After many months of harping on this subject, it has finally happened.  On Friday, March 22, 2019, the yield curve officially inverted as measured by the 3-month yield vs. the 10-year yield.  According to the U.S. Treasury’s own data, the 10-year yield stood at 2.44 on Friday, while the 3-month closed at 2.46.

The inverted yield curve – where long-term yields drop below short-term yields – is the best recession indicator that exists.  It is almost impossible to predict the financial markets, especially in our world of central banking and a mixed economy.  But an inverted yield curve is about the surest thing there is.

The last time these two metrics inverted was in 2007, and we know what happened shortly after that.

At this point, a recession prior to the 2020 election is looking highly likely.  I give it somewhere around a 50/50 chance of hitting in 2019.  While the inverted yield curve is great at predicting a recession, there tends to be a lag. We could still be a year out, but now is the time to prepare.

The trend had been going towards this inversion for many months now.  But after the Federal Open Market Committee (FOMC) released its latest monetary policy statement on Wednesday, the 10-year yield dropped big, while the 3-month yield barely moved.

The Fed has now said that it will stop hiking its target rate for 2019, and also that it will soon stop its deflationary policy of allowing $50 billion per month to roll off of its balance sheet.

Some are pointing to the Fed meeting as a cause for the 10-year yield dropping and the yield curve inverting.  But this may be confusing cause and effect.  I’m not saying that the Fed meeting had nothing to do with the short-term reaction of the bond market.  However, I do think it is more a case where the Fed decided to stop hiking rates and to stop reducing its balance sheet because of the flattening of the yield curve.  The Fed was acting in response to the bond market.

Last year, James Bullard warned that the Fed should stop hiking rates and challenging the yield curve.  He was already recognizing the flattening curve.

It is important to remember that the Fed already started reducing its target for the federal funds rate prior to when the financial crisis became apparent in 2008.  The point is that it probably doesn’t matter what the Fed does from here.    Powell could come out with a statement tomorrow saying the Fed has decided to start QE4 (more monetary inflation) and to reduce the federal funds rate.  If anything, this would just panic the market more.  It would not stop a recession that is already on the verge of happening.

The recession is already baked into the cake.  It was the Fed’s ultra loose monetary policy from 2008 to 2014 that caused the current unsustainable boom.

What to Expect and What to Do

You should prepare for a recession coming soon.  If it doesn’t happen in 2019, then 2020 is almost certain.  Either way, you need to get mentally prepared and financially prepared.

Getting financially prepared is obviously easier said than done.  We don’t know exactly how the recession will take shape, but we can take a pretty good guess based on past experience and based on what has happened over the last 10 years.

The most important thing is to keep your main source of income in a recession.  This is the number one priority for most people. The only exception is if you have a lot of wealth and you use that wealth (or are planning to soon use that wealth) as a source of income.  Otherwise, you need to do your best to keep your job.  Or if you are an entrepreneur, you need to plan on surviving the recession.

I don’t have a lot of advice in this area except to be aware of what may be coming and to work hard to avoid the worst-case scenarios.  If you are an employee, you want to be seen as a productive employee who is highly beneficial to your company.  This doesn’t guarantee not being let go, but it certainly increases your odds. And if you work for a company that is already on shaky financial ground, you may want to look elsewhere while unemployment is still relatively low.

Aside from your main source of income, you obviously want to do your best to protect the wealth that you already have.  The biggest boom in the U.S. over the last 10 years has been in stocks. I am referring to major financial assets when I say this.  I’m not including something like Bitcoin, although I expect that bubble to burst too.

I advocate a permanent portfolio for your financial assets. This includes 25% in stocks, but the other portions of the portfolio should get you through a recession.

I may decide to short stocks at some point.  I may just buy a bear fund or some kind of ETF that bets on a down stock market. I will avoid betting on any individual stocks falling.  If I short the market, I will do so cautiously with money I can afford to lose.

The other sector that has boomed is real estate.  This is not universal.  I don’t think housing is in as much of a bubble as it was 12 years ago.  I don’t think you should sell your house right now just because you think the housing market will go down, especially if you are comfortable with your monthly expenses and you are planning to stay in your house for a while.

There are exceptions to this.  If I owned a house in San Francisco, I would cash out now.  I probably would have already cashed out a couple of years ago, and it has only gone up more since then.  There are other hot markets in the U.S. that are likely to see big declines. In Canada, I expect the housing markets in Vancouver and Toronto to take a hit.

Aside from stocks and housing, I think it is important just to get rid of any debt that you can, and to save some money for an emergency fund.  In a recession, they say cash is king.  Maybe long-term U.S. government bonds will be king, but you probably can’t go wrong with cash (or cash equivalents).  You want some liquidity.

If you can make some little cutbacks right now, it is a good time to do so.  It will make it less miserable when the recession happens.  You will have already partially adjusted.  If you are accustomed to eating out 3 times a week, you can at least cut it back to once or twice now.  If you wait for the recession and you have to go from 3 times to zero, it will be hard on you mentally.  People get accustomed to a certain lifestyle, and it can be difficult mentally to cut back, even when cutting back on luxury items.

If you are mentally prepared for a recession, you will be much further ahead than most.  You won’t be taken by surprise.  And if you do have to adjust your lifestyle, it won’t be as much of a shock to your system.

In conclusion, a recession is likely coming soon, and you should already be in the process of preparing mentally and financially.  You can’t control what happens to the economy, but you can control many aspects of your own situation.

One last important point is that price deflation may occur in the short run.  This means that you may have good buying opportunities, whether it is for investments or consumer goods that you need.  If you need a new car, maybe there will be some good deals out there soon.  If you are looking to buy a house to live in or to invest in, be patient and wait for the buyer’s market.

Cash is king not just because of the security it gives you.  It also gives you opportunity when others are in crisis mode.

I recently received an email suggesting the subject of optimistic vs. pessimistic libertarians. I have written before on the topic of optimism vs. pessimism, but not as much specifically on those within the libertarian movement.

The person who emailed me said the following:

“I was first brought to libertarianism by economic people like Peter Schiff.  The doom and gloomers.  Telling me the dollar is going to crash under the weight of govt spending.  Telling me I need to prepare..buy gold…there is going to be a lot of pain coming soon.  
 
“But slowly over time I started to hear people like John Stossel.  He is excellent at showing you how much better so many things in life have become, often due to the free market.  He bucked the media’s narrative and showed me how much crime has dropped over the last 20 years, how much the internet has freed up information and how private businesses have made life so much more convenient for us etc.”
 

He concludes by asking if I am a positive or negative libertarian and whether I am optimistic for the future, both short and long term.

If you compare Peter Schiff to John Stossel, there are two different messages.  It doesn’t necessarily make either one of them wrong.  In my own opinion, I think Stossel may be overly optimistic, and I think Schiff is overly pessimistic. But they both have valid points.

When taking a step back and looking at the worldwide trend, it is mostly good news.  There is still a lot of pain and suffering constantly throughout the world, but it was even worse in the past.  Extreme poverty has dropped to a fraction of what it was just a few decades ago.  There is still widespread poverty by Western standards, but it isn’t to the same level as it was.

You can pull up statistics on this subject, but you have to pay attention to definitions.  They do get somewhat subjective.  When I think of extreme poverty, I think of someone who is malnourished with very little food and with no access to medical care, and perhaps no access to clean water.  It isn’t the same type of poverty as someone living in a tiny apartment having to work two jobs to pay for rent and groceries.

At one time, the majority of the people on the planet were in extreme poverty.  Now it is maybe 10%.  This is an incredible achievement for mankind.  In spite of (some might argue, because of) a huge increase in the population of the world, the overall poverty rates have plummeted.

This is best seen in China, where they have gone from a communist system to something of a centralized Keynesian system.  It is still far from being a free market system, but it is a lot closer than it was 4 decades ago.  It has vastly improved the lives of hundreds of millions of people.

In fact, China may be a good example of what the future holds for most of the planet.  The overall trend is up, but there is going to be some serious short-term pain.

Peter Schiff frequently warns about the US dollar, but there are libertarians who are actually much more pessimistic than him.  Schiff may warn of a dollar collapse, but he isn’t typically warning of a complete breakdown of civilization.  There are some people who warn about hyperinflation and total chaos.

I don’t think Schiff believes there will be total chaos everywhere.  If he did, he wouldn’t be living in Puerto Rico of all places. He would be buying a house in a rural area in which he could live off the land when everything goes bad.

I don’t think there is going to be hyperinflation when it comes to the U.S. dollar.  I’m not saying that it’s impossible, but just that it is highly improbable.  But there will be economic pain in the future as compared to what we have become accustomed to.

The unfunded liabilities in the U.S. have been estimated to be as high as over $200 trillion. Even if they are “just” $50 trillion, it is an amount that cannot be fulfilled.  These are promises that were made that are impossible to keep.

There are going to be broken promises.  The government retirement age is going to go up when the government can’t pay the bills and further monetary inflation is not an option.

I like to say that we are living in the best of times and the worst of times.  Of course, most people really aren’t living in the worst of times.  We are very fortunate to live in today’s world.  If you live in the U.S., you are living in one of the wealthiest countries in a time of the greatest wealth ever seen.  The problem is that we have nothing to compare it to from our personal lives.  Someone who is 30 years old only can compare his current life to his life as a younger adult or kid living in a first-world country.

There are many people living in the U.S. today who are struggling.  There are people struggling with health and mental issues. There are people struggling with family issues.  There are people struggling with financial issues.  Part of this is our culture, and part of this is the burden of government.  In some ways, these go hand-in-hand.

In some aspects, 1950s America was better than today.  In some ways, it really was a simpler time.  But for the most part, we are better off today than we were then.

The problem is that we should be much better off than we are currently.  We would have much greater freedom and prosperity if the state were radically smaller.  Right now, the government at all levels (federal, state, and local) spends about $60,000 per year per U.S. household.  This is a massive misallocation of resources.  If this money were actually spent or saved by those who earned it, then we would be vastly wealthier than we are now. Instead, we hear about people working extra hours and barely getting by.  They are barely getting by with smartphones, but they should be able to enjoy new technologies without having to struggle to pay for health insurance and rent.

It is also important to note that communication today is like nothing we have ever had. This is obvious, but people tend to forget it.  We hear about corruption, lying media, and other things that simply wouldn’t have been exposed in the past.  Between cell phones that take video, and social media to share it, there aren’t many secrets anymore.  But we have to remember that it isn’t that there is any more corruption today than there was in the past.  It is just that there are more stories of corruption because it is exposed.

So even though we hear more negative news, it is actually positive.  It means that people aren’t getting away with things as much. I don’t know if there is more police abuse of power today than in the past, but there is definitely more exposure.  It would be naïve to think that police corruption was rare decades ago.  It’s just that people weren’t taking videos then.

In conclusion, I think the overall trend is positive.  If you look at the U.S., the government has become bigger in many ways.  At the same time, we have a check against the establishment media that didn’t exist before.

We also have several other positive trends.  Gun control advocates have gotten almost nowhere.  Most Americans do not want to ban guns.  Meanwhile, states have essentially nullified the federal government’s war against marijuana users.

Perhaps the best news is that homeschooling has exploded in popularity.  Although parents have to pay their property taxes to support the government school system, they still decide to shrug off the enticement of “free” education and instead choose to do it themselves.  This is a great victory against the state, and I see the overall trend only continuing.

I am a long-term optimist for liberty.  As Harry Browne said, human nature is on our side.  People want to be able to choose things in their life.

In the short-term, I am a bit more pessimistic.  I do think there are going to be major financial/ economic problems.  It will not be confined to the United States.  In fact, I think China, Japan, and Western Europe will suffer more greatly than Americans.

The only thing hard for Americans is that we are used to high living standards.  It will be an adjustment for some people when they have to stop eating out at restaurants and have to drive a 10-year old car. Maybe some people will have it much harder than this, but I don’t think there will be anything close to starvation for most Americans.  Most people will still have a roof over their heads and food on the table.

If the government and the central bank react appropriately – that is, do nothing – then any hard period won’t remain hard for very long.  People can adjust quickly if allowed.  If the government and central bank prolong the suffering through more spending and monetary inflation, it will be unnecessarily that much more painful.

It will be similar for the rest of the major countries.  The good news is that there is actually less fighting going on now than in the past.  The 20^thcentury was a very bloody century.  The U.S. government continues to run an empire overseas and starts these wars in countries that most people don’t care about.  This is bad news for the people in these places.  The good news is that we are not likely to see any major world wars, and let’s hope that there is no use of any nuclear weapons.

As long as we can remain in relative peace, then the world will continue to prosper in a positive direction.  But it won’t be straight up.  There will be periods of pain.  We will probably hit one of those periods of pain soon.

There is great fascination with the recent story about celebrities paying big dollars to get their children into certain colleges/ universities.  This probably happens frequently, but in this case, the money was being paid covertly for cheating.

I find it fascinating from the human psychology aspect.  The two most well-known people in this scandal – Lori Loughlin and Felicity Huffman – paid big money just so that their children could get admitted to relatively top-name schools.  Now they are exposed and are in major trouble with the law.  But even if it were not against the law, is it really worth it to spend hundreds of thousands of dollars just so your kids can get into a good school?

This is a demonstration about today’s society and how much people care about appearances. These people are so concerned about what others think that they spend ridiculous amounts of money and risk major jail time just so that they can brag about where their kids are going to school.

They are facing jail time and huge legal costs, while also maybe losing their careers.  Loughlin was reportedly fired from the Hallmark Channel, and she may also be let go from the hit Netflix show, Fuller House.

Perhaps the most ironic thing is that her daughter is likely dropping out of school, and the companies Sephora and TRESemme have ended partnerships with her.  The daughter didn’t need to go to a top-name school. She already had name recognition and would have likely had a successful career without even going to college.

Loughlin and her husband reportedly spent about $500,000 in bribe money in order to get their daughter into the University of Southern California.  Actually, there was no guarantee she would get in.  The bribe money just improved her chances.

The Wrong Type of Bribe

While I think this is fraud, and it is also an absurd thing to do, I have to question whether this rises to a criminal offense.  The only real victims here are the colleges that were defrauded, and perhaps a few unknown people who might have been admitted otherwise.

What happens to someone who lies on a job application and the company finds out about it years later after hiring the person?  The most likely result is just that the person gets fired.

When you get down to it though, these people basically used a lot of money in order for their children to gain admission.  Meanwhile, let’s look at the other ways that are used to gain admission to higher education.

1. Affirmative action, where people of certain races or cultural backgrounds are given preference over others, is common everywhere.  Why are people given the option to identify their race on an application?  And if you belong to a certain minority group, you can almost be certain that this will help your chances.
2. People who make big donations to a school are far more likely to have their children admitted to that school.
3. It’s often a case of whom you know and not so much what you know.  There are many people admitted to certain schools just because they know the right people.
4. To go along with the previous two points, there is a general favoritism towards legacies. If your parents and grandparents both attended Harvard, this is probably going to increase your chances of getting into Harvard.

Yet, all of these things are legal.  They are all discriminatory, but they are seen as acceptable in terms of the law.

In this current scandal, there is an element of fraud, so I’m not saying it is the exact same thing.  But it is hard to miss the similarities.

Incidentally, Elizabeth Warren is now running for president, and she lied on her college application that she was a Native American.  Why isn’t she given the same treatment?  Is it just because of the statute of limitations?  Where is the uproar that she cheated?

With that said, maybe this whole cheating scandal will prevent Warren from winning the presidential nomination for the Democrats.  It will be hard for her to avoid the similarities.

Restitution

Lori Loughlin was released on a one million dollar bond.  You would think she was some kind of violent threat to society.

Under a more libertarian system of law (i.e., a more just system), jail time would not even be considered.  It should be a strictly civil matter.  If there is any punishment under the law, it should be restitution.  I am not even sure who the restitution money would go to, but it would be better than locking up people who are no threat to society and having the taxpayers pay for it.

These people are receiving punishment anyway outside of the law.  The rich parents are losing their jobs, as well as some of the kids involved.  This alone is devastating.

Meanwhile, anyone willing to fork over half a million dollars to improve their child’s chances of getting into a good school obviously cares about how they look in the public eye.  They care a little too much.  This whole incident is embarrassing and humiliating.  If all charges were dropped today, then these celebrities would have suffered enough with the shattered careers and the humiliation.

My last point in this whole saga is to look at the role of the FBI in this whole thing.  In the case of Felicity Huffman, FBI agents appeared at her house at 6:00 in the morning with their guns drawn in order to arrest her.

Is this really necessary?  It is like a repeat of the Roger Stone incident.  I’m sure she would have just surrendered herself at the courthouse or the police station if she had been ordered to do so.  She likely had no further evidence to hide at that point, and she was not a high flight risk.

And why is the FBI even involved in this whole thing?  Don’t they have terrorists to catch or something?  This is a total waste of resources, although I suppose it is better than the resources being expended on finding (creating) evidence that Russia hacked our elections.

Many years ago, I wrote a short e-book on the pros and cons of paying off (or paying down) your home mortgage.  It really comes down to being a personal choice based on your personal situation.

I tend to be more in favor of paying down or paying off a mortgage as compared to the typical person, including the typical financial person.  But I only favor this in the right circumstance, mainly that you have significant liquid reserves.  I am absolutely against putting extra money towards a mortgage if you still have a lot to pay off and you don’t have a good emergency fund set up.

For those who are adamant about not paying off a mortgage early, the main reason is typically that you can earn a higher rate of return by investing your money.  A secondary reason given is that you can deduct the interest on your taxes (if you itemize), but that reason has become mostly irrelevant for a large majority of homeowners with tax law changes.

In terms of an investment return, I like to remind people that you have to factor in taxes. If you make a 5% gain on your investments and you have to pay a 20% tax on your gains, then your after-tax return is only 4%.  But if you pay down a mortgage with a 4% interest rate, you are essentially getting a 4% “return” without having to pay taxes on it.

The other major thing to consider is that paying down your mortgage is a 100% guaranteed return. If your interest rate is 4%, then any additional you put towards principal is getting the equivalent of a 4% return compounded.  You may think you can get a 6% or 8% return (before taxes) by investing your money instead, but you don’t really know that.  You aren’t going to get that kind of return right now investing in U.S. Treasury bills or annuities.  You could put it in the stock market, but you could also end up in a bear market getting a negative 8% return instead.

If you take a long-term look at history, then statistically speaking you are better off investing in a broad U.S. index fund.  But as the SEC correctly warns, past performance does not indicate future results.  So even from a mathematical standpoint, investing your money instead of putting it towards the principal on your mortgage is not a slam-dunk.

But aside from this, we are human beings living in the real world.  Our emotions are not controlled by mathematical formulas.

Emotionally Empowering

I recently listened to an episode of the ChooseFI podcast, where they talk about financial independence (FI).  The guest on the show talked about how he and his wife were able to pay off their mortgage in just five years, even though it seemed like an impossible task when they first started.  Five years to the day, they walked in to the bank and made their last payment. They documented it with a video.

This has to be one of the most persuasive videos I have ever seen when it comes to paying down and paying off your home mortgage.  It wasn’t about investment returns or planning for retirement.  It was raw emotion.  It showed the great feeling you can get when you can declare yourself debt free, including on your home.  I don’t expect you to necessarily be as emotional as the woman on the video, but you can get that feeling of joy and accomplishment.

The family in this video obviously sacrificed a lot over the course of five years to make this happen. They found ways to make more money while keeping their spending tight (with 3 kids).  It was because of the sacrifice and feeling of accomplishment that she was so overcome with emotion.

If they had invested that same money and invested it in the stock market, she wouldn’t have been making a comparable video.  You don’t get really excited because your investment portfolio just hit $200,000.  Maybe some people do, but I don’t think it would be to this extent.  And unless you sell all of your stocks when you hit a particular milestone, then it could easily fall back the next day.  After you hit $200,000 (or whatever milestone you are going for), you could check back in a month and see it is back down to $190,000.  With a paid off house, this doesn’t happen.

The other important thing here is that you should enjoy the journey.  I am guessing the parents made it into something of a game, or a challenge, if you will.  There was probably a lot of gratification along the way watching the loan amount go down, slowly at first, and then faster.

I hear entrepreneurs talk about this all the time.  They talk about enjoying the journey.  Even when they hit a roadblock, they look at it as a challenge to be overcome in their little game.  They want to hold the Super Bowl trophy at the end, but they also want to enjoy playing the games that get them there.

If you decide to choose to pay extra towards the principal on your mortgage, make it fun. Even if it is just 20 dollars extra a month to start, as the couple suggests, it is something.  You can hang a spreadsheet on your wall and make a tick mark every time it goes below the next thousand-dollar mark.

Personal finance is fun to some people, believe it or not.  You can make it fun for yourself by turning it into some kind of a game or a challenge.  This is easier to do with paying down your mortgage than it is with investing, and you will find you have more emotional attachment to paying down your mortgage.

There are a lot of Democrats running for president for 2020.  The list is only going to get longer.  Only one of them is going to get the chance to challenge Donald Trump, assuming Trump is still the president and is running for re-election.

Much of the focus so far has been on domestic issues.  There has been a noticeable increase in progressive (i.e., leftist or socialist) rhetoric coming from the Democratic Party, and that includes the presidential candidates.

They are almost trying to outdo each other in terms of how much they can increase spending and increase taxes on the so-called rich.  In Elizabeth Warren’s case, it really is the rich, as she is proposing a tax on wealth.  Most tax increase proposals are on income.

It was easy for Bernie Sanders to be the far left candidate in 2016 against Hillary Clinton, at least in terms of rhetoric.  The field was very limited then.

Now, Bernie has many challengers, and it is not certain that he is the most politically leftist candidate.  When one of them proposes free healthcare for all, the next one will propose the same thing and up the ante with free universal childcare.  And the way they will provide these “free” services isn’t really explained except for higher taxes on the rich.

In terms of going against Donald Trump, I am not sure how much it is going to matter who the Democrats nominate.  Trump’s re-election is going to hinge so much on his political problems with the media and the establishment in general.  It is hard to say if all of the allegations against him will stick in the court of public opinion.  The hardcore Trump supporters will mostly still support him, and the Trump haters will obviously continue to hate him.  It is more a question of how the middle-of-the-road voter will vote, or even whether they will vote at all.

I think most of the election will revolve around domestic issues, unless something unexpected happens that is significant.  In this case, it really is the economy, stupid.  It’s ironic that that slogan came from the Clinton era, because Hillary Clinton ignored it at her own peril.

If we are in a deep recession in November 2020, then Trump will likely lose.  If the economy is booming, or seemingly booming, then Trump has a good chance to win.  If it is somewhere in between, then the election is likely to be really close.

Where a President Matters

It has long been my opinion that the president doesn’t really impact the economy that much, at least in terms of a domestic agenda.  Now, if you had a radical libertarian in office, then things would likely change, but they would have already changed because of the obvious change in public opinion.

A libertarian president could use the bully pulpit to advocate a massive reduction in spending. This is really what needs to happen.  That is what would make Americans more prosperous.  Tax cuts don’t matter much in the long run if spending continues to go up.

The one area where the president has the most power, or at least should have the most power, is foreign policy.  The president could declare an end to all wars immediately and bring the troops home.  This would put a stop to the killing of innocent lives, at least by the U.S. military.  It would put a stop to the massive destruction, at least by the U.S. military.  Unfortunately, the chaos already created by these wars can’t be undone. But they would have a better chance of fixing themselves in the future without the presence of U.S. troops.

Ending all of the wars would also help Americans economically.  It would be a major reduction in spending, or at least it should be.

Trump had some good things to say in 2015 and 2016 from a non-interventionist standpoint.  He also had some bad things to say. But it was better to hear his inconsistency rather than the consistent cheerleading for war by the other candidates.

This is the main reason that the establishment hates Trump so much.  It isn’t because of his brash personality or his mean tweets. It is because they fear he will contract the empire and the military-industrial complex.

Unfortunately, Trump has been mostly bad on foreign policy, just like his predecessors.  He has surrounded himself by war hawks, some of whom are from previous administrations.  He has surrounded himself by people who actually opposed him before his election.  They probably still oppose him, but they are just not vocal about it. They would rather have a seat at the table and have some influence, which they have had.

Trump has been mostly unable to achieve anything significant in terms of foreign policy.  The best you can say about Trump at this point is that he has not started any new major wars.  It was about this time into Obama’s presidency that the conflict in Libya was underway.

The question is, what if a Democrat wins the presidency in 2020?  Will we see any significant change in foreign policy?

Tulsi Gabbard – The Only Hope?

I wrote a blog post on Tulsi Gabbard, asking if she would make a good president.  I still stand by what I said that she would be the only one I would consider voting for from the Democratic Party.

However, I am leaning a little more in not voting for her if she somehow miraculously got the Democratic nomination.  I already vehemently disagree with her other leftist positions, particularly when it comes to economics.

Gabbard was recently on The View.  One of the co-hosts is Meghan McCain, the daughter of the late Senator John McCain.

After Meghan McCain thanked Gabbard for her “service”, she went on to say, “When I hear the name Tulsi Gabbard, I think of Assad apologist.”

Gabbard tried to stand her ground, but she did say this: “There is no disputing the fact that Bashar al-Assad in Syria is a brutal dictator.  There is no disputing the fact that he has used chemical weapons and other weapons against his people.”

Actually, Tulsi, there is disputing this.  Whether Assad is a brutal dictator is somewhat subjective.  Maybe it is a repetitive term.  But relative to other dictators, Assad is probably one of the better ones.  He has allowed people of different religions to peacefully co-exist in Syria.  It was the U.S. intervention that destroyed all of this.

And there is plenty to dispute as far as Assad using chemical weapons on his own people. These are just claims of the U.S. government.  It is no different than the claim of weapons of mass destruction in Iraq.  They are completely unsubstantiated.  They are probably purposely made up for their interventionist agenda.

If I had been Gabbard responding to McCain, I would have said, “When I hear the name McCain, I think of blood-thirsty warmonger.”  Maybe that’s why I wouldn’t make it in politics.

I don’t even like Gabbard’s response when everyone thanks her for her service and her bravery in going to Iraq.  If she is so opposed to intervention, then she should say that they shouldn’t be thanking her because she never should have been in Iraq.

Forgive me for being such a cynic here, but I know how these things go.  If she is wavering at all now, she will only waver more if she ever gets into office.

Near the end of the interview, Joy Behar asked her if her position would be popular with the Democratic Party.  Behar said that Trump said something similar when he was running.  Gabbard responded that he may have, but Trump has not followed through and has broken his promises.

But the real question is: why would Gabbard be any different?  She is a little more consistent than Trump was during his campaign.  But just because she says she will follow through, it doesn’t mean she will.

If I am doubting Gabbard, you can only imagine how I feel about the rest of the field of candidates.  Bernie Sanders and Elizabeth Warren are not hawkish in their rhetoric, but they mostly try to avoid talking about foreign policy.  It is not a priority for them.

And let’s remember that Sanders ended up supporting and campaigning for Clinton in 2016, even after what she and the party did to him.  Anyone who can even pretend to support Hillary Clinton is not going to be a non-interventionist in foreign policy as president.

I am glad that Tulsi Gabbard is running for president.  At least people are having discussions that otherwise wouldn’t have occurred. But I am doubtful that she will get the Democratic Party’s nomination.  The establishment is against her for some of the same reasons they are against Trump.  They may fear her even more.

But even if Gabbard were to become president, I don’t trust that she would fully follow through on what she is saying.  When I detect just a little bit of hesitation or wavering as I detected in her appearance on The View, I fear she will not be strong enough to follow through.  I have seen what happens to people when they get into power and are surrounded by the vultures.

A change in American foreign policy will come when there is a drastic change in public opinion. A change may also come when the government can no longer afford to pay for it all.

I have been paying close attention to the yield curve.  When the 10-year yield drops below the 3-month yield, I will be ready to call a recession.  We are not there yet (as of this writing), but it is close.

The Federal Reserve went on an unprecedented digital money-printing spree from 2008 to 2014.  The adjusted monetary base nearly quintupled.  However, this did not result in exorbitant consumer price inflation as some predicted.

I generally contribute the relatively low price inflation to two things.  First, the economy has been rather lackluster since the financial crisis of 2008.  It scared a lot of people.  It’s hard to say that consumers have been hesitant to spend and take on debt, but I think the last 10 years have been a little less crazy than the previous 10 years.  There may be another housing bubble now in some areas, but it is still not to the extent of the previous housing bubble in most areas.

The other major reason that consumer price inflation has been somewhat low over the last decade, at least compared to the massive increase in the Fed’s balance sheet, is that the commercial banks have piled up excess reserves.

Up until 2008, the excess reserves were close to zero.  In our current world of central banking, the banks lent out almost all of their deposits that they were legally allowed to.  If they fell below their legal limit, they would just borrow overnight from other banks that had a little extra.  The interest rate paid was essentially the federal funds rate.

It all balanced out as long as there were no massive cash withdrawals, which wouldn’t have been allowed anyway.  As long as the money stayed within the banking system, the banking system basically stayed solvent. Or at least that was the case until the financial crisis, when banks got caught with a lot of bad loans, mostly in the form of mortgages.

In response to the 2008 financial crisis, banks piled up excess reserves, which was basically unprecedented in our world of central banking.  This coincided with the Fed’s new policy of paying interest on bank reserves, including excess reserves.  While the rate was very small (0.25%) to start, it was still something. It is better for a bank to earn a risk-free one-quarter percent than to make risky loans at slightly higher rates.

Until 2008, the total excess reserves were around $2 billion, give or take.  In our world of trillions, it was basically a rounding error.  But from 2008 to 2014, coinciding with QE1 through QE3, the banks increased excess reserves to about $2.7 trillion by 2014.  This was at about the same time that QE3 was winding down.

The Slow Wind Down

Currently, the Fed is engaging in a slow wind down of its balance sheet.  It is allowing about $50 billion per month to roll off its balance sheet, which reduces the adjusted monetary base.  The Fed is not actually selling off assets. It is just not rolling over all of its maturing assets.

Excess reserves have fallen to about $1.5 trillion.  This is quite a drop from its high in 2014.  It is somewhat corresponding to the decrease in the monetary base. This major fall is in spite of the Fed now paying a higher interest rate on bank reserves.

This is what makes it so tough to see what is coming.  The Fed went on a massive money creation spree for 6 years.  It obviously caused major misallocations, but it could have been so much worse.  The Fed has gotten away with this because of the relatively low consumer price inflation.  There has certainly been asset price inflation in housing and stocks, but people generally cheer this.

Now the Fed is tightening.  The Austrian Business Cycle Theory tells us that the malinvestments should be exposed, and we should see a correction/ recession.  But while the Fed is tightening, the excess reserves are dropping fast.  So just as the monetary inflation was not amplified on the way up, the monetary deflation is not being amplified on the way down.

According to the CPI, consumer prices are fairly stable, so this is not telling us much.

We really are in uncharted waters.  We have never seen anything like this, or even anything close to this.  It is amazing the Fed has essentially gotten away with this, at least up until now.

The major drop in excess reserves is making me more cautious in predicting that a major crash is imminent.  If banks are lending a little more right now, it may extend the boom.  It may extend the bubbles.  But the large majority of the decrease in bank excess reserves is because of the drop in the Fed’s balance sheet.

I am still leaning towards an economic downturn.  I thought almost for sure it would happen before the 2020 election, but that isn’t all that far off now.  I don’t know if the major drop in excess reserves will buy enough time to keep the artificial boom going past the 2020 election.

That is why I am mostly paying attention to the yield curve these days.  There are so many other moving parts going in different directions, but the interest rates tell the best story.

If the yield curve inverts, then a recession is coming in the near future.  But until that happens, I don’t want to bet against the U.S. economy.

I recently received an email question from a reader.  Since it may be relevant to many people, I am answering it in a blog post. The email is as follows (reprinted with permission).

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I have about $13k in credit card debt at 25% interest.I also have $12k in an auto loan at 10%.  My savings account currently has about $25k in it, mostly in a modified permanent portfolio.  

Should I just take that $25k, wipe out my savings and pay off all of my debt? My job is pretty secure at the moment.  If I had an emergency I would always have open credit cards.  And long term I would be able to save more not having to service all of that debt.  Opinion?  Financially it seems that having no debt is the smart thing.  Psychologically however, seeing money in my savings is comforting.  Seeing open credit on a credit card (that could possibly be taken away at any time by the issuer) is not as comforting.

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The question basically boils down to whether it is appropriate to sacrifice an emergency fund to pay down debt.

First, this is a personal scenario.  The details of the question are good, but I can never know everything about a person’s situation.  It isn’t just a math question.  He says it is comforting seeing money in savings, but I don’t know how much discomfort there is in carrying the debt.

I don’t like to tell someone what they should do because everyone’s situation is different with specific details.  And even if you get two people with virtually identical financial situations, they probably have different personalities.

With that said, the big thing that pops out at me is the high interest rates.  The 25% interest rate on the credit card debt is really high.  Even the car loan debt at 10% is high, especially in today’s environment of relatively low interest rates.

I am an advocate of setting up a permanent portfolio, which he follows. But I don’t like the thought of making a 5% return on investment (or something like that), yet paying 25% interest towards debt.

As I like to say, you don’t get rich by paying interest.  You get rich by collecting interest.

If I were in this situation, I would immediately pay off all of the credit card debt with the savings. Again, I can only say what I would do given what I know.

I am assuming that he has access to all of the money and that it isn’t in a retirement account. Therefore, it should be easy to access and get into his bank checking account.  I would pay off the total balance of the credit card debt as soon as possible and stop paying those enormous interest rates.  I would then vow to pay off the total balance every single month until the end of time, barring a major emergency.

The auto loan debt is a little trickier.  It is still a high interest rate, but I wouldn’t want to go down to zero savings. I have no idea what the monthly payments are, but I am guessing the principal balance is going down by $300 per month or so if it is somewhat typical.  Therefore, in another three months, the auto loan may be down to $9,000.

I don’t know how much he saves each month.  If it is zero, he needs to find a way to change that.  He needs positive cash flow, even if it is a couple of hundred dollars per month.

I would leave at least a month’s worth of expenses in savings.  Beyond that, he could pay down the auto loan at this time without completely paying it off, but it isn’t quite as clear to me with this.  If he has a decent savings rate and he feels rather secure in his job, then he could pay the whole thing off.

It does make a difference regarding someone’s personal situation.  If you are supporting a family and own a house, it is probably good to have some money in reserve.  If you are single and renting an apartment, you are less likely to have emergency expenses.  Then it comes down more to the math, which says to pay off the high interest debt.

As was said in the email, he can always access the credit card again in case of an emergency. But I would want it to be a very serious emergency to go back into credit card debt.  I doubt that the credit card companies are going to shut down the card or cards, assuming there are no stolen cards or identity thefts. Even with a stolen card, you should get a new one in less than a week.

In summary, if I were in this situation, I would immediately pay off the entire balance of the credit card debt.  I would think about paying down the auto loan while maybe keeping a month’s worth of expenses in the bank.

I like the permanent portfolio, but not at the expense of paying 25% and 10% interest rates on debt.

Once the debt is gone, then your savings rate should go up.  That is with anything.  If you pay off a home mortgage, then your cash flow should increase each month by that amount (the principal and interest).  In this situation, the money that would have gone to credit card payments and auto loan payments each month can be put back into savings.

Without any credit card debt and car loan debt, then it should be easier to save and build up that emergency fund.  Then the permanent portfolio becomes a good option.

The U.S. government’s national debt recently surpassed $22 trillion dollars.  This is greater than the entire annual GDP of the United States.

The national debt will get more attention in the coming weeks because the arbitrary debt ceiling will soon be back in effect.  The whole debate over the debt limit is a political show, but at least it draws some attention to it.

The debt isn’t the most important issue.  Personally, I think the most important issue is foreign policy because a large number of lives are stake.  But even from an economic standpoint, war is incredibly wasteful, and we (Americans) would be much better off economically if the U.S. government wasn’t constantly waging war in foreign countries.

One could argue that the Federal Reserve is the most important issue.  If you connect the dots, you quickly realize that the U.S. empire would not be able to exist without the Fed or some kind of government control over the money supply.  If you didn’t have the Fed to digitally print money and fund the massive deficits, then it would be much harder to wage war.

Even strictly staying within economic issues, the national debt is not the most important issue. Still, it is refreshing to hear some talk of the big picture as opposed to hearing about the latest scandal or culture wars.

The unfunded liabilities are far greater than the national debt.  Some estimates exceed $200 trillion.  These are government promises that will not be kept in the future.  It is impossible. The big ones are Medicare, Medicaid and Social Security.  The Fed could massively inflate, but this in itself is a default.  The biggest default will come in the form of the age at which people can collect.

When the American public is polled about issues, most Americans will say they are concerned about the national debt.  But it is like a guy saying he is concerned about being overweight while he stuffs his face with Twinkies.  Talk is cheap.

The national debt is an important issue to the American people until you start proposing massive tax hikes and/ or massive spending cuts.  (I don’t even think massive tax hikes would “solve” the national debt, but sometimes that is put out there as an option.)

Most people say they are against the debt until it is one of their favorite federal programs being cut.  When Americans are asked what to cut in order to balance the budget, they will typically say we should cut foreign aid.  Ok, so that is maybe $30 billion, at best, out of the trillion-dollar deficit. Now let’s figure out the other 97% that has to be cut.

Maybe conservatives will say we should cut funding to Planned Parenthood.  Maybe those on the political left will say that we should cut funding for any pursuit of people smoking marijuana.  Both sides would be right, but they can’t even agree enough to actually do it.  And again, it is a drop in the ocean of the federal budget.

Total Spending Matters

I really don’t care about the deficit and the accumulating debt if federal spending is not changed. I would rather have lower taxes and a higher deficit than having a balanced budget with higher taxes.

In fact, I would be in favor of funding the entire federal budget using debt because it would quickly reduce overall spending.  At some point, the debt and inflation would become bad enough that interest rates would rise and the Fed would be forced to scale back or face massive price inflation.

Sometimes we hear that government spending and deficits are unlimited because the Fed can create an unlimited amount of money.  But there are limits, assuming the Fed does not want hyperinflation, which I don’t think the Fed members want.  It would destroy their own power.

It is hard to see now, but the federal government will eventually be forced to cut overall spending.  This may or may not happen in nominal terms, but it will definitely happen in real (inflation adjusted) terms.  The annual deficit can’t just keep going higher and higher.  And what happens when we hit a recession and tax collections go down?

For fiscal year 2019, the federal government alone (not including state and local) is projected to spend at least $4.4 trillion.  Divide that by about 127 million American households.  The average family is paying about $35,000 per year for federal spending.  This is not all in direct taxes, but the government is spending these resources one way or another.  If you take total government spending including state and local, then the average household is paying nearly $60,000 per year.

If we want to increase our living standards substantially, then overall government spending needs to be reduced.

Forget Future Generations

When talking about the debt, it is common to hear the cry for future generations.  We are told that we cannot leave this debt burden to be paid by our grandchildren.  But make no mistake about this.  We are paying for the debt right here and right now.

Every dollar spent by the government, whether it is through taxation or debt, is a dollar of resources that is being consumed and misallocated.  It makes us poorer as a whole.

So whether the government spends $4.4 trillion with a balanced budget or a huge deficit, the politicians and bureaucrats are still using up $4.4 trillion of resources. It is one giant misallocation, with some being worse than others.

Future generations do end up paying in some way.  Future generations can just write off the debt and stiff the bondholders, but they are still hurt anyway because of the reduced growth in living standards.

Imagine if, in the 1800s and 1900s, there had only been 0.1% annual growth in the West instead of the 2% or more that was typically seen.  Even if we had current growth of 5%, we would be living like it was something like 1840.  There would have been very low compounding growth.  We are the beneficiaries today of high growth rates of the last two centuries.

If government spending were dramatically cut right now, then most Americans would benefit. Their children and future grandchildren would also benefit.  There would be some politically connected people who would be worse off in the short run.

Over the long run, even most people who currently get subsidized (on net) by the government would be better off.  They would be the beneficiaries of higher living standards.  It is much the same way that the middle class has smartphones that didn’t exist a couple of decades ago.  We own cars that didn’t exist 120 years ago.

Unfortunately, most people don’t understand the economics of it all.  They can only see what is right in front of them.  The government will secretly take $35,000 from a family and then pay them off with $15,000 and a bunch of future promises.  Even if they got $35,000 in services back, it would still be a misallocation.

At least with the high deficits, there is hope that the government will one day be forced to significantly cut spending.  Despite the lack of economic understanding out there, the laws of economics still exist.  At some point, the public will stop funding the deficits, and the Fed will be forced to stop funding them or else face much higher interest rates and eventually hyperinflation.It doesn’t seem possible now, but we will eventually get a reduction i

Gold prices (in U.S. dollars) have been rather tame and boring over the last several years, especially for those hoping to make money (in U.S. dollars) on gold investments.

Gold peaked in 2011 above $1,800 per ounce.  That little bubble popped while stocks continued to climb.  The price of gold did go down with the 2008/ 2009 financial crisis, but it quickly recovered.

Gold mining stocks have been especially bad over the last several years.  I warn not to use gold stocks as a substitute for gold when setting up a permanent portfolio.  Gold stocks are extremely volatile and should be used for speculation only.  When they finally do recover, the profit potential will be enormous.

Gold has recently shown some signs of hope with the price going above $1,300 per ounce.  It is hard to know if this is just a brief rally or whether it will continue.  Of course, if any of us knew this for sure, we would be extremely wealthy.

I have been warning about the flattening yield curve.  There is a very narrow spread these days between the 3-month yield and the 10-year yield.  This indicates trouble ahead.  We have already gone a decade without an official recession.  If the yield curve inverts, then a recession in the near term looks certain.

If we do get a recession, what will happen to gold?  In terms of dollars, will it go up or down?

If it follows 2008/ 2009, it will initially go down and then quickly recover.  But we know that history does not repeat exactly. The bigger certainty to me is in bonds.  If we hit a recession, I fully expect long-term bonds to rise in value.  That is the same as saying that long-term yields will fall.

In a recession, U.S. Treasury bills are seen as a safe haven.  It isn’t gold.  The only exception is when there is a high fear of significant price inflation. This happened in the 1970s when the price of gold went up in spite of recessionary years.  This changed in the early 1980s when the Fed under Paul Volcker slammed on the monetary brakes and allowed interest rates to spike.  That was the end of the biggest gold bubble in modern-day history.

The Search for Liquidity

There is a saying that cash is king.  Cash is really king in a recession.  It doesn’t mean you literally have to have cash.  It is referring to liquidity.  You need the ability to access money.  You don’t want it tied up in a house, a retirement account, stocks, an annuity, or other assets.  The only exception, as just discussed, is long-term bonds. You want easy access to money in a checking account or a savings or money market account where can get to it quickly.  You also want to avoid debt as much as possible.  This is especially true for when a recession hits.

Cash is king for several reasons.  You don’t want your wealth tied up in assets that are declining in value.  You also want cash because you will have the opportunity to buy those assets that have declined in value significantly. In a recession, prices tend to decline.  Your “cash” may actually be gaining value instead of its typically losing value to inflation.

The rush to liquidity during a recession is a problem for gold.  People are trying to pay their bills and reduce their debt. They are trying to build up a stronger cash position if possible.  If anything, people who hold gold are probably more likely to sell in order to gain cash.

The big money investors, meanwhile, are trying to avoid massive losses.  They have money tied up in stocks, real estate, businesses, etc.  They are trying to come out without taking too much of a beating.  They probably aren’t looking to buy gold except when the price gets low enough that they see it as a bargain.

In a recession without massive inflation, gold will tend not to do well.

There is something that is working in gold’s favor though during a recession, and that is the Federal Reserve.  We can be rather certain that the Fed will engage in another round of quantitative easing (digital money printing) as soon as it is evident that we are in a recession.

It will depend on how aggressive the Fed is.  It will depend on timing.  But overall, assuming the Fed does inflate again, gold will likely recover as it did in 2009.  If the Fed is crazy enough to start expanding its balance sheet again as it did from 2008 to 2014, we will ultimately likely see all-time new highs for gold, at least in nominal terms.  One good dose of monetary inflation could easily push gold to $2,000 and beyond.

Timing everything, as with all investments, is the tough part.

I think it is important to have your core holdings as part of a permanent portfolio.  This will not change.  If we hit a recession and the Fed starts pumping in new money, then it will be time for speculation.  This might be a time to look at mining stocks.

If and when we have a recession, the Fed should allow the correction to take place. Unfortunately, that is the least likely path that the Fed will take.  It will continue to hurt our prosperity by depreciating the dollar and helping Congress to fund its deficit spending.

But at least we know what the Fed is likely to do, and we can at least somewhat prepare for it. Cash will be king in a recession, but you will want to move some of that cash into gold and gold investments when the time is right.

The crazy stories from the establishment media just keep piling up.  Whenever the media is reporting on something politically related, it tends to be more lies than truth.  Sometimes the core part of a story is true with slight lies and propaganda around it.  Sometimes the core part of a story is just plain false, such as the whole thing about Russia and Trump colluding to hack the election.  In that case, it is actually almost the opposite of what happened.

For lack of a better two words, we are dealing with fake news a lot of the time.

The media also largely controls the narrative.  That is one interesting thing that Trump has been able to pull off with his Twitter account.  He can bring up subjects – for better or for worse – on topics that the media might otherwise have ignored.

There is no question though that the media will focus on certain stories to promote their agenda, while ignoring other stories that are often more important.

All I can say is, thank goodness for the internet.  At least we have some options that weren’t available in previous generations.

I often wonder whether people in political power are evil or stupid.  When a politician is proposing something, it is hard to know. This can range from an economic issue such as the minimum wage, to a foreign policy issue such as starting another war.

Now I am wondering the same about the media, most of whom are quite similar to those in political power.  Are they evil or stupid?

I don’t think there is a clear-cut answer.  I think it is a combination of the two things.  Sometimes they purposely ignore things that go against their own narrative.  Whether it is conscious or not, they are putting blinders on.

I’m sure there are false narratives that I believe right now, and I am a lot more skeptical than the average person, to say the least.  Whenever the media makes some claims, particularly dealing with foreign policy, I think “weapons of mass destruction in Iraq”.

There is a misconception that the media is liberal.  Aside from the improper use of the term, it isn’t the best description. The media of television and newspapers is largely just establishment.  They promote a line of big government, but it doesn’t necessarily have to always be on the side of Democrats.  The establishment largely backed Bush’s war in Iraq, or at least they didn’t overtly question the “intelligence” agencies.

The few times the media has cheered on Trump have been in cases where he promotes war and intervention.  They cheered him on when he dropped some bombs on Syria, and the media promoted the story that Assad used chemical weapons on his own people, despite a lack of evidence. If anything, it was again probably the opposite of what they were saying.

MAGA in Chicago

The media has been particularly horrible lately.  The media personalities suffer from Trump Derangement Syndrome, and they just can’t help themselves.  It has made them into shills for the deep state, or perhaps more accurately, it has made it apparent that they are shills for the deep state.

The media jumped on the story about the Covington high school kids.  Why it was even a major story should be questioned, but of course we know it was because they hate Trump and want to make any Trump supporters look bad.  If a group of people with Obama shirts actually did the things that the Covington boys were accused of doing, you probably wouldn’t hear about it.

Of course, the media didn’t do any research on it before reporting the “story”.  They just want to put out the anti Trump propaganda as soon as possible.  And in the end, the story ended up being the opposite of what was originally told.

But the establishment media doesn’t learn.  They are too obsessed with taking down Trump.  So when a semi celebrity (he is more of a celebrity now) – Jussie Smollett – made claims of being attacked in Chicago by Trump supporters, the media jumped on that story.  There are many different examples from different media outlets with people saying how horrible this event was.  I expect some good YouTube videos in the future of compilations of media outrage when the original story was first reported.

As soon as I heard about this story, I figured it was fake.  I just can’t believe how gullible so many people are.  Just listening to the guy, you can pretty much tell he is lying.  He is a leftist political hack, and he claims to have been attacked in downtown Chicago by some guys yelling racial slurs and saying, “this is MAGA country”.

This is just so obviously ridiculous.  I mean, do these media personalities have the IQ of a first grader? When I think of Chicago – the home of Obama – I can just imagine walking the downtown streets at 2:00 AM and seeing a bunch of guys who are hardcore Trump supporters.  There must be MAGA hats all over the place in Chicago.

Even if the establishment media is evil, they must be stupid too.  This isn’t the kind of story they could just brush aside after the truth started to come out.  Now they are having to report that this leftist gay black celebrity played a hoax on them.  (I wouldn’t care about his race or sexual orientation except that the media obsesses over these things, and Smollett was their perfect caricature of both a hero and victim.)

My conclusion is that the establishment media is both evil and stupid.  You shouldn’t trust them about anything politically related, or even with any political implications.  I’m not saying that everything they say is completely wrong, but you should not listen to them.

Let’s also remember all of this when Trump leaves office.  The establishment media may no longer be as blatantly bad, but it will be the same evil and stupid people running the show.