There is talk about a wealth tax, particularly from Elizabeth Warren.  Some don’t know that Donald Trump once proposed a one-time wealth tax of 14.25% on those with over $10 million in assets.  That was back in 1999.  Luckily, he has not advocated for such a thing in a long time.

Bill Gates was recently discussing a wealth tax.  Gates is something of a coward.  Maybe it is because the Clinton administration took on Microsoft back about 20 years ago.  Gates mostly toes the establishment line.  It isn’t much different when it comes to a wealth tax. He said he’s paid over $10 billion in taxes, and he would be fine if he had to pay $20 billion.

However, he did half-jokingly say, “When you say I should pay $100 billion, then I’m starting to do a little math about what I have left over.”

Gates is supposedly currently worth about $106 billion.

Gates and Warren Buffett make it sound like they don’t mind paying high taxes.  Sometimes they will say that they should pay more. Yet, they never donate extra to the government.  They send a lot to charity and their pet causes, but that never includes funding the government beyond their minimum requirement to stay out of jail.

Now, here comes Bernie Sanders.  Sanders said the following on Twitter:

“Say Bill Gates was actually taxed $100 billion.  We could end homelessness and provide safe drinking water to everyone in this country.  Bill would still be a multibillionaire.  Our message: the billionaire class cannot have it all when so many have so little.”

That is spoken like a true socialist.  There are a couple of major points that need to be addressed based on these comments from Bernie.

Taxing Stock Ownership

A large portion of the wealth that Bill Gates has is on paper.  He doesn’t have this money in the bank.  Gates has diversified some of his wealth (smartly) out of Microsoft and into other stocks, and presumably other asset classes.

Still, a large portion of Gates’ wealth is in stocks, and particularly in Microsoft.  He may be worth $106 billion, but that is just a reflection of what his stocks (mostly Microsoft) are currently worth.

And there is a bigger point here.  If Bernie Sanders were in charge (I’m sure he would feel quite comfortable ruling over others), he could tax Gates $100 billion and say that he would still have several billion left over.  But he doesn’t know that.

If you start selling a mass quantity of one particular stock, even when it is a big company like Microsoft, it is going to drive share prices down.  Gates may be able to sell millions of dollars worth of Microsoft at its current price per share.  Maybe he can sell a few billion dollars close to its current share price.  But at some point, you need buyers to match the seller.  The buyers willing to pay a higher price for Microsoft shares will get their shares early on.  As Gates sells his mass quantity of shares, the price will go down.  If it is publicly known that he has to liquidate most of his wealth, the price of Microsoft may even go down significantly just in anticipation of him selling.

In other words, once Gates sells most or all of his shares in Microsoft, he probably can’t redeem $100 billion worth unless he is able to spread it out over a long period of time. But that isn’t what Warren and Sanders are talking about.  You would get hit with your tax, and you would be expected to pay it.

So if Gates were hit with a $100 billion tax, it would probably bankrupt him completely.

Government Spending as a Cure

The other part of Bernie’s Twitter comment that is important to address is that he says we could end homelessness and provide safe drinking water to everyone in this country.

Bernie has said a lot of stupid and ignorant things before, but this has to be one of his best. Economics is not one of his strong suits.

Let’s forget the drinking water and concentrate on the claim of eliminating homelessness (although the same logic can be applied to safe drinking water).

There are currently over 500,000 homeless people in the United States for at least one night during a year.  The chronically homeless is obviously lower than this.

So let’s say there are 100,000 people currently homeless, and that is seemingly their permanent situation.  If you had $100 billion to spend on homelessness, that would be one million dollars per homeless person.  I suppose you could pull an Andrew Yang and just give the homeless people the money directly. Of course, this is never how government works.  It has to go through the bureaucracy.  There will be programs to help educate the homeless.  There will be housing programs for them.  You know how it goes.

But if you did just hand over the money in one shot, why should we assume this would end homelessness?  Maybe some people don’t want a home.  Maybe some people would spend all of the money quickly on drugs.

And what about all of the people who are currently on the verge of homelessness?  Wouldn’t it benefit them to become homeless in order to collect the next round of checks?  For a million dollars, I might consider becoming homeless if it was for a short time.

In other words, it wouldn’t be sustainable, and the incentives would all be backwards, as they typically are with government.  And many of the homeless people would end up right back where they started.

If you want to get anywhere close to getting rid of homelessness, then you have to dramatically scale back the size and scope of government.  In California, where the problem is the worst, the home prices are astronomical in some regions.  There are high taxes on almost everything, and the regulations are ridiculous.  It gets reflected in the price of products and the wages that don’t keep pace with the cost of living.

Beyond all of this, I would like to point something out to Bernie and his supporters.  The federal government is spending almost $4.5 trillion per year.  This does not include state and local government spending.

In case Bernie can’t do the math, the federal government is spending over $10 billion every single day.  It is spending $100 billion in just over a week.  So if Bernie can get the federal government to divert just over one week’s worth of spending, we can cure homelessness according to him.  Of course, he will have to be in charge to implement the program.

The government is already running an annual deficit of about $1 trillion.  Why not just take on another 10% of that and eradicate homelessness?  It is that simple, according to Bernie.

Of course, the U.S. government could just stop fighting one or two of the wars overseas and save the $100 billion easily, but Bernie hasn’t brought up that as a solution.  He doesn’t really focus on foreign policy much, even though hundreds of billions could easily be saved (along with all of the lives).  He is too busy focusing on getting the rich.

After Bernie takes all of Bill Gates’ wealth and eradicates homelessness and provides safe drinking water, what will be next?  If he can get all of the wealth from Buffett and Bezos, Bernie should be able to eradicate all poverty and cure cancer.  Of course, he would have to be in charge.

According to the socialists, that is the only reason socialism hasn’t worked in the past. The right people need to be in charge.

Roger Stone has been found guilty of seven counts, which include obstruction, witness tampering, and making false statements.  Here is an article from the establishment media on the story.

I have given my thoughts before on Roger Stone.  Many years ago, I believe I played a role in Stone dropping his bid for running for governor in Florida on the Libertarian Party ticket.

Stone is not a libertarian.  He has an element of him that is anti establishment, not all that different from Donald Trump.  Stone can certainly come across as a shady guy, which probably didn’t help his case in court.  Still, just because you come off as shady does not make you guilty of a crime.

Stone faces up to 50 years in prison.  That would be 20 years for obstruction and 5 years each for the other 6 counts. He probably won’t actually get that long, but if he is sentenced to 20 years, that could easily end up being the equivalent to a life sentence.  Stone is 67 years old.

Maybe Trump will end up pardoning Stone.  That is what he should do, but he would obviously take a lot of flak if he did do it.  Trump already hates the media, and the media hates him, so I don’t know why he would care. Maybe Trump will do it after the November 2020 election.  He wouldn’t have much to lose after that point, regardless of whether he wins or loses.

The biggest joke is that Stone supposedly lied to Congress.  I don’t think Congress should even have the power to force someone to testify under oath if they are not on trial.  It is typically a trap, or to trap someone else.  You can be James Clapper and clearly lie to Congress about a national surveillance program, but that lying is ok in the world of Washington DC.

You can also lie about Russian collusion in the election, but that is fine.  You can also lie about weapons of mass destruction in Iraq, but that is acceptable.  You can make up unsubstantiated claims about chemical weapon attacks by Assad in Syria, but that is about spreading democracy.  You can secretly plan coups to overthrow foreign governments, but that is part of national security in Washington DC.

This is why I don’t take these things seriously.  I take them seriously in the sense that there are great injustices, but I don’t take seriously that Roger Stone necessarily committed any actual crimes. And if he did commit a crime, it also doesn’t necessarily mean it was something that should be regarded as a crime.

Trump took to Twitter and said the following:

“So they now convict Roger Stone of lying and want to jail him for many years to come.  Well, what about Crooked Hillary, Comey, Strzok, Page, McCabe, Brennan, Clapper, Shifty Schiff, Ohr & Nellie, Steele & all of the others, including even Mueller himself?  Didn’t they lie?…”

Trump hit the nail on the head with this one.  Trump may not be great for liberty in many ways, but he has his moments of shining against the establishment/ deep state.

This is why I am hopeful that maybe Trump will pardon Roger Stone.

The other charges are not quite as clear, but if you believe that the whole Russia collusion thing was a hoax, then most, if not all, of these charges should not exist.  If you are being framed and you obstruct a witness to try to prevent the framing, who is actually committing the crime?

Dumb Juries

We have a long way to go to achieve a free society.  Overall, I think it is good we have a jury system.  I would rather be judged by a jury than a government panel, at least in most cases.  Even if you get a decent and honest judge, they basically have to follow the law.  They don’t technically have to, but they probably won’t last long.  And the problem is that a lot of the laws are corrupt.

So I’m sure that members of this jury were convinced that Roger Stone lied to Congress. Therefore, they convicted him. But if you are on a jury, you don’t have to give your reasons for voting a certain way.  If you don’t think the law is just, you can vote “no” on convicting.  That is jury nullification.  You can just say that you don’t think he is guilty and leave it at that.

I have said before that we could have a generally free society if enough people believe strongly in the message of liberty and use their power on a jury.  If enough of the population comes to believe that there must be an identifiable victim or potential victim for there to be a crime, then juries will start to find people not guilty of victimless crimes. It only takes one person on a jury to hang it.

In other words, if 20% of the population were to believe in the general principles of liberty, this might be enough to completely change the whole system.  If someone is on trial for tax evasion, it just takes one person to vote not guilty (because it is a victimless crime).  If this happens over and over again, the laws eventually are nullified.

The same would go with prostitution cases and drug cases where there is no victim.  It would also stop people claiming to be victims who are suing over things that should not be a crime.  We could stop the violation of certain libertarian principles, such as freedom of association.  If I am on a jury, I will uphold the property rights of a business owner who is on trial for voluntarily not associating with someone else, regardless of the reason.  I don’t really care what the law says.  If it is an unjust or immoral law, then it should not be upheld.

If I had been on that jury, I would not have voted to convict Roger Stone, particularly for supposedly lying to Congress.  I don’t know all of the intricate details of the case, but I probably wouldn’t have convicted him of any of the counts.  Stone may have his shady tactics, but he should only be convicted of something where he intended harm on an innocent person.

I believe that the Stone conviction was all part of the Russia hoax.  I have no idea if he had any association with Wikileaks, but it is obvious to anyone paying close attention that the emails from the DNC came from a leaker.  They were not hacked by Roger Stone.  They were not hacked by the Russians.

Free Roger Stone!

In order to become financially wealthy, you have to attain money and/ or assets.  The only way to attain money and assets is by making money and not spending it all.  If you spend everything you make, then you can’t attain wealth.

There are people who have generous pensions.  They could claim to be wealthy.  As long as the entity providing the pension is solvent and keeps paying, then it is a legitimate form of wealth.  But a person obviously had to have worked (or at least been a time server at work) to get this pension.

If you see someone driving a Lamborghini, it doesn’t necessarily mean the person is wealthy. It is a possible marker of great wealth, but you really don’t know.  Maybe the Lamborghini is the only significant asset that the person owns. Worse, maybe the person has a big loan against the car.

Meanwhile, there are people that you see who are wealthy and you might never know it just by looking at them.  This was one of the key points in the book The Millionaire Next Door.

The problem that many people face is that they associate wealth with things.  This would be fine if it were the right things. The things that make people wealthy are income-generating assets, and to a lesser degree, appreciating assets.

If you see someone who is rich who is living in a big house and driving a fancy car, it is important to realize that it is not having these things that makes the person wealthy. He may be able to afford these things because he is wealthy.

If anything, the big house and fancy car are a drain on the finances.  You not only have the high price tag for these things, but you also have the maintenance costs that go with them.

Someone might think that in order to be rich just like that person, they need to buy a big house and a fancy car.  But unless the person has a really high income, it probably won’t be sustainable if it is possible at all.  And even if it is sustainable, then the person may end up with the car and house but little else to show.

This is really the typical American in a lot of ways.  They go to work, buy a lot of things, and are constantly stressed out. Every time there is a promotion or bonus, it is used to buy more stuff.  The stuff is typically in the form of a depreciating asset. It is rarely an income-generating asset.

You Get Rich By Collecting Interest, Not Paying It

This is a theme I have to return to once in a while.  It is so simple, yet it is not widely followed.  Some people seem to not even understand it, or they don’t want to understand it.

If you are going to become wealthy, you have to collect interest.  If you are paying interest, then you are most likely going to stay poor.

When I use the term “interest”, this can be any form of income from an asset.  It doesn’t have to be interest from a money market fund or a savings bond.  It could be dividends from stocks.  It could be rent collected from investment real estate.

If you are borrowing money for anything that does not enhance your income generation, then you are paying interest down a drain.  You are making someone else rich.  If you are continually paying interest for depreciating assets, then you will likely stay poor.

People who collect interest are getting ahead.  They are the ones who can become wealthy, or at least wealthier.

If you are borrowing money for a big house to live in, then this will not make you rich, unless you get lucky with a lot of appreciation over time.  Even then, you would have to sell the asset and keep some of the money in order to actually make anything.

On the other hand, if you borrow money to buy investment properties that give you a positive cash flow, then this is a possible road to wealth.  You are paying interest on your loans, but the money you are collecting from rent far exceeds this.  So, on net, you are collecting more than you are paying.  And once the mortgage is paid off on an investment property, then you will really be collecting.

This is why you should try to avoid almost all debt.  Even when it comes to real estate, you should try to limit the amount of debt you take on for a place to live.  It is a consumption item.  It is filling a need because you need shelter, but most people buy much more than a basic shelter.  Either way, it is still a consumption item.

If you eat out at a restaurant, this is consumption.  You have to eat to live, but it is still consumption.  You could have cheaper consumption by buying food at the grocery store and preparing it yourself.

Just keep this in mind in your daily life.  There is nothing wrong with spending money, even beyond the basics.  But it is a good idea to make intentional choices.

Take a look at the assets that you own.  Are they appreciating or depreciating?  Do they generate income, or do they cost you money to own? Or do they just sit there taking up space?

Look at your assets and liabilities.  Where are you paying interest to someone else?  Is it just a mortgage?  Do you have a car loan?  Do you have student loans or credit card debt?

Do you have anything that is generating cash flow for you?  Do you have a retirement account?  (These can lose money too.)  Do you have any investment real estate?  Do you have any royalty income or a side business that generates extra income?  Is there anything you can purchase that will generate money instead of costing you money to buy and maintain?

In order to get wealthy, you have to not spend all of your money on things that do not appreciate and do not generate income.  If you are continually just buying non-income generating stuff, you won’t get wealthy.  If you are borrowing money to buy this stuff, you certainly aren’t going to be wealthy.

If you want to be wealthy, then find ways to collect interest (i.e., income generation). If you are paying interest, then you are making someone else wealthy.

There are increasingly becoming two political worlds.  But sometimes one world can’t avoid the other.  There are cracks.  Let me explain further and give an example.

Project Veritas recently released a video of Amy Robach, an ABC news anchor, where she is venting her frustration that ABC did not air a story they had on Jeffrey Epstein from three years ago.  She is wearing a hot microphone, but she doesn’t know she is being recorded, and she certainly doesn’t know that her words would end up being released to the public.

Robach states that they had the Epstein story three years ago.  This shouldn’t be surprising, except maybe for the fact that ABC was actually investigating it at all.  I briefly mentioned back in 2016 that Clinton had taken repeated trips on Epstein’s private jet, and that was just from my own limited research.  It should have been a huge story then; yet it wasn’t.

Robach is visibly frustrated that ABC spiked the report.  The story was theirs to run with.  They had an alleged victim who was naming names.  She said they had other women backing it up. She said they had allegations against Prince Andrew, but that the Palace was threatening them in “a million different ways.”

They had implications against Alan Dershowitz.  She said, “we had Clinton”.  This is just what she said in this leaked video.  I am sure they had much more, but this is major news just based on the people she named.

It’s funny that ABC news was worried they wouldn’t get interviews with William and Kate if they aired this story.  I have to imagine it goes deeper than that.  Not only could they have aired the Epstein story, but then they could also air the fact that the Palace threatened them with it.  I certainly don’t speak for many people, but I would have a much better chance of watching ABC uncover a major scandal like this than watching some stupid and phony interview with William and Kate.

This Project Veritas video could ultimately take down the Palace.  The whole idea of a royal family is stupid anyway.  The Queen has little political power.  It is just the glamorization of a family that is living at taxpayer expense.  Maybe some of the British pride with the royal family will diminish with this. It certainly should.

Then we have Bill Clinton, who flew at least a couple dozen times on the so-called Lolita Express. But I’m sure Clinton was just talking business on Epstein’s private island.

Imagine if there were flight logs showing Trump was visiting Epstein’s private island.  Do you think the establishment media would be quiet about that?  Trump did know Epstein, but the media doesn’t even want to talk about that because the implications are so much larger for Clinton.

Here is a former president of the United States.  He is the husband of a woman who barely lost the last election, and there is even talk of her entering the race for 2020.  He is likely a pedophile.  At the very least, one if his best buddies was a pedophile.  Yet, the top dogs at ABC news didn’t think this story was newsworthy.

I assume they had the story before the 2016 general election.  This would obviously be a major reason for ABC spiking the story. No matter what, it shows that the corporate media is unquestionably part of the establishment.

The best ABC news can say now is that the story was uncorroborated.  But in the leaked video, Robach said there were pictures and other women to back up the allegations.

Plus, I would just like to point out that you don’t have to have 100% proof of anything to report it. If that were the case, there would be almost no journalism to speak of.  You report the facts.  The main fact in this case is that there was a woman (or women) making allegations against these famous people.

The establishment media certainly doesn’t care about corroborating facts when it comes to allegations against Russia or Trump.  Of course, even stories that aren’t political do not require 100% proof that something happened.  It is good journalism to make sure you aren’t throwing junk out there, but it doesn’t mean you can’t report something if it seems to be credible, even if you can’t 100% prove it.

You hear reports all the time saying that someone is under suspicion for a particular crime. The news report doesn’t say, “He did it.”  They phrase things a certain way.  They will not say, “The killer is under arrest.”  They will say, “The suspect is under arrest.”  That is factual reporting.

ABC could have legitimately run this story.  They should have run this story.  It is a scandal and cover-up that they didn’t run this story.

One thing that is important to point out regarding this leaked video is that Amy Robach is not at fault.  She is mad that the story didn’t run.  I actually feel a little bad for her that this came out.  I hope that all of the truth tellers of the world will back her up.

Sure, she could have leaked the story on her own and lost her job.  But it probably wouldn’t have been a story for very long. It is much more convincing that she was being open and honest, not knowing that she was being recorded.

This shows that some journalists actually do want to be journalists.  They may be mostly shills for the establishment, but they are not always intentionally acting on behalf of the establishment.  That is coming from the top.  Robach wanted the story to run.  She is mad that it didn’t.  The orders obviously came down from high up.

Two Political Worlds

I don’t watch the establishment media much.  It is hard to avoid, so I do get a sense of what is being reported. I’ll catch little snippets here and there.  I can also see what the news feed is saying on my smartphone.  It will show 4 headlines of news articles.  It is almost a certainty that at least one of them is an anti Trump story.  (I just checked my news feed for fun, and there is a headline going after Trump Jr.  This certainly counts as an anti Trump story.)

Anyway, I don’t know how much coverage this Project Veritas video got in the corporate media. My guess is that Fox News has covered it a bit.  I doubt that the other major networks have covered it much, if at all.  I did see it on DrudgeReport, but that is a site mostly visited by conservatives and libertarians.

I think it would be an interesting experiment to ask some random people if they have seen the video of Amy Robach, or at least if they have heard at all about it.  My guess is that a great percentage of people are not aware of it.

This is why we live in two political worlds.  If you just watch the establishment media, or even lightly pay attention to it, then you are not going to hear these types of stories.  I consider Fox News to be mostly establishment, but it is an exception with some of these stories.

Every headline should be screaming that Bill Clinton is likely a pedophile.  But it doesn’t even get mentioned.

Instead, we have to hear about Trump’s latest tweet, or how he may have withheld money from Ukraine to gain political favor.  Even here, does the establishment media play the video of Joe Biden bragging that he got a prosecutor in Ukraine fired (who was investigating his son’s employer) by threatening to withhold money?  The question answers itself.

There are two political worlds.  One world hears these stories from alternative media.  The other world does not.  It hardens the views of both sides.  When I see this leaked video, it just confirms that the corporate media is in bed with the establishment.  It confirms to me that they lie.  They really are fake news.  In this case, it is a lie by omission.

My only hope is that the two worlds sometimes collide.  The problem is that it is hard for people to admit that they have been duped.  And when you acknowledge and fully digest a video like this, you basically have to change your whole worldview if you were accepting the establishment media narrative before.

When you see this video, and if you actually accept what happened, then how could you really trust anything you hear again from ABC news?  I mean, if they can’t report that Prince Andrew and Bill Clinton are likely pedophiles, then why wouldn’t they be lying about anything that is convenient for them?  It would have been one of the biggest bombshell stories ever, but they chose not to report it.  Why bother listening to anything they have to say?

Mark Twain reportedly said that it’s easier to fool people than to convince them that they have been fooled.

(Hey ABC news, notice how I used the word “reportedly”?)

This leaked video shows that anyone who takes the establishment media seriously has been duped.  But they won’t accept the video.  They will make excuses.  They will pretend there were good reasons for not running the story.  They will pretend that this was a one-time omission.  In order to stay duped, people can make a lot of excuses to themselves.

The good news is that some people are not in either of the two worlds.  You may be able to have a conversation with someone where they don’t shut you out or find you annoying.  You may be able to post this video on Facebook and get someone to reflect a little.  There are cracks between the two worlds.

In the pre internet era, this video never would have been exposed.  Even if someone had gotten the secret video to leak, where would they have leaked it?  If ABC won’t run a story exposing Epstein, Prince Andrew, and Bill Clinton, then ABC isn’t going to run a story showing they spiked that story. And I don’t think the other major networks would run it either.

Maybe the National Enquirer would have picked up the story.  But you can’t watch a video in a magazine.  And how many people would have bought a copy?  How many people would have believed the story without an accompanying video?

For this reason alone, we should be very thankful for the internet and our technology today. These stories would not have been exposed in the past.  We would not know about these stories at all.  We might not even know anything about Epstein.

At some point, there is a breaking point where the establishment media is forced to cover a story.  It just becomes too well-known by the public.  I don’t know if we will ever see headlines saying that Bill Clinton is accused of being a pedophile.  They never ran stories about him being accused of rape.  But when that happened, it was in the early days of the internet.

There really are two political worlds.  There are those who don’t trust the establishment media, and there are those who are being fooled, and you can’t convince them otherwise.

In a recession, cash is king, or so I’ve been told.  In a U.S. recession, U.S. long-term government bonds are king, if there is little perceived threat of price inflation, and if you get out in time.  But that doesn’t make for a very good quote.

There is something to be said for having cash – or more accurately, liquidity – in a recession.

First, it is a form of wealth preservation.  Many assets such as stocks, real estate, and commodities are likely to fall in value in terms of prices in a recession.  You are better off having money sitting in a savings account earning 0.1% interest than having it in stocks that are falling 50% in a market crash.

Second, when asset prices do fall, having cash enables you to buy things at a discount as compared to what they were and probably to what they will be in the future.

Of course, it is impossible to know when things have bottomed out, but you don’t have to be precise.  If you had bought real estate any time between 2010 and 2012, you would have likely done well. If you had bought stocks any time in 2009 or 2010, you would have done very well up until now.

A third reason to have liquidity during a recession is to have access to the money you need, especially for emergencies.  The worst financial scenario for most people is the loss of a job.  If you have a large cash cushion, this certainly makes a big difference.  It doesn’t make everything right, but it can help a lot to alleviate stress. It can buy you more time. You may not have to be as desperate when looking for a new job.

These are just three broad reasons for wanting to have liquidity in a recession.  And not knowing when a recession will happen, it makes for a good argument that you should always have some liquid money available at all times.  Just having some cash in the bank can reduce anxiety in an uncertain world. If you actually reduce your stress level, then the reduced rate of return is worth it.  You are getting a better rate of return on your health.

Locking up Your Money

The problem today is that many people find that the large majority of their net worth – if they have a positive net worth – is locked up.  It is typically locked up in two things: a home and a retirement account.

If you have significant equity in your house, this doesn’t necessarily do you a lot of good when times get tough.  You could do a cash-out refinance to access some of your money, but then you are just sending your mortgage balance higher again.  There are usually costs to refinancing, and you don’t always know what the rates will be.  They will typically be lower in a recession, but not always.  You also don’t know if house prices will go down so much that it will wipe out most of your equity.

I am an advocate of trying to pay down and pay off your mortgage as a goal.  If you can actually pay it off, then this is a great boost to your cash flow, as you don’t have to pay that mortgage payment each month.  You will still pay property taxes, and probably insurance, but the principal and interest from the mortgage will be gone.  This adds a great deal of financial security if you can get there.

But unless you can actually pay off your mortgage, you have to be careful about paying it down. When you are paying it down, you are locking up that money.  If you already have a significant emergency fund, then this is probably fine. But if you have little in liquid savings, then I would generally advise not paying extra on the mortgage unless you are close to paying it off.

As for a retirement account such as a 401k, you are also locking up money when you contribute. You typically can’t take a withdrawal from a 401k if you are still working for the employer that sponsors it.  And if you lose your job or switch jobs, then a withdrawal is going to cost most people income taxes plus a penalty.

I think it is a good idea to get the employer match if you get one, but even here I am not firm in this.  There are opportunity costs.  And again, you are locking up your money.

You can have a large 401k balance, but it will be frustrating if you are stressing out about your day-to-day expenses of living.  It almost seems kind of silly, but this is a common situation. You can have a high net worth yet be struggling with your cash flow situation in the present.

Conclusion

It is good to have a long-term goal of building wealth.  This should include a goal of paying off your mortgage if you own your own home.  It should also include retirement accounts for most people.

However, you have to balance that with your liquidity, which is your happiness of today.

It’s not that you should be planning to splurge your money on cars and the latest gadgets.  I am talking about happiness in the sense of peace of mind.  You can be paying down your mortgage and maxing out your retirement contributions, but if you are stressed out about how you will pay your bills next month, then you are not in balance.

You should have liquidity for a recession.  You should have liquidity for emergencies.  You want cash on the sidelines for the unknowns in life.

If this gives you some peace of mind and allows you to sleep a little better at night, then it is completely worth it.  Your physical health is even more important than your financial health. And if you feel financially healthy, that can help reduce stress, which can make you more physically healthy.

I am quite amazed when I walk into a dollar store where everything is priced at one dollar or less.  You would think that some of the containers that the items are packaged in would actually cost at least a dollar.

Dollar stores are a testament to our high living standards.  They show the wonders of the division of labor, and also of economies of scale.  I don’t know how dollar stores are able to pay employees, pay for rent and utilities, sell everything for a dollar or less, and still manage to make a profit. But I appreciate that they are there and that they can do it.

I am also amazed at dollar stores when put in context with the rest of our world.  While everything is so inexpensive at a dollar store, I don’t know how other things can cost so much money.

I have said that we will know that price inflation has gotten really bad when dollar stores no longer exist.  The same stores may still exist, but they will no longer be able to sell everything for a dollar. Maybe we’ll see two-dollar stores with the same products.

We are able to buy these inexpensive products because of a relatively free market and relatively free trade worldwide.  American consumers benefit from cheap labor in China and other countries. American consumers benefit from the U.S. dollar being the world’s reserve currency.

The thing American consumers don’t benefit from is their own government.  The U.S. government, through its taxation, spending, regulation, and central bank monetary inflation, greatly harms consumers. And to be sure, we are all consumers.

The federal government is currently spending about $4.5 trillion per year.  It is important to focus on the total spending instead of focusing on taxation and deficits.  The government is consuming these resources, even if some of it is distributed back to people in the form of welfare.

There are about 128 million households in the United States.  That means that the federal government (not including state and local) is spending about $35,000 per American household.  Are you getting your $35,000 worth?

This has real costs. Whether those resources are consumed through taxation, inflation, or debt, it is real resources being consumed.  The problem is that most Americans don’t understand how they are paying for this, let alone that they are paying for it at all.

This proliferates in the form of higher prices as compared to wages.  Our living standards are lower because the government is misallocating all of these resources.

A New Roof

My neighbors recently had a new roof put on their house.  It took about two days to complete the job.  There was a dumpster delivered to their driveway the night before work began.  The next day was spent tearing off the old shingles and starting to prepare it for the new ones to be put on.  The next morning, it looked like little progress had taken place.  Then, within just a couple of hours, there were shingles on almost half the roof of the house.  Getting rid of the old shingles and the prep work apparently take more than half the time.  By the end of the second full day, it was done.

I don’t know how much this cost my neighbors.  My guess is that it was at least $15,000.  The people I have talked to in my area who have gotten a new roof seem to range from $15,000 to $20,000.  This seems high compared to a search for the national average, but it is anecdotal.  I find that my personal experiences are often more accurate than statistics.  The statistics can tell me that the economy is booming, but when I talk to people, I get a different feeling.

I don’t know exactly how many people were working next door to my house.  I think the maximum at any one time was eight people, but it may not have even been that much.

If the roof cost to my neighbors was $15,000, where does all of the money go?  Does most of this go to labor, or the materials, or profit to the company?

I looked up the salary for a roofer in my area.  There is a broad range from the mid $20,000s to the upper $40,000s. Let’s just be generous and say that these workers make $50,000.  That is $200 per day.  If there were eight people, that is $1,600 per day, which is $3,200 for the whole job.  Maybe there is a foreman who makes an extra $100 per day.  We’ll say that the labor costs (for salary only) was $3,400, but I still think that may be on the high side.

So what accounts for the other $11,600 for the roof?  I have no idea of the material costs.  I would think it would be around $5,000, but maybe it’s more. The house next to me is probably about 1,800 square feet.  There is more than just shingles, but the costs are still high.  And then it is hard to account for how much of this is due to tariffs and other taxes, as well as just inflated prices for raw materials.

The company, of course, has certain startup costs.  They probably have the costs of a receptionist to answer the phone and take appointments.  They have the machines and tools needed to put on a new roof.  These have to be paid for eventually.

There are also labor costs other than salaries.  There are benefits to the workers if they are not contractors.  There are insurance costs that are probably high, especially with this line of work.  There are also significant taxes.  Just the employer’s portion of the payroll tax is 7.65%.

As far as profit goes, I am sure the owner of a roofing company generally does well.  Of course, there is major risk involved when owning a company that does major work like this.  It isn’t like owning a photography business (just as an example) where you can limit your startup and operating costs to a few thousand dollars or less.

Maybe a roofing company profits a couple of thousand dollars for each major job.  I really don’t know.  They have to account for warranties where customers might come back later and tell them to fix something.

The one thing I do know is that the profits can’t be that crazy.  Or if they are crazy, then there is a reason for it.  The reason usually involves either high risk or government interference.  High startup costs do factor in as well, but there are a lot of roofing companies in my area.  If a company were profiting many thousands of dollars per job, then some other company that isn’t fully booked would likely step in and undercut the price.  This is what competition is all about.

My point of this story is that life is expensive.  It is made far more expensive than it should be by government.  It is all of the labor regulations and taxes and other little things that all add up.  It is expensive to employ someone, even if the wages being paid aren’t that high.

It is amazing that someone could spend $15,000 on a new roof while the workers doing it are barely getting 20% of the entire cut.

This is why we need a recession.  While a recession is extremely painful, it is a correction.  Prices need to come down in a significant way.

The problem is that the Federal Reserve and the government don’t typically allow a full correction to take place.  The government continues to spend money.  The Fed continues to tamper with interest rates and print more money (digitally speaking).

We need a major correction, and we also need a major correction in government.  I don’t know how this will come about.  The problem is that most people do not understand just how much better their lives would be if the government drastically shrank.  They don’t understand that when they clamor for welfare, they are only making their lives worse.

Unfortunately, the only way I see it scaling back is because interest rates will eventually rise and out-of-control spending (including so-called entitlement spending) will be forced down.

Also unfortunately, the dollar stores do not sell shingles for a new roof.  Aside from dollar stores and some electronics, most everything else seems to just get more expensive.  Wages aren’t keeping up.  The roofers aren’t highly paid.

If a roofer has to get a new roof for his own house, he probably wonders why it is so expensive and why his wages aren’t keeping up with the price of a new roof.  He should look towards the government.

The Federal Open Market Committee (FOMC) issued its latest statement on monetary policy.  As was widely expected, the Fed has lowered its target federal funds rate by a quarter of a percent.  Meanwhile, in other news, the S&P 500 index hit new all-time highs on the same day.  I wonder if that has ever happened before.

It certainly seems contradictory.  Why would the Federal Reserve be reducing its target rate if stocks are at an all-time high?  Is the economy booming, or is the economy in trouble?

Maybe the answer to both of these questions is yes.  It is booming according to the stock market, but it is also in trouble. This also seems contradictory. Perhaps it is less contradictory to say that there is an artificial and unsustainable boom, and the economy is in trouble.

The people at the Fed know that something is wrong.  They wouldn’t just be lowering rates to please Donald Trump.  They are just not explicit about the problems that exist.  There are the weird happenings in the repo market.  And I think more importantly, they see the partially inverted yield curve.

The Fed is now indicating that they may stop reducing the target rate for now.  They are waiting to see the data, which is really what they always do.  Jerome Powell and company are also saying that a hike in rates is unlikely until they see a significant uptick in price inflation.  They obviously haven’t looked at my health insurance premiums.

There were two dissenting votes in the decision.  Esther George and Eric Rosengren “preferred at this meeting to maintain the target range at 1-3/4 percent to 2 percent.”

In the Implementation Note, it states that interest rate paid on required and excess reserve balances will be lowered to 1.55%. This was to be expected, as the Fed’s free money to banks (not for us) is helping to control the federal funds rate.

Monetary Inflation and a Stock Bubble

The bigger elephant in the room that does not get as much attention is the Fed’s balance sheet. The Implementation Note indicates a continued swapping of $20 billion per month of mortgage-backed securities to Treasury securities.  This is a wash in terms of the Fed’s balance sheet.

The key statement though was this:

“In light of recent and expected increases in the Federal Reserve’s non-reserve liabilities, the Committee directs the Desk to purchase Treasury bills at least into the second quarter of next year to maintain over time ample reserve balances at or above the level that prevailed in early September 2019.”

This is what Powell said is not QE.  This is a lot more vague than what we were told for the last 11 years, but it still looks like monetary inflation to me.  It was originally reported a few weeks ago that the Fed will buy $60 billion per month initially, extending at least into the second quarter of 2020.  But the official statement does not give a set amount for the Fed to purchase.

Regardless, I don’t think this is going to prevent the recession from coming.  I don’t even think it will slow it down. But when a recession does arrive, the Fed will at least be able to say that it had already started doing something.

I keep saying that the biggest bubble of all is this unsustainable boom in stocks.  I don’t understand how the S&P 500 is hitting new highs while the Fed’s actions are indicating practical panic.

I simply think that the bond market is smarter than the stock market.  I know this isn’t technically true.  A market can’t be smart.  It is made up of millions of individuals.  But the people buying stocks are making a huge mistake, unless they are counting on the greater fool theory and planning to unload them in the near future.

The low yields on long-term bonds are not indicating good times ahead.  There are many reasons that people are buying bonds, but the overall conclusion is that they are seeking some form of safety.

While the Fed members are not smart enough to centrally plan an economy of 325 million people (nobody is smart enough to do this), they do understand what the bond market is telling them.  They know that the booming stock market is an illusion.  They are acting now to fend off some of the criticism later.

The market is betting now that the Fed won’t touch rates in its December meeting.  But a lot can change in six weeks.

We are in a bubble economy.  There is little question about that.  When the Fed nearly quintuples the adjusted monetary base from 2008 to 2014, there have to be major misallocations.

The problem is figuring out where the bubbles are and when they are going to pop.  If you can figure this out, you can make a lot of money.

As I write this in late October 2019, I think the biggest bubble in the United States is in stocks. I am talking about the major categories: stocks, bonds, real estate, oil, and even gold.

Cryptocurrencies – the most famous of which is Bitcoin – are probably one gigantic bubble, but I don’t know this for certain.  We hear that stocks can’t go to zero, or at least not when taken as a whole. I think it is possible for Bitcoin and other cryptocurrencies to go to zero or near zero.  I am not saying this will happen, but only that it reasonably could.

The Bitcoin market is relatively small though.  Most people don’t own any Bitcoin or any other cryptocurrency.  Some may never have heard of Bitcoin.  Many do not even know what it is. Therefore, I do not consider it an important bubble, because not that great of a percentage of people will be hurt by it if it goes bust.

For commonly owned assets/ investments, I think stocks are the biggest bubble.  If you have a brokerage account or 401k plan, you should take this into consideration.  It wouldn’t surprise me if stocks stay down for a while after the next crash. It may not be like the last decade after the 2008 financial crisis.  Even if the Fed does create new money like crazy, it may not have the same stimulative effect on stocks the next time.

Bonds may be in a longer-term bubble.  Corporate bonds will likely take a hit in the next recession, but I am talking about U.S. government bonds.  Some day, interest rates are going to spike much higher, crashing the long bond bubble.  However, in the near term, bonds will likely do well.  As long as price inflation expectations remain relatively low, people are going to seek safety in bonds in the next economic downturn.  Long-term interest rates could go even lower from where they are now.

I believe real estate will go down in most areas in the next recession.  I doubt it will be as bad as the crash in the mid to late 2000s decade.  It’s possible, but not likely.  Prices in many places are still below the peak in housing prices from around 2006, despite the inflation since that time.

Therefore, I think if you are looking to buy a house – whether it is to live in or as an investment property – you will probably get a better deal if you wait for the next recession.  But I also don’t think it will be as much of a catastrophe for as many people as what we saw around 2007 to 2009.

Regarding oil and gold, I would not put these in a bubble category right now.  Both could certainly go down in price with a recession, but it likely will be minor compared to other asset classes.

Driving Luxury

Now I would like to discuss automobiles.  I believe this is a major bubble, but I am not clear on how it will play out. Buying a car is not as big of a purchase as buying a house.  It is easier to get rid of a car than to move out of a house.  It is also less of a problem for the lending institutions when it comes to defaults, but it is still a problem.

The average new automobile sells for over $36,000 now.  This is over half of the median annual family income (before taxes).

My son likes to look at nice cars.  Sometimes, when I am driving him somewhere, we play a game where we call out if we see a nice car. I know the term “nice” is subjective.  We generally count any of the luxury cars.  We count any Tesla, Mercedes, or Audi.  We will usually count Lexus, Infiniti, Mustangs, and Corvettes, although I know that some of these cars can be bought new for under $40,000.

On a 25-minute drive, it is not uncommon for him to find 50 cars.  I am lucky to find 10.  I have to concentrate on driving, and his eyes are better than mine. Plus, he knows his cars well and can pick them out from far away.

One of the areas during our typical drive is in an upscale neighborhood.  The people living there really are in the top 1%. Therefore, my story is a bit biased, as part of the drive is in an area where people have significant wealth, or at least significant income.

Still, on a 25-minute drive, to see about 60 cars, most of which are bought for over $40,000, is quite astounding.  I’m sure there are some Acuras, and even the occasional Hyundai, which retail for more than $40,000 new, but we don’t count these.

There are a lot of people driving really nice cars.  I can appreciate a really nice car, but I can’t justify spending the money on one.  My wife drives a minivan that we bought slightly used.  That is as luxury as I will get.

In some ways, the luxury cars on the road are a symbol of our wealth.  In other ways, it is a symbol of a bubble that is about to pop. I wonder what percentage of these people can actually afford these cars.  Sure, they can afford to make the payments on them, but I’m guessing many of them would not be able to pay for them in cash.  And many more won’t be able to make the payments when the next economic crisis hits.

In the really nice neighborhood we drive through, I am guessing most of these people will be fine in an economic downturn.  In terms of raw numbers, and maybe even percentages, they will take the biggest hit in terms of net worth.  The upper class owns the greatest percentage of stocks, so they will take the greatest hit.  But if your net worth goes from $10 million to $5 million, you are still doing well compared to most others.

I believe we do have an automobile bubble.  Like other bubbles, it has been fueled by easy money and artificially low interest rates.  When people can make payments for 6 or 7 years, it makes the asset look affordable.  Maybe it is affordable, but that doesn’t make it wise.

There will be a lot of defaults on car loans when the next recession hits.  The rise in defaults may start before the recession is evident.  This will hurt banks.

It is easier for people to turn in the keys to their car than it is to turn in the keys to their house.  It isn’t much of an adjustment to drive a car that is less luxurious.  The biggest adjustment is the hit to someone’s ego.

Although we can thank government for the high prices of new vehicles, I believe prices will come down in the next recession.  If you are looking to buy a new car, it is best to wait at this point if at all possible.  When people start getting tight with their money again, they will not be buying new cars. Dealerships will get more desperate to sell new vehicles.  There will be better deals available.

Every bursting bubble has advantages for someone.  It is usually people will cash waiting to buy.

In early 2007, when I heard that Ron Paul was considering a run for the presidency on the Republican ticket, I got excited.  I remember thinking and saying that if he gets into the debates, a lot of people would hear a message that they hadn’t heard before.

My enthusiasm was well placed.  This is exactly what happened.  But I must admit that it didn’t play out quite the way I expected, and I mean that both in good ways and bad ways.

There are a lot of libertarians that get depressed over the situation in the United States and around the world.  They think there is little hope.  These are mostly people who were not libertarians prior to 2007.  They don’t know what a lonely time that was.  If you think the number of libertarians is small now, it was a fraction of the size prior to 2007.

At least when I became a libertarian, the internet was up and running.  There was no Facebook yet, but there were a few libertarian sites.  I followed Harry Browne through his website in the early 2000s.

It was after the first debate that Ron Paul gained significant traction.  Many people didn’t realize that a Republican could be anti war.  They didn’t realize that there was an argument to be made against having a central bank (“End the Fed”).  They rarely heard an argument for eliminating entire departments from the federal government. They were accustomed to hearing arguments about whether we should have a 35% top tax rate or a 40% tax rate. They didn’t consider whether there should be an income tax at all.

I wasn’t surprised that Ron Paul gained some traction.  I was surprised at just how enthusiastic his hardcore supporters – many of them new to libertarianism – were.  I never would have dreamed that he would be easily winning online polls and that cities and towns would be covered in Ron Paul signs.  And who could have seen a Ron Paul blimp in the cards?

This was obviously a pleasant surprise.  In fact, when I look back, it was one of the best times of my life.  I had a newborn baby at home, but luckily my wife was supportive and didn’t have a problem with me leaving a couple of nights per week to help with the campaign.  Our unofficial headquarters was at a business (owned by a Ron Paul supporter) less than a mile from where I lived, which was fortunate for me.  I would typically go there for two nights per week where a bunch of us (maybe 15 to 20 on average) would make signs, brochures, and occasionally phone calls, or whatever else we could do to help Ron Paul’s name get out there.  We had a great time doing this, and I met some wonderful people.

We did this for several months up until the Florida primary in early 2008.  I think some people were really disappointed when the vote totals came in and it was just a few percentage points.

I was never so naïve to think that Ron Paul had a significant chance at winning.  I had mild hope he would do better, but I figured the Republican establishment would snatch it away from him if he got close.  If you think the establishment hates Donald Trump, well, they would have really hated Ron Paul if he had gotten close to the presidency.  He was a threat to turn over the entire system.

When Trump says he is going to withdraw a few hundred troops from somewhere, the whole establishment goes ballistic. You can just imagine if it were Ron Paul saying that he is going to withdraw all troops from all over the planet.

Deeper Divisions

I think what still surprises me to this day is the deep divisions that formed.  Most people either bought into Ron Paul and his message, or they didn’t.  There were some conservatives that said they liked his economics, but they couldn’t support him because of his foreign policy.  There were also some independents, and even some Democrats, who respected Ron Paul for his integrity, but they didn’t really support his overall message.

I thought there would be more of a gradual shift in the thinking of the public because of Ron Paul’s message.  But it was more all or nothing, or at least it seemed that way at the time.

After Trump got the nomination in 2016, I had second thoughts about this assessment.  I don’t know how much of an impact Ron Paul had on people’s thinking outside of libertarian circles.  Trump stood on a debate stage right before a South Carolina primary and said that Bush lied us into war in Iraq.  I don’t know if it was a case of some people being tired of wars, or just general fatigue from the Bush regime and the establishment in general.  If Trump had done this in 2008, I don’t think it would have been as effective, and I don’t think he would have gotten the Republican nomination.

It’s actually quite amazing today just how deep the divisions are.  It isn’t just pro Trump and anti Trump.  It isn’t just Republican vs. Democrat, although that is certainly a major thing.  Many Democrats are openly calling themselves socialists.  Bernie Sanders almost snatched the nomination away in 2016.  But you still have some hardcore libertarians finding different places to vent their frustrations.  Some of them have sided with Trump.  Some are against Trump.  Some are – like me – not pro Trump, but recognize that many of his enemies are the worst elements of our society.

My guess is that there are still at least a million people in this country who are hardcore libertarian.  It is hard to tell for sure because there is nobody running for office who has a consistent libertarian message.  We haven’t had this since Ron Paul’s campaign in 2011/ 2012, so it is hard to measure.  If the Libertarian Party were to actually run a libertarian, then we could get a better idea of how many there are of us out there.

I believe there are many factors playing into the deeper divisions that we see today.  Some people are just fed up with the status quo.  I think Ron Paul’s campaign in 2007 kicked things off.  It was a way for people to protest the status quo.

Donald Trump has obviously created deeper divisions, but we should be careful not to blame Trump. If the establishment and their media had not gone after him so hard, then the divisions wouldn’t be as deep. Trump was playing to the dissatisfaction with the status quo.  People didn’t support him in spite of being loud, obnoxious, and a fighter. They supported him because of these traits.  They were tired of electing people who would cower to the establishment.  Believe me, his supporters want Trump to continue calling his enemies names, including the corporate press.

We must also consider that this has all happened in the age of the internet.  You can find any news that you want.  You don’t have to listen to the establishment media for your news.  There are alternative sites for virtually any point of view.

Overall, this is good, but there is a problem that people live in an echo chamber.  If you go to a bunch of different websites that all share a common view, then you are probably going to get firmer in that view if you don’t hear the dissenting opinions.

I can’t say that most libertarians would fall into this category.  I certainly visit libertarian sites more than non-libertarian sites when it has to do with politics.  But I live in the real world.  Any time I hear a news report on television, I am getting the establishment view.  The libertarian sites I visit just balances out everything I hear in my everyday life.  Many people don’t even realize they are living in an echo chamber.  They don’t realize they are being propagandized when they are at work or at school.  They just think this is normal and that most people think this way.  This is why it was such a shock to some when Trump received over 60 million votes.

Decentralization

I just don’t know that these divisions can be healed.  They could be healed, in a sense, if we live under a tyranny.  There weren’t many deep divisions in the Soviet Union, or at least they weren’t talked about.  You spoke politely about the regime, or you risked death. I don’t want to eliminate deep divisions that way.

The only sensible solution at this point is for mass decentralization.  It just doesn’t make sense to have 325 million people battling for control.  Different sides want to run the show, but there are always going to be tens of millions of people who are unhappy.

That is what happens when you use violence against others, which is what this is.  When people have violence threatened against them, they tend not to like it, even if it is delegated to the state.  It is hard to not have deep divisions when there are so many threats of violence, even if they come in the form of laws and regulations.

If power is radically decentralized, most of the divisions will go away.  There may be divisions on a local level, but these are more manageable.  If you really don’t like it, is easier to move to the next town over, or worst case, the next state over.

This has to be the long-term solution.  I don’t think there is going to be any other solution.  People are going to keep visiting the same websites on the internet, hearing confirmation of what they want to hear.

There are likely some rough waters ahead, economically speaking.  There is an unsustainable national debt.  There are unsustainable unfunded liabilities. When promises get broken, people will be looking for explanations and solutions.  I hope that people will consider decentralization, which simply means removing power from Washington DC.

Since September, the Fed has been assisting the “repo” market by lending overnight and other short-term funds to keep short-term rates from spiking higher.  A “repo”, or repurchase agreement, is a form of short-term borrowing for dealers in government securities.

I have hesitated to write on this topic because, frankly, I don’t fully understand what is going on. Federal Reserve officials have tried to give explanations for the need to step into this market.  They say it was a perfect storm.  They said that there were quarterly corporate tax payments in September, coupled with dried up liquidity from monetary tightening.

I don’t buy the corporate tax payments excuse at all.  Why is this time any different than any other time?  Why didn’t short-term rates in the repo market spike up in September 2018 or September 2017?  And if this is really an issue, why is the Fed continuing to lend money into this market?  If it was a corporate tax issue, it shouldn’t have lasted more than a few days.

Since October 2017, the Fed was allowing a certain portion of maturing securities to not be rolled over.  This went on into part of 2019.  This equated to a small (relatively speaking) reduction in the Fed’s balance sheet.  It was mild monetary deflation, but this had stopped before the repo issue appeared.

With the balance sheet reduction, there was a sizeable reduction in excess reserves held by commercial banks.  Still, the excess reserves are at a total of about $1.3 trillion, which is nearly $1.3 trillion more than what existed in early 2008.  Prior to 2008, the total excess reserves were measured in billions, not trillions.

If there is still a huge pile of excess reserves held by the commercial banks, why did the repo market explode like it did?  Why are banks desperate for liquidity?  Why would you need to borrow overnight funds if you have massive excess reserves?

If anyone has a good answer to these questions, please let me know.  I have not heard a good explanation yet.

The best that I can guess is that there are certain financial institutions that are in trouble.  It is probably more than one.  For all I know, maybe these are foreign institutions.  We don’t know for sure.  Maybe the Fed is helping to support failing European banks.  Maybe there is a major bank in the U.S. that is in crisis, but they don’t want to tell the general public.  Maybe it is the government-sponsored entities – Fannie Mae and Freddie Mac – that are in trouble.

Again, if all of the major banks had significant excess reserves, then I don’t see why they would need to borrow overnight.  The Fed has not explained this.

A Rose By Any Other Name

Fed Chairman Jerome (Jay) Powell has insisted that this is not QE4.  He says that the Fed will need to be accommodative, but that we should not consider this as quantitative easing.

The FOMC released a special statement on October 11, 2019.  One of the points stated the following:

• In light of recent and expected increases in the Federal Reserve’s non-reserve liabilities, the Federal Reserve will purchase Treasury bills at least into the second quarter of next year in order to maintain over time ample reserve balances at or above the level that prevailed in early September 2019.

I take this to mean that the FOMC, in its statements, will not be specific as to the target of money creation, as it was from 2008 to 2014.  In other words, the Fed isn’t going to specify that it will buy $30 billion (or whatever number) in Treasury securities every month. There is not going to be a set amount as before.  The Fed will just buy securities (create money) on an as-needed basis to keep short-term rates in its target range and to gradually expand its balance sheet.

I don’t see a significant increase in the adjusted monetary base yet, although it has ticked up slightly. It did go up by about $100 billion in a couple of weeks time.  The Fed is not on a monetary inflation spree as it was from 2008 to 2014, or at least not yet.  But it looks like the Fed will be expanding its balance sheet again, even if it is just gradually (again, relatively speaking).

The way I see it, this is QE4.  If it’s not already here, it is coming.  The Fed will be a net buyer of government debt.  It buys this debt by creating digital money out of thin air.  It is not necessarily the actual printing of dollar bills.  It is digital accounting, but it is still monetary inflation.

It was actually because of the Fed, under Ben Bernanke, that the term quantitative easing began widespread use.  I believe they thought this would deflect the critics from calling it monetary inflation or money printing.  It was a more technical sounding term that didn’t sound as harsh.

But the Fed critics quickly adopted the QE term, so it now has a negative connotation.  This is as expected.  The people who talk about the Fed are usually critics. I am not counting the establishment figures at the Fed itself or in the establishment financial media.

The reason is because anyone who studies the Fed and talks about the Fed is going to understand that the Fed is an enemy to the average person.  The defenders are people in the establishment who directly benefit – financially and through power – from the system.  This is why they defend it.  Anyone else who understands the system is probably going to criticize it because they know that they, and a majority of people, are getting the short end of the stick.

So even though the Fed started the widespread use of the term “QE”, now they are trying to avoid it.  You can call it whatever you want, but the Fed is creating money out of thin air.  This serves as a bailout and benefit to certain special interests.  For the rest of us, it means a misallocation of resources and a reduction in living standards as compared to what they would have been.

Whether it’s called QE or not, the American people are poorer for it.