doubles or triples in the matter of days.  The speculators make this less likely to happen.

Of course, some speculators could be wrong about their guess for the future.  But they will lose money if they bet the wrong way.  Those who guess correctly are the ones who are rewarded.  And they should be rewarded, because they are the ones sending correct signals to the market.  They are preventing less shortages in the future.  They are helping to properly allocate resources.

Obama does not understand free market economics.  If he does, he is a total liar.  Either way, he is demagoguing the situation.  Oil is going up for other reasons that he is partially responsible for.  Oil prices are higher than they would otherwise be because of threats to Iran, government regulation, and monetary inflation (which is encouraged by government debt).  If Obama wants to help lower oil prices, he should resign.  He should ask Bernanke to do the same.

The other day, I discussed loaning free money to the government via too much tax withholding.  I briefly mentioned the poor and said that while they don’t pay federal income taxes, they most certainly do pay taxes.

First, while I use the term “poor” for the purposes of this writing, a more accurate term would actually be “low income”.  The income tax does not tax wealth.  It taxes income.  But we can make an assumption that at least most people who are really poor, also have a low income.

I hear many so-called conservatives who like to point out that the poor do not pay taxes.  This is not correct, when stated like that.  Most poor people do not pay any regular income taxes, but they most certainly do pay taxes.

What really amuses me is when I hear supposed conservatives say that everyone should “contribute” something.  They want to raise taxes on the lower income people.  These people are statists.  If the income tax is unfair, it is only because it exists.  When Ron Paul is asked about only half of American taxpayers paying any income tax, his response is that we are halfway there.  He doesn’t want to raise taxes on anyone; he wants to cut them.

While most poor Americans do not pay any federal income taxes, they do pay many other taxes.  There are payroll taxes, which are paid by anyone working “on the books”.  There is also the employer portion, which is an indirect tax.  There are corporate taxes, which make shareholders poorer, prices higher for consumers (including the poor), and wages lower for workers (including the poor).  There are many different sales taxes and excise taxes and fees.  There are taxes on gasoline, on hotels, on cars, on phone bills, on water bills, on electric bills, etc.  There are car registration fees.  There are property taxes, which are paid indirectly by renters through higher prices.  The list could go on and on.

Most of these taxes actually fall disproportionately on the poor.  If there is a one dollar tax on something or if the price of a loaf of bread goes up a few cents because of a tax, then it hurts the poor person the most, who is already struggling to make it.

The worst “tax” of all is monetary inflation.  It creates business cycles, it redistributes wealth (usually from the poor and middle class to those with political connections), it discourages savings and investment, it changes people’s time horizon, and it is all done in a hidden way.  Most poor people don’t realize how much they are being screwed by inflation.  They don’t understand that prices are going up solely because of monetary inflation.

Again, when the price of milk goes up 25 cents, it is the poor person who is hurt the most.  Their income won’t rise because of inflation until later, if they are lucky.  They are already paying the higher prices by the time they see any rise in earnings.

Inflation is the worst tax of all.  It can ruin a society.  America had huge income tax rates in several decades of the early and mid 20th century.  The highest rate was over 90% at times.  And Americans were supposedly in a Cold War against communism?  90% or more sounds communist enough to me.

Yet, despite the high income tax rates, times were not always too bad.  Society can survive this.  The 1950’s were a relatively prosperous time, considering the high rates.  The key is that monetary inflation was relatively low.  In the 1970’s, income tax rates were a bit lower, although still high.  But because of the high monetary inflation, it was a tough time, economically speaking.

Today is a tough time because of massive government and massive money creation.  It is wreaking havoc on the economy.  Monetary inflation is hurting us every day.  We need to end the Fed by removing its monopoly on money.  That is one sure way to help the poor.

There are tens of millions of Americans who loan money to the government every year.  I’m not talking about people buying government bonds.  I’m talking about people who have extra income taxes withheld throughout the year and then receive a big refund after filing their taxes.  With the main part of tax filing season coming to an end, now is a good time to discuss the topic.

Believe it or not, I actually have mixed opinions on this.  I understand the point made by those who say that you shouldn’t loan the government any money at zero percent interest, but I think there are also arguments to be made the other way.

First, if you live in a state with a state income tax, I would be very careful not to overpay too much on your taxes throughout the year.  This is especially true for states that have major fiscal problems, which is many. There have been states, California being one example, in the last few years, that have delayed refunds to taxpayers because of the budget crunches created by politicians spending recklessly.  If I lived in a state like that, I would be sure to not overpay on state taxes.

As for federal taxes, I don’t think there is much of a threat of having your refund delayed.  It may take over a month if you file now during the busy time.  But the federal government does not face the same constraints as the state governments (unfortunately).  The government in DC can issue more debt and can get the Fed to buy that debt if needed.  The federal government is not going to delay tax refunds for several months because then people will lower their withholding and it will just cause more of a temporary shortage of money for the government.

I can understand why many Americans overpay on their taxes during the year.  Some reasons are good and others are not as good.  If you don’t have a salaried job and your income is not steady, I can see why you might overpay.  The same goes for people who have substantial taxable investments.  They may not know how much they are going to end up making.  People in this situation may want to be conservative and overpay on their taxes, just to make sure that they don’t end up owing a large sum when they file their taxes.

The majority of Americans who overpay on their taxes do so because they don’t want to have to write a check when filing.  From this point of view, it is actually a good reason.  It is tough to budget and you want to make sure that you don’t have an extra unexpected (or even expected) bill.

But many Americans overpay by thousands of dollars and receive huge refunds after filing.  They do this just so that they can have a big windfall, even though it is just money coming back to them that they already paid.  They are basically using the tax system as a forced savings plan.

While I would prefer that Americans simply have the discipline to save their own money, I am not sure that giving an interest free loan to the government matters all that much right now.  If you save your money in your checking, or even savings, account, then it is there, tempting you to spend it.  Meanwhile, even if you have it in a savings account, a couple of thousand dollars won’t earn enough interest for you to buy lunch.

If we lived in the 1970’s where we had double digit interest rates, I would have a stronger opinion that people should not be significantly overpaying on their taxes.

Of course, there are many Americans who will not pay any federal income tax (but please don’t say they don’t pay taxes, because they pay many of the other taxes out there).  Some people may even get refundable tax credits where they not only don’t pay any income taxes, but they actually receive a check after having not paid anything.  These people don’t have to worry about giving a loan to the government because they are getting money that is being redistributed anyway.  They are not getting back money that they already paid in, at least from that pool of taxes collected.

In conclusion, I don’t think it is that big of a deal if you give the government an interest free loan, unless you live in a state that is having financial difficulties.  You should teach yourself to save on your own though.  If we hit a situation where we have double digit price inflation and double digit interest rates, then I will have a stronger opinion about not handing over a free loan to the government.

The Tax Foundation puts out a report each year reporting “Tax Freedom Day”.  It is the day of the year that the average American taxpayer works to pay his share of federal, state, and local taxes.  The tax freedom day this year is listed as April 17, 2012 (not including the Leap Day).

I find this number hard to believe.  In fairness to the Tax Foundation, its article does say that, “If the federal government raised taxes enough to close the budget deficit – an additional $1.014 trillion – Tax Freedom Day would come on May 14 instead of April 17.”

While I believe the May 14 date would seem more accurate, it still seems understated to me, and I am not even accounting for government regulations that take away more of our time and effort in our lives.

If we are going to measure a tax freedom day, it should not be done based on just regular taxes.  It should be done based on total government spending.  If government runs a deficit (federal, state, or local), then it is still basically spending taxpayer money, unless you expect it to default on its bonds.  In the case of the federal government, government debt could be (and is) bought up by the Federal Reserve, but then your money is simply being devalued.  In the case of Fed monetary inflation, it might be more accurate to say that dollar holders are paying.  While this would include most American taxpayers, it would also include foreigners who hold U.S. dollars.

So a more accurate measure for a Tax Freedom Day is to use spending.  Using spending, the federal government spends close to 25% of the GDP alone.  The federal budget is about $3.8 trillion.  The annual GDP is approximately $15.3 trillion.  While these numbers may not be perfect, the federal government spends about one quarter of GDP.

The Tax Foundation article lists state and local taxes at $1.42 trillion.  That means they are saying that state and local taxes make up less than 10% of GDP.  I find this quite hard to believe.  I am not sure where they are obtaining this number, but my guess is that it is a lot higher.  If anyone has any sources for a total of state and local spending in the U.S., feel free to leave a link in the comments section.

With the federal government spending about 25% of our income, that would put Tax Freedom Day at about April 1 right there.  I think a more accurate date would be in June for the total.  Prior to the recession hitting in 2008, it would not surprise me if total spending was over 50%, which would put Tax Freedom Day in July.

Regardless, this does illustrate the absurdity.  Government is taking almost half of our money.  This is why so many mothers work and do not have much of a choice to stay home with their kids.  It is why so many Americans struggle to pay their everyday expenses.  Government spending is out of control.  Americans must withdraw their consent to government.  Americans must stop relying on the government.  Americans must realize that their lives will be much better off with a dramatically smaller government.

Whether people want to admit it or not, government education is a form of welfare.  Most people think of welfare as going to poor people, such as food stamps.  But there are all kinds of welfare.  Social Security and Medicare are forms of welfare.  Corporate bailouts are welfare, mostly for the rich.  Wars and the military industrial complex involves welfare.

Of course, everyone in America could be accused of being on some kind of welfare.  We all get some kind of “benefit” from the government.  We have to drive on government roads.  With education, you don’t have much of a choice in having taxes taken away from you, although you do have the choice of not sending your kids to government schools.

I don’t fault anyone for collecting Social Security.  They had to pay taxes previously and are still paying taxes in other ways.  You may as well get back some of your money that is being confiscated.  The same goes for education.  I don’t fault anyone for using the government school system, at least as far as getting some of your money back.  If you are to be blamed at all for sending your kids to government schools, it is only because of the brainwashing and lack of actual education that your child is receiving.

Aside from whether it is a good decision to send your kids to government schools and whether you can even afford it, that is not the real issue here.  The real issue is this: are you an advocate of having government run schools?

I don’t see hypocrisy for being against government schools, yet using them because you are forced to pay for them.  I do see hypocrisy for those who criticize government welfare to a large degree, yet they are advocates of the public (government) school system.

Why is it any worse to be on food stamps than it is to use the taxpayer funded school system?  If anything, food is more of a need than education for your kids.  Without food, you can’t survive.  This is not an argument for food stamps from either a practical side or a moral side.  The point is, both food stamps and government schools are a form of welfare.

Of course, if we didn’t have to pay property taxes, then it would be easier to afford to pay for schooling for kids.  The same could also be said for someone on food stamps.  Despite what we hear, poor people do pay taxes.  They may not pay regular income taxes, but they pay payroll taxes, sales taxes, property taxes (often indirectly), corporate taxes (also indirectly), excise taxes, etc.  The poor also pay heavily for the worst tax there is.  It is the hidden tax of inflation.

There is absolutely no reason that the government should be funding education.  It should not be happening at the federal level.  But it should also not be happening at state and local levels.  People who have children should pay for their own daycare or schooling, or else they should find someone who voluntarily will.  We don’t hold a gun to someone’s head to make them pay other expenses for parents.  If the government is going to take people’s money to pay for schooling, why not clothing, food, furniture, and family vacations?

If education were left to the free market, we would see innovation and cost cutting.  Schools would get cheaper and the learning methods would get better.  Until then, let’s call government schooling what it really is: a form of welfare.

There continues to be a tug-of-war between a mini inflationary boom and a recession and/ or depression.  The stock market has been quite strong in the last couple of years after tanking in late 2008 and early 2009.  With the Fed’s aggressive monetary policy since that time and with massive government spending, it was bound to create more asset bubbles.  It is always a question of which assets will boom the most.

Of course, if we are in a mini inflationary boom, it is mostly an illusion.  Real growth is based on savings, capital investment, and technological innovations.  While there might be a little of that, most of the boom is illusory, caused by a loose monetary policy and massive government spending.

The last few days have been bad for the stock market.  The Dow has retreated well below 13,000.  It will be interesting to see where it goes from here.  The 10-year yield has dropped back below 2%, meaning that either the Fed is buying more government debt or investors are running to perceived safety.  Of course, U.S. government bonds are only safe as long as people still perceive them as safe or as long as the Fed keeps buying and pushing down rates.

It really does seem to be a struggle between inflation and recession right now.  This doesn’t mean that we can’t have both at the same time.  The Keynesians were proven wrong in the 1970’s when there was high price inflation and high unemployment at the same time.  With that said, I think one or the other will be more dominant.  In the last 6 months, I was leaning more towards a mini inflationary boom (artificial) before we saw another recession.

Americans understand right now that something is not right with the economy.  In fact, the pessimism has helped keep prices in check as more people try to save more and spend a little less.

What Americans don’t understand (or at least not many) is that there are going to be some hard times in the near future no matter what.  Even if Ron Paul were elected president and the Congress turned libertarian overnight, there would still be some pain.  A drastic cut in government spending and regulations would probably cause a recession, but that would be the best case scenario, as the recession would likely be over quickly.

On the current path, we are headed for much worse.  While government spending, regulation, and debt are major problems, that is not the worst of it.  It also isn’t the massive unfunded liabilities.  The major problem for the short-term economy is all of the past monetary inflation that was used by the Fed to prop things up.  It has not allowed for the previous malinvestment to correct and it has made things far worse by misallocating resources on a grander scale.

We actually need a recession to correct all of the previous malinvestment.  We need a realignment of resources that coincide with actual consumer demand.  Until that happens, the economy will not be on a solid footing.  We will have to continue to endure these roller coaster ups and downs.

Let’s see where the stock market goes from here.  If it continues to go down, we may be headed back into recession.  Then we will have to fear more monetary inflation by the Fed.  If the stock market bounces back up, then it is more likely that we will continue in an illusory boom period.  Either way, we will eventually see a major bust.

There was an article on LewRockwell.com today about peak oil.  The author of the piece gives some history on the subject and the lack of accuracy by those who have warned about peak oil in the past.  He also gives some statistics about oil production and oil reserves that seem to refute the peak oil proponents.

I can’t confirm or dispute the numbers.  I don’t really have any criticisms of the article, but I do want to add some comments about the subject.

While I found the article interesting, in the long run, it doesn’t matter all that much whether peak oil is real or not.  It doesn’t matter all that much how many barrels of oil are being produced or how much is in reserve or how much has yet to be discovered or how much demand there will be in the future.

The thing that matters most is that governments get out of the way and stay out of the way.  The oil market is already heavily regulated.  Governments tax oil and gas.  Governments regulate oil drilling and refineries.  Governments own land with oil, almost everywhere it exists.  I could go on for pages about different ways that governments interfere in the energy markets.

Most things done by the government restrict the supply.  Most Republicans think that the U.S. government should drill in ANWR and other places.  The problem is that it shouldn’t be up to the government.  The U.S. government should either return the land to its proper owners or else sell it to the highest bidder.  Then the owner or owners of the land could drill.

It would also help if the U.S. stopped running an empire around the world.  Whether the motives involve control of oil or not, bombing Iraq and Libya, and threatening to bomb Iran, does not help the situation.  It causes disruptions in supply or fear of disruptions.

As long as we live in a relatively free market system, then peak oil does not matter much.  If the world really is running out of oil, then prices will go up to reflect the situation.  They will go up in anticipation. Higher prices will encourage people to cut back on demand.  It will also encourage an increase in supply.  Higher prices are the best solution to high prices.

If there is concern about peak oil by the market and prices go up, then the market will turn to other alternatives.  Perhaps the oil in tar sands will be extracted.  This is a more expensive process, but it may be worth it if the price is high enough.  Also, the market will most likely respond with other technologies.  Maybe electric cars are viable, but they shouldn’t need to be subsidized by the government.  If gas gets expensive enough, then consumers will voluntarily switch to other forms of energy if they find it is worth it.

There is one thing I may disagree with on the article regarding peak oil.  The author states, “for at least the next hundred years, oil will remain our primary energy source because it is abundant, inexpensive, and reliable.”  While he may turn out to be right, it is impossible to know right now.  If the government gets out of the way and stays out of the way, there are endless possibilities for providing energy in the future.  There may be things that don’t exist right now that we can’t even fathom.  How many people could have fathomed the internet and text messaging 50 years ago?

In conclusion, don’t worry about peak oil.  Instead, worry about the government interfering with the free market.  If the market is left free, then peak oil will not be a problem, if it even exists.

There usually seems to be a trade-off between time vs. money.  It is probably not a coincidence that people who have a lot of money are short on time and people who have a lot of time don’t have money.  One would think it would be the opposite.  If you have a lot of money, you should have a lot of time on your hands.  But this only happens if you are retired.  If you have a busy job or own your own business, you don’t have much time.  But you can’t quit your job or business or you might not have enough money.

I think it is good to think about the trade-off between time and money.  Of course, everyone’s time is limited, unless technology finds a way to make us immortal.

If you make 100 dollars per hour in your work, it is probably not a good use of your time to clip coupons.  On the other hand, if you make 8 dollars per hour, it probably is a good idea to clip coupons.  There is really almost a sliding scale here.

The more money you make, the more you should make use of the division of labor.  Tiger Woods is better off spending an extra hour with his golf coach each week instead of mowing his lawn.  He can pay someone a trivial amount to mow his lawn (from his perspective), but spending an extra hour with his golf coach could mean the difference of a win or second place finish.  It could potentially mean tens of thousands of dollars.

Even if an extra hour with his golf coach wouldn’t matter, he is still better off relaxing or doing a hobby (hopefully not getting into any more trouble) than mowing his own lawn.

For someone making 8 or 10 dollars an hour, they probably should be mowing their own lawn, unless they have another source of income or if they are using their extra time building skills.

For someone making 50 dollars an hour, it would make sense for them to call a plumber for something that would take a couple of hours to fix.  It might make sense to hire a lawn service.  It may or may not make sense to hire a maid.

Again, the more you make, the more you should make use of the division of labor and delegate other tasks.  You are better off focusing on your own work.  However, if you like mowing your lawn and find it good exercise, then do it.  If you want to change the oil in your car by yourself because you like working on cars, then do it.  If it is more like a hobby to you than a chore, then there is nothing wrong with doing it.  Tiger Woods should mow his own lawn if he feels like it is a good stress reliever.

You should also look at time vs. money when you are spending.  If you are spending 15 dollars for a dinner and that is how much you make in an hour, then ask yourself if the dinner is worth an hour at your job.  It may be.  I think it is even more useful when talking about larger ticket items.

If someone makes $30,000 a year after taxes and is considering buying a car that will cost $30,000, that person should ask himself if a full year at work is worth having that car.  It puts it in a different perspective.  It makes you realize how much your time is worth.  If you can buy a decent car for $10,000 and “save” $20,000, then perhaps with good investing (if you invested the money you would have spent on the more expensive car) you will be able to retire a year or two earlier than if you bought the expensive car.

If you are looking for ways to make more and/ or spend less, I would look at the spending side first.  If you cut your spending by 10 dollars, then you save 10 dollars.  But to save 10 dollars by working more, you might actually have to earn 12 or 13 dollars because of taxes.

The time vs. money decision is a personal decision.  But you should at least do a fair comparison so that you know what you are getting.  Maybe an expensive vacation isn’t a good idea if it is going to cost you a month’s salary.  But then again, maybe it is your dream vacation and a month’s salary is completely worth it to you.  Just make sure you fund that vacation out of savings and not by running up debt, because putting it on your credit card without paying it off right away will mean it will cost you several months worth of salary.

There is a legitimate argument to be made that 401k plans, IRAs, and other retirement plans are not safe.  In saying the word “safe”, I am not talking about the threat of financial institutions going bankrupt or the threat of a stock market collapse, although those may be legitimate threats too.  When I say “safe”, I am talking about safe from government confiscation.

I go back and forth on this issue.  I think the government would love to get its dirty mitts on retirement accounts.  Governments are in “need” of money and it is only going to get worse.  Politicians will do almost anything they can get away with.  While it has been tried in other countries and even been partially successful (from the government point of view), I think it is less likely in the U.S.

In the U.S. there is a lot of wealth being held in retirement accounts such as 401k plans and IRAs.  While this makes it a big target for governments, it also adds a layer of protection.  With tens of millions of Americans in 401k plans, it means that there will be fierce opposition to any government attempt at confiscation.

The only way that the U.S. government will be successful in confiscating retirement funds is by doing it in baby steps.  Isn’t that the way we have turned into a virtual welfare state?  It is the story of putting a frog in boiling water.  If you don’t want the frog to jump out, you have to slowly heat up the water.

There are a number of measures the U.S. government can take to start heating up the water, even if slowly.  These are just a few ideas.  The politicians could raise the minimum age for withdrawal without a penalty.  The politicians could increase the penalty for an early withdrawal.  The politicians could simply increase the income tax rates.  This will mean people paying higher taxes upon withdrawal, except for those in a ROTH IRA or ROTH 401k plan.

Another step the government could take would be to offer “government guaranteed investments”.  After a stock market crash, the politicians could announce a new government fund designed for a safe and secure retirement.  They would “invest” the money in U.S. treasury bonds.  This would allow them to kick the can further down the road in terms of running up spending and debt.  It would be a way to do this without relying on the Fed for massive monetary inflation.

Such a program of offering a government guaranteed investment would probably be voluntary at first.  Again, you don’t want to heat up the water too fast.  After the voluntary program, perhaps the government would start offering tax incentives for people to invest in the government funds.  Again, I have no idea how exactly things could play out, but I am just throwing out some possible ideas.  If you think some politician is going to steal an idea here, don’t worry, because I’m sure the politicians are already thinking about all of this.

The good news is that we have the internet.  When the government tries one of these preliminary steps, there will be people like me talking about them and warning others.  There are hundreds of thousands of libertarians now in existence in America.  Perhaps the number is in the millions.  Most of these people have friends, particularly on Facebook.  It will be hard for the government to get away with a retirement confiscation.

If for some reason the current libertarian swell and the internet are not enough to stop the government, you will at least get plenty of warning signs ahead of time.  The government will not throw the American people into a boiling pot.  It will start slowly.

A couple of weeks ago, I wrote on the topic of interest rates.  I asked if we were seeing the beginning of rising rates.  Interest rates, like the 10-year yield, jumped higher in a short amount of time.  Since then, the rates have retreated slightly, although the 10-year rate remains above 2% as of this writing.

One thing I failed to mention in that post is that we are not likely to see significantly higher interest rates until we see significantly higher price inflation.  In other words, I don’t expect to see the 10-year yield to double or triple until we see much higher consumer price inflation.  We might see the 10-year yield go to 2.5% or even 3%, but I don’t expect it to go to, say, 6%, unless we see substantially higher consumer price index (CPI) numbers.

The reason for this outlook is the Federal Reserve.  If the rates start to creep up more, I would expect the Fed to start buying more government debt, particularly longer-term bonds.  Whether they call it QE3, Operation Twist, or anything else, I would expect the Fed to buy longer-term bonds.  This will put a lid on interest rates.  I would not expect to see a Bernanke Fed sit on its hands and do nothing in the face of rising rates in the current environment.

The one scenario where I see the Fed sitting on its hands is if we see a big spike in consumer prices.  I understand that things like food and gas are already going up at a decent clip.  I understand that the CPI is not the most accurate measure of price inflation and may be swayed to understate the number.  But generally speaking, price inflation is not huge right now.  It is not like the 1970’s yet.

Big price inflation (let’s say 10% or more) is the one thing that could stop the Fed from buying more government debt.  While many libertarians disagree with me on this point, I think the Fed will stop the monetary inflation if the dollar is severely threatened.  It does not make any sense why the Fed and bankers would allow a situation of hyperinflation.  This would destroy the division of labor.  They would be committing financial suicide to go this far.

So the one situation I can see where the Fed would allow rates to rise would be in the face of severe price inflation.  The Fed will probably choose to save the dollar.  At that point, interest rates would go up.  We would see an unwinding of all of the previous malinvestment.  We would see a severe recession or depression.  The federal government would finally be forced to cut back on its massive spending.

In conclusion, we should watch the CPI just as carefully as we watch interest rates.  If the CPI remains around 2 to 3 percent on an annual basis, then the Fed can keep holding rates down.  Once bigger price inflation kicks in, then the Fed will have to make a decision to stop or severely cut back its purchases of government debt.  Then we could see much higher interest rates.