I recently attended an event featuring Jordan Peterson.  He is on tour promoting his book 12 Rules for Life.  Peterson is a clinical psychologist, an author, and something of a YouTube star.  He was also a university professor.

At the event, there were actually a few protestors outside holding up signs and doing a few chants. I didn’t even understand their message or what they were protesting.  My guess is that most of them have never listened or read 10 straight minutes of Peterson.  If they have listened to him at all, it was probably out of context.

Peterson became somewhat well known when he refused to obey the dictates in Canada that he use gender-neutral pronouns.  In other words, Peterson did not want to eliminate the words “he” and “she” from his vocabulary. This is what our world has come to.  He took a stand based on free speech implications.

I really don’t find Peterson controversial at all.  Although he is more favored by the political right because of his refusal to give in to ultra political correctness, Peterson does not really identify with any particular political group.  He generally favors the free market, but that is no different than many people out there.  And even when it comes to politics, it tends not to be the arena that gets emphasis from him.

Most of what Peterson said at the event is common sense.  He talks about taking responsibility, being honest and courageous, and being a productive individual.  He is known to use some big and fancy terminology, and I wonder how much of a sensation he would be without it.  It’s hard to say if he would be more effective or less effective if you spoke more simply.

Peterson’s message is negative to a certain extent, but also positive in another.  He said if you find happiness, then you should enjoy it, because it isn’t going to last.  He basically says that the basic state of humans is misery and that we should find ways to better our lives and make them less miserable. He pointed out that we are in the top 1% in terms of history.  Even in today’s world, many Americans are in the top 1%, or at least in the top 10%.  I would say that most Americans are better off than more than a billion people living in China and more than a billion people living in India.  And those aren’t the worst places on earth.

I think his basic message is what has helped many young men get on their feet and take responsibility for their lives.  Sometimes you have to get back to the basics.  Even professional athletes, during times of struggle, have to remind themselves of the basics.

It makes sense that struggling people would be helped by Peterson’s message.  They already have a negative outlook on life.  Peterson is acknowledging that life is hard, which I think they appreciate.  It is just acknowledging the truth.  But then he says that you can take steps to lessen the misery and maybe actually get to a point of contentment, at least for some time periods.

There was a short little interview session at the end.  He was asked if he would consider running for president if the laws in the United States were changed.  (He is Canadian and would currently be ineligible to run.)  Peterson may not have directly answered the question, but he believes he is more effective in preaching his message.  On this, I believe he is correct.

He was also asked about wealth redistribution.  He spoke about how amazing it is that extreme poverty has largely been eliminated.  He said that if we want to eliminate starvation and extreme poverty, then we should be seeking less wealth redistribution.  We should allow the rich to get richer because it produces more wealth, even for those at the bottom.  He also spoke about people who are actually better off without money because they are self-destructive when they have money.  He used an alcoholic as an example.

Peterson’s message on wealth redistribution was right on point, and I appreciated it as a libertarian.  I am glad he said it. At the same time, from a personal standpoint, I tend to like his self-help content better just because it is different.  I travel in some libertarian circles, so I understand the benefits of free markets and have basically heard all of the arguments.  I know it is a point missed by the majority of people, so they do need to hear it.  But for me personally, I get more out of his material when he talks about human nature, happiness, and other deep thoughts that can help me think and reflect on my own life.

My one major criticism of the show is that I think Peterson talked too much (over an hour) in his monologue.  I thought it would have been better if he had just talked by himself for about a half hour and then spent an hour or more taking questions in more of a discussion format.  If he does another tour in the future, I hope he will consider this, or something similar.

I am a libertarian. I am also an advocate for good financial decisions and money management.  I sometimes tie these two things together.  At the same time, I also have to wear two different hats at times.  Let me explain.

Let’s say that I am chatting with someone and they say something along these lines: “I just don’t have very much money.  I can pay my bills each month, but that is it.  If I take one nice vacation each year, I don’t really have anything left.  I’ve been stuck in the same job for a while.  It pays the bills (barely), but it isn’t fulfilling and I don’t know how to get off this treadmill.”

These types of stories are common in America.  Admittedly, they are first-world problems.  Someone in a third-world country would be thrilled to have a job that pays the bills and allows them some luxuries as well.  They would be even more thrilled if they only had to work that one job at about 40 hours per week.

In the U.S., I have said that we live in contradictory times.  “It was the best of times; it was the worst of times.”

We have luxuries that were unimaginable even a couple of decades ago.  Compared to a century ago, it doesn’t even compare.  We have transportation in the form of cars, airplanes, and other things.  We have electricity.  We have air conditioning.  We have refrigeration.  We have these little devices we carry around in our pocket in which we can almost instantly communicate with other people, as well as use it to look up billions of pieces of information.

At the same time, middle class America is struggling, and I don’t think libertarians should ignore this fact.  Most aren’t struggling to put food on the table.  Most have a roof over their head, although the tens of thousands of homeless people in Los Angeles alone run contrary to this.  It’s just that, compared to, say, the 1950s, we aren’t completely better off.  There have obviously been some cultural declines.  But even in terms of living standards, not everything is up.

I know that most of us would not trade places with someone in the 1950s or the 1970s.  They didn’t have smartphones and some other luxuries we enjoy today.  But the prototypical family seen in Leave it to Beaver is not completely off the mark. The husband went off to work, while the wife stayed home.  She raised the children to a large extent.  When the children went to school, she took care of the house and made sure that dinner was ready and the laundry was done.  This may sound like a stereotypical example, but it was the truth to a large degree.

The wife/ mother didn’t have to work.  The husband/ father could work and make enough income to support the whole family.  They had a house. They probably had one television set, although this was still somewhat of a luxury that was not widely available yet in the 1950s.  When a child got sick, the doctor would typically make a house visit, and it didn’t cost an arm and a leg.

In today’s world, there is a far greater percentage of women in the workforce.  I know that many women choose to work.  But even here, we have to realize that the choice is more of a tradeoff.  I believe there are many working mothers who would choose not to work, or not work full time, if their husband’s income was adequate to support the lifestyle they want.  Since the family wants their smartphones, and they want to be able to take one nice vacation per year, and they want a decent sized house, they send the wife/ mother to work.  Such a lifestyle often requires two working parents.

The problem is that we should not be faced with this.  Stated differently, we would not be faced with this if we had a relatively free market.

The reason we have to work more in order to enjoy the new luxuries of life is because government has made our lives so expensive.  If you add up government spending at the local, state, and federal levels, then about 40% of your income is being consumed (misallocated) by government. For some people, their share might be above 50%.  And that isn’t even counting all of the regulations that inhibit voluntary transactions especially in some areas such as medical care.

It shouldn’t be like this.  We should be able to enjoy a much greater living standard over time without having to send the second parent off to work.  In fact, we should be able to work less while still enjoying higher living standards.  We should be able to get our smartphones and big screen televisions without having to work more and without having bigger expenses in other areas.

Wearing Two Hats

This is where I sometimes have to wear two hats.  I want to sell people on libertarianism by pointing out that much of their hardship is because of government.

At the same time, I don’t want to give them the impression that they are virtually helpless in changing their situation because of the government.  In other words, I don’t want to give them an excuse for not bettering themselves.

In the example I used above, I want to point out that the struggling person would not be struggling so much if it weren’t for big government.  If the government, particularly at the federal level, were a fraction of its current size, then each individual would have more resources at their own disposal.  This is a libertarian argument.

But I would also want to point out that this should not be an excuse to not change.  If you aren’t saving any money, then you have to adjust at least one of two things.  You either need to make more money, or you need to spend less. There is also the combination of the two things, which is often the best remedy.

If you need to raise your income, then look outside of your current job to see if you are missing something.  Don’t sell yourself short.  Or find ways to serve your employer better so that you are seen as more valuable.  There is also an option of exploring entrepreneurship or some kind of gig on the side.

On the spending side, see if there are ways you can cut back.  This isn’t about deprivation so much as it is about prioritization. Figure out what really matters the most to you and focus on those things.  Go through your budget for one month and see if you are spending money on things that just aren’t really worth it to you.

Even though big government is holding us back, we shouldn’t use that as an excuse to not move ahead. We have to play with the cards we are dealt.  I don’t think you should do anything immoral.  As a libertarian, I don’t think you should be in a position where you feel compelled to advocate for big government.  But after that, you have to play ball in the ballpark that they’ve put you in, even if you don’t like everything about the ballpark.

In conclusion, sometimes it is important to wear two hats when advising people.  But it is ok to point out that you are wearing two hats.  For their own good, and for the good of society, they should advocate more liberty.  But at the same time, don’t use the current situation of big government as an excuse not to better your position in life.

The 2018 mid-term elections are coming up in November.  We call them mid-term elections because we are using presidential elections as a base point.  They are often seen as a referendum on the president.

It must be realized that the mid-term elections tend to go against the party that occupies the presidency.  Since Trump is a Republican, the Democrats seem to be favored to gain seats in this year’s election.

In the case of Trump, I don’t think many, maybe even most, Republicans in DC like Trump.  But since the Republican grassroots tend to like Trump, the Republicans in Congress are forced to go along with Trump’s agenda.  They can’t be seen as opposing him too much, or else they risk their job, particularly in Republican primaries.

I don’t think the mid-term elections are completely a referendum against the president, even though they are viewed this way.  It is just that some voters want balance.  They don’t want one-party rule.  They want some opposition against the most powerful person, or at least whom they view as the most powerful person.  Some of this is conscious, while some may just be instinctively voting this way without deeply thinking through it.

In this respect, the voters are not completely wrong.  We typically are better off when there is not one-party rule across the presidency and Congress.  When Bill Clinton was president with a Republican Congress, there was actually some spending restraint.  On the other hand, when we had Bush and the Republicans controlling Congress, we got massive spending and deficits.  We also got massive entitlement expansion (Medicare prescription drugs) and war under Bush, but that was more of a bipartisan effort. Under Obama and the Democrat Congress, we got Obamacare.  Once the Republicans took over Congress, we didn’t get any more massive expansions in spending.

This certainly isn’t a perfect science, and the government can easily expand under any combination. But there is a tendency to have a little more gridlock when there is not one-party rule.  I view this as positive.

There have been some good things with Trump domestically so far.  The cut in taxes, particularly corporate taxes, is positive.  The repealing of regulations is positive.  However, the spending and deficits have exploded that much more under Trump, and his tariffs are a disaster.  On foreign policy, he has made some peace motions toward Russia and North Korea, but he has been bad in many other ways, including the continuation of wars in the Middle East.

For the mid-term elections, there are basically three possible outcomes.  One, the Republicans maintain control of both houses of Congress.  Two, the Democrats win both houses of Congress.  Three, the Democrats win a majority in the House of Representatives, but do not win enough seats to gain a majority in the Senate.

It is technically possible that the Democrats could win the Senate and lose the House, but this is highly unlikely.

Perhaps the best-case scenario for liberty is that the Republicans lose the House but keep a majority in the Senate.  This would provide some opposition to Trump, although the opposition might come on all the wrong issues.  Keeping the Senate for the Republicans would likely ensure better potential candidates for any more Supreme Court openings, but even here we can’t be certain.

So what about the economy?

In short, I don’t think it is going to make much of a difference what happens.  If Trump and the Republicans want to get more tax cuts through, they better do it now.  If the Republicans somehow are able to hold a majority in the House, I think it will be a slim majority.

Trump likes to take a lot of credit for the booming economy.  Many voters will credit or blame the president for the economy. I think this is incorrect on all fronts, as the Federal Reserve has a much bigger impact than the president. It also has to do with luck and the timing of the boom-bust cycle.

I understand why Trump is taking credit for the economy, especially given his ego.  But he is really going to regret it if the economy tanks.  It will be really hard for him to deflect the blame because he is trying to take credit for everything good now.

The mid-term elections may add some uncertainty, which the markets (i.e. investors) tend not to like.  But they can also get over uncertainty quickly, just as they did with the election of Trump in 2016.

I think whatever happens with the economy is basically baked into the cake at this point.  There have been malinvestments from the Fed’s loose monetary policy, particularly from 2008 to 2014.  Sure, little things can impact the timing of when the downturn finally comes and just how big of a downturn it is.  If Trump keeps piling on tariffs, it isn’t going to help the economy.  Still, I maintain that the Fed’s policy is the most important.  And even there, the Fed cannot necessarily prevent a recession, even if it reverses course on interest rates.

I may do another post about the mid-term elections before they happen, and maybe a post after the results.  But this is more of a curiosity.  I don’t think it will have a deep impact on the economy.  For that, I’d rather watch the yield curve.

When the Federal Reserve sets its monetary policy, it is looking in the past more than it is looking in the future.  The Fed is trying to predict the future (and possibly change the future with its policies) by looking at statistics in the past.  Fed members will look at the price inflation rate, the unemployment rate, interest rates, the yield curve, and other factors in trying to predict what is on the horizon.

It has now been 10 years since the onset of the financial crisis.  The recession actually started officially in December 2007, but this was backdated.  We didn’t know we were in a recession in early 2008, or at least we don’t know officially.  The big dominos started to fall in September 2008, even though there had been certain events prior to that.  Housing was already falling from the peak of its bubble, and some lenders were already failing. But it wasn’t clear that we were in a major financial crisis and recession until around September 2008.

I recently looked at a chart of the federal funds rate.  This is the rate targeted by the Fed when it sets monetary policy.  It is the overnight lending rate for banks. Since late 2008, this rate has had less meaning because commercial banks have piled up massive amounts of excessive reserves. Therefore, the banks have little need to borrow overnight money to meet reserve requirements since they already easily meet reserve requirements.  The Fed controls the federal funds rate these days by paying interest on bank reserves.  This sets a floor below the federal funds rate.

Prior to 2009 though, the federal funds rate was largely controlled by the Fed’s buying and selling of assets – specifically U.S. Treasuries.  If the Fed wanted to lower the federal funds rate, it would buy U.S. government debt.  This would be done by essentially printing money, or its digital equivalent.  It was monetary inflation.

If the Fed wanted to raise the federal funds rate, it would do the opposite.  It would sell some of its U.S. Treasury debt.  It would reduce its balance sheet as necessary.  It would be deflationary in most cases, unless the rate was naturally rising without any Fed action.

The interesting thing, when looking at a chart of the history of the federal funds rate, is that the Fed was actually lowering the rate prior to the recession. It actually started to lower the target rate around September 2007, which was even before the official recession began.  The Fed kept dropping its rate throughout 2008.  Again, this was before the worst of everything became apparent in September 2008.  It was in December 2008 that the Fed finally lowered the target rate to near zero.

You can view the history of the targeted rate here.

The key point here is that the Fed correctly saw that there was economic weakness.  They tried to react to this by lowering the target rate, which would have also been mildly inflationary (although nothing compared to what was seen from late 2008 to 2014).

In other words, maybe Fed members saw a recession coming.  They would just never publicly say so.  They will use terms such as “lower growth” or “suboptimal conditions”, but they never say that they see a recession is coming. Otherwise, they would get the blame for “talking down the economy” when the recession actually does hit.

But the biggest takeaway from all of this is that the Fed was unable to prevent the biggest financial crisis and recession since the Great Depression, even though they likely saw something coming.  They were already lowering the federal funds rate.  They were loosening monetary policy, and it wasn’t enough to stop it.  At that point, the damage had already been done.  The loose policy from the Greenspan years was already over.  There was already massive malinvestment that needed to be corrected.  The market correction was going to take place regardless of what the Fed did at that point.  The damage had already been done.

I say this to make the point that it may not matter what the Fed does in the next couple of years. I’m not saying that what they do is completely irrelevant.  But when the misallocated resources are ready to be corrected by the market, the Fed isn’t going to be able to stop it.  They probably won’t even be able to delay it, barring some unlikely move towards hyperinflation.

In fact, if the Fed puts a halt to its balance sheet reduction, that will be a warning sign. If the Fed puts a halt to its rate hikes (of the federal funds rate), this will also be a warning sign. If the Fed actually starts lowering rates and/or starting monetary inflation again, then this is probably not going to prevent anything.  It will just be a further warning that things are likely to get bad really fast.

We’ve already got the yield curve as a warning indicator of a coming recession.  While the Fed’s monetary policy is not quite as reliable, it may add confirmation when the time comes.  The Fed was actually right to a certain degree in 2007, but it was helpless to correct its previous bad policies.

On economic matters, Trump gets things wrong.  He has a few good instincts as far as reducing regulations and reducing some taxes, but after that he lacks a basic understanding.  With many politicians, you wonder if they are just lying in order to gain power and influence.  But with Trump, you really get the feeling that he just doesn’t understand economics.

One of the issues tied to Trump’s tariffs is the trade deficit.  Trump says that trade is not fair.  He says that the United States is getting ripped off with a huge trade deficit, and he is trying to correct that.  He’s also going to find out, if he hasn’t started to realize it already, that it isn’t easy to turn around the trade deficit.  And if you do solve this imaginary problem, you probably just created a whole set of new problems that aren’t imaginary.

There isn’t really such a thing as a trade deficit if the trade is done voluntarily.  There is stealing.  If one country invades another country and takes some of its resources, then perhaps you could say that this is a trade deficit. But that’s not really what Trump is talking about.

The main reason that the United States runs this so-called trade deficit is because it is an attractive place for investors.  A good example is China selling goods to the United States.  But the Chinese often don’t get goods in return. The exchange might be in the form of services.  Or the exchange might be in the form of investments.

If there were any trade deficit at all, it would be other countries getting the short end of the stick.  They are manufacturing goods and sending them to the United States.  They are often not getting any hard goods in return.  They are getting the equivalent of certificates in investments that may or may not be returned in full.

One of the main things bought by the Chinese and Japanese are U.S. government Treasury bills and bonds.  In other words, they are purchasing U.S. government debt.  So the Chinese will manufacture goods and send them to the United States and receive a bunch of IOUs from the government.  And Trump is complaining about this?

This is actually the one area where trade deficits do matter in the long run.  When these foreign central banks accumulate U.S. government debt, it allows the U.S. government to sustain its reckless spending for longer with cheaper interest rates.  So in this sense, it hurts us.  But that is a problem of spending and debt.  It is not caused by the trade deficit.  The trade deficit is just a reflection of the spending and debt.

But Trump isn’t telling foreign central banks not to buy U.S. debt, let alone actually sell it. He is a low interest rate guy.

Other than the national debt, the trade deficit is basically irrelevant.  It is mostly the workings of the marketplace given the circumstances.  Sure, if the Chinese economy were freer, then maybe the Chinese would invest more of their capital at home.  But the fact that their capital flows to the U.S. does not harm the U.S. economy (other than the government debt as discussed above, which is the fault of the U.S. government).

Let’s say you live on an island with 99 other people.  A foreigner comes in and offers to trade with you.  He will give you some food and luxury items in exchange for a small hut on the island.  You agree.  He decides to come to your island for two weeks out of the year and live in the hut.  As long as he is peaceful, there should be no problem.  This could be considered a trade deficit for the 100 people on your island though because the hut is on the island.

Maybe the foreigner comes to your island and offers to give you food, and in exchange you will give him food five years from now.  Again, this is a trade deficit.

Maybe the foreigner comes to your island and offers to give you food in exchange for one hour of consulting on how to survive on a small island.  You provide your services and get the food.  Although you gave him a service, it was not actual hard goods.  Therefore, you have a trade deficit.

You can start to see how absurd this whole thing is.  Yet there are economists who worry about the trade deficit, and Trump worries about the trade deficit.  It isn’t really a deficit if it is voluntary trade.  The trade just involves different types of goods and services.

We all run trade deficits at a personal level.  If you go to the store and buy a pair of shoes, then you are running a trade deficit with the store.  But the owner of the shoe store will take the money and run a deficit with someone else.  This is how it works. It doesn’t change much just because there are national borders involved.  The only difference is the exchange in currency.

The trade deficit can be a reflection of certain things.  As mentioned above, it is probably higher because of the overspending and debt issued by the U.S. government.  But then it is just a symptom of the problem and not the problem itself.  So if Trump really wants to reduce the trade deficit, then drastically cut spending and allow interest rates to rise.  Unfortunately, I don’t think he is going to take this position.

There have been two newsworthy events in the last couple of weeks.  One is the scandal within the Catholic Church, and the other is the death of John McCain.  One of those events, the death of John McCain, received far more media attention.

To be sure, the revelations of the child sexual abuse scandal of the Catholic Church in Pennsylvania certainly did receive some headlines in the so-called mainstream media.  It is hard to ignore a long cover-up within the church where it is reported that hundreds of priests sexually abused more than 1,000 victims, most of whom were minors.

This happened over a span of perhaps 7 decades.  It included the sexual abuse of little boys and girls, although it seems to have been more boys than girls.

Then there is Pope Francis.  I have never liked Pope Francis since right after the time he became Pope.  He has had a left-wing agenda.  He blathers on and on about social tolerance, environmentalism, wealth redistribution, and socialism.  He talks about these things more than he actually talks about, you know, Catholicism.  The few good things he has said are overshadowed by his seemingly communist agenda (and I try not to use that word lightly).  Overall, I have thought he is a hypocrite and a fraud.

Now, there are credible allegations that this scandal was known about at the top.  Pope Francis has personally been implicated, and he doesn’t seem to be denying the allegations.  I know this doesn’t automatically make him guilty, but you would think he would have something to say on the matter.

Pope Francis likely knew about what had happened, and he likely helped cover it up. Archbishop Theodore McCarrick has been implicated as one of the abusers, and he was sanctioned by the previous Pope, Benedict XVI.

According to the allegations made by Archbishop Viganò, “He [Pope Francis] knew from at least June 23, 2013 that McCarrick was a serial predator.  Although he knew that he was a corrupt man, he covered for him to the bitter end; indeed, he made McCarrick’s advice his own, which was certainly not inspired by sound intentions and for love of the Church.  It was only when he was forced by the report of the abuse of a minor, again on the basis of media attention, that he took action [regarding McCarrick] to save his image in the media.”

When Pope Francis said that we should be tolerant of homosexuals, most people didn’t realize that it included homosexuals who rape little boys.

The problem is that this is an explosive story that has not received the vast media attention that it likely deserves.  If you are just watching the mainstream media, you may not have heard about these credible allegations against Pope Francis.

Instead, we got to hear over a week’s coverage on the death of the maverick, John McCain. McCain was a maverick (according to the establishment) because he crossed party lines.  In other words, he supported all of the worst policies of both major parties.  Most importantly, he could be counted on to support any war, regardless of the party in power in the White House.

McCain is regarded as a war hero because he dropped bombs on innocent people in Vietnam.  He was captured and supposedly tortured, although there are many disputes about what actually happened.

There is one thing that isn’t in dispute though, and that is that McCain spent the rest of his life shilling for wars to expand the U.S. empire overseas.  Instead of talking about the brutality of war and spreading a message of not putting others through the same pain, he chose the opposite path.  Since he got to fight and suffer through war, he was quick to make sure that others would suffer as well.

McCain was one of the worst elements of society.  He was evil in almost every way.  But if you watched the establishment media last week, you would never know it. If you believe their words, then McCain was a hero and a great man of principle.

Conservatives like to refer to the mainstream media as the liberal media.  This is obviously not a reference to classical liberalism. Still, it is even hard to call it the left-wing media.  It is the establishment media that will shill for big government at every turn. You must worship the state.

Fox News was, of course, paying homage to McCain.  But all of the other networks were doing the same.  They are all in agreement on this point – that John McCain was a great man.  For that, we can be sure that the opposite is true.

The establishment media can’t be too far to the left because they are paying homage to a war criminal. There are a few leftists out there who referred to McCain as the war hawk that we was.  But there were few of them in the last week.  It seems to be only some libertarians and a handful of hardcore leftists who are willing to tell the truth about McCain at this point.

Most of the leftists support McCain now because him and Trump were enemies.  They care more about taking down Trump than they do about war.

Meanwhile, during this same time, there was little said about the allegations against Pope Francis?  Why would that be?

It is because the establishment media loves Pope Francis.  He is their favorite Pope because he is a defender of the state in all its forms.  He wants more centralization and more socialism.  Therefore, the media would rather keep these allegations (against Francis) quiet if they can.  They will only address it if it becomes too explosive to ignore.

So that is the world we are living in today.  The media pays homage to the war criminal, while they ignore these explosive allegations of Pope Francis helping out child rapists.  It is a good thing we have the Internet.

The Federal Reserve (“the Fed”) currently holds about $1.7 trillion in mortgage-backed securities.  Prior to 2009, the Fed owned zero mortgage-backed securities (MBS).  It began its accumulation in January 2009 in the wake of the great financial crisis that appeared in the fall of 2008.

The Fed went through three buying sprees of both U.S. government debt and MBS.  They were labeled quantitative easing (QE). There was QE1, QE2, and QE3. QE is nothing more than monetary inflation.  The Fed buys assets with money created out of thin air.  Most of this money is not created on a printing press.  It is digital.  That is why I often refer to digital money printing.

QE3 ended in October 2014.  For almost four years, the Fed has not been inflating the money supply directly.  The money supply can still change based on bank lending and bank reserves.

The Fed is actually reducing its balance sheet right now, although at a relatively slow pace. Still, month after month, those tens of billions of dollars in assets start to add up to some real money.

The Fed is currently reducing its balance sheet by $40 billion per month.  $16 billion of that is in mortgage-backed securities. The FOMC implementation note does not say that the Fed is to sell off these assets.  Rather, it is to not roll over maturing securities up to these amounts.  These reduction amounts are supposed to be increased again, but things can change.

The thing that is not clear is what happens with any assets (debt) that the Fed owns that are defaulted on.  This obviously is not an issue with U.S. Treasury bills and bonds, as the U.S. government does not default on its debt, unless you factor in the depreciating value of the currency.  The problem is with the MBS.

First we have to understand how the Fed collected these securities.  During the housing bubble, banks and other lending institutions made loans to people for houses (and other types of residential properties).  It was common for these loans to have low down payment amounts, such as 3%, instead of the more conventional 20%.  When the housing bust happened, somewhat in sync with the financial crisis, many people defaulted on their mortgages.  They either couldn’t pay, or they chose not to pay.  If you have a $200,000 mortgage and your house is now worth only $150,000, it is sometimes easier to hand your keys over to the bank and default.

The Fed’s buying of MBS from the banks was part of the bailout.  While the public complained to some extent about the bank (and other) bailouts, the bailouts kept happening for many years after 2008, as the Fed bought up these MBS.  The Fed was not paying market value for them.  They were buying these securities for what they were previously worth.

With these mortgage securities, some people would have continued to pay their mortgage, while others did not.  In many cases, there were negotiations to refinance or allow the homeowner (more of a renter, with the bank acting as landlord) to stay in the house with modified payments.

No matter what, we have to assume that a certain portion of the currently-held $1.7 trillion in MBS is bad debt.  We have no idea what percentage this is.  So what happens with the securities that are bad?

I don’t know what tricks the FOMC has up its sleeve, but I see no way to completely drain this portion of the balance sheet without somehow acknowledging that some of it is bad debt.  Therefore, you can’t actually reduce the balance sheet with a retraction in the money supply for all of these securities.

Is the Fed just reducing its balance sheet without actually deflating the money supply when it comes to these MBS?

We know this isn’t the case with the U.S. government debt.  The Treasury actually pays back the interest owed and the principal amount for maturing debt.  The Fed ends up returning most of this money to the Treasury after it funds its own expenses.  It is a tricky game, but at least the accounting works with the Treasury. When the Fed reduces its balance sheet of U.S. Treasury bills and bonds, then this money is sucked back up by the Fed.  There is monetary deflation.

With the MBS, it is unclear what is taking place or what will take place in the future.  The Fed could write off the bad debt, but this is ultimately inflationary.  The Fed printed money (digitally speaking) to buy this debt, and then it is letting the debt expire or be written off without reversing the original digital money printing.  If people aren’t paying these old mortgages any longer, then there is nobody to collect the money from to reverse the original monetary inflation.

There is no question that the Fed is currently engaged in a slightly deflationary policy.  But we don’t know for sure to what extent, and it is also tricky trying to figure out how banks will react to this in the near future.

The excess reserves held by commercial banks have been going down since 2014.  Part of this is in lockstep with the Fed’s tighter monetary policy, but it seems that excess reserves have gone down a bit faster than the Fed is reducing its balance sheet.  Therefore, the Fed’s policy is slightly deflationary, while the banks seem to be slightly inflationary.

There is a lot of confusion to sort through with the Fed’s balance sheet and bank reserves. That is another reason why a permanent portfolio setup is ideal at this stage of the game.  It is also why it is easier to follow the yield curve and let the bond market tell us what is happening.  If the yield curve inverts, then maybe I will speculate a little in shorting stocks.  Until the inversion happens, anything goes.

For the first time ever, the Nasdaq hit the 8,000 mark on Monday, August 27, 2018.  Two days later, the revised GDP estimates for the second quarter came in at 4.2%.  With unemployment low and consumer price inflation seemingly in check, the good times are here.  Or, the good times are here at least according to the statistics.

We don’t know what’s next.  Maybe the Nasdaq will hit 9,000 before the year is over.  Maybe it will hit 10,000 next year.  Maybe the Dow will go to 30,000.  The S&P 500 is just a couple of good days away from the 3,000 mark.

In the tech bubble of the late 1990s and early 2000, the Nasdaq peaked at just over 5,000 in March 2000.  It plunged to about 1,200 by 2002.  Then it recovered a little bit up until to 2007 before falling again to below 1,400 in the spring of 2009.  The return has been staggering for the last 9 and a half years, as it has gone up almost 6 fold since that time.

If you had invested all of your money at the very bottom in February or March of 2009 in a Nasdaq index fund, then you would have done incredibly well.

On the GDP front, the revised second quarter GDP number is higher than it has been for almost four years.  Of course, it’s important to remember that GDP was above 5% for the first quarter of 2006, and we know how that turned out a couple of years later.

In other words, no matter how good things look right now, they can turn around quickly. Sometimes the numbers lie.

This is somewhat anecdotal, but several people I know or have had communication with are not doing that great.  Most everyone I know who wants to be employed is employed.  So they are making money.  The problem is that they don’t really have any money.

I have heard from several people who essentially live paycheck to paycheck.  Their savings consist of a 401k plan and, for some, equity in their place of residence.  In terms of money in the bank, there is almost none. There is just enough to pay the next round of bills.

Now, I know the common objections.  Yes, they all have smartphones.  Most of them will go out to eat, at least on occasion.  They don’t need all of the stuff that they have.  At the same time, I am not speaking of shopaholics.  If they really buckled down, they could probably save up $1,000 over the course of 6 months to a year.  But they just don’t want to give up their smartphones and eat rice and beans for dinner every night.

While we all have to take responsibility for our own actions, I find it rather ridiculous when conservatives and libertarians put an emphasis on all of the luxuries (such as smartphones) as the reason that many people are struggling.  I get especially irritated when I hear libertarians emphasize this.

Sure, someone could give up their smartphone, although maybe they do use it for some work purposes. If you don’t have any cell phone, then maybe you can save $80 per month, or whatever it is.  After a year, maybe you can get up to a $1,000 cushion in your checking account.  Is that really something to get excited about?  I think I would rather take my chances with my smartphone and at least enjoy life a little.

It shouldn’t be this way though.  We should be able to enjoy luxuries that didn’t exist decades ago without retracting our living standards in other places.  But this is not happening.  People are struggling, and many of them are far from frivolous in their spending habits.

This is because of big government.  At all levels (federal, state, and local), government is spending (misallocating) about 40% of our wealth.  If you add the burdensome regulations on top of this, probably over half of our money is taken away from us in some fashion.  I understand that some of it comes back to us in the form of various “benefits”, but most of the “benefits” are not what we would have spent our own money on.

Even though GDP is doing better and the stock market is roaring, the experience of the average middle class American is not one of great prosperity.  Their house value may be up if they own one. For those who don’t own, they are getting locked out of the market for now.

And maybe the 401k balances are going up, but we don’t know how long this will last.  Most are probably not well diversified in a setup such as the permanent portfolio.  And the 401k does little good if you can’t easily access the money to help pay your bills.

We have a government problem.  It is way too big. This is why we need a correction. We actually need some price deflation because our wages aren’t keeping up with prices.  Any correction is initially going to be painful for almost everyone.  But if it forces some kind of reduction in government, then it is ultimately what we need.

We need a drastic reduction in the size and scope of government at all levels.  This is how we can vastly improve our living standards.  We should be able to have our smartphones and still save money.  We should be able to get a $5 coffee if that is what makes us happy, without having to worry about paying the next electric bill.

For libertarians, we should not squander this opportunity.  When someone says they are struggling, you don’t need to lecture them on their owning a smartphone or their drinking of a $5 cup of coffee.  It is an opportunity to sell them a message of liberty and drastically smaller government.

People shouldn’t use big government as an excuse not to better themselves.  But at the same time, everyone needs to be made aware of the main reason that middle class America is struggling to get by. It isn’t the little luxuries. It is a problem of big government.

James Bullard is the president of the Federal Reserve Bank of St. Louis.  He is currently an alternate member of the Federal Open Market Committee (FOMC).  This makes him an influential economist. He is part of the establishment, but it is wise to listen to what he saying.

Bullard recently said in an interview that he would prefer for the Fed not to raise interest rates (the federal funds rate) any more this year.  He said he does not see the need for higher rates given that inflation is not running high.

He then commented about the flattening yield curve.  He said that it was a mistake for the Fed to have kept raising rates in 2006 when the yield curve inverted.  Then he said about an inverted yield curve, “This time, I want to take this signal seriously.”

He goes on, “There is no reason to challenge the yield curve at this time.  There’s no reason.  In other circumstances, if inflation was higher and heading higher, then I might say, well, we’re taking some recession risk but I’m willing to trade that off because it looks like inflation is getting out of control. We’re not in that situation today. Inflation is low.  It’s stable.”  He goes on, “We don’t need to challenge; we don’t need to be preemptive on the yield curve.”

Bullard made similar comments in another interview saying that we shouldn’t challenge the yield curve, meaning he doesn’t think the Fed should push short-term interest rates any higher at this time.

The yield curve has been a great predictor of recession.  When it inverts (long-term rates fall below short-term rates), it indicates a recession is coming, and it has historically been quite accurate.  So what if the Fed were to react to the yield curve?  It could stop tightening when the yield curve is flat.  It could even loosen if the yield curve is flat or inverted, anticipating a recession.  Would that in itself ruin the yield curve as a recession indicator?

I was a bit surprised that Bullard made these comments.  It’s not that he and other Fed members don’t think such things, but I am just surprised he said it out loud in a public interview.  While he is just one person, he is one of twelve people on the FOMC.

First, what are the chances that the FOMC voting members would actually follow the yield curve and let it influence their votes?  This is certainly possible, as Bullard has alluded to.  But I would be surprised if they were forthright about it.

Here is the thing. The Fed never predicts a recession or issues some kind of statement saying that a recession could be imminent.  It just doesn’t happen.  They will use technical jargon and say that the economy is softening or that growth may be slowing. But you never hear the Fed chair say that we should be worried about a coming recession.  You never read an FOMC statement saying that the Fed is loosening to prepare for a recession in the near future.

Even if they thought this, they would never say it.  Because if they were correct and a recession came, then the president, Congress, the financial media, and most of the American public would actually blame the Fed for causing the recession.  (They might be correct, but for the wrong reasons.)  They would say that the Fed caused the recession by making people worry about it and caused them to stop spending money. People would say that the Fed created a self-fulfilling prophecy.

Therefore, if the Fed is going to stop its tightening, let alone actually start loosening again, it would need a good excuse.  The Fed members are not going to say that they are loosening monetary policy because of an inverted yield curve that is making a recession look imminent. They would have to come up with another excuse, and it wouldn’t be easy to do in this economic environment with low unemployment, new stock market highs, and relatively low inflation (at least according to the government statistics).

And even if the Fed were to loosen in reaction to an inverted yield curve, would it actually prevent the recession from happening?

This depends. Most likely, it would not stop the recession from coming in the near future.  The malinvestments from the previous loose monetary policy have already begun to be exposed in this scenario.  If you remember the financial crisis of 2008, the housing prices started coming down about 1 to 2 years before that.  If the Fed had started printing (digitally speaking) money in early 2008, I don’t think that would have stopped the housing bust from happening, and it probably wouldn’t have prevented the meltdown in stocks.

Of course, it does depend on just how much the Fed were to react.  If the yield curve were to invert and the Fed were to announce QE4 where it increases its balance sheet by $200 billion per month, then sure, that may be enough to stave off the coming recession temporarily.  You can stop the patient from its drug withdrawal symptoms by overdosing the patient with the drug.

If the Fed were to react this dramatically, then there would obviously be other, and more severe, consequences.  We would probably get high consumer price inflation.  We would most certainly get more malinvestment on a greater scale. And when the inevitable recession finally did come, it would be that much more severe.

In conclusion, I don’t think the Fed is going to loosen policy based on a flat or inverted yield curve.  The Fed may stop hiking its target federal funds rate.  Maybe it would stop its balance sheet reduction.  But I highly doubt it would start another round of QE or lower its federal funds rate unless we are actually in a recession.

If the Fed were to take unprecedented and dramatic steps based on the yield curve alone, then we will be in uncharted waters.  But I still don’t think it would prevent the coming recession.

On Monday, August 20, 2018, Donald Trump stated in an interview his disappointment in his new Fed chair.  In reference to Jerome Powell, Trump said, “I’m not thrilled with his raising of interest rates.  No, I’m not thrilled.”

Trump also said, “We’re negotiating very powerfully and strongly with other nations.  We’re going to win.  But during this period of time, I should be given some help by the Fed.  The other countries are accommodated.”

In other words, Trump wants help from the Fed in pursuing a weaker dollar policy, or at least a less strong dollar policy.  Trump is a mercantilist.  This is why he promotes tariffs, which are nothing more than taxes imposed on imported goods.  He also promotes, if not always explicitly, a weaker dollar policy. These policies that he promotes make consumer prices higher for Americans than they otherwise would have been.

During his campaign, candidate Trump criticized the Fed for a loose monetary policy and said that the stock market may be in a bubble.  That was about two years ago.  If stocks were in a bubble then, then what are they now?

Now that Trump “owns” the economy, his position has of course changed.  He wants low interest rates from the Fed.  He does not want tight money.  He wants the boom (artificial or not) to continue on his watch.

The problem for Trump is if the boom goes bust, especially before his November 2020 re-election bid. It is hard for the president to disown the economy anyway, but it will be especially hard since Trump has not shied away from taking credit for the supposed good times.

If there is one thing you can say about Trump, it is that he has exposed a lot of dirt and corruption that goes on in Washington DC.  Sometimes it is intentional on his part, and sometimes it is unintentional. Much of it is due to his personality, and it also helps that we live in the Internet and social media age where communication is wide open.

In the case of the Fed, Trump’s comments just show that the Fed is not some independent agency. It is perhaps independent of Trump, and that is why he is criticizing it.  Trump nominated Powell for Fed chair, and he expected Powell to push for Trump’s policies.  But in a certain sense, the Fed is no different than the CIA, FBI, or NSA. It is part of the deep state, or establishment, if you will.  The Fed people will seek to protect themselves, and they will try not to rock the boat.

If the economy gets into trouble similar as in 2008, then you can rest assured that the Fed will engage in a loose monetary policy once again.  Of course, I say this facetiously in the sense that the Fed’s previous loose monetary policy has created the bubble that we are in now.

The Fed is not going to accommodate Trump, but it is part of the establishment that seeks to generally maintain the status quo.  Why would Fed members want anything different?  The status quo gives them their power and prestige.  It would take a really principled member to seek doing the right thing while destroying his own power.  Any such member would have to be very secretive about his true beliefs in order to get into such a powerful position in the first place.

On the same day as Trump’s comments, the 10-year yield dropped.  The financial media headlines said that yields were dropping on Trump’s comments about the Fed.  Of course, the financial media typically look for explanations for any major market moves.

However, even Trump’s comments did have an impact, why would the 10-year yield move so far?  The Fed controls short-term rates to a much greater degree, at least in the short run.  But if you look at the yields on August 20, the yield on the 3-month Treasury actually went up by 0.01 for the day.

In other words, on the same day that Trump made these comments and the financial media were saying that yields were falling because of these comments, the yield curve was actually flattening.  Short-term rates stayed about the same or even went up slightly, while long-term rates fell.

I have no idea if this yield curve flattening had anything to do with Trump’s comments, and neither does anybody else.  Maybe the yield curve would have flattened that day without Trump’s comments too.

The yield curve has not inverted yet.  It is still upward sloping, but it is considerably flatter than it was a year ago.  This means that the longest bull market ever in stocks may be coming to a close finally.  But with any bubble, it usually lasts a bit longer than you would think possible.

If Trump wants to avoid a recession on his watch in his first term, then he is right to push for lower interest rates from the Fed.  This would prolong the malinvestment (the bubble activities). It makes us poorer in the long run, but it covers up the misallocations for a while longer.  It would make the correction that much harsher in the future.

Fortunately, the Fed is not listening to Trump right now.  It has had a policy of tight money since the end of QE3 in late 2014. The problem is that the public knows that the Fed puts an implicit guarantee on the bond market.  The investing public knows that the Fed stands willing to inflate at a moments notice if and when the economy turns bad.