One common finance/ investment question arises when somebody comes into some new-found money.  The question(s) goes something like this:

I just inherited $20,000.  Should I invest all of it right away or wait until a market correction?  Or should I use dollar-cost averaging?

Of course, in most cases, the person asking the question is referring to investing the money in stocks.  If someone had invested a lump sum of money in U.S. stocks in March 2009, they would have done very well up until now.  But past performance is not an indicator of future returns.

I do not advocate investing in stocks except for speculation or as part of a permanent portfolio.  I do not buy the common theme that stocks always go up in the long run.  Tell that to the Japanese person who bought into the Nikkei at its peak in 1989.  They are down 50% nearly 3 decades later.  Just how long are they supposed to hold?  Just how long is the “long run”?

And while people will say that won’t happen in the United States, I am not sure how they can say that, especially given the massive levels of debt and regulation.  The only reason you might be able to make this claim is because the Fed would be more likely to engage in massive monetary inflation.

Still, Japan is not a third-world  country.  We are not talking about Ethiopia or Bangladesh here.  In the 1980s, there were many pundits in the U.S. worrying about Japan taking over the United States, economically speaking.

Stocks have paid well in the U.S. since the 1980s with a buy and hold strategy.  Still, this does not guarantee anything in the future.  And also consider that there have been major booms and busts within the last 3 decades, so it hasn’t been a smooth ride.

I recommend a permanent portfolio for more stability and safety.  The returns have been relatively lousy in the 2010s as compared to U.S. stocks.  But this is a reflection of low interest rates and relatively low consumer price inflation.  You give up some of the big returns in exchange for stability.  When stocks take a hit, as they did in the fall of 2008, the permanent portfolio is a good place to be, even if it declines.  The losses will typically be far less.

To get back to the original question, anyone that comes into $20,000, or any amount of money right now, should stay away from stocks, unless it is in terms of the permanent portfolio.  But that leads to another question.  Should you use dollar-cost averaging for the permanent portfolio?

If there were ever a time to use this strategy, it would be now.  Stocks are hitting new all-time nominal highs on an almost regular basis.  Interest rates are still extremely low by historical standards, which means almost no returns from the cash portion and not that much potential for the bonds.  Gold could still go up, but it is not likely to be significant until we see a return of higher consumer price inflation.

With that said, I wouldn’t hesitate too much to dump a lump sum of money into the permanent portfolio.  By its nature, you are not likely to take a big loss, even if the financial markets change quickly.  The permanent portfolio is designed to withstand virtually any economic environment short of an end-of-the-world scenario.  The permanent portfolio is far from perfect, but I haven’t really found anything that works better at this point.

The one environment that hurts the portfolio is a recession.  Even in this scenario, the long-term bonds are likely to go up in value as interest rates fall further.  This probably won’t offset the losses from stocks (and perhaps gold), but it is still far better than being heavy in stocks.

As Harry Browne wrote in his book, recessions don’t last that long.  It will either turn into a depression (good for cash and bonds), or it will turn into inflation (good for gold), or it will turn back into some form of prosperity (good for stocks).

If you have a good chunk of money ready to invest right now, a good strategy might be to invest the majority of it in the permanent portfolio, and to keep a small percentage (in addition to what is in the portfolio) in cash or a cash equivalent.

For example, if you have $20,000, you could put $16,000 into a permanent portfolio setup and leave $4,000 in a savings account.  You would actually have $8,000 in cash when you include the $4,000 (25%) that is in the permanent portfolio.

This way, if there is a downturn, you can put the additional $4,000 into the permanent portfolio.  I am not predicting an imminent major pullback, but it wouldn’t surprise me.  So if you are concerned about an upcoming recession, this is a strategy that you can use if you are hesitant to dump everything into the permanent portfolio.

It is true what they say: In a recession, cash is king.  Perhaps U.S. government bonds will be king too, but you get the point.

It is tempting to invest in stocks right now as you see your friends looking at their 401k balances grow.  It can be frustrating in a boom time when you are not fully participating in the boom.  But when the bust comes, you will be thankful, and this is the important thing to remember.

The boom may last a while longer.  Nobody really knows.  But when the fall in stocks finally happens, you will be able to sleep at night with your permanent portfolio.

Of course, this is just the investment perspective.  The most important thing is to keep your job or whatever form of income you have.  Your income is your number one priority in terms of finances.  Protecting the assets you already have is secondary.

Donald Trump has signed into law legislation to increase sanctions on Iran, North Korea, and Russia.  It was passed overwhelmingly by the U.S. Congress.  As Ron Paul likes to point out, sanctions are virtually an act of war.

This legislation is especially egregious.  Iran has abided by its agreement on nuclear weapons, not that it should have been bound by such a thing in the first place.  This is just more bullying of a country that is no threat to Americans.  If anything, Iran wants ISIS destroyed, but it seems the U.S. government would prefer to fund and support ISIS and overthrow Assad in Syria.

The sanctions against Russia are also horrible, as relations are already bad.  This is due to an alliance between the war hawk Republicans (neoconservatives) and the left in opposing Trump.  It is helped along by the leftist media, who would prefer to risk war with a nuclear power than see Trump succeed at something – in this case, peace with Russia.

The crazy thing about this legislation is that Trump has spoken against it, while at the same time actually signing it.  He says he did it for “national unity”.  But this isn’t national unity.  It is political unity in Washington DC.  It goes against everything that he campaigned for prior to his election as president.  The reason Trump was elected was to stop political unity and to bring us some political disunity.

Trump also correctly pointed out the flaw of hampering the executive branch.  Under this new legislation, the president cannot get rid of the sanctions without congressional approval.  In other words, he has no room to do what he is supposedly good at: negotiate.

If we are lucky enough to avoid another major war, this new round of sanctions is only going to contribute to the demise of the U.S. dollar as the world’s reserve currency.  Americans will no longer be subsidized by foreigners, but I think it will be good for Americans in the long run.  It will put a more severe limit on the federal deficits.

Russia now has to avoid dealing with the dollar.  It does not have to use the dollar as a middleman.  Russian officials continue to accumulate gold reserves, and there is also speculation that they are looking more into cryptocurrencies.

With this new round of sanctions, even Western Europe is not happy.  The U.S. government is managing to make virtually the whole world mad in some way or another.  The major powers are realizing that they do not need to use the dollar as a middleman for trade.  This doesn’t mean they will stop trading with the United States.  But if Russia and China are trading (whether it is between governments or businesses), there is little reason to use the dollar any longer.

For this reason, I believe the U.S. dollar will lose its status as the world’s reserve currency.  It will not be replaced by anything, or at least not another currency.  The only realistic replacement is gold.  These new sanctions are not good for world peace or for world trade, but the price of gold in terms of U.S. dollars will likely go higher as a result.

The three Fed chairmen prior to Janet Yellen all presided over recessions.  The crazy thing is that the last four Fed chairs date back to 1979.

There have only been a total of 18 Fed chairs dating back to 1914 when operations began.

Paul Volcker took over in August 1979 when consumer price inflation and interest rates were both in the double digits.  He presided over recessions in 1980, 1981, and 1982 (arguably one recession).  Volcker was brought in by Jimmy Carter to save the dollar.  He saved the dollar and ruined any chance Carter had of being reelected.  Volcker halted monetary inflation and allowed interest rates to float higher.  This is what led to the recession or recessions of the early 1980s.  This was the correct policy.  It was probably the last time that a good cleansing of the malinvestment was allowed to take place.

Volcker eventually did preside over some monetary inflation, but he was a relatively good Fed chairman if such a thing exists.

Alan Greenspan took over in 1987 and a market crash happened shortly after in October 1987.  He presided over recessions in 1990-1991 and 2001.  He holds much responsibility for the major recession/ financial crisis in 2007-2009 even though he was no longer in office.  Greenspan was in office for a long period of over 18 years.  Despite supposedly being a disciple of Ayn Rand, Greenspan was mostly terrible, engaging in consistent monetary inflation.  The monetary pumping pales in comparison to the period of 2008 to 2014, but it is still no excuse.  The Fed’s policies of easy money and low interest rates led to the tech stock boom and bust and then the housing bubble and bust.  It was also the main culprit of the financial crisis.

Ben Bernanke was left holding the bag.  He took over in February 2006 and adopted the correct policy of tight money.  The problem is that this exposed all of the previous malinvestments from the Greenspan era.  And as soon as the financial crisis hit, Bernanke was part of the plan for bailouts and massive monetary inflation.  Bernanke wasn’t a bad Fed chair because he presided over the major recession that became evident in 2008.  He was a bad Fed chair because of the bailouts and QE1, QE2, and QE3.

He left office in early 2014.  Janet Yellen took over and we have not yet seen an official recession.  Growth has certainly been lackluster, but not officially recessionary.

Yellen presided over the end of QE3.  It was already winding down when she took office and it finally ended in October 2014.  Since that time, monetary policy has been tight.  Sure, interest rates have remained low, but the Fed’s balance sheet has not expanded during this time.

Again, this is the correct policy.  Even though she is considered to be a Keynesian and to the left (she was nominated by Obama), she has still fallen in line with the establishment.  Up to this point, her policies have actually been mostly good, setting rhetoric aside.

The problem is that she hasn’t really been tested yet.  Bernanke didn’t really do any damage until the crisis hit.  Then he ramped up the digital printing presses as no other Fed chair has ever done in history.  We should assume that Yellen would do the same if faced with a major financial crisis.

Yellen’s term is set to expire in early 2018.  While Trump had initially indicated that he would replace Yellen, now there has been a softening and some indication that he might allow her to stay.

It is incredible that Yellen has been able to avoid a recession on her watch for nearly 4 years.  Whether or not a recession hits before early 2018, I think it would be wise for Yellen to step down (from her point of view).  I know these people like the prestige and power, but she should thank her lucky stars if she can exit gracefully without a recession on her watch.  She can hand off all of the problems to the next Fed chair.

If there are no major economic changes between now and early 2018, Yellen could leave office as being one of the least inflationary Fed chairs in modern history.  That is a story that most libertarians could not have predicted.

While the financial independence (FI) community has grown in recent times, the whole concept is still not appealing to most people, if they even know about it.

There is a big difference between contributing to your 401k versus living on $25,000 per year.  Most middle class people, if they are really determined, can find a way to set aside a small percentage of their income.  But the idea of living on $2,000 per month or having a savings rate of 50% or more just seems miserable to most people.

Living on $2,000 per month sounds miserable to me, at least in this stage of my life with a family.  When I was in my young 20s right out of college, I was living on less than $2,000 per month.  But that was when I had two roommates and my health insurance premiums were something in the neighborhood of $10 per pay period.  Everything was much cheaper at that time, but particularly health insurance.

I have heard claims from people of living on $7,000 per year.  This seems absurd to me, unless you are being subsidized such as living in your parents’ basement for free.  Even the claims of living on $25,000 per year seem absurd for someone who has a family.  In today’s world, health insurance can cost you $10,000 per year right off the bat, unless you work for an exceptional employer that covers most of it.  In most cases, you would only find an “exceptional” employer in the form of the government.

I have discussed a lot recently about the financial independence/ early retirement community.  I already think that the 4% rule is going to steer people wrong, especially when we see a major market crash.  And if you have your money in a money market fund, then you are not going to be living off the interest because you aren’t going to get a 4% return.  You are going to eat into your principal savings amount.

You could have your money invested somewhere other than stocks making a decent return.  But real estate has its own set of risks, and it is also not purely passive income in most cases.  And in the case of a business, that is probably not going to be purely passive either.

Within the financial independence/ early retirement community, I also hear a lack of discussion on the issue of inflation.  That is a huge factor that should be considered, yet it seems to be largely ignored.

People who retire early because their living expenses are really low are probably making a mistake.  If you can actually live on $25,000 per year, then 25 times that (4% rule) is $625,000.  For someone who is, let’s say, 45 years old, that does not seem like very much money to retire on.

Don’t get me wrong here.  That person is far better off than the person who is living paycheck to paycheck and has little in the way of savings.  But it will also be hard for this early retiree to go back to work because his savings fell short.

With such a low budget of just over $2,000 per month, you could be set back significantly with one major expense such as a medical event.  And as I already mentioned above, what happens with inflation?  If prices double over the next two decades, you will be spending over $4,000 per month and likely eating into your principal savings.

Again, there are also no guarantees of returns.  If you have your money in stocks, that is really scary, which is what many in the community advocate and do.  Imagine retiring on just $625,000 and then seeing a major stock crash that cuts your portfolio in half or more.  Good luck living the next 4 decades or so on just $300,000.

The other aspect in all of this is personal, and it involves enjoyment and life pleasures.  While we should certainly take advantage of the many enjoyable things in life that are free or close to free, we should also acknowledge that some things just cost money.

What kind of life would it be to live on just $25,000?  I don’t really like the idea of early retirement anyway because most people should be doing something productive.  That could mean working on a calling or a passion, but it should still be something.  But I certainly could not imagine not working while also living on a small amount each month.  Wouldn’t you want to earn money and take a nice vacation or enjoy some different experiences?

In conclusion, I like the idea of saving money and adding freedom and flexibility to your life.  With that said, you shouldn’t be striving to leave a particular job.  You should be striving to go into something.

And if you are going to go the financial independence/ early retirement route, make sure you are factoring everything in.  You should account for recessions, inflation, and unexpected expenses.  You should also factor in a scenario of getting bored and wanting to do new and exciting things.

If you make a high income and are achieving financial independence because you are living a middle class lifestyle while earning an upper class income, then you will be much better off than the person who is retiring early just because he tries to live on such a tight budget.

The whole idea of achieving financial independence is to have freedom.  But if you then have to live on $2,000 per month, that doesn’t sound like very much freedom to me.  It sounds like a rather dull life.

The latest report of major foreign holders of U.S. government debt was released on July 18, 2017, which reports the latest holdings at the end of May 2017.

Japan still holds the number one spot, but China is in a very close second.  From one year ago, both countries have decreased their holdings (China more than Japan), but it hasn’t been that significant.  The total holdings are also down, but again, not significantly.

Foreign central banks are mostly mercantilist, but this is especially true of the Chinese and Japanese central banks.  This means that they will buy U.S. Treasuries in order to hold down the value of their own currencies in order to boost their exporting sector.  The problem (for the people in those countries) is that it ignores the consumer.  It makes ordinary things more expensive for the people living in China and Japan.

The U.S. is not mercantilistic for the most part.  Donald Trump can be at times, but policies so far have not reflected his rhetoric.  Americans certainly have a lot to complain about in terms of the Federal Reserve and the U.S. government, but American consumers have nothing to complain about when it comes to being subsidized by foreigners.  As long as foreigners still love the U.S. dollar, Americans will continue to be subsidized.

Also, while the Fed has certainly been really bad for the last decade, it has engaged in a tight monetary policy for nearly three years now.  It has not expanded the monetary base since October 2014.  Meanwhile, the other major central banks of the world (Japan, China, Europe) all continue to inflate.  So even though the U.S. dollar should not be loved, it is easy to see why it is the most favored currency relative to all of the others.

You never know what will change in the future, but I certainly don’t see this mercantilistic view changing for the central banks of China and Japan any time soon.  If they decide to dump their U.S. Treasuries, it will be for other reasons.

It is easy to hear talk of China dumping U.S. Treasuries, but it hasn’t happened yet.  Maybe Chinese officials will allow some debt to mature without rolling it over, but it will not likely be significant.  The Chinese central bank will likely continue to accumulate more gold, but it will still be a small fraction compared to its holdings of U.S. debt and debt denominated in other currencies.

We have heard a lot of talk in the U.S. over the last few years about the Fed raising interest rates.  But if the Fed continues to raise its target rate and we get a recession, then long-term interest rates on U.S. bonds will likely go down.  American investors view U.S. government debt as safety, so that it where they will run to in difficult times.  Likewise, foreign central banks view U.S. government debt as a safe haven.

Therefore, until we see significant consumer price inflation, I do not think we are going to see significantly higher interest rates.  If anything, long-term rates will probably drop in the next recession.

If the Fed reacts aggressively (recklessly) in the next recession and expands its balance sheet further, then maybe we will finally start to see significant broad consumer price inflation.  Until that happens, you shouldn’t bet against the U.S. bond market.  Foreigners and U.S. investors still view it as a place of safety.

Trump has been in office for 6 months, and the world has not yet fallen apart.  When Trump was elected, it seemed like a little bit of a relief in that tensions with Russia would likely go down.  Hillary Clinton was provoking a game of chicken with Russia in Syria.

Unfortunately, things haven’t worked out that way.  It was naive to expect Trump to get into office and overturn the U.S. empire.  Just going against the spy agencies is a feat in itself.  There is so much hatred for Trump though, that alliances have formed against him whether they admit it or not.

The Hillary Clinton supporters and the war hawks in the Republican establishment are on the same side.  Even the Bernie Sanders wing, to a certain extent, has joined the party.  They care more about opposing Trump than starting another war, let alone a war with a major nuclear power.

Since Trump won the presidency, all of the Trump enemies are trying to find an excuse to delegitimize Trump.  Instead of just attacking Trump personally (which they continue to do), they also will risk war with Russia by making up stories about Russian interference in the election.  In doing so, it has made things worse with Russia.

Luckily, Trump finally met with Putin recently.  It should have happened sooner.  I don’t think Trump wanted to go out of his way to meet up with Putin because of appearances, not that Trump should be one to care about appearances.  We can all wonder what was said in that meeting with Putin.  The hope (for us who favor peace) is that Putin told Trump the truth.  The hope is that Putin told Trump that the spy state was against him (Trump) and that there are insiders who are continually betraying him.  The hope is that Putin told Trump the real story of what is happening in Syria and that it is the U.S. that has been killing innocent people and funding the terrorists.

In terms of the Russia investigation, the most interesting story in the last week is Trump’s comments on the betrayal of Jeff Sessions, his attorney general.

Trump said of Sessions: “How do you take a job and then recuse yourself?  If he would have recused himself before the job, I would have said, ‘Thanks, Jeff, but I’m not going to take you.’  It’s extremely unfair – and that’s a mild word – to the president.”

These are incredibly strong words.  While Sessions was a Trump supporter early on (at least in his words), Trump obviously feels betrayed at this point.  I see this as a positive development.

From a libertarian standpoint, Sessions is terrible.  He may have a few good attributes as compared to other politicians (not saying much), but he is horrible on the issues that he focuses on.  He is a big proponent of asset forfeiture, and he is a major drug warrior.  While he comes across as a “law and order” kind of guy, he certainly isn’t that when it comes to the Constitution.  He wants to ramp up the war on marijuana, even in states where it has been officially legalized.  Of course, if he followed the Constitution, he would know that there should be no federal war on drugs.

It is also positive that Trump feels betrayed because there might be hope of him opening his eyes.  While I am no great fan of Steve Bannon, I think he is more trustworthy than almost anyone else Trump has around him.  At least Bannon is not an establishment guy, and he does not promote conflict with Russia like most of the others do.

I know that Trump has been a failure on most of his promises.  He pulled the U.S. out of the Paris agreement, which made both sides happy.  Sure, the left is outraged, but they like it that way.  They need someone to beat on.  But let’s face it – that whole climate agreement was basically unenforceable anyway.  I liked the symbolism of Trump withdrawing, but it probably wasn’t much more than that.

On Obamacare and taxes, Trump has been a failure.  Many Trump supporters would say it is a failure of the soft Republicans in Congress, which is right to a certain degree.  But Trump should have pushed for immediate repeal before getting into office.  He should have had the language of a bill ready to go on day one.

On government spending and deficits, Trump has been just as bad as all of his predecessors.

Even in the areas where I strongly disagree with Trump (tariffs and building a wall), he has done virtually nothing.  I am glad on these fronts, but it just shows that not much has changed.

If there was one hope for libertarians, it was that Trump would change the foreign policy, or at least attempt to do so.  So far, he has mostly been a disappointment.  But maybe things are looking up a little after his meeting with Putin.  He has also supposedly agreed to stop funding some terrorists.  Maybe that is a result of his meeting with Putin.

Trump played too much ball with the establishment that is trying to take him down.  He really shouldn’t trust most of his cabinet and his advisors.  Most of them will hurt Trump in a second if they see it benefits them.  Some of them already have hurt him whether he knows it or not.  This includes Mike Pence.  Pence is staying quiet on the sidelines for a reason.  He will turn on Trump when the time is right, if that time should arise.

Maybe this is naive on my part, but I still have a small hope that Trump has some honesty and decency about him.  It doesn’t mean that anyone should look up to him or think that he is an image of morality.

I see similarities with Trump and John F. Kennedy.  Kennedy had his moral indiscretions as well.  But I think Kennedy wanted to avoid nuclear war.  He had something of a conscience.  I think Trump might be the same way.

If Trump can just come to the full realization that the spy state, the deep state, the establishment, and the military industrial complex (or whatever you want to call all of these overlapping things) are all in opposition to him, then we will be better off.  At least then he can fight against them instead of naively giving them more power.

While Trump has virtually no authentic support in Washington DC, he has to remember that nearly 63 million people cast a vote for him last November.  That is where his power lies.  That is where he needs to find friends.  Those are the only people he can truly trust.

The Bureau of Labor Statistics (BLS) released the latest consumer price index (CPI) numbers for June 2017.

The CPI for June came in at zero.  That is 0.0%.  The year-over-year stands at just 1.6%.

The more stable median CPI came in at 0.1%.  The year-over-year median CPI now stands at 2.2% after being at 2.5% for the first three months of 2017.

When I said that the year-over-year CPI stands at “just” 1.6%, that is not to mean that lower price inflation is bad.  As consumers, we hope for less price inflation, unless you actually like to pay more for the things you buy.  We should actually hope for an increase in purchasing power due to advancing technology and production capabilities.

The problem here is that this is mostly a monetary phenomenon.  It would be great if monetary inflation stayed near zero and we gained purchasing power.  The problem is that this disinflation is a result of a prior artificial boom, even if it hasn’t felt like that much of a boom.  The other problem is that the Fed will likely react in harmful ways, as it typically does when things get bad.

The term disinflation is an appropriate one at this time.  It means there is a decrease in the rate of price inflation.  We are still losing purchasing power, but at a slower rate.

This is a warning sign of a softening economy.  The American middle class has already been struggling.  The good news reported is in primarily two things:

1. A booming stock market
2. Low unemployment (at least according to the government statistics)

Unfortunately, there are problems with both of these things.  For stocks, it is a bubble waiting to implode.  The boom in stocks has largely been a result of the low interest rates and the easy money since 2008.

In terms of unemployment, it is complicated.  It does not include the people who have given up looking for jobs.  And just because the official unemployment rate is low, it doesn’t mean great things are happening.  Sure, it is better for people to be working who want to work.  But at the same time, we should consider that wages have been mostly stagnant.

The disinflation we are seeing in the latest CPI numbers could mean that some air is starting to come out of the bubble.  This is why I have continued to caution on stocks.

The Fed has kept the monetary base relatively stable for nearly 3 years now.  But from 2008 to 2014, it was a time of very loose money.  And even with the Fed’s tighter policy, interest rates have remained low, which has probably contributed to the boom in stocks.

We also have to wonder how the lower CPI numbers are going to impact the Fed’s decisions going forward.  Is the Fed going to continue to raise its target federal funds rate in the face of disinflation?  And how low do the price inflation numbers have to go before we start hearing talk of another round of quantitative easing (digital money printing)?

This could still take a little while to fully develop, but be warned here.  There are many warning signs of a coming recession.

There is a lot of talk currently by Janet Yellen and other Fed officials about interest rates and the Fed’s balance sheet.  There is always debate going on in the financial community about where the Fed will take interest rates and how fast.

Right now, the Fed controls the overnight lending rate for banks (the federal funds rate) by paying interest on bank reserves.  It is not controlled (as in the past) by increasing or decreasing its balance sheet (the money supply).

Therefore, the Fed does not directly control interest rates.  In fact, it is possible even the opposite will happen of what is expected.  If the Fed continues to raise its target rate, most people are expecting market interest rates to rise.  But if the Fed’s raising of its target rate coincides with a recession (whether or not it is the cause), then long-term interest rates will probably go down as investors seek safety out of stocks.

Now let’s forget about the Fed and look at what might happen if market interest rates were to rise significantly.  Many libertarians and those of the Austrian school have been stating that there is a bond bubble.  The problem is that some of these people have been saying it for a rather long time.  Of course, anyone who knows Austrian economics and the study of human action should know that it is impossible to predict the market with certainty, especially the timing.  This would require predicting how billions of people are going to act.

We probably are in a bond bubble, but we don’t really know when it will finally collapse.  Things can go on for a lot longer than what seems possible.  After all, Social Security is still humming along.

It is common to read (amongst both libertarians and non-libertarians) that if interest rates go up by a certain amount, then it is going to lead to payments on the national debt going up by a certain amount.  This is all true.

The problem is that many analysts say this as if it would be a dire situation.  You may hear someone say something such as, “If interest rates go up to this level, then the federal government will owe $500 billion per year in interest payments, and then we will be in big trouble.”

My question is, “Who will be in big trouble?”

I think that higher interest rates would ultimately be a blessing for the average American.  Sure, just as with a recession, there will be aspects that will be painful.  But you need this short-term pain in order to straighten things out onto a path of greater prosperity.

The biggest problem we have economically is the massive level of government spending.  I understand this is debatable.  The regulations we live under are horrendous and stifle business to a great degree.  One could also say that the Fed is the biggest problem, but I think this really just goes hand-in-hand with government spending.  It is the Fed’s ability to create money and buy assets that allows the great level of deficit spending by the federal government.

Virtually every dollar spent by the U.S. government is a misallocation of resources.  Of course, some spending is far more damaging than other spending.  I would rather see someone get their Social Security check than to see more money go into bombs and tanks in order to go to war.

The federal government is currently spending in the neighborhood of $4 trillion per year.  The bulk of this spending (about 80%) is on military (called “defense”), Social Security, Medicare, Medicaid, and interest on the debt.

Let’s say, hypothetically, that the national debt grew bigger and interest rates spiked up so high that the annual interest payments on the debt amounted to $2 trillion, which is half of the current budget. Meanwhile, as similar to the 1970s, the dollar is quickly losing its status as a reliable currency.

Therefore, the Fed has to pull back and allow its target rate to rise even further, as similar to the late 1970s and early 1980s.

All of a sudden, Congress is essentially forced to cut spending.  Actually, even if it doesn’t have to cut overall spending, it has to divert nearly $2 trillion to interest payments that was previously being spent on other things.

If Congress does not drastically cut Medicare and Social Security, then it will be cutting most of the military and most of the discretionary items.

Where does this $2 trillion of interest payments go?  It goes to investors.  That includes going to foreign central banks such as Japan and China.  It includes private investors.  It includes private pensions and 401k plans.

I would much rather see $2 trillion per year diverted to investors than continued to be spent and misallocated by the bureaucrats in Washington DC.

While virtually all government spending is a misallocation of resources, some misallocations are worse than others.  I would rather see money going into private hands where it can be saved, spent, or reinvested, rather than being spent on government programs that take away our liberty.

In addition, the higher interest rates would likely lead to overall spending being reduced.  This is what we so desperately need.

After the fall of 2008, many state and local governments were forced to cut back, especially with falling tax revenues from property taxes.  Meanwhile, because of the Fed, the federal government’s spending exploded.  That was the exact opposite of what we needed.

One of the main reasons that the American middle class is struggling so much is because government is simply spending too much of our money.  It doesn’t matter if it is done through taxation or through deficit financing.  All of this spending is misallocating resources.  This money is going towards resources that are not in the highest consumer demand.

Therefore, I say we should hope for higher interest rates sooner rather than later.  It will be a painful time either way.  Right now is a painful time as many Americans struggle to save money and pay their bills.  They are in need of a correction.  They need reduced government spending, especially at the federal level.  This can be brought about by significantly higher market interest rates.

In early 2014, then president Obama announced during his State of the Union address a new government-sponsored retirement program.  It is called myRA, or my retirement account.  It also has a play on words (or letters) with IRA, which is an individual retirement account.

The myRA is a type of Roth IRA, which allows after tax dollars to be contributed, just like a Roth IRA.  It is geared towards people without a lot of money and those who don’t have employer-sponsored plans.

You can contribute small dollar amounts.  Therefore, it would be common for a participant to contribute 25 dollars per paycheck to a myRA account.  However, you are limited to $15,000 in the account. Once it reaches this amount, it has to roll over into a private retirement account.

While it is better to save something rather than nothing, good luck to somebody who is planning a retirement based on savings of $15,000.  I don’t know how many people will reach the $15,000 limit by contributing a few hundred dollars per year while earning very little interest.

And that is the other catch.  It is not like a Roth IRA where you can buy stocks, mutual funds, or other types of investments.  In a myRA, you will be put into government bonds, which don’t exactly pay very well right now.

In this article about the myRA plan, a certified financial planner makes the comment that because you are investing in U.S. Treasury bonds, that it is guaranteed, and you will not lose value.

In nominal terms, this is probably correct.  But she is obviously not accounting for depreciation of the money.  If you are earning 2% interest and consumer prices are going up at 3%, you are losing money in real terms.  Your purchasing power is going down.

In the title of this post, I label the myRA as another government boondoggle.  But this is really giving it the benefit of the doubt.  A boondoggle is just a waste of money or resources.  Unfortunately, like many government programs, there may be ill intent on the part of the people who designed it.

They put out the program as a way to invest safely without risk.  That is why participants have to buy U.S. government debt.  But the politicians and bureaucrats are setting the stage for getting people to buy U.S. government debt in their retirement programs.  Whether it is to keep interest rates low, or to confiscate money through inflation, or to eventually default on the debt, or simply to allow massive government spending to go on longer, the motivations by the government officials are to benefit themselves at the expense of others.

This is why all retirement accounts are concerning to a certain degree.  I have offered reasons why not to invest in a 401k plan.  One of those reasons is that the government could eventually force you to invest a portion in U.S. government debt for “the good of the country”.

As the U.S. national debt gets worse, the government is going to look for new ways of financing its deficits.  The politicians and bureaucrats in Washington DC are going to do everything they can to encourage (force?) people to buy into U.S. government bonds.

The good news about this whole myRA plan is that most people are simply ignoring it if they even know about it.  According to this article near the end of 2016, there were only about 20,000 participants.  Out of a country of 325 million people, that is basically a drop in the ocean.  Of course, there are probably a lot of people not participating because they can’t afford to because they have to pay for Obamacare and the massive government spending.

Let’s hope this program continues to go nowhere.  But just be warned that as the fiscal problems continue to grow in Washington DC, there are going to be creative ways of trying to extract more money out of you.

The minutes from the last FOMC meeting were released.  You can view them here if you need to read something to fall asleep.  There are a few parts that may be interesting, but most of it is Fed speak and mostly useless.

While the FOMC hiked its target federal funds rate at the last meeting, that isn’t really the big news.  This rate does not mean a lot right now anyway because it is not driving the monetary base.  It is the overnight lending rate for banks, but most banks don’t need to borrow overnight to meet required reserves because they have built up massive excess reserves since 2008.

In the past, when the Fed wanted to raise its target rate, it would sell off assets into the open market.  This was monetary deflation.  In the inverse, it would buy assets if it wanted to lower its target rate.  Since 2008, this no longer holds true.  The Fed is hiking its target rate by paying a higher interest rate on bank reserves.  It is independent of the monetary base.  The only reason its hike in its target rate is possibly deflationary is because the higher rate paid on bank reserves might entice banks to lend even less money.  If the banks can keep deposits with the Fed and earn a higher interest rate than before, why risk loaning out the money?

The bigger story with the Fed is its overall balance sheet.  It is now talking about reducing its balance sheet by not rolling over all of its maturing debt.  The big question mark right now is the timing of all of this.  Will they start soon?  Will it be next year?  And if they wait too long and the economy shows signs of a recession, would this take the balance sheet reduction off the table?

The only dissenting vote in the last FOMC meeting was Neel Kashkari.  He dissented because he thinks the Fed is being too hawkish.

It is important to note though that the Fed has not been inflating since it ended QE3 back in October of 2014.  In another three months, assuming nothing changes, we can say that the Fed has gone the last three years without inflating the money supply.

Our problem isn’t the Fed’s tight money policy of the last three years.  Our problem is the really loose monetary policy from 2008 to 2014.

I think the Fed is trying to tighten its policy in case there is another recession.  It has been almost 9 years since the financial crisis hit (when it became evident), and the monetary base is still almost 5 times higher than where it originally was.  If another recession were to hit right now, is the Fed going to double or triple its balance sheet on top of what it has already done?

In the FOMC minutes, there is one particular part that caught my attention: “However, the Committee would be prepared to resume reinvestment of principal payments received on securities held by the Federal Reserve if a material deterioration in the economic outlook were to warrant a sizable reduction in the Committee’s target for the federal funds rate.  Moreover, the Committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate.”

In other words, if the economy turns down, the Fed will not hesitate to resume its monetary inflation.

I would like to point out one other thing regarding these minutes and the stories linked to them.  There is an almost obsession with consumer price inflation being relatively low.  I follow the CPI numbers closely because everyone else is.  But I would like to remind everyone that you can still be in a bubble economy even with relatively low price inflation.  This is exactly what happened in the late 1920s in the lead-up to the Great Depression.  Consumer price inflation was low, but assets were booming.

Of course, Hoover, and then Roosevelt, did many bad things to prolong the initial downturn and make things far worse than they ever should have been.  But the point remains that stocks crashed from their bubble while consumer prices had remained relatively stable up to that point.

In other words, just because there is low consumer price inflation as measured by the government’s statistics, it doesn’t mean that there isn’t bubble activity in certain sectors.  This seems especially important to point out right now as stocks keep hitting new highs, despite continual lackluster economic growth.

This isn’t to say that stocks won’t run higher still.  But the saying here holds that I would rather be out too early than a day too late.