A reader of my blog sent me the following email.

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“I invest in the Permanent Portfolio and have for a few years. I chose it principally because I agree with the Austrian economic philosophy that you cannot predict the future with billions of individuals making billions of daily decisions. So you should have money in all 4 assets to be prepared for most circumstances. 

“However, there is a subset of Libertarians who believe that the total collapse of the US markets, financial system and the dollar is inevitable. I am talking about people like Peter Schiff, Jim Rickards or Jim Rogers. I will admit that as unpredictable as life can be, it is difficult to see how a citizenry with an appetite for “free” stuff combined with a political class willing to give it to them could ever not turn out in disaster.  

“If their prognosticators are correct then physical gold is the only asset you would want to own because if the dollar collapses then every paper asset like Treasuries or US stocks would go under as well. 

“I would love to hear your take on these doomer Libertarians. Are they on to something?  Or [are] they as crazy as mainstream financial pundits paint them?”

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First, I will address the investment aspect here.  I advocate a permanent portfolio, or at least some kind of modified version of it, for the majority of financial assets for most people.

There may be special circumstances where, say, someone owns a business and it might make more sense to invest money in that business so that it can prosper.  There are also scenarios where maybe someone is young, with no dependents, who wants to take a chance on an investment or business that has a good chance of taking off.

With that said, for most people, I recommend a permanent portfolio approach to invest money that you cannot easily afford to lose.  It is a strategy of wealth protection.  You can still speculate with other money, but I recommend that it be a small percentage of your net worth.

We don’t know if there will be a total collapse of the U.S. markets, the financial system, and the dollar.  While these three things are highly related, they also aren’t the same thing.  You could have a major meltdown in one category without necessarily having a major meltdown in everything else.

I can’t really define “total collapse”, but you could certainly have a scenario where stocks go down by 90% while the dollar remains somewhat stable.  You could have a meltdown in the financial markets where banks are insolvent, yet not see a total collapse of the dollar.  We already saw something similar to this in 2008/ 2009.  The banks were bailed out, but the dollar didn’t collapse.  In fact, we never got anywhere near 10% annual price inflation.

As the reader says, you cannot predict the future with billions of individuals making billions of daily decisions.  So, for investment purposes, it isn’t a question of whether a collapse in these categories is inevitable, but whether it is possible.

I don’t think there is a high likelihood of a total collapse, but I think the odds are higher now than they were two months ago.

The key is that there is a possibility, so that is why the permanent portfolio is important. Diversification is important.

The permanent portfolio is designed to hold up in any economic environment.  Of course, I have to add that there are even exceptions here.  It won’t protect you from an asteroid hitting the planet.  It won’t protect you in a complete breakdown in the division of labor.  But nothing will protect you except living out in the country with a farm, and even that isn’t a sure thing.

We have seen how fragile our system is over the last two months.  There is a shortage of toilet paper.  There is a shortage of certain kinds of food.

Almost all of the population is dependent on our high division of labor society.  We depend on trucks delivering goods to the grocery stores.  If this doesn’t happen, even a lot of the preppers will be in major trouble after a few months.  We depend on electricity and running water.

I am talking about worst-case scenarios here.

From an investment standpoint, there are other risks to the permanent portfolio.  If the government declares an outright default on all of its debt, then there goes the bond portion.  If the government declares that holding gold is illegal, then your gold portion is in major trouble.

And while it’s good to consider all of the possibilities, we can’t be completely immobilized due to fear.  There is a very low probability that the U.S. government will outright default on all of its debt. It is unlikely that gold will be made illegal.  We are in a different situation than in 1933 when the dollar was still tied to gold.

So I think that the permanent portfolio is the best that I can come up with in terms of wealth protection.  This includes a collapse of the financial markets and the dollar.

Inevitability

There were three people mentioned in the email.  They are Peter Schiff, Jim Rickards, and Jim Rogers.  I am most familiar with Schiff out of these three.

By the way, I wouldn’t refer to them as Libertarians (large L), as I don’t think they are members of the Libertarian Party.  I am not even sure if they consider themselves small L libertarians. All three are definitely sympathetic to the free market though.

I don’t know if any of them have actually used the terms “inevitable” and “total collapse” together.  They are certainly known for their doom and gloom outlooks.

I have to say that there is little in this world that is inevitable, especially when it comes to economics and politics.  Things can change quickly.  How many people saw the coming downfall of the Soviet Union in 1991 five years before?  How many people saw it one year before, even with the fall of the Berlin Wall?

How many people predicted the election of Donald Trump in 2016?  There were a few, but not many.

With all of the lockdowns across the country in response to a virus, how do we know how many people have withdrawn their consent to the state?  If there are a lot more than we know, then it could change things significantly down the road.

We also don’t know what will happen economically.  State and local governments are going to run out of money.  They probably won’t be able to keep promises that were made, especially in regard to generous pensions.  If there are defaults across the country, we may see a radical shift in public opinion.  At the very least, some people will not be so trusting of the government next time.

We may hit a scenario where price inflation does start to go up by 10% or more per year.  The Fed may be faced with a choice of hyperinflation or a pullback.  When the Fed is essentially forced to stop creating money and buying up U.S. government debt, then Congress will be forced to drastically reduce spending. It will be forced to modify its previous promises, especially to retirees.

It’s possible that the dollar could collapse, but it isn’t likely.  We aren’t Venezuela, and I don’t think we are going to become Venezuela.  There are much deeper roots for liberty in the United States.  I don’t think the middle class will give everything up that easily.

The dollar may lose its status as the world’s reserve currency.  But there won’t be a defining moment when this happens. It is already gradually happening. When the Chinese or Russians trade without using U.S. dollars, this is part of the process.  With the low price of oil, countries like Saudi Arabia become less significant.  Countries don’t really need to use dollars to trade for oil.

If price inflation hits double digits, I think this will provide enough vindication for Peter Schiff and others without having a complete collapse of the dollar. While the popularity of gold has certainly increased over the last two months, most people are not talking about double-digit price inflation across the board.  But I think this is a good possibility in the next few years. It’s also possible that the fear will cancel out the massive monetary inflation and general prices won’t go up significantly.  Again, this is why it is important to diversify.  Nobody really knows.

If we get double-digit price inflation similar to the 1970s without a collapse of the dollar, I think this will be good enough to point a finger at the Fed.  I have already been pointing a finger at the Fed for many years, but most people don’t pay attention because they don’t see the impact it has on them.  If prices are rising quickly, then they may be more prone to notice.

In conclusion, I don’t think anything is inevitable at this point in U.S. markets.  I don’t think the dollar has to collapse. However, we should prepare for these types of scenarios, which is why gold is a major component of the permanent portfolio.

The Federal Reserve’s balance sheet went up “only” $82.8 billion in the last reported week.  This would have been considered unprecedented two months ago. But after seeing the balance sheet going up over $500 billion per week a couple of times, $82 billion seems mild.

For context, the balance sheet did jump extraordinarily after the financial crisis hit in late 2008, although never at $500 billion per week.  During QE3 that lasted until 2014, the Fed was certainly not creating anything close to $82 billion per week.

Here is the FOMC statement from September 2013.  It says the Fed will continue to buy $40 billion per month in mortgage-backed securities and $45 billion per month in Treasury securities.  So the Fed was creating $95 billion per month. Compare this to the recent $82 billion in one week, which was a great improvement from previous weeks.

Better yet, compare that to the past two months where the Fed has increased its balance sheet by well over $2 trillion.

In other words, the Fed has been massively inflating for the last two months.  But the rate of creating money out of thin air has decelerated now.  The balance sheet is still going up significantly, but at a slower pace than before.  I expect this will continue for a little while.

Meanwhile, I can speak anecdotally about food prices.  I know there has been talk of a meat shortage, so maybe this is not a fair example.  But it is still a valid example of how we are already paying higher prices for certain things.

I went to the grocery store the other day.  I bought some chicken.  The store was limiting purchases of chicken to two items.  So this already indicates a shortage.  But on top of this, prices had gone up significantly.  I can’t give an exact percentage because prices are based on weight.  I don’t typically look at how much it is per pound.  However, based on my experience, I am guessing the price went up by about 50% as compared to a couple of weeks ago.

So there is temporary hyperinflation in chicken.  I consider a 50% increase in prices in less than two weeks to be hyperinflation. If general prices were behaving in this manner, it would be hyperinflation.

I hope the rise in price is temporary, or that at least it will stop going up for a while.  It is a supply and demand issue.  More people are buying at grocery stores instead of eating at restaurants.  Due to regulations (of course) and the difficulty in switching where production goes, supplies at the grocery store are not meeting the new increased demand. There is also a question of whether supplies will be maintained, as some food producers have had temporary (hopefully) closures.

It makes sense that prices would rise.  I would prefer to have the option of paying a higher price than not having it available at all.

Monetary Impacts on Prices

Still, at what point does this also become a monetary phenomenon?  There are more dollars chasing the goods and services in existence.  If anything, there are fewer goods and services in existence.

It is difficult to say if we will have imminent price inflation.  There is a lot of fear out there, and I think this fear will continue.  It means people will tend to buy fewer things.  This is deflationary.

On the other hand, the government is spending money like crazy, and it is all coming from debt monetization by the Fed.  The only way the federal government is able to run a massive deficit is because the Fed is willing and able to buy that debt.  It buys the debt by creating money (mostly digital) out of thin air.

People are getting their $1,200 (or however much) stimulus checks.  Unemployed people are starting to get their “benefits”, which includes $600 per week from the federal government.

Imagine someone working as a hair stylist.  You don’t spend money on a hair stylist because you are not allowed to (per the government).  Therefore, you have some extra money from not going to the hair stylist.  But the hair stylist is still getting income in the form of government payments.  Maybe this replaces what you and other customers would have paid.

So you and other customers have extra money from not going to the hair stylist this month.  The hair stylist has income from the government (maybe more than before).  The extra $600 per week came courtesy of the federal government, which is really courtesy of the Fed.  So there is no question that there is extra money floating around out there.

I don’t think there is any question that at least some prices are going to go significantly higher.  Real wages are going down, and they will probably stay well below where they were in February for a long time to come.

Life is going to get even more expensive.  The lockdowns certainly didn’t help.  But even when the lockdowns are over (hopefully at some point), there will have been great damage done by the reckless spending and monetary inflation.

This will have to proliferate in the form of lower real wages.  There is no free lunch.  I don’t know if nominal wages will stay down or if the inflationary pressures will push them up.  Either way, life will be more expensive.  If nominal wages go up, prices for goods and services will go up that much more.

I expect the changes in price levels will vary greatly depending on the product or service. Food prices are going to continue to go higher.  Everyone has to eat, so it is hard to reduce demand much in this category. Maybe some will eat more inexpensive foods than before, but the overall demand will still be there.

I expect most asset prices to decline.  I am less clear on real estate.  I think real estate prices will most certainly decline in the short term. If people expect high price inflation, then some may move back into real estate as a form of wealth protection.

Again, I don’t know how this whole thing will play out, but I am certain that real wages will go down.  I expect that price inflation will rise significantly at least in certain sectors.  It may take a little time to play out.

The name of the game right now is income preservation and wealth preservation.  A few people may come out of this whole thing ahead, but it will be a small fraction of the population.

While I don’t think this was some kind of grand conspiracy, I am starting to think that the hysteria over the coronavirus is something of a punishment to the American people for allowing Trump to be president.

I am not saying it was planned in a boardroom.  I am not saying that governors and mayors were in on it.  The governors and mayors are politicians. They like power.  Once the hysteria was in full swing and people were clamoring for action by their savior (the government), then governors and mayors were more than happy to exercise their newfound power.

I also understand that the coronavirus is a worldwide issue.  It is not just an American problem.  When the Chinese government locked down millions of people there, I naively thought that it wouldn’t happen here.  China is a more authoritarian place.  Even compared to Western Europe, the U.S. is a bastion of liberty.

I think the U.S. media could have somewhat downplayed the virus.  The politicians could have downplayed it.  It could have been like the swine flu in 2009 where there was a little bit of paranoia and a few extra precautions, but life mostly went on.  Instead, we got mass hysteria and predictions of millions of people dying.  The lockdowns could not have happened without the propaganda coming out of DC and the establishment media.

I truly wonder whether the hysteria came as a form of revenge from the establishment. They tried to make up stories about Russian collusion, and they largely didn’t stick.  They tried to get rid of Trump for wanting Ukraine to investigate Biden.  They got an impeachment, but not much to show for it.  They have been trying to beat down Trump ever since he became a candidate.  The establishment may have finally gotten to him on this one.

Trump downplayed the virus back in February.  They have made him (and nearly everyone else) pay since then.  They said he wasn’t taking the threat seriously. At that point, it was in the interest of the establishment to make the virus as bad as possible.  This is why the CDC has encouraged attributing coronavirus as the cause of death on death certificates.  It inflates the numbers.

This whole thing has obviously wrecked the economy.  While I think “the Trump economy” was not that great and also didn’t have a lot to do with Trump, it was seemingly one of his winning hands.  Now he can’t really brag about the economy. He can blame the coronavirus for the bad economy, and he will continue to do so until Election Day, but it still messes up his winning hand.

If Trump from the beginning had said that the coronavirus is a very serious threat that could lead to tens of thousands or more Americans dying, then do you think the media would have just joined the hysteria with him?  The establishment media will say the opposite of what Trump says and try to come up with any evidence they can that is contrary to what he says. Therefore, if Trump had hyped the virus from the beginning, there is a good chance the establishment would have downplayed it.

I also wonder if Hillary Clinton, or really anyone else, were president, what would have happened. Either we would have gotten a full national lockdown from Queen Hillary, or there never would have been much hysteria in the first place.  It is hard to say for sure, but I think this would have been more similar to the reaction with the swine flu if someone else were in office.

Again, I don’t necessarily think this was coordinated.  The media has been trying to enact a coup against Trump since before he took office.  This time, something stuck.  And they are hoping it will continue to stick until the election in November.

The Establishment Media

I am not a big fan of Trish Regan.  I had only seen brief clips of her show.  She seemed like a Trump apologist.  Therefore, there were certain issues where I agreed with her, and there were some in which I disagreed.  But when she defends Trump against the establishment media, I will typically agree with her.

Unfortunately, Trish Regan didn’t fully understand that she worked for the establishment media. Fox is rare in television for leaning Republican/ conservative, but this doesn’t make it anti-establishment. There is certainly a wider range of discussion on Fox, but there are limits, and Regan hit hers recently.

On her show on Fox Business, Regan referred to the “coronavirus impeachment scam”.  She said, “We’ve reached a tipping point.  The chorus of hate being leveled at the president is nearing a crescendo as Democrats blame him and only him for a virus that originated halfway around the world.  This is yet another attempt to impeach the president.”

Regan was blaming the Democrats for trying to use the virus to take down Trump.  For this, she was fired by Fox after the outrage mob pointed to it.

The show aired on March 9, which was still closer to the beginning of the hysteria and just before most of the lockdowns were starting.

I don’t really find much to disagree with Regan on in the segment that got her fired. Anyway, it was obviously an opinion piece.  Fox News and Fox Business are full of opinion commentaries.

It’s funny that Fox would fire Regan over these comments.  The network was full of people advocating for the Iraq War and continuing to promote it many years later.  You may even find a few people on there today still defending it.

This is the world of the establishment media, which includes Fox.  You can feed lies and propaganda that leads to a war that kills a million people, and that is acceptable.  I don’t know of anybody who got fired over promoting the Iraq War.  You see, it was all a mistake.

But when you speak politically incorrect truths about the coronavirus being like the flu and the Democrats using it against Trump as a means to get rid of him, then this is just unacceptable to Fox.

I often say that the establishment hates Trump because Trump occasionally tells the truth.  I guess I can say the same about Fox now. The network didn’t like the fact that Regan was pointing out some truths to ponder.

Taking a position of calling the hysteria exactly what it is – hysteria – gets you in hot water. You all of a sudden want people to die.  You don’t care about old people, etc.

If Trump weren’t president, or even if he hadn’t made his initial comments downplaying the virus, I have a feeling that we would be in a different scenario right now.

The establishment will stop at nothing to take down Trump.  That includes causing mass fear and destroying the economy.

Let’s review where the Unites States stood in February 2020.

First, let’s look at the good news.

• The unemployment rate was historically low.
• The stock market was booming.  (This also falls into bad news.)
• The U.S. had officially been out of recession since 2009.
• There was optimism.  (Maybe this also falls into bad news.)

Now let’s look at the bad news from February 2020.

• The U.S. national debt was over $23 trillion
• Medicare and Social Security were set to run out of money in the not-too-distant future.
• When you consider that the trust funds held nothing but a bunch of IOUs, the so-called entitlement programs were already out of money.
• The total unfunded liabilities were estimated from the tens of trillions of dollars to over $200 trillion dollars.
• The stock market was in a massive bubble from over a decade of easy money and low interest rates courtesy of the Fed.
• Corporate debt was continuing to rise at seemingly unsustainable levels.
• Individuals were accumulating more debt.
• A majority of Americans had less than $1,000 in savings.
• The federal government was running an annual deficit near $1 trillion.
• The repo market had just blown up in September 2019, compelling the Fed to intervene.

The Coronavirus Economy

Then the coronavirus came to America.  The media and government officials managed to instill great fear into Americans (along with the rest of the world).  Americans allowed governors and mayors throughout the country to act like dictators and close down many businesses that were deemed non-essential.

Since that time, the federal government has spent multiple trillions of dollars.  That, coupled with decreased tax collections, means we could see a deficit hitting somewhere close to $4 trillion this fiscal year. The government will spend more than twice what it actually collects in taxes.

Meanwhile, the Fed has gone on a digital money printing spree.  It increased its balance sheet over $2 trillion in about six weeks.  Its $6.5 trillion (and growing) balance sheet really pales in comparison to the $900 billion it was in 2008.

We were already in a massive stock market bubble.  We were already in a massive debt bubble.  We were already staring at hard times ahead.  We were already looking at defaults coming in entitlement programs.  We were already looking at broken promises.  We were already looking at defaults through inflation.  We were already looking at adjustments to our living standards.

This was all the case in February 2020.  Now, state and local governments shut down businesses for a couple of months. Some may extend it longer. And the federal government is spending money like there is no end in sight.  The politicians in DC decided to pay people not to work. Many of them are making more money not working than they previously did.  How could they not see this as a problem?

Even if the economy does turn back on like a light switch – which it won’t – there has already been tremendous damage done over the last two months.  The government spending and the monetary inflation are serious issues that Americans obviously have little grasp of.  If they did, they would be outraged by it.  But most people don’t seem to care. They just think it’s great that they are getting “free” money in the form of a stimulus check in the mail.

This is a complete disaster.  There are going to be severe consequences.

I try not to underestimate the power of the free market.  The problem is that we have to find some semblance of a free market at this point.

Germany and Japan were both devastated from World War 2.  They both adopted relatively free market policies after the war. It is actually quite amazing how quickly these two countries were able to grow wealth.  They were starting from a point of devastation.

The U.S. is obviously in a much better place than Germany and Japan were in.  Our infrastructure hasn’t been destroyed by bombs.  But if we want to have any hope in prospering, we need a drastic reduction in the size and scope of government at all levels, but particularly the federal level.

Our living standards are going to suffer in the near future no matter what.  The debt isn’t just going to hit future generations. It is hitting us hard now. It is extracting resources from the productive economy.

If we want great prosperity, Americans need to withdraw their consent from the politicians who are so eager to spend money like there is an endless supply.  But that money is supposed to represent resources, and there is a limited supply of resources.

The Federal Reserve’s balance sheet rose by $205 billion according to the latest data.  This is a slowdown in the rate of increase from the last 6 weeks, but it is still extraordinary.

Again, this is on a per week basis that I am doing these weekly reports on the balance sheet. Since February, it is up by close to $2.5 trillion.  The total balance sheet was around $900 billion when the financial crisis hit in 2008.

If you had told me back in February that the Fed’s balance sheet would exceed $6.5 trillion before the end of April 2020, I would have either thought you to be insane or I would have thought there was some kind of worldwide crisis coming.  I would have been correct on the latter, but I didn’t expect it to come in the form of a pandemic or, more accurately, fear from a possible pandemic.

The coronavirus did not put us in this situation to be sure.  This is a result of massive government lockdowns, which got the consent of a large portion of the population due to the fear instilled in them from the “experts” and their “models”.

We also can’t overlook that we were already in a bad situation due to previous government and Fed policies.  There was a lot of monetary inflation from 2008 to 2014, and we have had artificially low interest rates courtesy of the Fed for well over a decade (if not more).  There was also massive government spending, and the annual deficit was already at approximately $1 trillion during supposedly good times.

The Fed and the government have disincentivized savings.  They have made it difficult for people to save even if they want to.  They have made it difficult for businesses to build up capital.

While there never should have been these major shutdowns of private businesses, it also shouldn’t have been the case that there are so many individuals and businesses that are hanging on by a thread.  It says something when there are shutdowns for 6 weeks and a large segment of the population can’t pay their rent or mortgage.  And it isn’t much better for businesses, many of which are on the brink of bankruptcy from missing about 6 weeks in revenue.

I continue to stress that even if all fears of the virus go away in the next month or two (which they probably won’t), you can’t just flick a switch to turn back on the economy. We certainly do need to move on and allow businesses to reopen, but we can’t go back to the way things were in February any time soon.

A lot of businesses are going to attempt to reopen and they are going to find that business is a lot slower than it was before.  The virus may play a role in keeping some people from eating out right away, but I think more people will avoid eating out because they are worried about their family budgets.  They certainly won’t be buying a new car.  They won’t be taking expensive vacations.

Don’t get me wrong here.  I don’t want to sound like a Keynesian.  I understand that consumption isn’t what gives us economic growth.  But if we see a major shift in consumer demand (away from things like eating out, buying new cars, and taking vacations), then there will have to be a shift in resources.  There will be failing businesses and there will be unemployed people.  This is what happens in a recession when resources are reallocated.

In other words, even if there is no longer fear over the virus, there will be major fear about economic conditions, and rightly so.  People are going to act differently than they did in February.

A more important point is that the Fed and the government are doing massive damage in response to the disaster that they already created.  We are getting more spending and more monetary inflation, which will only serve to weaken economic growth in the long run.

Personal Protection

One thing that is going up with the Fed’s balance sheet is the price of gold.  It ended the week strongly above the $1,700 mark. I have heard anecdotally that some gold dealers are out of physical gold.  I think the price in the paper market will start to reflect this more and more.

Gold has not gone up as wildly as the Fed’s balance sheet, but it has the potential to do that.

I actually heard a financial advisor say that gold is the worst hedge against inflation/ hyperinflation.  I’m sure there are others who feel the same.

Of course, this is a ridiculous thing to say.  It is perhaps the best hedge against massive inflation.  Maybe one could argue for real estate, but it would actually be pretty stressful to own rental real estate right now when renters are essentially being told they don’t have to pay rent.  Also, real estate is not liquid.

You absolutely want gold in your portfolio.  This can include physical gold, gold ETFs, gold certificates, and mining shares.  On that last point, you should understand that buying stocks in gold mining companies is quite risky. But if things go well, share prices in some of these companies will go many multiples of where they are now.

I believe in diversification.  This is why I still advocate the permanent portfolio, even though I have strayed a bit from it.  I think the gold portion is more important than ever.

With that said, it is also important to have liquidity.  You want cash and cash equivalents.  You want a strong emergency fund, and it is nice to have cash on the sidelines for potential bargains down the line.

Even though we may eventually get hit with high price inflation, you still want to be out of debt with a few possible exceptions.  You definitely don’t want any credit card debt or high-interest debt.  Even if we do experience high price inflation, you don’t want debt to burden you.  You also don’t know when the Fed may slam on the monetary brakes.

This is going to be a wild ride ahead.  The Fed is setting us up for a disaster.  We should actually hope for higher price inflation without going to hyperinflation.  Maybe the Fed will be forced to stop with its reckless policies for a while.

Where is Paul Volcker when we need him?  He was far from being anything close to a libertarian.  He never wanted to end the Fed.  But at least he recognized that you can’t just create money out of thin air like crazy without suffering consequences.

There are many Americans finding themselves involved in politics who don’t typically get involved in politics.  The situation has forced them into it.

If the main issue in the country were just the coronavirus, then people wouldn’t have to take a political position.  Maybe you could say that you trust or don’t trust government officials who are giving guidelines, but that would be about the extent of it.

Here is my point. You could believe that the coronavirus is the greatest threat ever to the human race, but if you don’t advocate for any government force in response to it, then I really have no issue. Maybe I could think you are naïve for thinking such a thing, but your thoughts are basically harmless to me.

If a lot of people believed this, then you might see a significant change in society. Some businesses might shut down voluntarily.  Again, I could think it is naïve, but I can’t claim they are denying me my freedom.  It is the right of the business owner (the property owner) to decide what to do with his property.

Even if half the people thought the coronavirus is the greatest threat ever but didn’t advocate a government response, it wouldn’t shut down society.  The other half could go about their lives.  Their lives would be changed in the fact that they wouldn’t have as many options of people to associate with, but there would likely be functional businesses in every industry.  Some hair salons might close.  Some might stay open without any change in policy (such as “social distancing”).

I don’t get involved in a lot of discussions on Facebook, but I couldn’t help myself a few times. There have been people posting things who don’t normally post political things.

If someone posts something ignorant about the virus, I will usually leave it alone.  It can impact me in the sense that it is making people more paranoid than need be, and this provides support for government shutdowns.  But hyping up the virus in itself is not a direct threat to me.

If someone posts something advocating government shutdowns or opposing the easing of restrictions, then sometimes I can’t help but respond.  They have gotten themselves into politics.  And with politics comes the threat of violence.

I could leave these people alone if it didn’t impact my family and me.  But it does.  When people are praising mayors and governors for closing down businesses, this impacts me, and it impacts millions of other people who would have chosen a different path.

You can spout off whatever nonsense you want, but I take exception when that nonsense is promoting the reduction of liberty.

Political Divide

There has been a major political divide in this country for a long time.  It didn’t start with Donald Trump, but I think the ascendancy of Trump exacerbated it.  It certainly exacerbated the rhetoric.

From a libertarian standpoint, I often see false lines.  I know the two major parties tend to agree when it comes to war.  I know the two major parties tend to agree when it comes to massive government spending and deficits.  If it wasn’t already clear, it should be now after the past month.

Still, there is a major divide.  I think there is also a major divide with the coronavirus.  There are certainly varying opinions on how serious it is and how much the media and government are hyping it up.  I know of nobody who says that the virus is a complete fraud and doesn’t exist.  But there are many people, including me, who think it is way overblown.

But really, the main divide comes down to whether you believe in the use of government force as a reaction to the virus.  You can think that the virus is the most deadly pandemic of the last hundred years, but it is still possible to advocate only voluntary responses.

I have found that there is more of a tendency to favor government shutdowns from the political left.  I have found there is more of a tendency to be opposed to government shutdowns from the political right.  But this is a generalization, and it doesn’t completely hold true.

There were young adults crowding the beaches during spring break in March.  They were being lectured and ridiculed by the establishment media.  I am sure that a majority of these beachgoers would not identify with the political right.

I think age does play some factor in this.  After all, the virus is barely dangerous at all to young people. I know you can always find one story out of tens of millions of people who supposedly died of the coronavirus, but it really is extremely rare.  The biggest threat by far is to elderly people.  So it is understandable that older people would be more paranoid and younger people would not care as much.  And the younger people on spring break probably weren’t stopping by the beach on their way to their grandparent’s house.

Whenever someone says, “But don’t you care about old people?”, I respond that old people are free to self-quarantine just like anyone else.  It doesn’t have to be any different for them than what is happening now.  In the meantime, allow young people (or anyone for that matter) to carry on with their lives, which includes working.

There have been hundreds of thousands of businesses that have been forced to shut down. Maybe the number is in the millions.  If they weren’t being threatened with violence by the government, then most of them wouldn’t have shut down.  Many of these people are very angry, and I don’t blame them.

The tens of millions of employees who worked for these businesses are now out of work. Many of them are happy because they get paid more in unemployment than they did working at their job.  Now they get to sit at home and make more money.  But they have to know that this will not last.

What happens in six months when some of these businesses have not reopened?  What happens to the millions of unemployed people? All of these people have a story.

Politics Will Find You

I have long-said that you may not take an interest in politics, but politics will take an interest in you.

Someone can ignore the world around him, but it doesn’t make things any less real.

I have to be clear that I don’t think people should obsess over politics.  You should focus the most on things that you can control. This is why I try not to go on Facebook much.

You also shouldn’t use politics as an excuse not to better yourself.  It is one thing to acknowledge the situation you are in. It is another thing to let it completely hamper your ability to function.

I think some people who previously considered themselves apolitical are now finding that it is hard not to take a position.  I don’t know of many people who don’t really care one way or the other whether there are government shutdowns.  There are some people who don’t want to speak out because they don’t want to get into an argument, but I think there are very few who essentially hold no opinion on the matter.

There are many small business owners who didn’t take an interest in politics at all who are now all of a sudden taking a position.  Their livelihood depends on being allowed to reopen their business. They didn’t expect a dictator governor or dictator mayor to shut them down completely.

I like to use an extreme example of politics taking an interest in people.

Imagine a Jew in Germany in 1933.  One of his friends comes up to him and says that we should probably be worried about this guy Hitler and what he is going to do in power.  The guy responds that he doesn’t really have much interest in politics.  He is apolitical. He doesn’t really have a strong opinion one way or another about this new guy Hitler.

In 1942 when he is being marched off to a concentration camp with his friend, is he going to say the same thing?  “I know I am being marched to some camp, probably for my own safety, but I don’t really take much of an interest in politics.  I’m sure it will all work out.”

We are not in that position in our country, but there is no question that the actions of state and local governments (dictator governors and dictator mayors) have upended the lives of many people.  If you spent the last 20 years spending a lot of money and time to build up a business and you see it evaporate in the matter of two months because of the government, what would you think?

The governors and mayors are actually not at fault though.  I like to blame government for many of our problems, but ultimately it is the people that decide this.  The governors and mayors are acting like dictators and getting away with it because a large percentage of the population is clamoring for the lockdowns.  Even if they have been propagandized by the government and its compliant media, they are still ultimately to blame for being duped.  And as I stated earlier, you can still believe that the virus is the greatest threat ever, but you can still not advocate for government responses.

When it becomes clear that the economy is in the toilet and not coming out of the toilet any time soon, then I think more people will realize that a continuation of government shutdowns is not a good idea.  Hopefully some will realize that it was never a good idea in the first place. I would really hope that most business owners see this already.

“The masses will never again accept the mindless serfdom of the Old Order; and given these demands that have been awakened by liberalism and the Industrial Revolution, long-run victory for liberty is inevitable.” ~ Murray Rothbard

Americans are accustomed to a high standard of living.  They are willing to give it up for a short period of time in order to “flatten the curve” (i.e., listen to their government rulers).

When things that are deemed non-essential are shut down for a month or two, most people can handle it for this duration.  Even though you can’t go out for a haircut or go out to the movies, you can still watch Netflix at home.  You have the internet.  You have food on the table.  Life for many right now doesn’t seem too bad.

Many people are being paid to sit at home and do nothing.  With the legislation passed by Congress, many people are receiving wages that are higher than they would have been had they kept working. These people are being paid to do nothing.  There is not much incentive to stop doing nothing until the money dries up.

Welfare can “work” for a limited number of people.  If there are 150 million people working while a couple of million people collect welfare, this is sustainable as long as the majority of people put up with it. It is economically sustainable.

It doesn’t work when most of the country is on welfare.  It cannot be sustained without a massive decline in living standards.

Right now, millions (soon to be tens of millions) are being incentivized to not produce.  This cannot last.  Work ethic will be revived when the welfare state dries up, which will be quickly.

The federal government was already set to run a $1 trillion deficit this year.  Congress has provided (not out of its pocket) funding for over $2 trillion in addition to this.  I don’t know if all of this money will be spent this year, but a majority of it should be.  This doesn’t account for what else we get over the coming weeks.

We could be looking at a $3 trillion deficit this year.  But it could even be worse than that.  Tax collections (sometimes called tax revenues) are going to plummet.  Maybe Walmart, Amazon, and Netflix will be paying higher corporate taxes, but most companies will see a massive decline in profits.  For many, there won’t be any profits.  They won’t be paying taxes.

And the tens of millions of people who were forced out of work will essentially not be paying payroll or income taxes.  There is going to be a major decline in tax collections at every level of government.

The federal government can create money out of thin air through the Federal Reserve.  State and local governments do not have this luxury.  The Fed has indicated it will buy municipal bonds, but how long can this last?  This will not be enough to prop up state and local governments for long.  State and local governments will be forced to scale back significantly.

For all of the people cheering on the lockdowns and the government “assistance” that goes with them, they are not counting the economic costs.  This economy is going to hit them across the head like a brick.

I think fears of the virus will end up being similar to fears of climate change.  Many people will speak in politically correct terms about it and say they are doing their part to fight it.  But their actions won’t really reflect what they say.

The politicians have gotten away doing things with the virus that they weren’t able to get away with regarding climate change.  Many people would recycle and drink out of paper straws, but they wouldn’t significantly alter their life because of climate change.

When the economy gets worse, I think many people will no longer enthusiastically support government shutdowns, even if it is being reported that the virus is still going strong.

The basis of our living standards is productivity.  It is a basic economic point, but it is not widely understood.  You can’t have a small number of people producing while a large number of people live off of that productivity and contribute nothing.  It doesn’t even really work if it is half and half of the working age population.  Our society is not that far advanced.

If the market were allowed to operate freely, things would adjust quickly, even with fears of a virus.  Maybe some people would self-quarantine, and that should be their choice to do so.  Maybe some businesses would even temporarily shut down on a voluntary basis, but at least they could weigh the costs and the benefits.

Where the market is relatively free to operate, people adjust and productivity continues.

I shop at Publix grocery stores, and Publix has been great.  The workers are there to work and satisfy the customers. Toilet paper has started to appear on the shelves.  We can be thankful that the government has not yet taken over the toilet paper industry.

I went to Olive Garden the other day to pick up food.  There were many other cars there doing the same.  I waited in my car and someone came out with a tablet. She asked my name and punched it in.  There was a number corresponding to my parking spot.  A few minutes later, someone came out and handed me a couple of bags of food. They did not function this way a month ago.  The employees adjusted quickly to their new roles.

It’s not to say that everything is wonderful in a free market.  You may get bad service.  But if that company wants to stay in business, it will have to quickly start satisfying consumers.

The government is our major threat right now.  The destruction of the currency is the biggest threat of all.  This is being overseen by the Federal Reserve, which is essentially an arm of the federal government.

Creating money out of thin air does not produce food or toilet paper.  It doesn’t produce any service other than redistributing wealth and distorting the market economy.  Monetary inflation doesn’t increase the number of goods and services available.  If anything, it reduces it.

There are going to be severe economic consequences for years to come based on the current actions of the federal government and the Fed.  Real wages are going to drop.  I hope that most Americans come to understand that the virus didn’t do this to us.

Americans clamored for their enslavement, and politicians were more than happy to provide it. Now we will all pay the price.

The Federal Reserve’s balance sheet is now at $6.367 trillion.  The previous week it was at $6.083 trillion.  This is an increase of approximately  $284 billion in one week.  For a couple of weeks in March, it was going up over $500 billion per week.

This is what is being added every single week.  The total balance sheet was around $900 billion in 2008 before the worst of the financial crisis hit.

The Fed doubled its balance sheet in late 2008 in the matter of a couple of months.  It then took over 5 years to double it again, which in itself is crazy.

Now it looks like the Fed could double its balance sheet again in the matter of a couple of months.  But instead of starting at under $1 trillion, it was starting around $4 trillion.

I don’t know where this ends.  Maybe it will be at $10 trillion by the end of the year.

This is going to have severe consequences that are far greater than businesses being shut down for a couple of months.  We are going to see a dramatic decrease in living standards.  Real wages will decline significantly.

On the one hand, people will be fearful and cut back consumption.  But then we have the Fed creating massive amounts of money, almost daring people to defy it by holding back consumption.

The Fed is seemingly trying to create significant price inflation, and I am afraid we will get it good and hard one of these days.  The positive side is that it might finally force the Fed to scale back, and government along with it.

This is going to hit government at every level.  The Fed is going to buy municipal bonds to help bail out state and local governments, but it can only do so much.  The state and local governments cannot create money on their own.  With a major decline in tax collections, they will eventually be forced to scale back dramatically.

This whole thing is going to be extremely painful.  You should prepare yourself accordingly.  I think your number one concern should be protecting your main source (or sources) of income as best as you can.  Your second concern should be protecting against massive price inflation.

Let’s hope that we can get through this and government at all levels will be forced to scale back drastically.  Maybe we can one day look forward to much greater liberty when the welfare state loses legitimacy.

When Donald Trump was elected president, I felt like it exposed a lot of people.  I saw people who called themselves libertarians who supported almost every aspect of Trump.  I also saw people who called themselves libertarians who opposed virtually every word uttered by Trump.  There really is such a thing as Trump Derangement Syndrome (TDS).

It is understandable for a libertarian to love Trump for his political incorrectness, his slams against the establishment media, and his exposing (even if inadvertent) of the deep state.

It is also understandable for a libertarian to hate Trump for his bad economics, his horrible cabinet picks, and his continuing of foreign wars.

With that said, it is almost impossible to be a principled libertarian and not have something of a nuanced position towards Trump.  Some of the things he says are really good.  Some of the things he says are really bad.  I think the best a libertarian can do is to cheer him on when he says or does something that favors liberty and to speak against him when he says or does something against liberty.

When I hear a libertarian who says Trump should be impeached for colluding with Russia, it tells me something about that person.  This is someone who doesn’t really oppose the state.  They are buying into the war propaganda (against Russia). They are buying into the establishment lies.

I can see where libertarians could have legitimate differences regarding Trump on an issue like immigration.  I can see legitimate differences on opinions of Trump’s effectiveness or his overall intentions.

But overall, Trump’s presidency has done me a favor of further identifying people who call themselves libertarians who I just can’t trust.

I have my safe spaces, if you will.  There are websites and podcasts that I go to on a fairly regular basis where I can depend on hearing good libertarian thought.

I am in a small minority in the world.  Most of my life is surrounded by people who see the world in a different way, at least politically speaking.  I also get some exposure to the establishment news, even when I try to avoid it.  This is why I like to be able to escape to a libertarian world at times.  I find this in reading articles, watching videos, and listening to podcasts.

The Coronavirus Exposure

Like almost everyone else in this world, things have changed dramatically in my life over the last month.  Many businesses are shut down in my area.  I am working at home full time.  Fortunately, we can go outside and get exercise, and my kids were already homeschooled, so there is no adjustment there.

Unfortunately, something else in my life has changed over the last month.  Some of my “safe spaces” have become a little less safe.

I have seen many libertarians fall for the media hysteria hook, line, and sinker.  They have been swindled.  They have been taken for a ride.  Some of them are starting to admit this is the case. Some of them are gradually changing their tune without admitting they were duped.  Some of them are standing by the hysteria.

I am not just talking about the libertarians who I already didn’t trust.  This isn’t about people who enthusiastically supported Gary Johnson and Bill Weld in 2016.  This isn’t about someone working at a DC think-tank who calls himself a libertarian just because he wants lower marginal tax rates and the legalization of marijuana.  (There is nothing wrong with these things, but libertarianism goes way beyond this.)

I am talking about people who consider themselves to be hardcore libertarians.  They follow the Austrian school of economics. They have been hardcore against the state.  Some of them even call themselves anarcho-capitalists.

Yet, they bought into the media lies and propaganda.  They listened to Fauci and his predictions of hundreds of thousands of people dying and the hospitals being overwhelmed.

Even worse, I have even heard a few of them consider the possibility that we may need government action to deal with a pandemic.  This is disheartening beyond belief.

The establishment media constantly lies and distorts about anything that is remotely political. I don’t understand why some libertarians all of a sudden started trusting them just because of the existence of a virus.

Establishment Media: We have to invade Iraq because there are weapons of mass destruction.

Libertarian Guy: That’s fake news.

Establishment Media: Assad used chemical weapons against his own people.

Libertarian Guy: That’s fake news.

Establishment Media: We have to deal with climate change now and listen to our models or we will be under water in 10 years.

Libertarian Guy: That’s fake news.

Establishment Media: Trump won the presidency because Putin interfered in our elections.

Libertarian Guy: That’s fake news.

Establishment Media: There’s a virus that is highly contagious with a high mortality rate.  We must listen to our models and act now or there will be hundreds of thousands or even millions dying in a pandemic.

Libertarian Guy: Oh my.  They said there’s a horrible virus.  We really need to take this one seriously and listen to the experts on how to handle this.

This is my world crashing down on me.  My safe spaces are now limited.  Lew Rockwell has been fantastic with his website.  Ron Paul has been excellent on the issue.  The Mises Institute has had some good material.  Beyond that, I don’t know what happened to my libertarian world.

I have heard some libertarians who bought into the media hysteria but still insisted that there should be no mandatory lockdowns.  So I can’t pull their libertarian credentials because they aren’t advocating for the use of force.  I don’t understand how they could be so gullible this time, but at least they didn’t sell out their principles.  In the long run, I can forgive these people.

For the ones who seemed to justify government action, especially in the form of lockdowns, they have probably lost me forever.  I won’t be able to trust them again.

The good news out of this is that I have talked to many people who think that shutting down the economy is a joke.  These are people who are not libertarians, but they understand that the reactions to the virus are way overblown. 

So in the last few weeks, many libertarians I know have moved away from libertarianism, while many non-libertarians I know have moved slightly towards libertarianism, at least as far as not trusting the government.

I actually heard some libertarians defending the hysteria because in this case, it was expert epidemiologists who were warning of a severe pandemic.  But how is this any different than climate scientists saying we will get global warming or flooding or whatever bad thing will happen?

The problem is that the people we are told are the experts are the people handpicked by the establishment and their media.  There are epidemiologists who think this virus is way overblown, but you have to find them on the internet.  You won’t likely see them on ABC news or CNN.

You can always find an expert in something to tell you what you want to hear.  This is especially true in government when there is money and political power involved.

It has been sad to see some libertarians fall for this hoax.  I am not saying the virus itself is a hoax, but the media and government hysteria is a hoax.  It allowed the politicians to do things that were almost unimaginable 6 weeks ago.

There is going to be great economic carnage from this whole thing.  If the government stays out of the way (relatively speaking), then we should still be able to buy toilet paper and food.  Thank goodness that our grocery stores are not run like our medical care system.

The federal government and the Federal Reserve are being reckless now and will make things very bad.  But I am optimistic that the government will lose legitimacy over this whole thing.  There are many people seeing through the propaganda.  It is easier to see through when you are unemployed because of the propaganda.

Our living standards are going to suffer, but I hope we can come out of the other side of this with more liberty, as more people see that they can’t trust the government, and they can’t depend on the government.

I have been analyzing various aspects of the government’s and the Federal Reserve’s responses to the current economic conditions, which were largely brought on by the government and the Fed in the first place.  For this post, I am going to discuss the Fed’s move to eliminate reserve requirements for banks that it announced on March 15, 2020.

This new policy almost slipped through the cracks with all of the major moves coming from the Fed.  It’s possible the move isn’t significant, but it’s also possible it is quite significant.  I tend to think it is significant because it wouldn’t make sense for the Fed to implement this new policy if it has no impact.

Before implementing this new policy, banks were previously required to hold 10% in reserves. In other words, if you deposit $1,000 into a bank, then the bank must keep at least $100 of that in reserve. The other $900 could be lent out. This is fractional reserve banking.

Austrian school economists differ on the policy of whether fractional reserve banking should be legal in a free society.  I take the position that it should be legal as long as the parties are consenting to it.  If a bank says it is keeping all checking deposits in reserve (like a storage facility) but then loans some of it out, then this would be fraudulent.  But if all parties agree to the terms of the contract and those terms are upheld, then I see no issue from a libertarian standpoint.

With that said, I take the view that Mises held that fractional reserve lending would be extremely limited in a system of free market money.  This would mean the non-existence of a central bank and the FDIC.

Given that we don’t have anything resembling a free market system in banking, it makes some sense for the banks to be required to hold reserves.  If the Fed is going to prop up and bail out the banks when needed, then it makes a certain degree of sense to require the banks not to be completely reckless.

Since the fall of 2008, commercial banks in the U.S. have largely increased their reserves in tandem with the Fed’s monetary inflation.  I believe this is one of the reasons that we did not see massive price inflation over the last decade.  The Fed was inflating the money supply, but it largely wasn’t being multiplied by the banks through fractional reserve lending.

The massive excess reserves started to fall in 2019 with the Fed’s mild deflation of its balance sheet.  Now that the Fed is creating money out of thin air like never before ($1.5 trillion over a three-week period), I expect that excess reserves will increase.  It appears that is happening already.

Banking Troubles?

It doesn’t make that much sense why the Fed would eliminate reserve requirements when there are already massive excess reserves held by banks.  In other words, it seems that most banks are well over the 10% threshold already, so why did the Fed eliminate the 10% requirement if it was easily being met?

The only thing I can conclude is that one or more of the major banks is on the verge of bankruptcy, or else the Fed is worried that the major banks will quickly deplete their excess reserves and possibly face bank runs.

I don’t think we are going to get bank runs as was seen in the Great Depression.  Most of our banking system is digital.  This doesn’t mean that you shouldn’t have a small amount of physical cash available just in case.

But the banks can experience a digital run, so to speak.  The Fed is obviously taking pre-emptive action to reduce this possibility.  We know that massive defaults are coming.  If there is 25% unemployment, that alone will mean massive defaults on mortgages and other loans.

With regard to the elimination of reserve requirements for banks, the obvious major fear is hyperinflation.  If banks can loan out essentially all of the money they receive for deposits, this can multiply the money supply almost infinitesimal.  This is why the Fed’s new policy makes no sense.

It says in its statement: “This action eliminates reserve requirements for thousands of depository institutions and will help to support lending to households and businesses.”

This is exactly the thing we should be afraid will happen.

As I have argued before, the Fed doesn’t want to see hyperinflation.  The people working at the Fed would be destroying their own power.  They would also be destroying their own dollar-based pensions.  But that’s not to say that the Fed couldn’t lose control of the situation and still destroy the dollar.

I was going to say that we need to keep a close eye on excess reserves held by banks, but then I realized that essentially everything the banks have will be considered excess reserves since the reserve requirement is now zero.  So I’m not sure how this will get measured.

My biggest fear coming out of all of this is that we face some kind of hyperinflation without any alternative functioning money in place.  I am a big fan of using gold as money (as was chosen by the marketplace for thousands of years), but it isn’t easy to just switch to gold overnight.

I fear hyperinflation because it could mean a major breakdown in the division of labor. It would make the last month look pleasant by comparison.

I am not predicting this will happen.  I hope the Fed’s move in eliminating reserve requirements was done for other reasons that I cannot see.  But forgive me for feeling a little anxious over the Fed giving a green light to banks to lend everything they have.  It’s something I am going to keep a close eye on.  Either way, we should prepare for massive price inflation ahead.