Hunkering Down

As Obama  and company strut toward a second term, full of vigor and unfettered by fear of facing another election, many people are wondering what to do to stay out of the firing line and preserve as much as possible of their freedom, wealth, and income.  Some things are obvious, such as staying off the EPA’s and DOJ’s radar and  trying to keep one’s number of employees below the threshold for Obamacare. Others are less obvious, and people should share their ideas on things one might do. I have a few preliminary thought on the subject.

The first one is to realize that making investments is going to be difficult for a while. John Bogle has called this the toughest investing environment he has seen, and people such as Jim Rogers are even more pessimistic. Bonds prices are in a bubble phase after a  thirty year secular bull market. Continuing monetary inflation from the fed and large deficits from the government seem likely to lead to price inflation and higher interest rates that will be bad for bonds and particularly bad for bond funds. Cash is guaranteed to depreciate against inflation at present money market rates. Precious metals are subject to the high “collectibles” capital gains rates. American stocks could be driven down or at least held back by government actions that stifle the economy, retard growth, and make businesses less profitable. Owning real estate, even farm land, can make an investor a target for regulators of all sorts. People might consider putting a larger fraction of their portfolios into stocks of foreign countries. Certainly many foreign countries are even less free than Obama wants to make this country, but they have been that way for a good while, and those conditions are already priced into their markets. I would look particularly for opportunities in countries that are moving toward freer economies and more nearly pro-growth policies. It might also make sense to look at the bonds and currencies of nations that seem likely to have less inflation and slower rates of debasing their currencies than the U.S. Precious metals and other collectibles could do well if inflation gets really serious, even with the unfavorable treatment of capital gains on them. Some real estate and farm land might be good as well, but probably should be owned through a corporate structure that gives some protection against ruinous regulatory persecutions. Of course these are just  guesses. I don’t know what will happen, and in my ignorance I am staying diversified. The key fact is that investors should realize that there has been a fundamental change.  For about a quarter of a century beginning early in Reagan’s first term, the United States enjoyed a benign political environment for savings and investing. That began changing a few years ago, and now the benign environment had definitely been replaced by a hostile one. 

I would also suggest that people start taking their privacy a bit more seriously, and protecting it a bit more diligently. The government is going to be looking for newer ways  to shake its citizens down, grab more of their wealth and income, and control more of their activities. We can expect a bigger and more vicious IRS, a burdensome assortment of new reporting requirements, and possibly an increase in out and out surveillance of ordinary, taxpaying Americans. People should consider consciously minimizing the paper (and electronic) trails  they leave. It might make sense for people to get in the habit of doing a larger fraction of their daily business in cash and a smaller amount with credit or debit cards. Purchases that might lead to unfavorable attention from the government,  such as buying ammunition or “seditious” or “red flag raising” books and publications probably should be made only with cash. People should remember that email systems are not private and avoid using email for anything  that needs to be kept private. This of course applies all the more so to social media sites. Political comments at web sites, at least inflammatory  ones, are probably best done using a nom de plume. The notion that the names on those secession petitions that have been in the news are being fed directly into the IRS’s audit database is just a humorous fancy today. In a couple of years, who knows? We can also expect greater interest by the government in finding targeted citizens in technical violation of obscure or even contradictory rules to keep them under control and dampen dissent. People need to be aware of this and take precautions. So, If you choose to be a vocal critic of the administration, and you receive a six dollar check for jury duty, by golly report that windfall on your tax return, just in case.

There are many goods and services that people can either purchase or provide for themselves. People decide what to do  based on a number of factors including differences in nominal costs, inclination or disinclination to do the work involved, and time and effort required to earn enough money to purchase the good or service versus time and effort required to provide it themselves. As taxes and regulations increase, the values of some of these variables change. As a simplified illustration of this, suppose that you want a faucet installed in your bathroom, that  Bob the plumber  is willing to do that job if he can clear twenty dollars on it, and that both of you are taxed at twenty percent at the margin.  To clear his twenty dollars, Bob will have to charge you twenty five. To pay Bob his twenty five dollars, you will have to earn $31.25 from your business or job, a small enough amount that you may easily decide that hiring Bob is well worth it. If you and Bob are both taxed at fifty percent, Bob now has  to charge you forty dollars to clear his twenty, and you have to earn eighty dollars to cover his bill. This removes a good part of the comparative advantage of hiring Bob, and you may think about doing the job yourself. If we progress to Obama’s dream world where you both face a ninety percent marginal rate, Bob will have to charge you two hundred dollars to clear twenty, and you will have to earn two thousand to pay him. At that point, unless your time is very valuable indeed, you probably will be getting out your wrenches, and Bob will be losing your business. Increasing the regulatory costs per dollar earned on either or both of you has a similar effect.

With higher taxation and more regulatory costs, improving one’s life and increasing one’s wealth  through the “money economy” becomes progressively more difficult and expensive, while doing so by non-monetary means often does not. In the light of that people need to reconsider what things they want to acquire with money, and what things they would be better off handling themselves. Increased taxes and regulation stimulate  another underground economy besides the one where money changes hands in unreported  and untaxed transactions – the quite legal underground  economy where people work and cooperate to make their lives better without any money changing hands or goods being bartered. Food at the grocery store will get more expensive. Food people grow in their  gardens will not. Tables and chairs from a retailer will cost more. Tables and chairs made at a wood shop at home will not. (Ikea and stuff like it would fall in between.) Hiring an electrician or house painter will get more expensive. A group of friends helping each other out with wiring or painting will not. Doing more things by himself or in cooperation with friends has a side benefit of expanding a person’s set of skills at performing various basic tasks and thus making him more self reliant and less dependent on the economy’s running smoothly. This by itself could be valuable if things get really rough.

I don’t think things will get really rough. I think the chances of that are small. However they are not negligible, as they have been for most of my adult life, and I think it makes sense to consider what might happen. The risks are there. Obama’s policies are based on false notions and will not produce the results that are being promised. Continued monetary inflation could lead to really bad price inflation. A deepening recession could lead desperate governments to resort  to direct confiscation of people’s assets to keep themselves  going. Increasing poverty, decreasing opportunity for advancement, and a realization that Obama has not delivered the paradise he promised could lead to “civil unrest” among his welfare constituents. Weakness and poor policy in foreign  affairs and defense could lead  to wars, oil embargos, or other damaging crises.  Strikes, “green” pogroms against producers of food and energy, and simple bureaucratic screw ups could lead to the disruption of the production and delivery of basic goods and services. Civil liberties could be curtailed in the name of homeland security and maintaining order, particularly the civil liberties of  those dangerous right wingers.

The question everyone needs to work on is what sort and amount of insurance a person might reasonably want to acquire against these possibilities. It seems clear that it is not time to grab the musket and head for a hideout in the hills, but it seems imprudent to do nothing. For the first time since the 1970s, it is important for reasonable and sensible  people to tackle this problem in a serious way.