The FOMC released its latest monetary policy statement.  It was not clear whether the Fed would lower its target for the federal funds rate, but investors seemed to be betting that it wouldn’t happen this time around.

The FOMC did not lower its target rate, and stocks held up pretty well, which indicates that investors got what they expected, or better.  When I say “better”, I mean from the perspective of the stock bulls who always want lower interest rates and easy money.

The reason stocks reacted somewhat favorably is because the statement dropped the word “patient” from last time, meaning that the Fed is more likely to act in the near future. In addition, in his press conference, Fed chairman Jerome Powell said that the case for somewhat more accommodative policy has strengthened.

Stocks weren’t the only thing to rise.  Bonds went up, and gold went up.  The 10-year yield is now sitting around 2%, which is far below what most people expected six months ago.  The 10-year yield is still below the 3-month yield, which indicates coming weakness in the economy.

To be more precise, there is already weakness in the economy.  The malinvestment has already happened.  Resources were diverted to things that were not necessarily their best use in accordance with consumer demand.  It’s just that the weakening is not really evident yet, except for those of us actually looking at the yield curve.

James Bullard is watching the inverted yield curve.  He spoke last year about the flattening yield curve.  He was against rate hikes at that time.  He was the one dissenting FOMC voting member in the current statement. He thought the federal funds rate should be lowered now.

I don’t agree with him in his policy prescription.  Even though there is a coming recession, the Fed shouldn’t be artificially lowering interest rates, although I admit I don’t technically know what they should be.  Of course, that is the point.  The Fed shouldn’t be dictating interest rates at all.  It should be done by the free market.

Still, I think Bullard is right in his concern.  He knows there is trouble on the horizon.  Maybe the others do too and just don’t want to sound the alarm bells.

A Demotion for Powell?

This all comes on the heels of whining from Donald Trump.  During his campaign in 2016, he talked a few times about the Fed blowing up bubbles due to low interest rates, or at least something to that effect.  He also said he was a low interest rate guy, but people thought he was referring to himself as a businessman and not a politician.

In other words, when Trump was in business and buying real estate, he liked the low interest rates. He took advantage of the low rates to buy properties.  But this doesn’t mean that you have to think it is necessarily good policy for the country.

Ever since Trump became president, he has been an advocate for lower interest rates, which is implying a looser monetary policy.  I guess he wants to blow up the asset bubbles even bigger, as long as it is on his watch.

The other day, Trump was asked if he wants to demote Jerome Powell.  Trump’s response was, “Let’s see what he does.”  Now we know that the Fed is not really an independent institution, but Trump is really putting it out there that it is a politicized institution.

If Trump is going to try to fire the chairman of the Federal Reserve for not lowering interest rates, what is the point of having a Fed chair?  Maybe Trump would just like to dictate monetary policy by himself. He is already telling the president of China that he better show up for a meeting.

When Powell was asked about his job in the press conference, he responded, “I think the law is clear that I have a four-year term, and I fully intend to serve it.”

This whole story almost fits perfectly with the whole Trump presidency.  Trump is a disaster in many ways, but he actually helps to expose the corrupt system, even if it is sometimes inadvertent.  In this case, he is clearly showing how it is in the best interest of the current president to have a loose monetary policy.  He is also showing that the Fed is a political institution.

That Which is not Mentioned

There is one area that gets very little attention.  You could read several “mainstream” articles on the Fed’s meeting today, and you probably won’t see it mentioned.

You have to look at the Implementation Note from the FOMC statement. It says that the Fed will continue to reduce its balance sheet by not rolling over $15 billion per month in Treasury securities and $20 billion per month in mortgage-backed securities. In other words, the Fed is still reducing its balance sheet by $35 billion per month.

This may not seem like a lot in the context of the balance sheet having been over $4 trillion, but it is important to realize that the Fed is still in deflation mode.  With all of the talk about interest rates, this somehow gets left out.

This just adds confirmation to me that a recession is highly likely in 2020.  It could happen before 2019 ends, but I think 2020 is the best bet right now.

Let’s remember that the yield curve inverted back in 2006.  The Fed started lowering its target rate in 2007 before the official recession began.  So the Fed acted, but the recession happened anyway.

This is an important lesson because it tells us that it doesn’t really matter what the Fed does at this point.  Barring some version of hyperinflation, the imminent recession cannot be stopped. It probably can’t even be delayed much.  It doesn’t matter if the Fed drops interest rates in July.  It can’t stop the coming correction.

There is an inverted yield curve, the Fed is still in monetary deflation mode, and stocks are near all-time highs.  This is a recipe for disaster, especially for those who have a good portion of their net worth tied up in stocks.

The U.S. dollar has reigned supreme since the end of World War 2 and the implementation of the Bretton Woods agreement.  The dollar, throughout this time, has been considered the world’s reserve currency.

The U.S. dollar has gained this status for a few reasons.  Some people think it is because the U.S. is the world’s superpower with the greatest military might.  Some people think it is because the U.S. has the world’s largest economy.  I think it is a combination of these things, although probably more the latter.

Although the U.S. government is basically an empire, the currency would not be able to hold up without the economic power, unless the rest of the world was literally forced to use dollars.

At the same time, I do want to acknowledge the political aspect of the dollar as the world’s reserve currency.  Washington DC has had a deal worked out with the Saudis for decades now.  The Saudis trade oil in U.S. dollars, while the U.S. government keeps the House of Saud from sinking through its implicit, and sometimes explicit, military backing.

It is a deal that has served both sides well.  When I say both sides, I mean the governments of both sides.  I don’t necessarily mean the people under their rule. The House of Saud gets to stay in power and be wealthy from the oil revenues.  The U.S. government gets its military industrial complex, and it gets the benefit of a strong U.S. dollar.  It allows them to spend and run deficits to a much greater degree.

There was a time in the 1970s when the U.S. dollar was under threat.  It was a threat by the Federal Reserve system that creates the dollars.  There was too much money creation.

There was, at least to a degree, a gradual loss of faith in the currency.  This is what happens when the central bank creates money out of thin air and interest rates and price inflation rates are in the double digits on an annual basis.

It took the appointment of Paul Volcker as Fed chair to slam on the monetary brakes and bring the price inflation rates way down.  It brought on the recession or recessions of the early 1980s, but it had to be done.  If it hadn’t been done, then the U.S. dollar really did risk losing its status as the world’s reserve currency.  International markets are only going to rely on a currency with double-digit price inflation rates for so long.

Shooting Their Collective Feet

I believe that U.S. officials are currently overplaying their collective hands.  They are playing emperor of the world, and the rest of the world doesn’t really like it.

Look at all of the wars and meddling around the world by the U.S. government.  And aside from the shooting wars, there are sanctions and trade wars.

Just in the last decade, there have been major power plays by the U.S. government around the planet. There have been sanctions placed on Russia.  It started as a response to Russia’s annexation of Crimea, which was really just the people of Crimea overwhelmingly voting to join Russia.  It happened because of a CIA-backed coup in Ukraine.  The media will refer to “Russia’s aggression against Crimea”, but it was really just Russia accepting what the people of Crimea wanted.

There have been severe sanctions against North Korea and Iran, two countries that do not want war with the United States.  The leaders of these countries know they would be decimated.  They talk about nuclear weapons only as a deterrent.  They can see what happened to Gaddafi in Libya and Saddam Hussein in Iraq.  The war hawks in the U.S. are pushing especially hard for war with Iran.

There are severe sanctions against Venezuela, along with an attempted coup.  Even though this is a weak economic player, there is oil there.  But more importantly, Russia does not want war there, especially with U.S. involvement. Russia (Putin) also does not want war in Iran.  They didn’t want war in Syria, which Obama went ahead with anyway.

Putin, and presumably most Russians, are tired of the antics from the U.S.  They are tired of the threats and the bullying, just as they should be.  Sanctions alone can be seen as an act of war.  Therefore, Russia is trying to avoid the U.S. dollar as much as possible. Last year, Russia dumped most of its U.S. Treasuries.

Now China is feeling the heat from the Trump administration, especially in the form of tariffs. Trump recently threatened the president of China that he better attend the G-20 summit or else more tariffs will got into effect.  Is this really what the U.S. empire has come to?  The president of the United States threatens the president of China to attend a certain event or else there will be repercussions? How would Trump and U.S. officials take it if China’s president threatened something similar?

China still has over $1 trillion in U.S. government debt.  They could sink the U.S. bond market if it sold this debt in a hurry.  So far, there has only been brief mention of such a possibility, but no credible threats. I think it would take a lot for Chinese officials to go this far.  But when you push someone hard enough, and you keep pushing, don’t be surprised when the person being pushed eventually pushes back.

Russia and China have been amazingly patient with U.S. threats.  Putin in particular has been amazingly restrained, especially with the constant allegations made against him.

Instead of threatening back, Russia and China are somewhat quietly working on the sidelines to get along and bypass the U.S.  More accurately, they are working on bypassing the U.S. dollar.

There is no need to use the U.S. dollar has a middleman currency other than to bow down to U.S. officials.  Russia and China are big enough that they can ignore the threats, or at least not follow them. Both countries are being painted as really bad guys in the U.S. press, so kneeling before Trump isn’t going to get them anywhere anyway.

The Saudis and some other U.S. puppets will continue using U.S. dollars for now.  But some of the big players are starting to turn away from using dollars when feasible.  There is no reason to use the dollar as a middleman in most cases.  It would help more if the Chinese would allow the yuan to be a free-floating currency on the exchange markets.

I believe that foreign officials are realizing that they don’t have to use the U.S. dollar. With open exchange markets, there really doesn’t have to be a world’s reserve currency.  You can exchange foreign currency for your own currency, or you can use it to buy the goods and services that are produced in that foreign country.

If anything does replace the dollar as the world’s reserve currency, I don’t think it is going to be another fiat currency issued by a government/ central bank.  If anything, it will be gold.

This is a good long-term reason to buy and hold gold and gold shares.  Russian officials have shown the wave of the future, which is to dump U.S. government debt and to shore up gold reserves.

Every time you hear about the U.S. government issuing more tariffs or more sanctions, just think about adding another straw on a camel’s back.  But the camel isn’t going to collapse.  It is going to shake off the straw and turn elsewhere.  That elsewhere will likely be gold.

The latest consumer price inflation (CPI) numbers were released, and the consumer price inflation rates are relatively low. I say “relatively” so as to distinguish our world of central banking as compared to a time without the Federal Reserve.

In the late 19^thcentury, prior to the existence of the Federal Reserve, the overall price level did not go up.  In fact, prices actually slightly declined, as productivity increased.

The U.S. was on something of a gold standard, even if it wasn’t pure.  Libertarians should actually favor a completely free market in money, but obviously a gold standard is far preferable to the disaster we have now where the central bank controls the money supply and continually tampers with interest rates.

So considering the last century, with the existence of the Fed, price inflation is relatively low, at least according to the government statistics.  The year-over-year CPI in May stood at 1.8%.  The median CPI is a little higher at 2.7%. This certainly isn’t the 1970s when consumer price inflation was in the double digits.

If anything, this more resembles the 1920s.  Murray Rothbard wrote a book called America’s Great Depression, which really details the lead up to the Great Depression.  It was the easy money policies of the 1920s that eventually led to the bust.  You can read his comments here on how stable prices fooled a lot of people into thinking everything was fine.

I am not saying we are going to have another Great Depression.  There were a lot of disastrous things done after 1929 that prolonged the depression.  Some people say the depression ended with the beginning of World War 2, but that really only “solved” the unemployment problem by sending a mass number of boys overseas to fight.  The economy didn’t really recover until after the war ended.

Hoover and Roosevelt both made the situation far worse with their economic policies, which generally consisted of more government interventionism.

If we hit a severe recession, we don’t know what the policies will be.  We can assume more monetary inflation by the Federal Reserve, and likely more spending out of Washington DC, but we don’t know for sure.  We can hope that there will not be more interference in the labor markets.  We don’t want unemployment like there was in the Great Depression.

Asset Prices vs. Consumer Prices

Even though I am not predicting another Great Depression, I am making a comparison of 2019 to, perhaps, 1928.  Maybe it’s more like 1927 or 1929.  90 years is a nice even number, but I don’t know that the major crash will happen before the end of this year.

In the late 1920s, people saw stable prices, at least for many consumer products.  However, there was asset price inflation. The obvious sector that was most inflated was stocks.  I believe that stocks are the most inflated now.  I am not considering asset classes that most people are not in, such as cryptocurrencies.

When the Fed creates money out of thin air and keeps interest rates artificially low, there are many potential consequences.  Rising consumer prices is just one possible consequence.  For sure, we know that it results in a misallocation of resources.  There is malinvestment, where capital is put into projects that otherwise wouldn’t have happened without the loose monetary policy.

The money supply is not the only thing that drives prices.  There is the supply and demand of each individual product.  There is productivity, which can increase the number of goods and services.  There is also the demand for money.  If people are saving more and paying down debt, this can counteract the monetary inflation.  And the lending market through fractional reserve banking impacts the money supply.

We aren’t going to see a complete replay of the Great Depression, but there may be similarities.  I think the relatively stable prices are going to fool a lot of people.

Stocks will get hit the hardest, but other sectors such as housing will also take a hit. Unemployment will rise, as is typical in any recession.  The resources need to be reallocated in accordance with consumer demand.

The government statistics aren’t completely reliable, but prices are not going up dramatically at the grocery store.  Health insurance prices have certainly gone up, but that is more of a function of the government’s regulations than it is of overall consumer price inflation.

We have asset bubbles. That is where you will see the big pop.  The yield curve, as measured by the 10-year yield vs. the 3-month yield, is inverted.  A recession in 2020 is looking likely. We may be in 1928 right now.

Are you going to buy stocks to get the last little bit out of the bull market?  It is better to be out too early than to be out too late.

I am a fan of using the principle of compounding interest.  I believe it is essential to understand this to have long-term financial success, at least for most people.

Unfortunately, some of the same people who promote the understanding of compounding interest also tend to be long-term bulls on stocks.  They talk about historical returns, and they specifically talk about U.S. stocks, usually with optimistic outlooks on returns.

In a way, they have largely been correct up to this point.  Over the last century, if you invested in a broad-based U.S. index fund, you were probably successful if you stayed in long enough.  The Great Depression was obviously an exception, but there were other periods where returns were also low or negative.

I often hear an assumption of 8% returns.  Sometimes I hear as ridiculous as 10%.  The problem is that the people assuming these returns are not talking about running a business or buying real estate.  They are not talking about investing in yourself by gaining more skills and knowledge.  They are talking about financial investments, and specifically stocks.

I think this is a bad assumption.  You should not be basing your retirement plans on a return of 8% over the long run, especially in real terms.  You may get 8% nominal annual returns, but it isn’t going to do you much good if inflation is running at 4% or 6%.

Unless you are creating your own product or business, I don’t think you should count on 8% annual returns from passive investments, unless you are betting on extraordinary overall economic growth in the United States, and perhaps the whole planet. If we have a huge wave of libertarianism blow over this planet, then I think a relatively free market could possibly give us real returns of 8%, but even that may be a stretch.

Stocks and Inflation

I often like to point out that the overall rising stock market is largely a function of inflation.  Without monetary inflation, there would be no overall trend of stocks going higher.  Some individual stocks would go higher, and some would go lower.  But overall, the stock market would not continually go up, even over long periods of time.

People would invest in individual stocks for speculation that some might grow (capital gains), just as they do now.  People would invest in stocks for dividends.  Without the current distortions with taxes and regulations, dividends would be more common.  It is really the main fundamental reason for investing in stocks over the long run in a free market, but we live in a distorted market.  The whole point of buying into a business is to earn a share of the profits, which are the dividends that eventually should get paid out to shareholders.  If shareholders were never paid a dividend, what would be the point of being a shareholder, other than to sell your shares even higher to the next sucker?

In a society without monetary inflation, the overall stock market would likely be relatively stable over time.  You would invest in stocks for dividends.  Also, due to increased productivity, your money would likely buy more goods and services over time.  So even if your investments were not going up in nominal terms, they would be going up in real terms, as your money gained purchasing power.

Compounding Interest Over 2,000 Years

I like to use this example to illustrate my point about the unrealistic returns.  Let’s say that someone living 2,000 years ago invested one dollar.  This would have been the time when Jesus Christ walked the earth.  This investor was able to get a return of 8% every single year and reinvest the returns.  When he died, he passed on his investments to one of his children, who kept the investments earning 8%.  They never withdrew anything.  Each child kept passing the investments on to the next child.

After 2,000 years, how much would today’s heir have with the investments having earned 8% compounding for that whole time.  Using the Rule of 72, the investment would have doubled approximately every 9 years.

After just 500 years, the initial investment of just one dollar would have turned into over $50 quadrillion, or $50,000 trillion.  That is way more money than is currently in existence in terms of U.S. dollars.  And that’s just after 500 years.  After 2,000 years, the number would be so large as to be incomprehensible.

In other words, it would have literally been impossible to get 8% annual returns over the last 2,000 years.  It was not possible given the economic growth.

Even if you just had a 2% compounding return over the course of 2,000 years, how much do you think that would turn into?

Your one dollar would turn into about $158,614 trillion.  You could add up all of the world’s GDP over the course of history, and it wouldn’t match this number.

Again, this just shows that a 2% annual return over the last 2,000 years would have been impossible, at least in real terms.

Now, the last 200 years or so have been incredible as compared to the previous 1,800 years. We have had sustained economic growth that basically didn’t exist before.  Somewhere around the late 1700s and the beginning of the Industrial Revolution, economic growth took off, or at least this is when it became evident in retrospect.

I have no idea what economic growth will look like over the next 40 years, let alone the next 200 years or 2,000 years.  Most of the world lived in extreme poverty 200 years ago, and that is not the case now.  Very extreme poverty in the world is probably somewhere around 10%.  This is a significant drop just in the last few decades.

My main point in all of this is that you should not expect sustained 8% annual returns in real terms.  I think returns these days, to the extent we see them, are somewhat artificial.  I don’t think there is enough accounting for inflation. There are also bubbles that cannot be sustained.

You should not plan your long-term future with an expectation of 8% annual returns, or even 6% annual returns, unless you are actively investing.  You shouldn’t expect to just buy an index fund in the S&P 500 and watch your money double every 9 years, adjusted for inflation. It probably isn’t going to happen.

I have been saying repeatedly over the last several years that the Federal Reserve would very quickly return to a loose monetary policy at the slightest sign of recession.

When this long – and largely artificial – boom comes to an end, we will initially see interest rates go down.  We will likely see price deflation.  At the very least, we will see significant asset deflation.

The asset deflation will happen hardest in stocks this time around.  That is where the unsustainable boom has been the most. I think real estate will also go down in many areas, but I don’t expect prices to fall as much as they did in the last decade.

Commodities, in general, are likely to go down, just as they do in most recessions.  Gold is a little more unpredictable, but there may be a temporary downturn as the dollar temporarily strengthens.  This may be short-lived because the Fed will adopt a loose monetary policy.

I fully expect another round of so-called quantitative easing (QE).  This will be QE4.  QE3 ended in late 2014.  The Fed is currently in a deflationary mode, but that is going to end very soon. The Fed never exactly got around to reducing its balance sheet to anywhere near what it was in 2008.

You don’t hear Fed officials speak a whole lot about the yield curve, but I am certain that they watch it closely.  James Bullard, who is considered a dove (meaning he tends to favor a looser monetary policy), has mentioned the yield curve.  Last year, he said that the Fed should not challenge the yield curve, meaning that he thought the Fed should stop hiking its target interest rate.

The yield curve inversion has gotten worse.  The 20-year yield actually briefly dropped below the 3-month yield. The 30-year yield is still above the 3-month, but not by a whole lot.  The 10-year yield is currently well below the 3-month yield.

The bond market is smarter than the stock market.  Of course, markets aren’t people.  They aren’t really smart or stupid.  But the people who invest in the bond market tend to be more correct than the people who invest in the stock market.  This is a generalization, but it has continually proven true, at least in the short run.

Now, I do think buying a 30-year bond at a 2.5% interest rate is crazy, unless you plan to sell it well before maturity.  I am not confident that inflation will be low 20 to 30 years from now, let alone 10 years.

In the short run, the bond market is smart.  The inverted yield curve is the closest thing we can get to an accurate recession indicator.  It is really just a matter of how much time it will take to shake out.  It is typical for a recession to start about a year after the yield curve inverts.

It Didn’t Take Much

With the further inversion of the yield curve, and with a few hard days for stocks, the Fed indicated that it is willing to accommodate as necessary.  Stock investors loved this indication by the Fed, even though everyone should have known it anyway.  Now, people are expecting an actual cut in the Fed’s target interest rate. Because of this, stocks boomed on the announcement that really wasn’t that much of an announcement.

This is the Fed’s put.  Investors expect the Fed to step in any time things get rough.  And they’re probably right.

The only problem is (from their perspective), the Fed can’t control everything.  Just because the Fed announces an interest rate cut, or even a new round of monetary inflation, it doesn’t mean it can save the stock market.  The Fed could go crazy and announce, let’s say, $250 billion per month in new money, but this would only make things worse in the long run.  It may or may not prolong the boom, but it would certainly prolong the agony.  If the Fed got aggressive enough, it would eventually risk destroying the dollar as the world’s reserve currency.

I don’t expect the Fed to start QE4 until we are actually in a recession.  For now, I think they will just lower the target range for the federal funds rate.

It is important to know that the Fed started lowering its target rate prior to the fall of 2008.  It actually started prior to the official start of the recession in December 2007.  It obviously didn’t matter.  It couldn’t stop the bust, and it won’t be able to stop it this time either.

If anything, the Fed’s actions to loosen monetary policy should concern investors.  We are told the economy is booming and that unemployment is historically low.  Yet, the Fed is talking about lowering rates that are already low by historical standards.  Yes, the Fed is definitely watching the yield curve.  But whatever they do, it will be too little and too late to stop the bust.

The Fed is already blaming the tariffs imposed by Trump.  I think the tariffs are bad, but they will not be the cause of the bust.

The only way to stop the bust would have been to never start the unsustainable boom in the first place.  There shouldn’t have been QE1, QE2, and QE3.  Growth would have seemed slower up to this point, but the growth would have been real and sustainable.

Instead, we are facing a recession ahead.  My bet is on 2020 at this point.  I want to take a few short positions (betting on stocks going lower), but I am not quite ready yet.  I think it is a little early.  We may see one final run up in stocks before the full bear market hits.

The biggest threat to the average American is unemployment.  If you can keep your income during the recession, you may actually benefit.  Things should get cheaper, at least for a little while.

I do think stocks are going to get hit the hardest.  The boom in stocks is really irrational.  The revenues and profits are not there now to back up the prices, and they certainly won’t be there once the next recession becomes evident.  I think we could easily see stocks go down 50%, but it wouldn’t surprise me if it is much worse than that.

Some people’s dreams will be shattered.  I think you should mostly be out of stocks now, but I especially can’t understand people who are supposedly close to retirement who are heavy in stocks.

There will be some pain ahead.  It will also be a time of opportunity for those with some cash on the sidelines.

If there is one really good thing about Donald Trump being president, it is that he has helped clarify how much I should trust other people.  For anyone really paying attention, Trump has helped expose the shills for the establishment.

It’s not that Trump himself isn’t, at least part of the time, a shill for the establishment. He has obviously surrounded himself with some horrible people, especially in the realm of foreign policy.  But because Trump has a tendency to be unpredictable and to sometimes disrupt the status quo, the establishment fears him and will do almost anything to take him down.

You can be opposed to Trump without having an irrational hatred of him and his rhetoric. There is a difference between opposing Trump policies and having Trump Derangement Syndrome (TDS).  TDS means hating Trump and opposing him no matter what the issue.  It means not being able to think clearly whenever Trump’s name is mentioned in a conversation.

Thanks to Trump, he has exposed another shill for the deep state.  That is Congressman Justin Amash, who has announced his support for impeachment proceedings against Trump for possible obstruction of justice in the Russia collusion investigation.

Amash is considered by some to be the most libertarian member of Congress.  When he first entered Congress, some were saying that he was another Ron Paul.  I have never bought into this.  While I have agreed with most positions taken by Amash, there has always been something off about him.  I can’t always pinpoint it, but I can pick up little subtleties with language. He is certainly not as forceful as Ron Paul.

I have now lost all respect for Justin Amash.  He is acting as a shill for the establishment and deep state.  I am not sure how intentional it is on Amash’s part.  I think he is just trying to stand out and get some attention.  He has done that.  He has received some praise from the left and the rest of the anti-Trumpers.

I don’t simply oppose Amash for opposing Trump.  I oppose Amash because of his reasoning for opposing Trump.  The Russia-gate story is a hoax.  There is no evidence that the Russian government interfered in the 2016 election in any significant way.  We are supposed to believe that perhaps $100,000 or so of Facebook ads (that weren’t even particularly pro Trump) threw the election in his favor.  If only Hillary Clinton had known how to be this effective with hundreds of millions of dollars at her disposal, along with most of the establishment media in her corner.

I see a few of my Canadian Facebook friends post something about American politics.  Can I now say that the Canadians are interfering with U.S. elections?  The whole thing really is just as ridiculous as it sounds.

Obstructing a Hoax

There was no evidence presented of collusion between the Trump campaign and Russia.  It is just assumed that Russia interfered in the election, but there is absolutely no evidence of this.  The exposure of emails from the Democratic National Committee (DNC) was likely an inside job.  It probably came from a Bernie Sanders supporter who knew they were getting the shaft from the DNC and Clinton campaign.

It would be nice if Mueller would share the basis for why the investigation started.  The reason we know about why the investigation started is from the Steele Dossier, which was put together by Christopher Steele, who was working for Fusion GPS, which is a company that was working for the Clinton campaign.

The Russia story is a hoax.  It was put on by the deep state to undermine Trump, to make an excuse for him winning the election, and to keep tensions high with Russia on behalf of the military-industrial complex.

Even if Trump did obstruct the investigation, I don’t really care, and I don’t really blame him. And I don’t really care if there is a federal law that he violated because most of the federal laws are unconstitutional and unlibertarian.

If the police are framing you for a murder that you didn’t commit, and you try to obstruct their framing, are you guilty of obstruction of justice?  Who is really the criminal?

Amash – Gullible or Establishment Hack

Justin Amash is completely buying into the fake Russia story, or at least he is pretending to buy into it.

If he really believes that Russia hacked the elections, and he believes that the people investigating Trump are honest, then he is just completely gullible.  He is so naïve, he shouldn’t be trusted in power. He certainly shouldn’t be trusted by libertarians to promote the cause of liberty when he is acting as a defender of the establishment.  He is only serving to defend the deep state and to risk inflamed tensions with Russia.

Otherwise, Amash is just another lying politician who is serving up some rhetoric to promote himself.

Either way, we can’t trust Amash if he is going to buy into an establishment narrative that is so obviously false.  He is not the only supposed libertarian who is being exposed by this story.

Judge Andrew Napolitano has also been promoting the establishment narrative that Russia hacked our elections without questioning the allegations.  He if trying to follow the letter of the law, as if libertarians should do such a thing when the law is so corrupt.  He, of all people, should know better that there is often a lack of justice, especially when it comes to federal law and the intelligence agencies.

When Amash and Napolitano and other “libertarians” talk about the Mueller report and the possibility of obstruction of justice by Trump, just remember the people prosecuting this war against Trump.  Remember who Robert Mueller really is.

Anyone who thinks Trump should be impeached for obstructing justice is just acting as a defender of the evil establishment.

Amash and Napolitano could advocate impeaching Trump for bombing Syria or starving little kids in Yemen, but that’s not what they’re doing.  Instead, they are helping to promote a fake story put on by the establishment, and they are helping out the military-industrial complex by promoting more bad relations with Russia.

Even amongst promoters of a free market system, there is a mistake in thinking that technology is the primary driver of economic progress.  Advancing technology is incredibly important, but it has to work hand-in-hand with capital investment in order for it to mean anything.

Murray Rothbard wrote on this subject in his book Man, Economy, and State.  He refers to Mises on this point.

“The relative unimportance of technology in production as compared to the supply of saved capital becomes evident, as Mises points out, simply by looking at the “backward” or “underdeveloped” countries.30 What is lacking in these countries is not knowledge of Western technological methods (“know-how”); that is learned easily enough. The service of imparting knowledge, in person or in book form, can be paid for readily. What is lacking is the supply of saved capital needed to put the advanced methods into effect. The African peasant will gain little from looking at pictures of American tractors; what he lacks is the saved capital needed to purchase them. That is the important limit on his investment and on his production.“

Again, this isn’t to say that technology is not important.  It’s just to say that it is virtually useless without capital investment.  The technology comes with capital investment.  To get capital investment, you typically need a society that generally respects property rights and voluntary trade.

You can have some capital investment in a more socialist society, but it will be minimal in comparison, and the capital investment will be a misallocation.  Resources will go towards things that are not necessarily a priority for consumers.

Capital investment comes from savings.  If you are going to invest, then you first must save.  Even if you are just investing your labor, you are still saving in a sense beforehand.  If you are going to spend a week to work on a project, you essentially have to have access to food and water, and probably a shelter.  You need savings to sustain yourself if you are not working on something that immediately rewards you with basic necessities.

Prospering Quickly

It is a curiosity that, right around the end of the 18^thcentury, parts of the world started prospering as never before.  It was around the start of the new United States of America, but that is not the primary reason for the economic growth that occurred.  After all, taxation was actually very low in the American colonies under British rule.

It was certainly a period that had a great degree of economic freedom as compared to most other points in history.  Without this relative economic freedom (including in Great Britain), the Industrial Revolution probably wouldn’t have happened, or else it would have taken a much longer time to go through.

The economic growth that began around 1800 was sort of like a vehicle being pushed, or a giant boulder.  Once you get it going, you get some momentum.

Maybe there was 1% growth in the year 1500 somewhere.  But 1% of almost nothing is almost nothing.

The people who lived in the year 1800, even in the United States and Britain, had more in common with people from 1800 years ago than they would with people today.  The world is a completely different place, and mostly for the better.

The year 1900 was a lot different than 1800, and the year 2000 was a lot different than 1900. All three of these time periods are hard to compare with each other because of the extraordinary changes.  It really is a hockey stick graph where the standard of living was fairly constant for thousands of years before shooting upwards just over the last couple of centuries.

If an economy grows by 5% per year, this means that the economic output doubles approximately every 14 years (using the Rule of 72).  This is an unbelievable advancement.  Imagine your living standards doubling every 14 years.  This means a quadrupling after 28 years.  Compounding interest calculations work for economic growth in a society too.

Even at 2% growth, that is a doubling every 36 years.  This means that every generation will be twice as rich as the one before.

Capital Investment with Today’s Technology

Even though I have stressed that capital investment is the key factor, it is easier to catch up in today’s world with today’s technology.  As Rothbard described, an African peasant doesn’t gain much by looking at a picture of a tractor if he lacks the saved capital.  But in today’s world, if that same African peasant gets a taste of freedom, he can prosper much more quickly than someone could have 100 years ago.

We live in a global economy.  Any place that adopts a relatively free market economy will see capital investment pour in. The technology automatically comes with it.  The capital investment will quickly raise the living standards of the people living there.  The African peasant doesn’t need to be able to build a tractor or buy and own a tractor.  He can use the tractor owned by a capitalist, even if the capitalist is from another country.  The person using the tractor is worth more if he can use it competently. Someone with a tractor, even if he doesn’t directly own it, is far more valuable than someone working on a farm with a shovel or with his bare hands.

The same will hold true for any capital equipment, assuming that there is market demand for the product that the capital equipment helps produce.  If a poor person in a poor country is given a computer and a little training, he can help fulfill a need somewhere.  If you go on a site such as Fiverr, you can find someone in Ukraine to design a book cover. You can find someone in Egypt who can edit your videos.

There are many stories about poor countries that have been able to prosper quickly.  Hong Kong emerged as an economic powerhouse after adopting a relatively free market system after World War 2.

Perhaps the most amazing example, and certainly the biggest, is China.  While it is certainly not a free market economy, it is much freer than it was under its economic system of communism.  The agriculture sector was freed up to some degree in 1979, and it set off a wave of liberalization policies.

It is incredible how prosperous the Chinese have become.  It is still a centrally-planned economy to a large extent, and there are major problems that exist, but we can’t ignore the vast improvement.  Even if there are massive misallocations, at least there are resources to misallocate.  It is better to have bridges to nowhere and empty cities than it is to have virtually nothing.  Some of the Chinese prosperity may be an illusion, but some of it is very real.  I can’t imagine there are many Chinese people who would trade today for 1979.

Technology has continued to advance in our world, despite massive government interference everywhere.  Just imagine how incredibly wealthy we would be if the governments around the world were a fraction of the size.

If government were just cut in half everywhere (regulations, taxes, spending, inflation), then our living standards would explode upwards.  If you had a much greater degree of savings and capital investment, coupled with today’s technology, our wealth and living standards would rise to a degree that is probably unimaginable by most.

If our world can avoid any major world wars, and we can keep governments in check, then our living standards will continue to increase.  It won’t be straight up though.  There will be some setbacks.

If government interference is scaled back, then our living standards could explode.  The people living in the year 2100 will barely recognize life in the year 2000.  If technology really advances, then maybe some of us will still be alive to see it.

When Trump was a candidate for president, his inconsistencies were noticeable. On the one hand, he said the Iran deal was a disaster and that he would bomb the families of terrorists. On the other hand, he said that Bush lied us into Iraq and that we (the government) needs to stop these endless wars in the Middle East.

Since becoming president, Trump has maintained his inconsistency.  I have said several times though that I prefer his inconsistency to the consistency of most everyone else in the establishment. People like Hillary Clinton and Marco Rubio would take the wrong and evil side on virtually every issue dealing with foreign policy.  They are consistent.  I would rather someone who is inconsistent and sometimes wrong and evil over someone who is consistently wrong and evil.

Trump has been horrible with his appointments, particularly with people like John Bolton and Mike Pompeo.  You can’t really get much worse than those two.  Trump has been bad on Venezuela and Iran.  He has been mostly bad dealing with Russia, perhaps to push back against the fake stories of him being in collusion with Putin.  Trump has been bad with China because of his tariffs.  This is not good for relations.

Trump made great strides with North Korea until he let Bolton get involved and ruin any goodwill.  Trump tried to withdraw troops from Syria, and the entire DC establishment went ballistic.

The best you can say about Trump in regards to foreign policy is that he has not started any new major wars up to this point.  That is a better record (so far) than Bush and Obama.

A Vote for Trump

There is an old joke regarding the 1964 election between Lyndon Johnson and Barry Goldwater. The joke goes something like this:

They told me if I voted for Goldwater, our boys would end up fighting in Vietnam.  And they were right.  I voted for Goldwater, and they are fighting in Vietnam.

I could almost tell a similar joke that, for me, would be personally true.  Some of my libertarian friends told me I should vote for Trump or else we’ll have greater tensions with Russia.  And they were right.  I didn’t vote for Trump and we have greater tensions with Russia.

It’s not because Trump wants greater tensions with Russia.  But because the anti-Trump crowd hates Trump so much, they are willing to risk war with Russia just to try to take down Trump.  They may not see it quite this way, but they slightly raise the chance of nuclear annihilation because of their hatred for Trump.

Most of the left was never really anti-war.  Trump has shown this to be true.  If Trump takes a more non-interventionist position on something, the left will criticize him.

There really is such a thing as Trump Derangement Syndrome (TDS).  People who suffer from it can’t think clearly.  It doesn’t mean you have TDS if you don’t like Trump.  I am highly critical of Trump, particularly in regards to his stupid tariffs, his spending, and his mostly hawkish foreign policy.  But I don’t get upset with Trump over his Tweets and name-calling, unless that name-calling is to a foreign leader.

I don’t care about Trump’s tax returns.  I hope his accountants stiffed the IRS good and hard.

I don’t care about Trump’s brash personality.  If anything, it is refreshing to hear someone who is not a total phony.

On most days, I don’t much like Trump, but I do not suffer from TDS.  I can see when he does something positive, and I can still think clearly when his name comes up in a conversation.

Trump’s Moment of Truth

Trump recently did an interview, and it is probably not getting as much attention as it deserves. He gets several things wrong on Iran, but then goes the other way.  You can watch the whole thing for context, but these are the key statements that Trump said.

“And don’t kid yourself.  You do have a military-industrial complex.  They do like war.”

In regards to Syria: “I say I want to bring our troops back home.  The place went crazy.”

Eisenhower mentioned the military-industrial complex when he was leaving office.  But that was a little late.  It’s like when the former president of Mexico started criticizing the war on drugs afterhe had left office.

In this case, Trump is still president, and he actually said on video that we are dealing with a military-industrial complex.  This is what is so refreshing about Trump, despite his horrible positions on so many things, including foreign policy.

Trump basically admitted that he is not in charge.  I mean, if he is in charge, then he should just ignore the military-industrial complex.  He is commander-in-chief.  He can order all troops home immediately.  If he does so, and the orders are not obeyed, at least he is putting it out there for all to see.

Obi-Wan Kenobi was struck down by Darth Vader in front of Luke Skywalker for him to see. Trump needs to play Obi-Wan. He needs to expose the evil of the establishment, but I am not sure he has the courage to do so.  (Sorry for the Star Wars analogy to anyone who’s not a fan, but you get the point.)

Trump just told the world that he is not in charge.  I wish he would make it clearer through his actions.  I wish he would order an end to all of the wars.  Force the establishment and their military-industrial complex to react with furor.  At least it would be a good lesson for the American people.

With recent tariff hikes on some Chinese goods, there is some discussion about who exactly pays for these tariffs.  Do Chinese businesses pay for them?  Do American consumers pay for them?  Are they just avoided?

The answer is most likely a partial “yes” to all three of those questions.  In a market economy where some government interference is enacted, we can’t know who pays the higher price.  It is typically a mixed scenario, where costs are borne by several parties.

In the case of tariffs on Chinese goods, there is no question that Chinese suppliers will feel an impact in the form of reduced sales.  They could try to raise their prices, but Americans may turn to other suppliers.  The reason that Americans import so many Chinese products is because it is cost effective.  If that cost advantage goes away, then they might just import goods from another country or make them in the United States.

Tariffs are really just sales taxes on foreign goods.  Therefore, for the rest of this discussion, let’s just focus on taxes in general, and how much they are passed on to other parties.

If there is a tax added to a corporation, it isn’t just one party that ultimately bears the cost of the tax.  The corporation may pay the tax directly.  In the case of a sales tax, it would be the consumer paying directly.  But now we have to look at the indirect impacts.

If a corporation has to pay an additional tax, that money has to come from somewhere.  It could just mean lower profits for the corporation, but this obviously has its limits.  Most businesses aren’t going to keep going for a long time with tiny profit margins, unless you are Amazon where you are selling many millions of dollars every day.

Corporations will pass along these costs if it is possible.  This can impact wages for employees, as that is a way to cut costs.  The business could obviously raise its prices, but only if it will not lose more profit as a result.

Where Some Austrian School Followers Get it Wrong

I find that many followers of the Austrian School of economics get this point wrong. They are taught that the consumer ultimately determines the price of goods.  And while this is true, it leads some people astray.  They get too smart for their own good.

Here is the key point. When businesses are imposed with added costs in the form of regulations or taxes, it doesn’t mean that some of those costs do not flow down to the consumer.

Sure, the consumer ultimately determines the price because they are in control of their own money. If you don’t like the price of something, you are free to walk away.

But this doesn’t mean that prices are not impacted by costs (which doesn’t necessarily have to be just taxes).  This is such an obvious point, yet I see Austro-libertarians making this mistake.

I say it is obvious because you just have to look at the real world.  Gas stations sell gasoline for your car.  Oil is used to make the gasoline.  The gas stations aren’t selling oil directly out of the ground.  Yet, when the worldwide price of oil goes up, we expect gas prices to go up. It makes sense.

Are some Austro-libertarians going to tell me this isn’t the case?  The cost of the inputs for the gasoline went up, and the consumer pays a higher price at the pump.  Why does this happen?

It’s possible consumers may cut back on driving or buy more fuel-efficient vehicles if the price rises enough.  But for the most part, people keep buying gasoline.  They pay the price that is listed at the pump.  So while the consumer is free to walk away and not buy gas for their car, most of them don’t.

So why don’t gas stations just charge more for gas if consumers aren’t willing to walk away? The answer is competition. It’s because the gas station across the street will take away all of your business if you raise prices too high.

But the gas station across the street can’t steel your business by continually lowering prices because there is a limit.  That limit is the cost of selling the gasoline.  A business might be willing to take a loss for a short time to gain new customers, but it is obviously not a sustainable business model to keep selling a product for a loss, unless you are more than gaining in another area.

Therefore, if the price of oil goes up, expect gasoline prices to go up.  If there are additional gasoline taxes imposed, expect the price to go up for the consumer.  If a tariff on oil were enacted, we should expect the same thing.

It is not clear-cut who ends up paying for tariffs or any other taxes and by how much.  We don’t know how exactly everything would have happened in the absence of such a tax.  There are many parties that end up paying, which can include shareholders, employees, and consumers.  Sometimes products that would have been sold just end up not being sold at all. We don’t know how many transactions simply don’t happen because of an added tax or some other cost.

There is no question though that consumers end up paying more because of taxes, which includes tariffs.  The consumer is always free to walk away (unless compelled by the government).  But it doesn’t mean that the consumer won’t pay more for something if there is an added tax on it.

The yield curve has somewhat inverted in 2019. Comparing the 3-month yield to the 10-year yield, there was an inversion on March 22, 2019 that lasted about a week. It slightly inverted again on May 13, 2019.  As I write this, the two yields are essentially the same.

An inverted yield curve is a precursor to recession.  In fact, it is maybe the only thing we can look at with reliability, as it hasn’t signaled a false positive, at least up until this point.  A recession will follow an inverted yield curve typically within 2 years or less.  The timing part is hard to get right.

As with so many things in economics, it is important to understand cause and effect.  An inverted yield curve is not causing a recession.  It is a warning for a recession.  Bond investors are buying more long-term government debt, thus pushing interest rates lower on that long-term debt.

Why would an investor buy a 10-year Treasury bond with a 2.4% yield when the investor could buy a 3-month or shorter Treasury bill for the same 2.4%?  After all, you are locking up your money for 10 years if you don’t sell the bond.

The reason is because the investor expects rates to go even lower in the future, which would drive the price of the bond higher.  He would rather lock in a rate at 2.4% and also lock up his money for 10 years rather than buy the short-term debt.  If we hit a recession, the yield on the short-term debt could go way down from 2.4%.  It could go to close to zero.  In our bizarre world of finance today, it could even go negative.  That is why an investor would want to lock in a rate for 10 years.  It is due to fear of lower rates in the future.

The bond market is the smart money, at least compared to the stock market.  This is a generality.  There are always buyers and sellers on both sides.  It’s just a question of what the latest price is, or what is happening on the margin.

The Fall of 2008

It is interesting to go back to 2006 to look at the yield curve.  The 10-year yield fell below the 3-month yield in February 2006.  In that same month, the 30-year yield actually fell before the 3-month yield. They were only briefly inverted and then went back to “normal” in March 2006.  The yields inverted again for much of 2006 and part of 2007.

But it is important to note that the official recession began in December 2007.  By that time, the yield curve was no longer inverted, as short-term rates had already started to fall quite a bit.

The financial crisis became evident in September 2008.  This is when it looked like financial Armageddon.  But this is just when things came to a head.  The problems were already there.  The housing bust had already started, and the recession had already started even if not everyone was aware of it yet.

Again, this just shows that the timing is impossible to predict.  But the inverted yield curve was quite accurate in predicting the recession of 2008, which technically started in 2007.

The 30-year yield inversion is even more dramatic than the 10-year yield.  Different people use different measures, but I don’t think that having the 30-year yield drop below the 3-month yield is a necessity for a recession.  It may or may not happen this time, although I suspect it will eventually invert.

The 10-Year Yield vs. the 30-Year Yield

The reason I don’t fully subscribe to just watching the 30-year yield is because it is just too far out there.  We have no idea what anything is going to look like in 20 or 30 years.  If you see a deep recession on the horizon, it doesn’t necessarily make sense to lock your money up for 30 years unless you think you can easily sell the bond at a much lower interest rate. Most of us don’t expect a Japan-like scenario where interest rates are low for decades.

If you think there will be a deep recession over the next few years followed by a period of higher price inflation, then a 30-year bond wouldn’t make sense.  Interest rates will go up once there is fear of price inflation.  Just look at what happened to interest rates in the 1970s.  Short-term and long-term rates went into double digits due to price inflation.

If a recession hit, then it is almost a guarantee at this point that the Fed will buy more U.S. government debt.  This would tend to drive rates down further.  But if the Fed creates so much monetary inflation that it turns into fear of expected higher price inflation, then this could ultimately drive interest rates higher.  It would likely take a little time for this to play out, but you can see why an investor might not want to buy a 30-year bond, even if the Fed is initially buying up debt.

For this reason, I don’t think the really long-term debt yields have to drop below the short-term yields to guarantee a recession.  For me, the drop in the 10-year yield is enough.  Bond investors are telling us that they would rather lock in this seemingly low rate for 10 years because they think it is headed lower. We should listen to the smart money and take this warning seriously.