I am an advocate of having a good portion of your financial investments in a permanent portfolio setup.  For conservative investors, you can really just put all of your investments in the permanent portfolio.

This may not include other portions of your net worth.  For Americans, most of their wealth is tied up in their primary residence. Most of the rest is in retirement accounts, such as a 401k plan.  You can set up part of a permanent portfolio in a 401k plan, but it is difficult to buy gold.  Sometimes it is possible to buy PRPFX, the mutual fund that somewhat mimics the permanent portfolio.

In terms of calculating your net worth, I don’t think you should include all of the junk in your life.  I think most people know what I mean by this.  In addition, something such as your smartphone isn’t an asset that should be included in your net worth, even if it is a tool for you.  In terms of money, it is most likely a liability, as you pay money every month in order to use it.

Even a car probably shouldn’t count towards your net worth, unless perhaps if you are flipping cars or buying collectibles.

It is a little trickier with houses.  As Robert Kiyosaki says, most people don’t understand that a house is a liability.  You do need somewhere to live, but most people who own a house have a lot more than what they reasonably need.  Don’t get me wrong; I am not saying that you shouldn’t have a nice house that you enjoy.  It’s just that you need to be careful in counting it towards your net worth.  In many cases, that house is a massive roadblock to achieving significant savings, let alone financial independence.

Still, there is a difference between someone who owns a $200,000 house with a $200,000 mortgage versus someone who owns a $200,000 house with a $100,000 mortgage.  The person with no mortgage and a paid off house is even better.

I think there are many advantages in paying off your mortgage.  However, the one major exception is that you shouldn’t do it for the tradeoff of having zero or little cash (or really cash equivalents).

Liquidity and Less Anxiety

There is one area in which I agree wholeheartedly with most financial advisors.  I agree that it is important to have an emergency fund.  I think 6 months of living expenses is a good start, although 9 months may be even better.

It does depend on your situation.  If you are 23 years old and living with your parents, your living expenses may be pretty low. In that sense, it should be easy to get at least 6 months of living expenses saved.  But on the other hand, you may not need to do this because your risks are low and nobody else is depending on you.  This is especially true if you have a low wage. If you have a job making $10 per hour and you get fired, then it probably won’t be that hard to find another job that pays a similar wage.

If you have a large family and you are the primary breadwinner, then you may want even more of a cushion than 6 to 9 months of living expenses.  It really is a personal situation.

But for most people, it is important to have liquidity.  You don’t have to have all cash (or digital equivalents).  You don’t have to have all of your money in a checking account of money market fund.  If you have $50,000 saved up, which covers 9 months of expenses, then it is probably ok to put some of that in a permanent portfolio, as you are unlikely to lose a large percentage due to market conditions.  Even here though, I would still keep the 25% cash portion in some kind of money market fund or some easily accessible vehicle.

I think the biggest problem for most people is that they don’t have liquidity.  Most of their net worth is in their house and their retirement plan.  Unless you are planning to sell your house or do a cash-out refinance, then your money is locked up.  And even there, it takes time to do those things to access the money.

In the case of taking money out of retirement plans, you will owe an early withdrawal penalty if you are younger than the designated retirement age, and you will owe income taxes on top of this, unless it is something like a Roth IRA or Roth 401k. Worst of all, if you have a 401k and you still work for the company that sponsors it, then you probably can’t withdraw any of “your” money at all.  In other words, there is no liquidity.

We sometimes hear that cash is king, and I believe it is true to a certain extent.  If you are worth a million dollars, I certainly don’t recommend having any more than 25% in cash and cash equivalents. But if you are worth $10,000, then I think it is probably best to have that sitting in some kind of checking account or money market fund.  The only exception might be that 23 year old, who is living with his parents, and who is using the money to fund a startup business.

It is nice to have cash, especially in a recession, when other assets are down.  You can purchase them when they are “on sale”. But I think there is a bigger benefit here, and that is your emotional state.  When you have liquidity, you feel more powerful.

If you have money set aside that is easily accessible, then it reduces money stress.  If you have an expensive car repair or you need a new air conditioning unit for your house, then having that liquidity makes it less stressful.  It’s not that you will enjoy paying for such things, but you won’t be in a panic. It won’t really impact your day-to-day life in any significant way.

There is an equation in all of this:

Liquidity = Less Anxiety

This is the real reason that cash is king.  It reduces the stress in your life.  It makes something unpleasant far more bearable.  When something unexpected pops up, you dip into your reserves, and you move on with your life.

With stocks in a likely bubble, and with a possible recession on the horizon, I think having liquid funds set aside is all the more important right now.  You aren’t going to regret having some money set aside for a rainy day.  As long as price inflation isn’t running rampant, then this safety premium isn’t costing you much at all, except for possibly missing out on some gains in other investments.

The 2016 elections are over, and I think most people are thankful.  It has been hard to avoid the constant barrage of advertisements and telephone calls.  I don’t watch a lot of the establishment media, but the little I have watched in the last few weeks has been mostly political talk.

I don’t think any of it matters as much as what it is made out to be, especially at a federal level. I like to pay attention because it does somewhat gauge the mood of the country.

Personally, I voted, but it was really only because there were a bunch of state amendments on my ballot.  Of all the races, I only voted for one person in a very local seat.  I did not vote for anybody in any of the federal or statewide offices.

I was tempted to vote for Ron DeSantis for governor of Florida, but it would have only been for defensive purposes.  I am glad he won only because I didn’t want Andrew Gillum – the self-identified socialist – to be the governor.  He probably would have had trouble enacting all of his proposed social welfare programs, but even if he had succeeded with 10%, it would have been too much.  Of course, it could end up being one of those situations where the Republican comes in and does some of the bad things the Democrat said he was going to do.

The governor race was extremely tight, as was the U.S. Senate seat in Florida.  It appears that the Democrat incumbent, Bill Nelson, will lose his seat, but it is still subject to a recount.  I will not be sad to see him go.  But for those outside of Florida, I would like to point out that Rick Scott was pretty bad on the campaign trail from a libertarian perspective.  He was running ads about how he fully supports mandating health insurance companies to not discriminate based on pre-existing conditions.  It wasn’t exactly a free market-oriented position.

The most notable Libertarian (large L) running for office was Gary Johnson, the two-time Libertarian Party nominee for president.  Johnson ran for the U.S. Senate in New Mexico, where he was once governor. He received about 15% of the vote. Typically, this would be good for a Libertarian, but it isn’t all that strong considering he was once the governor there for 8 years.

The Trump Referendum

The election was largely seen as a referendum against Trump.  Because Trump is all the talk, it caused a large turnout.  I think almost everyone who voted Democrat is anti Trump.  There are always a few exceptions, but I believe this to be the case.

I don’t think everyone who voted Republican is necessarily pro Trump.  If anything, some are just anti anti Trump.  They are tired of hearing all of the smears and attacks against Trump for every stupid little thing.  They are tired of hearing the establishment in DC and the celebrities in Hollywood telling them what they are supposed to do. Voting Republican wasn’t necessarily an endorsement for Trump so much as it was a middle finger to the establishment and the establishment apologists.

The Democrats will take over control of the House of Representatives in 2019, while the Republicans will actually likely gain a couple of Senate seats.

Overall, I don’t think either side (the Republicans or Democrats) can claim a big victory. It is a divided nation, and this election just showed how divided it is.  It is close to a 50/50 split.

From a libertarian point of view, there are good points and bad points.  I think the very slim majority for the Democrats in the House is probably good.  It puts everyone back on their heels a little bit.  It’s hard to use the term gridlock, but perhaps there is a little more gridlock than before.  But with the Republicans holding the Senate, it means Trump can nominate Constitution-friendly judges to the Supreme Court (and other federal courts), should any vacancies come up.  It doesn’t mean he will, but he can.

Of course, in some ways, the American people all lost.  Despite the supposed gridlock, there is plenty of bipartisanship when it comes to an interventionist foreign policy, invasions of privacy, continual massive spending, and massive debt.  The federal budget is nowhere near balanced, and it won’t be for a long time, pending a massive economic shock.

Maybe Democrats will slow down spending in the House, meaning that the rate of increase will go down.  One can hope.

Still, nobody addresses the fiscal elephant in the room of the unfunded liabilities.  As baby boomers continue to hit retirement age, the costs for Medicare and Social Security continue to go up.  The money to pay out for these programs will have to come from somewhere, and it probably isn’t going to be higher direct taxes any time soon.  Trump’s tariffs aren’t going to fund much of this.  They mostly just make things more expensive for consumers.

There will be so-called entitlement reform, but it won’t be initiated by the politicians.  It will be initiated by the laws of economics.  It is unsustainable. At some point, we should expect an increase in the designated retirement age, but not before we hit at least one more massive recession.

Libertarian Hope

There are a lot of things to be pessimistic about from a libertarian standpoint.  However, I am still optimistic for the long run. We still have technology and open communication on our side.  As Harry Browne said, we also have human nature on our side.  When it comes down to it, most people want to be able to make their own choices in life.

There are a lot of bad things to say about Trump.  He is certainly anti liberty in many respects.  He doesn’t understand much economics, and he has largely surrounded himself by the leftover war hawks from the Bush era.  The good news with the Democrats taking control of the House is that is should dampen Trump’s authoritarian streak.

Trump is helping libertarians to a certain degree though.  He is helping to destroy the beast.  He may not be draining the swamp, but he is at least exposing the swamp for those who care to see.  Trump is helping to expose just how deep the deep state really is. It is not always intentional on his part, but he is helping to do it nonetheless.

There are going to be opportunities for libertarians to take leadership roles in the coming years, especially when the fiscal situation blows up.  In the meantime, it is important that we continue to write and speak and tell the truth.  We want to build our numbers, and we need principled libertarians who will not shy away from the truths that need to be spoken.

When the whole system implodes and is fully exposed, people will be looking for answers.  They may finally be ready to turn elsewhere than the predictable answers from career politicians in Washington DC.  At that time, a libertarian message will sell a lot better.  But it is important to realize that the groundwork has to be laid in advance.

The politics can be entertaining, but I believe it is especially important now for libertarians to help educate others, although not necessarily in an abrasive way.  It is time to set good examples and to be there telling the truth every step of the way.

In the United States, we hear frequently enough about the top 1%, especially from those who call themselves social democrats or progressives.  The implication is usually that we have to help the bottom 99% by hurting the top 1%, usually through higher taxation.

This ignores several points.  The most important is that, in a free market, one person’s gain does not have to be at the expense of someone else.  Wealth can be created.  In order for the poor to get more, it doesn’t have to be through redistribution.  In fact, redistribution ultimately undermines property rights and wealth creation, which can actually hurt the poor more in the long run.

Another point is that, instead of trying to tax the top 1% or harm these people in some other way, why not just stop subsidizing them first?  There are many ways that government helps subsidize the rich at the expense of the poor.  Regulations are often put in place to keep out competition for those already established, which ends up hurting the little guy more.

There are other protective measures enforced by government to keep out lower wage competition. The central bank creates an environment of easy money and artificially low interest rates that often benefit the big players at the expense of the little guy, especially when it creates asset price inflation.

There are also outright subsidies for companies.  Look at Elon Musk and Tesla where the government heavily subsidizes electric cars.  They are toys for the rich, while Musk gets richer because of the subsidies.  And to top it all off, there are direct bailouts for the rich and connected as we saw in 2008 and 2009.

One last point for now is that it seems silly to criticize the top 1% just because they are the top 1%.  Maybe these people didn’t take any math classes, but there always has to be a top 1%.  If you have 300 million people, there will always be 3 million people who make the most money or have the most money. It is just a question of how they make/ made their money.

In a free market, those who get rich will generally be those who have served the most people or provided the greatest service.  In a free market, it is quite difficult to get rich by using fraud.  It is far easier to make money by providing value to others.

Unfortunately, some of the people who complain about the top 1% are egalitarians because of envy. The problem is that their main concern isn’t to help the poor, but rather for everyone to be more equal. These are the most dangerous people.  Of course, they are also hypocrites too, because they probably live far better than the average person on the planet.

The Top 10% Isn’t That Wealthy

There was a recent article describing what it takes to be in the top 1% and top 10% in the world in terms of net worth.  In other words, this is a study based on wealth and not income.  There are some people who have a relatively high income without having a high net worth. Although the article is harping on wealth inequality, it is still useful.

In order to be considered in the top 1%, you have to have a net worth of at least $871,320.  In order to be considered in the top 10%, you have to have a net worth of at least $93,170.

According to this article, the equity in your primary residence counts towards your net worth in this calculation.  So if you own a house currently worth $300,000, and you have just $200,000 left on the mortgage, then that alone puts you in the top 10% of the world.

This means that quite a large percentage of Americans are qualified as being in the top 10%. This may not be a completely fair comparison with the rest of the world, as some things may be more expensive in the U.S. than the average in other countries.

At the same time, I recently heard someone point out that the U.S. isn’t really that expensive of a place to live in comparison to much of the rest of the world.  It’s just that Americans expect a high standard of living with all of the materialistic things that have become so common.

Let’s say someone moves to Thailand and lives in a 600 square foot house and shops at the market every day for meals.  This person lives on a U.S. pension of some sort.  He might say that his dollars go really far in Thailand.  But here is the problem.  If this person lived in a low cost of living area in the United States and lived in a 600 square foot apartment and never ate out at restaurants, then he would probably find that his dollars go pretty far in the U.S. too.

Regardless, there is no question that Americans have a higher standard of living than the large majority of the rest of the people on the planet.  But the redistributionists living in the U.S. do not talk about giving up their lifestyle to help poor people in places such as Africa and Latin America.  They aren’t sending 90% of their money off to some family living in a hut on the side of a dirt road in India.

I think Americans should be grateful for what they have.  It really is a blessing to be able to live in an area with opportunity.  At the same time, we could be so much better off than we are in terms of living standards if only we would see a dramatic reduction in the size and scope of government.

The answer to higher living standards is not more redistribution and more forced equality. The answer is secure property rights and free markets.  We don’t want to make the top 1% or top 10% poorer.  We want to make everyone richer and more prosperous.

The other day, I was on Facebook trying not to waste too much time, and I saw a particular post I want to discuss.

I have several friends who could be considered politically leftist.  Some would use the term liberal, but that isn’t really accurate, unless you use the term only in its modern-day usage of meaning a leftist. Likewise, the term progressive isn’t really accurate.  They may be making progress in their own view, but pushing for big government and central planning is not my idea of progress.

Anyway, one of my Facebook friends, whom I haven’t seen in person for probably 20 years or more, is a far leftist to say the least.  He is a self-identified socialist, as the term socialist has become acceptable again in some circles.  It was abandoned for environmentalism when the Soviet Union fell, but now they call it democratic socialism or some variant.

My Facebook friend has major Trump Derangement Syndrome (TDS), and I would also consider him to be a cultural Marxist.  I’m not even sure how to define that term, but if I had to describe it, that would be this one Facebook friend.  As hard as it is, I do find some common ground with him on foreign policy. To his credit, he has been critical of Barack Obama and Hillary Clinton for their wars and bomb droppings.

At the same time, perhaps my biggest frustration with him isn’t his socialist views, but the fact that he will tend to place more emphasis on special rights for transgender people than he does on innocent people being killed in foreign countries from U.S. bombs.  In fact, he would probably place a higher priority on reining in corporate greed (by having more government, of course) than on stopping U.S. wars.

The other day, he posted a picture of Donald Trump’s approval ratings.  It showed that Trump’s job approval stands at 47%.  My Facebook friend said, “One of the hardest things about being smarter than most people is not acting like it.  But man, I live in a country of f***ing morons.  Of course I’d be one too if I placed absolute faith in polls after 2016.”

It was something in line with Hillary’s comments on the deplorables, except this was perhaps even more arrogant because he was explicitly stating how smart and enlightened he is.  He tried to add both a little skepticism and humility with the last sentence.

I did not make a comment on the post, as I didn’t feel like getting into an argument, but the thought crossed my mind that I should post a picture of the percentage of people who favor socialism – because to me, favoring socialism is completely moronic.

Give Me the Shirt on Your Back

Those who preach socialism generally have no clue about economics.  They probably can’t properly define socialism, which is the state’s ownership of the means of production.  I am willing to accept some variations, but you can’t just flippantly say that we should have socialism because the Scandinavian countries have socialism and they seem like nice places to live.  Countries such as Sweden and Norway are not socialist countries.  They are welfare states and certainly have many government interventionist measures in their economies.  But at the same time, they do have a system that still uses English common law as a basis, which means that property rights are still respected to a large degree, absent the somewhat high taxation.

If you really want to see socialism, then Venezuela is a clear-cut example, where the government really is nationalizing industries and controlling virtually all aspects of the economy that it is able to.

Even for the self-identified socialists who just want redistribution and equality, they are still mostly hypocrites.  If we live in a society with no property rights, then that means I can just walk up to you and rip the shirt off of your back.  Why should you be able to wear a shirt that I want? You don’t really own anything, so it is really up for grabs.

It is also noteworthy that my Facebook friend, along with most other leftists in the United States, probably lives better than 95% of the world’s population.  If they want equality, they should start donating most of their stuff to Africa and South America.

Socialism, as it is advocated, is a system of violence.  If you don’t actually see the violence, it is only because one party is obeying the dictates of the other.  If someone robs a bank and walks out with a bunch of money without shots being fired, would you say there was no violence just because the bank employees and customers obeyed the dictates of the robber?

Humble Pie

When my Facebook friend made this comment, I don’t think he understood how foolish he was making himself look.  He certainly surrounds himself with a disproportionate percentage of other leftists.  The world he lives in confirms his world-view for the most part.  He can’t fathom that someone would vote for Donald Trump, even though he does see some of the faults of Hillary Clinton.

He really thinks he is better than almost everyone else.  And when it comes down to it, this is really the view of leftists. Maybe it is the view of some libertarians too, but libertarians don’t want to control people, even if they do think that others are dumber.  Leftists think they are so smart that they should mold the world, and the people should listen and obey for their own good.  If they don’t obey, that just means they are that much stupider.

There are many things I don’t like about Trump and his policies.  But I can at least try to understand why some people would support him.

I think one problem with leftists in particular is that they translate being smart in some areas to being smart in everything.  If someone gets an advanced degree and is really good in English and history, they might start to think they know everything.  Even though they can’t have a coherent conversation about economics, they think they just know best.

When it comes to politics and economics, I really do believe that I know more than the vast majority of the population.  But in this, I recognize that people can make better decisions for themselves than I can make for them, especially at the point of a gun, which is government.

I also don’t think I am necessarily smarter than someone just because I know more about economics, or the Federal Reserve, or libertarianism.  There are many smart people who have little interest in these subjects.  I know little about fixing cars.  I am a terrible artist.  I am not a great public speaker.  I have a lot of weaknesses in areas where people are far better than me.

There are people I look up to in particular areas, and they aren’t necessarily libertarians. There are many entrepreneurs, and marketers, and even athletes, whom I admire for what they are able to do in their profession.  I think I am smarter than these people when it comes to defending liberty, but I fully recognize that they are far smarter or better than me in other areas.

And I think this is an important distinction that my Facebook friend fails to realize. He thinks that if nearly half the population approves of Donald Trump, then that whole group of people is just stupid.  He should have at least been self aware enough to say that they are stupid when it comes to politics.  Unfortunately, I believe that he really does think these people are completely stupid overall.

In today’s world, we are bombarded with experts.  We are told by the establishment that something must be true because the experts told us it is true.  They want people to conform and to not question authority.

And that leads to my last point, which is that political beliefs are not just about how smart you are.  There are other aspects.  I would say the most important is morality.  Maybe you really do think you can remake society by using government force to make a better place.  But is that the moral thing to do?

And what if someone just doesn’t want to conform to what they are being told to do?  What if they want to be free to make their own choices, even if some of those choices will be viewed later on as mistakes? Does that make someone less smart just because they want freedom to make choices?

In summary, I was able to get a good honest view from a hardcore leftist.  I don’t know if he will ever change his mind with his radical socialist views.

As Mark Twain supposedly once said, it is easier to fool people than to convince them that they have been fooled.

It has been a tough October for stock investors, unless those investors were shorting the market. As I write this, October still isn’t quite over, and we don’t know if Halloween will be a trick or treat.

October has historically been a tough month for U.S. stocks.  Crashes and recessions seem to come to fruition in October more frequently than any other month.

The S&P 500 dropped more than 10% below its record peak set in September, which officially puts it in correction territory.  But a 10% correction in stocks doesn’t necessarily mean that we are in a recession, or even that the bull market is officially over.

I can recall other bubbles such as silver in 2011 or technology stocks in late 1999 and early 2000.  When you look at a graph of these bubbles before they burst, they go parabolic.

That is why I am hesitant to say that stocks have already peaked and are now in the early stages of a bear market.  While it wouldn’t surprise me if this were the case, it also wouldn’t surprise me if we see one more grand move upward.

Things got rocky back in January 2018.  It became a roller coaster, and the higher volatility did not look promising for those holding stocks.  But then things calmed down, and stocks resumed their climb.

I have been watching the yield curve carefully.  On the big down days this week, there is no question that long-term rates went down.  Short-term rates were more mixed.  But overall, the yield curve has only slightly flattened for October.  The 10-year yield is right about where it started the month, and the 3-month yield is about .10% higher than where it started.

While the yield curve has flattened quite a bit over the last year, it is still not yet inverted.  If it inverts, I think there is little question that a recession is imminent.  The only thing is, it might already be apparent by the time it inverts. If stocks keep falling and go down another 10 to 20 percent, then things aren’t looking good for the short-term economy.

To be clear, I think we need a major correction/ recession to clear out all of the malinvestment. It is not something I am wishing for in terms of the short-term pains that go with recessions.  But the damage has already been done, and a recession is the best way to repair that damage and reallocate resources in accordance with consumer demand.  Life is too expensive, particularly for middle class America, and a correction will help alleviate that if the Fed and the federal government do not react too drastically to the inevitable correction.

Bonds are Safe for Now

In a post I wrote on October 10, 2018, I said that the cure for higher yields is higher yields.  When the 10-year goes up too high too fast, stock investors react negatively and we see a sell-off in stocks.  Then when stocks sell off, the 10-year yield tends to fall back.

I said that, “the fact remains that most investors view U.S. government bonds as a safe haven investment.  As long as price inflation is seen as contained, then bonds will continue to be a refuge for those seeking safety.”

That was basically confirmed to me the last couple of weeks since I wrote that.  There is no serious threat of price inflation right now, or at least very few people view it as a threat.  Therefore, when stock markets crash, people look for safety, and U.S. government debt is viewed as safe.  There is a small inflation premium and virtually no premium for risk.  The U.S. government is highly unlikely to default any time in the near future (not counting the hidden default of inflation).

Therefore, whether the bear market just started, or it starts in 6 or 12 months, we should expect investors to flock to long-term government bonds.  Yields will fall, and bond prices will rise.

This is a reason that I recommend the permanent portfolio, and it also illustrates why holding long-term government bonds is an important aspect.  Even though libertarians tend to hate holding bonds, they are there in the portfolio for a purpose.  In a recession and stock market crash, the permanent portfolio, which is made up of just 25% stocks, should fare rather well. The people who are heavy in stocks are going to pay a big price, while permanent portfolio investors may just see a slight decline.

Gold Rises

The one other interesting aspect of the last few weeks is that gold actually rose in terms of U.S. dollars.  It has been a tough market for gold investors.  There is just very little interest in gold by individual investors.  Some foreign central banks still like gold, but it hasn’t been enough to keep the price up.  After gold fell below $1,200 per ounce, it actually had a good couple of weeks in the face of the downturn in stocks.

It is interesting to look at the Dow-to-gold ratio.  There is nothing that says this ratio has to stay in any particular range or return to its long-term average.  But it is still useful in looking at what is possible.

The Dow-to-gold ratio is currently about 20 to one.  It takes about 20 ounces of gold to buy the current price of the Dow Jones Industrial Average.  In early 1980, this ratio actually was briefly close to one to one.  In other words, it took just over one ounce of gold to buy the Dow.  This was a time when stocks were down and gold was in its biggest bubble ever, so I am not saying we should necessarily expect to see this ever again.

However, if we did see a return to a one to one ratio, even if briefly, we would have to see a huge rise in gold, or a huge drop in the Dow, or some combination of the two.

If the Dow lost 50% to about 12,500, then the price of gold would have to rise from its current level just about $1,200 per ounce to $12,500.

Again, I am not predicting this, but just stating what is possible.

In the 2008/ 2009 financial crisis and downturn in stocks, gold went down for a brief period of time with stocks.  Gold does not tend to do well in recessions, unless there is a threat of high price inflation as was seen in the 1970s.

I have no idea what will happen to gold in the next recession.  But in the last couple of weeks, gold went up in the face of crashing stocks.

Again, this lack of correlation just shows the strength of the permanent portfolio, particularly in tough economic times.  It has been a boring and rather lackluster portfolio for the last several years, but you will be glad to have it when things get tough.

There was one winner in the Mega Millions lottery that gained nationwide attention.  The winning ticket was sold in South Carolina and is worth over $1.5 billion. If the winner decides to take a lump sum, it will still be worth $877.8 million.

The government – in this case, at multiple levels – will get its take.  Of course, the lottery itself is sort of like a voluntary tax, so the state makes out quite well with it.

The top income tax rate in South Carolina is at 7%.  The U.S. federal rate is 37%.  So when all is said and done, nearly half of the payout will go to government at some level.

We don’t know yet whether the winning ticket was bought by one individual person, or whether it was bought by a group of people.  It is common to have office pools.  With this jackpot, even if it were split 20 ways, the winners would be making out really well.

Or so we think.

I heard a statistic that one-third of lottery winners end up in bankruptcy.  I’m not sure what qualifies as a lottery winner. There is a big difference between winning $100,000 versus $5 million.  Also, there are many lottery winners who don’t actually file for bankruptcy, but end up near broke.

The lottery really is like a tax on the poor and those who tend not to be future oriented.  I think it is ok to play to dream a little, but I find that most people dream a little too much, while taking too little action in their lives.  Going to a convenience store and buying lottery tickets is not taking action. It is gambling with extremely low odds.

Before the last two drawings of this mega jackpot, I was asked if I was going to buy a lottery ticket, or if I wanted in on a group pool.  I don’t mean to be a party pooper, but I really didn’t want to play. I responded to someone that I really didn’t want to win that much money.  It really does ruin lives.  Either you hand out money to everyone who comes knocking on your door, or you keep your money really tight and probably ruin some relationships. When someone wins the lottery, you really hope that they already have a good set of friends in place.

The other thing that has puzzled me for a long time (I actually remember commenting on this when I was an older child) is why suddenly everyone feels compelled to play the lottery when the jackpot gets up so high.  What, was the $5 million jackpot last week not good enough for you?

I suppose it could make sense for a large group of people playing.  If you have 20 people in a group and you win $3 million total, that is “only” $150,000 each.

I don’t play the lottery and haven’t for quite a while.  I did participate in an office pool a long time ago for a few dollars per week. But if I did play the lottery, I would rather buy a ticket for a scratch-off or for my state’s lottery where you win at least $3 million.  The odds are far better than the Mega Millions because you don’t have to pick a powerball.  I’ll take the better odds and the lower payout.  For me, $3 million would be life changing.  Even if it were $1 million after taxes, that would still be quite significant (although not enough to retire forever, even though I wouldn’t retire anyway).

You Can’t Handle the Money

With great power comes great responsibility.  When you win, say, $500 million, that gives you great power.  You have to be quite responsible.

One of my most popular posts ever on this blog was about the television show My Lottery Dream Home.  I observed that some lottery winners were spending a good chunk of their fortune on buying a house.  It was bad decision making, at least from what I could observe.  You never know for sure if someone already had a lot of money, but it was doubtful in the cases that I saw.  If you are living in a small rundown place and then are all of a sudden buying a mansion, you probably didn’t have much money before winning the lottery.

I have continued to watch that show on several occasions, and I have seen the decision making get better.  I have seen people win multi-millions and then look for houses in a range of less than $500,000. I have seen some really conservative people even looking at houses in the $200,000 or less range.

If you ask people their number one reason for wanting to win the lottery, I think the number one answer by far is that they want to quit their job.  In other words, they want more freedom with their time, and this money could buy them their freedom.  Yet, curiously, some people go out and start buying stuff with it.

If you win $5 million and then buy a $1 million house (and all of the major expenses that come with it), then you are losing your financial freedom.  The rest of the money will likely disappear within a few years time.

This usually happens to people who were already poor, which happens to be a lot of the lottery winners.  If someone was already accustomed to making money and saving money, then that person is going to be more responsible with it and know how to handle it better.

I said that I wouldn’t want to win the jackpot that will probably be about $500 million after payout and taxes.  But if I started a business and grew it into a huge successful business that sold for $500 million, then I wouldn’t have any issue with it.  My name wouldn’t be plastered everywhere. My friends and family would have already known that was my line of work.  It isn’t like working an office job for a middle class salary and then all of a sudden quitting the next day because you struck it rich.

If you do happen to strike it rich with the lottery or some other way, such as an inheritance, my best advice is to find some continuity and grounding.  Maybe it is best not to quit your job right away. It is best not to move right away, unless you are in really miserable living conditions.  Take things slow and be methodical with where your money goes.  And don’t make any promises to anyone.  If you want to help out any friends or family members, then don’t tell them. Once you have decided you want to help and the amount you want to give after careful thought, then can just do it.

There will be a tendency to treat the money with less respect because you didn’t really earn it or have to work for it.  You just bought a lottery ticket.  This would be a mistake.  And if you can’t avoid feeling this way, then you are better off giving it all away so that it doesn’t ruin your life.

If you really can’t stand your job, then I think you should still find work that is meaningful to you.  As human beings, I think it is best when we are productive, at least to a certain extent.  It is good to have goals.  Sometimes it is good to have a routine.  This will give you grounding.

Immigration continues to be an issue in the forefront.  Trump won the presidency for several reasons, including good timing, but there is no question that his stand on immigration resonated with many conservatives, and even some libertarians.

Immigration is a tough issue to deal with for libertarians.  It is probably the one issue where libertarians disagree even more than abortion.

The reason it is a tough issue is because we live in a state-dominated world.  When the government has an interventionist foreign policy and a massive welfare state, immigration becomes more contentious. In a more decentralist society with stronger property rights, I believe immigration would be an easier issue for libertarians to deal with.

It is like asking a libertarian if he favors prayer in public schools.  Someone can have a personal opinion on the matter, but libertarians agree (or should agree) that schools should not be funded or run by the government.  In a free society, it would be up to each individual school whether they want prayer in their school.  It might depend on the opinions of their customers.

And so it is with immigration.  We are dealing with government borders and massive intervention in terms of foreign policy and state welfare.  How is one supposed to take a position on immigration in this non-libertarian world?  This is why some libertarians will argue that we can’t allow open immigration as long as we have a welfare state, while others will argue that we shouldn’t have to wait for an end to government welfare before allowing people into the country.

Regardless of where you come down on this issue, I don’t think immigration to the United States is going to stop, and I don’t think most Americans, including conservatives, will have the willpower to stop immigration.

The first thing you have to realize is that the government is not capable of stopping immigration with its current resources.  It can perhaps slow things down.  But even if a wall were built on the border with Mexico, people will find a way around it (or over it, or under it, or through it).

Considering that the federal government is running trillion dollar deficits with massive unfunded liabilities staring everyone in the face, I don’t see where the extra money is going to come from to stop immigration.  It is one thing to build a wall, and it is another thing to actually station guards all across the border to make sure the barriers are not breached.

Conservatives Love the Welfare State More

It is easy for conservatives to talk about stopping immigration just the same as it is easy for the left to talk about socialism.  When push comes to shove, they have bigger priorities.

The massive unfunded liabilities are mostly made up of Medicare and Social Security.  It is going to be impossible for the federal government to keep its promises to senior citizens (and residents). There is going to be a major haircut for these programs.  It will likely be a combination of raising the eligible age, reducing payouts, and tax hikes.  We can also be certain that the powers-that-be will try to use inflation as a means of hidden default, which it has already been doing to a certain extent.

The government is going to need workers paying taxes, and the government can’t control birth rates easily.  One way to increase the number of workers as compared to retirees is to allow more immigration. If seniors – and this includes politically conservative seniors – are given a choice between more immigration and cuts in Social Security, which one do you think most of them are going to choose?

One of the complaints about immigrants is that they come here and collect welfare.  I have always found this puzzling because if government welfare actually did help people, then it is more appropriate that some poor Mexican guy with no money and few skills gets welfare instead of an American who has just been too lazy to find good work for many years. I’m not saying that there aren’t struggling Americans who work hard.  But when it comes to the very basics of putting food on the table, you would think there would be more sympathy for someone who literally has almost nothing and has never had much opportunity.

Even still, I rarely hear conservatives suggest that we eliminate all welfare for immigrants. But what if an immigrant would prefer the choice of coming to the United States with no government welfare over the choice of not being allowed across the border at all?

Although I believe we should eliminate the welfare state for everybody, I would be in favor of eliminating it just for immigrants in the meantime.  But this leads to a slippery road for any non-libertarians.

Are we going to deny welfare to the point that hospitals don’t have to take care of immigrants when they show up at the emergency room?  Are we going to deny their kids going to public (government) school?

Of course, hospitals could still voluntarily take care of immigrants who show up with no money. Private schools could still help the children of immigrants by offering discounts or scholarships.  And the immigrants can certainly pay for these or any other services out of their own pockets.

But it puts all non-libertarians in a predicament.  It points out that the government schools are welfare. It would show that immigrants are able to survive without government handouts.

Whether conservatives will admit it or not, they favor the welfare state.  They just want it to be their version of the welfare state. And that is why they aren’t going to stop immigration.  If they truly wanted a reduction in immigration and for only hardworking individuals to immigrate here, then they would be calling for a massive defunding of the welfare state.

The big internet media companies have made some headlines, at least on the internet, with their censorship of certain content.  Google has been accused of favoring certain sites in its search engine to promote its leftist political agenda, while pushing other sites down the ranking list that go against the agenda of the people running the show.

Social media sites, particularly Facebook, have also gained much attention in banning certain content that is best described as anti-establishment.  It isn’t just conservative and libertarian content being banned, as there is some leftist content that also goes against the establishment line.

As with almost everything, the government has its hand in the jar.  Congress will pull the CEO of Facebook to be grilled, but they don’t seem to give the same treatment to the intelligence agencies that are supposed to be under its domain.  Let’s remember that Congress is responsible (or is supposed to be responsible) for funding all government spending.

We also don’t know just how much the government is pressuring these social media companies to censor content.  There are several recent articles, such as this one, that describe how the government is involved in banning this content.

Unfortunately, many conservatives – and even worse, some libertarians – are calling for the government to stop this social media censorship on grounds of free speech. They justify it because they say these are not really private companies.

But is this really the solution?  First of all, why would people who criticize the government then expect the government to go in and solve the problem?  This is the dictator syndrome, where people say what the solution should be (with more government control), and they expect the law to pass just as they describe it.

The whole nature of government is gaining power, corruption, lobbying, cronyism, and backdoor deals. Why would this be any different in this scenario?  We can demand that the government go in and stop Facebook from censoring certain content, but then that gives full reign to the government to control everything dealing with social media, including other companies.  And why wouldn’t the same people in government who are encouraging Facebook and others to censor content continue to rig the game when they are given even more power?

As a side note, it is interesting that these social media companies supposedly censor content for promoting violence.  If that were true, it should only be the libertarian content that is allowed. Unless you are just stating pure facts – such as, “Donald Trump signed legislation today” – then virtually every political post is advocating violence because that is what government is. Virtually all government involves the initiation of violence.  This is what differentiates it from most of the rest of society.

Cut Budgets

It is not that conservatives and libertarians should not be critical of what is going on.  It’s just that the solution is not more government.  The solution is less government.

This is an opportunity, especially for libertarians, to criticize what is going on and to call for massive budget cuts.  It is wrong that any government-funded company is teaming up with Facebook. It is wrong for people in Congress to threaten, intimidate, or even question the CEO of Facebook or anyone else in private business.

Libertarians should propose defunding any organization that is receiving government funds and in any way involved in “helping” social media companies or controlling them in any way.

Some will say that Facebook, Google, Twitter, and other companies are like monopolies.  But just because they happen to dominate their markets now, it doesn’t mean that will always be the case.  There are competitors, and if the censorship gets bad enough, they will lose business.  It can happen a lot more quickly than one expects.

We need these choices though.  We need for the government to stop interfering with what these companies do.  It is economic fascism.  We need a free market.  If the head people at Facebook still want to delete content just because it goes against their political beliefs, then that is their choice.  It is also the choice of the shareholders on whether they want to throw out the Board of Directors and get people in there who prefer profits over politics.

Again, we don’t know how much of this is based on coercion and how much of this would happen in a truly free market.

There will always be decisions made by individuals and individuals running businesses that we don’t agree with.  But it is their business.  You can criticize it, and you can choose not to do business with it, assuming a relatively free market.

I may not like the way my local grocery store stocks its shelves.  When they advertise good sale prices, I wish they would order more inventory so it doesn’t run out.  There are many places I criticize for certain things, yet I still do business with them.  There are others that went too far in not pleasing me, so I don’t do business with them.

As libertarians, we must favor property rights, which includes the property rights of business owners and the managers they hire.  If the government is involved in controlling that business, we should demand that government power be removed.  We certainly shouldn’t advocate for even more government control.

The way to remove government power is to cut budgets.  Unfortunately, we are not hearing much noise for budget cuts or the defunding of entire agencies.

Libertarians, and some on the political right, sometime refer to those in the green movement as watermelons.  They are green on the outside and red (communist) on the inside.  They advocate environmentalism to cover for their socialism.

When communism/ socialism fell out of favor with the fall of the Soviet Union, the proponents of this violent philosophy needed some cover, so they turned to environmentalism. After all, who can argue with wanting a clean environment?

Of course, with the modern-day green movement, virtually everything they advocate involves more government control and intervention.  It is an excuse to bring us socialism under a different name.

This past week, one of the winners named for the Nobel Memorial Prize in Economic Sciences was William Nordhaus.  To quote Wikipedia about the prize, “As it is not one of the prizes that Alfred Nobel established in his will in 1895, it is not a Nobel Prize.”  Still, it is highly regarded by many.

The prize is mostly an award given by the establishment.  It has typically gone to Keynesians or other types who advocate big government.  There are exceptions.  The most notable exception was when it was awarded to F.A. Hayek in 1974.  While I prefer Ludwig von Mises to Hayek, Hayek had many great contributions as a member of the Austrian School of Economics.

Nordhaus won the prize for “integrating climate change into long-run macroeconomic analysis”. In other words, he is a watermelon.  He has helped to justify government intervention into the marketplace by using so-called climate change as a basis.

This is typical of the establishment.  They will always find some “expert” to validate what they want validated. I have said before that if Keynes hadn’t existed, then they would have found someone else to justify the economic interventions of the 1930s and beyond.  They would have found some other “expert economist”.

You will find the same thing with any other topic involving state intervention.  Whether it is foreign policy, or healthcare, or monetary policy, or education, the establishment will find some “expert” – as chosen by the establishment – to present what they want presented.

Nordhaus is Leaky

Nordhaus is the co-author of the textbook Economics.  Paul Samuelson – another Nobel Laureate – wrote the original editions.

One of the quotes pulled out of the Economicstextbook is as follows:

“The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive.”

How did that theory work out for them?

That was just before the collapse of the Soviet Union.  It really was like Bangladesh with missiles.

No matter how hard the watermelons try to cover up their radical violent beliefs (because communism and socialism require extreme violence), they can’t help themselves sometimes.

Sometimes the red leaks out.  They are leaky watermelons.  William Nordhaus is a leaky watermelon.

He will promote his green agenda and tie it into his socialist economics, but sometimes he can’t help himself and his socialism is fully exposed.  It becomes obvious that he cares more about his socialist command economy than he has ever cared about the environment.

This is the kind of garbage that will get you the title of Nobel Laureate.  If you can help justify the command economy based on environmentalism, then you have a place in the establishment.

It is sad that someone can be an advocate of the Soviet command economy, yet receive this prize, let alone be respected at all in the field of economics.  The communism of the Soviet Union produced great poverty and misery.  And the system could only be enforced at the point of a gun, which resulted in tens of millions of deaths.  That is quite a record.  It’s no wonder the socialists need to find some cover.

There is a saying, at least amongst economists, that the cure for high prices is high prices. In a market that is allowed to function at least somewhat freely, higher prices will generally lead to more supply and less demand.

For example, let’s say that the price of bananas goes up significantly.  As a result, some people who marginally like bananas cut back on their consumption.  And since the price is higher, it serves as a signal to suppliers to grow and sell more bananas.  As people cut back consumption and more bananas are sold in the marketplace, the price should go down (with the typical economic caveat of “all other things remaining the same”).

Oil is also a good example.  If the price of oil goes up, then many people will reduce their consumption (such as driving less). It also becomes more profitable for suppliers to enter the market or increase supplies.  This serves to drive prices back down.

This does not always hold true because there are other variables.  In other words, all other things do not remain the same. If the price of bananas went up because of an overall general increase in consumer prices, then it may not be profitable for suppliers to produce more bananas.  If it becomes more expensive to extract oil from the ground, it may not be profitable to drill for more oil, even with higher prices.

Still, the general rule that higher prices is a cure for higher prices is useful.  We can also apply it to interest rates, which is essentially a price on money.  When interest rates go up, it can become more attractive for investors to buy bonds.  Without any other considerations, a bond that pays 3% interest is more attractive than a bond that pays 1% interest.

There are some major differences though between bonds and bananas.  Beside the obvious that you can’t eat a bond (or at least I don’t know of anyone having done so), I see the major difference being that interest rates are far more significant.  Virtually every transaction involves money, and virtually every loan involves interest rates.  The bond market is humongous and impacts just about every other market there is.

10-Year Yield Spikes, Stocks Crash

Interest rates move in the opposite direction of the bonds.  If interest rates go up, the price of the bonds go down.  So far in the month of October, the 10-year yield has spiked higher.  As I write this, it is above 3.2%.

I write this on the evening of October 10, 2018.  Stocks were clobbered today.  The Dow went down over 830 points.  The Nasdaq went down 315 points, which is over 4%.  Many think this is a reaction to the higher long-term yields.

The yield curve had been flattening, which indicates a possible recession.  In October, the long-term rates have been rising faster than the short-term rates.  In other words, the yield curve has slightly steepened.  Yet, it was this steepening, with higher long-term rates, that is supposedly spooking investors.

The 10-year yield finished essentially flat for the day.  I don’t expect this to continue if the down stock market turns into a bear market.

I am not saying that this is the beginning of a bear market in stocks.  I really have no idea.  We were faked out earlier in the year with some major down days. What I am saying is that when the bear market in stocks does come – and it will come – then the long-term interest rates are likely to fall back down.

I know that libertarians see the disaster of the bloated federal government and the ever-growing national debt.  It is almost hard to believe that the government could be running trillion dollar deficits during supposedly booming times, yet interest rates are still relatively low by historical standards.

But here we are, and the fact remains that most investors view U.S. government bonds as a safe haven investment.  As long as price inflation is seen as contained, then bonds will continue to be a refuge for those seeking safety.

That is why, if we hit a major downturn in stocks, investors are going to seek safety in long-term bonds.  If the bond investors are as smart as they are made out to be, then bond prices should start going up before stock prices collapse, or they should at least rise simultaneously with falling stocks.  In other words, long-term interest rates should fall with a falling stock market.

I don’t put too much weight into one day.  Stock investors likely see this as a one-day selloff from an overheated market.  Most are not predicting an imminent bear market.  The people who think a bear market is coming and coming soon are mostly out of stocks already, at least to a large degree.

If we see more down days where the board stock market is falling 3 to 4 percent or more, I fully expect the 10-year yield (and higher) to start moving down again.

The cure for high long-term yields is high long-term yields.  We may be seeing that this week.  Once the 10-year yield spiked up in just a few trading days, stock investors started to get nervous of the prospect of significantly higher rates.  This likely contributed to the selloff we saw.  But if stocks keep selling off, then this should move rates back down.

It may all seem confusing, and it is to a certain extent.  Regardless of what should happen, we are dealing with the decisions of millions of people (buyers and sellers).

I think there are bubbles in both stocks and bonds.  But I think the stock bubble will collapse first.  The bond bubble has slightly deflated in the last couple of years, but I expect it to be blown back up again when stocks go down and investors seek safety.

We aren’t going to see a full-blown collapse of the bond bubble until we see significantly higher consumer price inflation.  Otherwise, the Fed will just print more digital money to prop it up if the Fed members don’t have to worry about high price inflation.  The Fed will allow rates to rise, but not too far if there are few worries about price inflation.  I don’t think investors, at least for the time being, are going to let rates rise too far either.