Thursday, March 31, 2011

Foreign Governments and U.S. Debt

For some reason, foreign governments and foreign central banks continue to buy U.S. government debt.  The Chinese and Japanese governments are by far the largest holders.  The "leaders" of these countries are mostly Keynesians or some sort of off-shoot.  You could also call them mercantilists.  They are stupid to continue to fund Congress' spending spree.  The Chinese and Japanese governments would be better off buying gold.  Actually, they would be better off accumulating nothing and just allowing their economies to be free.  Although the Chinese government has been more openly talking about buying gold, it is not anywhere near to the extent of U.S. government debt.

These foreign governments are basically subsidizing U.S. consumers.  This is good for most U.S. residents, at least in the short-term.  The bad part is that the foreign governments are helping to support a bad habit (spending by Congress).  It is like a parent that keeps giving money to the irresponsible kid.

When foreign governments buy U.S. treasuries, it means that the Congress can keep running up the debt without having to worry about who will buy its bonds.  If, for example, the Chinese government said "no more", or even worse, if it started selling U.S. debt, then other buyers would have to step in.  It could be other foreign governments.  It could be foreign citizens.  It could be U.S. citizens.  And of course, it could be the Federal Reserve.

In order to entice buyers, interest rates would go up.  This means the federal government would have higher interest costs.  This means that there will be even more deficit spending, unless Congress makes cuts to the budget (yeah right).

It is just hard to grasp how these foreign governments could be so stupid.  They should easily see the writing on the wall.  With QE2 in full force, the dollar has nowhere to go but down in the future.  The Chinese and Japanese will get paid back in dollars that are worth less, while getting paid tiny amounts of interest.  They are central planners and they don't understand economics.

The free ride in the U.S. is almost over.  The politicians in DC will continue to spend like crazy until they are forced to cut back.  The Chinese and Japanese politicians will continue to be stupid for a while longer and hold onto U.S. government debt.  But the market will straighten things out eventually.  There will be a day when rates will go up and the Fed will be forced to create new money to support the spending habits in Congress.

The ultimate day of reckoning will be when the Fed faces a complete destruction of the dollar.  The Fed will have to stop the money flowing or else face hyperinflation.  When the Fed stops the money flow in an attempt to save the dollar, then the politicians in DC will really be squirming.  They will face angry voters.  They will be forced to cut spending on a massive scale.  They will face a similar circumstance as what many states are facing.  It will just be on a much larger scale.

Wednesday, March 30, 2011

How the Fed Creates Money Out of Thin Air

The Federal Reserve has a monopoly on the money supply in the United States.  No individual or business can legally do what the Fed does.  Although the Fed supposedly has a dual mandate of keeping stable prices and maintaining low unemployment, it does neither.  In fact, the Fed causes higher unemployment and less stable prices.  The real purpose of the Fed is to protect the big banks and allow Congress to deficit-spend.

Although more Americans are understanding that the Fed creates money out of thin air, most do not understand how it is done.  Basically, the Fed buys assets and it does so by creating digits.  These new digits represent money.  So when the Fed buys assets, it is creating money out of thin air, essentially with an accounting entry on the computer.

Now, many of us like to say that the Fed prints money.  This is technically not correct, but it does get to the point.  The Fed creates digits.  If more people try to redeem these digits from the banks, then actual money will be printed.

Before 2008, the Fed only bought U.S. government treasuries/ bonds.  In late 2008 and early 2009, the Fed bought huge amounts of so-called toxic assets.  These were mortgage-backed securities that were owned by the big banks.  These mortgages (pooled together) were in trouble because of the crash in the housing market and the recession.  More and more people were defaulting on their mortgages and these assets were declining in value.  The Fed bought many of them from the failing banks in order to save the banks.  The Fed bought them at their original value, instead of their lower market value.

Usually, if the Fed wants to lower its balance sheet (take money out of the system), it can simply sell some of its assets.  These assets are typically U.S. treasuries.  But in the case of these mortgage-backed securities, they may only sell on the open market for half of what the Fed paid for them.  Therefore, the Fed will have trouble pulling back the money supply with these.  And the Fed will not dare sell them back to the banks at the original values or else it would sink the big banks.

The Fed can create money out of thin air by buying anything.  The Fed could start buying cars and televisions.  But since the Fed typically buys government debt, it allows the federal government to run up its debt to very high levels as we currently see.  This has an effect on interest rates because of what the Fed is buying.  If the Fed bought cars and televisions, it would distort those markets, but it would not impact interest rates anything like buying government debt does.

With QE2 in full force, the Fed continues to create new money at a staggering pace.  Usually this new money would be lent out by the banks and the fractional reserve banking process would take over.  But this new money has gone into excess reserves, which has kept price inflation in check (for now).

It will just be a matter of time before the Fed has to make a major decision.  It will either have to continue to create new money and fund the Congress or it will have to stop and maybe even reverse.  If the Fed continues, it will eventually risk hyperinflation and a complete destruction of the currency.  If the Fed stops (which I think it ultimately will once we have high price inflation), then we will experience a major depression and the federal government will be forced to cut spending dramatically.

We have many reasons to be optimistic in the long-term.  We also have many reasons to be pessimistic in the short-term.  Hold onto your hat for a wild ride ahead.

Tuesday, March 29, 2011

The Importance of Stable Money

Libertarians understand that government interference in our lives generally makes things worse.  This holds true in any area, but particularly in economics.  We know that when the government taxes or regulates, it harms free individuals trying to freely associate.  Taxes and regulations harm employers, employees, customers, etc. and they also distort production.

One thing that is overlooked outside of Austrian economic circles is the importance of the monetary system.  You can have a limited government as far as taxes and regulations, but if the monetary system is bad, then the economy will suffer greatly.

The United States saw the greatest growth in productivity and living standards in the 19th century as ever before.  People who have some grasp of free market economics attribute this to the low taxes and regulations during that time.  And while this aspect was certainly important, I believe the monetary system was even more so.

During the 1800's, the U.S. had a fairly stable monetary system.  It was not exactly an Austrian economist's dream, but it was definitely a lot better than what we have today.  There was not a complete free market in money and there wasn't even a pure gold standard.  But it was still a monetary system based on gold and silver.  Although it had its flaws (due to government interference), the monetary system of the 19th century kept a very strict limit on government inflation and debt.

The 19th century provided the people of the U.S. with price deflation (oh the horror).  But this was not deflation like during the Great Depression.  This was an increase in purchasing power for the average guy. He was able to buy more with his money as technology and productivity increased.  Capital was accumulated and invested like never before.  People saw their standard of living increase, even though the early 20th century really exploded off of the capital investment and technology from before.

The fact that the monetary system was reliable and predictable really set the stage for booming business.  Although there were "panics" and mild swings in the 19th century (again, usually caused by government), it was actually a much more stable time.  Since the Federal Reserve was formed in 1913, we have seen booms and busts like crazy.  These wild swings are attributable to the Fed's monetary policies.

If the U.S. (and any other country) really want great prosperity going forward, the first thing that needs to happen is to get rid of the central bank and allow a free monetary system.  To start this process, we should all advocate the repeal of legal tender laws.  We should all be allowed to do business with whatever currency or other form of money we wish to use.  The Fed should not have a monopoly on money.  This should be a major goal for those who love liberty.

Monday, March 28, 2011

Timing Investments

Understanding economics, particularly Austrian economics, can help us in our investing.  Austrian economics teaches us that the study of economics is really the study of human action.  While charts and formulas can be helpful, predicting economic trends is really trying to predict human behavior.

This is also why it is so tough to time investments.  There were some people that called the housing bubble back in 2003 and 2004, a few years before the actual peak.  There were a few that called the tech bubble in the 1990's years before the actual peak.  So while they were right in their predictions of the bubbles popping, their timing wasn't right.

Keynes did get something right during his lifetime.  He said that the market can stay irrational longer than you can stay solvent.  This really is a great statement.  It is why it is so tough to play the futures/ options market.  It is also why you should never go "all in" (to borrow a poker phrase) and put all of your money in one basket.

Let's say that you think the price of gold is going to go to the moon.  The current price is just over $1,400 per ounce.  Let's say you think it will double and go to $2,800 in the next year.  If you put all of your money into gold and it does as you think, then you will double your money.  But what if that doesn't happen?  What if it goes down over the next year to $1,000 before actually going to $2,800 the following year?  In that scenario, you lost the opportunity to buy it at an even lower price and make even more money, but at least you still doubled your money.  It just took longer than you thought.

Of course, there is the possibility that you could have been totally wrong and lost money.  Someone could have predicted in 1981 that gold would surpass $1,000 per ounce and they would have been right if they were willing to wait over 25 years.

The point is that even if you can make some accurate predictions as to what will happen in the economy and with certain investments, you should still remain somewhat conservative.  You should speculate with money that you can afford to lose and you should always keep some cash.  You may think that you see the investment of a lifetime, but what if something even better comes along in another 6 months?  You would be better off keeping some cash on the side.  In the case of the gold example, if you thought it was a great buy now because you think it will go to $2,800 per ounce, then what if the price drops over the next few weeks?  Wouldn't it be nice to have some extra money to buy more gold at $1,000 instead of the $1,400 price?

This is not to say that you should wait on things either.  I am a believer in the permanent portfolio as described by Harry Browne in his book Fail Safe Investing.  I believe everyone should put a majority of their investments in something similar and do it immediately.  But if you are going to take some big risks with some play money, I would still suggest that you not bet it all at once.  Leave some money aside so that you can play another hand later on.  After all, you may be right in your prediction but wrong on your timing.

Don't become insolvent while the market stays irrational.  You may think that something should happen now, but the billions of people that make up the market may not act that way right now.

Saturday, March 26, 2011

Excess Reserves and Price Inflation

The adjusted monetary base continues to go up at a staggering rate.  It has nearly tripled in the last 3 years.  You can view it here:

http://research.stlouisfed.org/publications/usfd/page3.pdf

The excess reserves held by commercial banks continue to go up with the monetary base.  You can view it here:

http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=EXCRESNS&s[1][range]=1yr

One question I haven't really seen answered (or at least not very well) is whether we can still have significant price inflation if excess reserves continue to increase with the monetary base.  I am not absolutely sure of the answer either, but I have thought hard about it and think I can answer it.  Because there is still slight doubt in my mind, please allow me to revise my answer in the future if I need to.

There are two things that will cause price inflation.  You can have an increase in the supply of money or you can have a decrease in the demand for money (a.k.a. high velocity).  With an increase in excess reserves, the fractional reserve banking process is prohibited.  The Fed is buying assets and more money is being kept on hand at the banks.  The increase in excess reserves means that banks are not lending this new money (probably out of uncertainty).

So basically, the amount of money in the system is increasingly available, but it is not being used.  Unless the reserve requirements are changed, the banks could change their minds any minute and decide to loan out the new money.

But even aside from the supply of money, I believe that the demand for money could also be affected by all of this.  First of all, there is just an expectation of future price inflation due to the easy money policies (QE and QE2) and the massive debt.  In addition, there is actually more money in the system for people to spend.  At some point, the checking account balances of certain individuals and certain businesses will get high enough that they will start to spend more money.  So even if the total money in the banking system basically stays the same, the money may start changing hands faster.  This means there is less demand for money.  Another way to put it is that the velocity of money is higher.  The faster that money changes hands, the more prices will go up.

Just to use an extreme example, let's say that the Fed buys $10 trillion in government bonds at one time.  The government instantly uses this money to hand out checks to every American citizen in the amount of $30,000.  Americans put this money in the bank and the banks hold it as excess reserves, as opposed to lending it out.  Even though it is sitting as excess reserves, people will undoubtedly start buying more things like cars, televisions, organic food, furniture, etc.  Prices will be bid up, even as money in the banking system stays there (but changes hands).  Money will change hands more quickly and prices will be bid up.

Aside from this, just the announcement of the Fed buying $10 trillion in government bonds would be enough to trigger massive price inflation.  It would happen just upon the announcement.

In conclusion, I have not seen this question answered well by anybody, even the great Austrian economists of our time, but I do believe it is possible and maybe even quite likely that we could see significant price inflation even as bank excess reserves are increasing.

Thursday, March 24, 2011

Portugal Now on the Brink

Portugal is in the news today.  The prime minister resigned as the country will soon become the third European country to seek a bailout.  Just like the other welfare states of Europe, the Portuguese government spends an excessive amount of money and the government refuses to cut back in any meaningful way as many voters continue to demand a free lunch.

The situation in these European countries is similar to what is happening in many states around the U.S.  It is also similar to what is happening in Washington DC, although there are a few major differences.  Although Americans have become more dependent on big government, there is still a streak of individualism and independence in the American culture.  That is the good news.

Now for the bad news.  When these European countries are on the brink of disaster, they have to get bailed out by other European countries.  They depend on the European central bank.  There may be a limit as to how much bailing out there is because, eventually, other countries will refuse.  But it is different with the federal government of the United States.  The U.S. government has the Federal Reserve.  The Fed has a monopoly on the money supply in the U.S. and can continue the deficit spending for much longer as it buys government bonds.  The only limit that the Fed faces is that of hyperinflation and citizen outrage.

The next few years will be painful for almost everyone.  It will be painful for the masses of people that will suffer due to the horrible policies of their governments.  It will be painful for those who are used to getting a free lunch (think unions in Wisconsin).  It will be painful for politicians who have to deal with voter outrage.  Don't get me wrong; I am not feeling sorry for some of these people, especially the last group.

Voters will continue to demand the impossible.  Politicians will continue to promise the impossible.  These things will all come to a climax and something will have to give.  Voters want reduced taxes and less government on the one hand, but then flinch when specifics are mentioned.  In particular, the majority of voters say they don't want to see significant cuts in Medicare and Social Security.

What seemed like a free lunch is almost over.  The Fed can keep the game going a little bit longer, but even the Fed has been taken down a few levels.  It cannot get away with as much now.  The Fed will continue to finance deficits, but price inflation will show up in a big way eventually.  The Fed will face massive inflation or hyperinflation and will have to refuse to buy any more government debt.  Interest rates will skyrocket.  The politicians in DC will be forced to cut back.  It is just a matter of time.

Wednesday, March 23, 2011

New Home Sales Drop in February

It is being reported that new home sales plummeted in the month of February.  This is being reported as bad news for the housing market and bad news for the economy.  I am not trying to be a contrarian just for the sake of doing so, but I disagree with the so-called mainstream opinion on this one.

Unless you have been living under a rock, you know that housing prices are way down, a lot of people are underwater on their homes, and foreclosures are high (and would be even higher if the banks had their acts together).  Unless you are shopping for a house right now, news in the housing market is really bad.  But why is a drop in new home sales seen as a bad thing?

Although the government has intervened a lot in a lot of different areas, there is still some semblance of a free market.  The fact that new home sales are dropping is the proper response of the market to the situation.  There are a lot of vacant homes and a lot of other occupied homes in which the owners would like to sell.  If there is already an oversupply of houses, then home builders should not be building new homes, or at the very least should be cutting back on the number of new houses being built.  A drop in sales of new homes is a signal to home builders to slow down or stop.

While this may not be good for the bottom lines of home builders, this will help clear the market from an oversupply of houses.  There are a few people that will insist on buying a new house and that is fine.  But most people looking to buy will be willing to buy a used house if the price is right.

The free market is working here and it should be allowed to work.  Prices need to continue to go down until the excess inventory is cleared.  At that point, housing prices will stop falling and may even start to go up.  At some point, it will be profitable for home builders to start building new houses again.

There are a lot of things to be fearful of in this economy.  We are drowning in taxes and regulations, the federal government is running massive deficits, state and local governments are on the verge of bankruptcy, and the Fed is creating massive amounts of money out of thin air.  But don't be fearful of a slowdown in new home sales.  That is just the market trying to correct the previous screw-ups caused by the government and the Federal Reserve.

Tuesday, March 22, 2011

Stock Market Investing and Inflation

Investing in the stock market is not a good hedge against inflation.  If you look at the 1970's, the stock market did not do well, while price inflation was in double digits.  An inflationary environment will hurt profits for many companies.  Inflation (monetary or price) will not necessarily translate into an increase in the stock market in the short-term, even nominally.

In addition, even if stocks did go up with inflation in the short-term, it is still not a good hedge against inflation.  For something to be a good hedge, you want it to overcompensate.  A good hedge against inflation would go up at a greater rate than the inflation rate.  This is why gold is a good inflation hedge.  It will go up in dollar terms faster than the actual inflation rate, during a high inflationary time.  A good hedge should help compensate for the losses in other investments in your portfolio.

In the very long-term, stocks actually are somewhat of an inflation hedge.  At the very least, stocks will tend to keep up with inflation.  In fact, I would argue that the stock market would go up very little, if at all, if there were no monetary inflation.

If the money supply remained constant over a long period of time, why would the broad stock market go up in any significant way?  Some individual stocks would go up as others went down, but generally, the overall market would not go up.  If it did, where would the money come from?  This is a hard concept for most people to grasp because we are so accustomed to living in a world of fiat money and inflation.

So what would be the point of investing in the stock market if it didn't go up?  Well, stocks would pay dividends.  This is really supposed to be the point of stock investing anyway.  In addition, in a free market environment, due to increases in capital, technology, and production, things would actually get cheaper.  So even though your stocks might not be going up in nominal terms, the value of your money would be increasing as you could buy more goods and services with it.

The whole stock market system is highly distorted because we don't have a truly free market.  Monetary inflation, regulations, and taxes all distort how the stock market functions.  It discourages dividends and encourages capital gains.  It also makes investing very difficult.  This is just another reason that we need a free market in money.

Monday, March 21, 2011

U.S. War in Libya

The United States, joined by other countries, is now attacking Libya. (As a side note, before the massive centralization of power that was occurring even before Lincoln's war, it would have been "the United States are...", instead of "the United States is...")

Of course, when I say the United States, I really mean the U.S. government.  The U.S. government is firing missiles to take out certain targets of the Libyan military.  People have been protesting in Libya for weeks now and the Libyan dictator, Gaddafi (spelled a million different ways), has not backed down.

This article by Lew Rockwell makes the point that it is possible to both oppose Gaddafi and oppose a war on Gaddafi and that is the position Americans should take.  As a libertarian, I am aware that in most situations, the opposite actually occurs of the stated purpose for a government program.  If the government passes a law to help poor people, it will inevitably make people more dependent on government and more poor.  If the government tries to save water by mandating low flush toilets, it ends up using more water trying to flush a toilet several times because it doesn't work.

The same thing will happen with war.  By intervening, the U.S. government actually reduces the chance for liberty in Libya.  By giving orders and blowing things up, it will only turn the people of Libya against the United States.  It may actually strengthen Gaddafi from this perspective and even if Gaddafi is exposed of, who will take power and will it be a puppet of the United States?

The executive branch (presidency) of the U.S. government really does have dictatorial powers at this point.  There has been no declaration of war by congress.  There hasn't even been an authorization, like what took place preceding the Iraq war.  This is not a compliment to Bush in any way.  It is just to point out that Obama is just as evil as Bush and that Obama does not favor peace.

If the Libyan people have an overwhelming desire for liberty, then they need no help.  If they don't have a widespread desire for liberty, then why would the U.S. government get involved?  If the liberty movement became widespread enough in Libya, then Gaddafi would fall just as others have.  The men in the military would feel great pressure from friends and family and would turn on Gaddafi.  This needs to happen naturally without the U.S. military bombing buildings and causing massive death counts.

As far as the economy and your investments, this whole episode should just confirm to you that spending will not be reduced in any way until a financial Armageddon hits.  The cost of these missiles is actually very low when you compare them to the trillion dollar deficits.  But this whole thing is another straw on the camel's back.  Don't expect Obama and the congress to stop adding straws.  They will continue to spend money like crazy until the Fed refuses to buy U.S. treasuries.  The Fed will only stop buying treasuries when it faces the prospects of massive inflation or hyperinflation.

Saturday, March 19, 2011

Is Paying Off Your Mortgage a Good Idea?

I have written a few blog posts lately on buying a house.  I had written that for someone buying a house, you should take out a 30-year fixed rate mortgage and pay back the loan in depreciating dollars.  I received a comment from someone asking, "If I had no debt (other than my mortgage) and an extra $1000/month to spend, would it be better to put that $1000 towards the principal of my 5% fixed-rate mortgage, or to invest/use it in some other way?"

I used to be an advocate of paying down the principal on your mortgage with the goal of paying it off early.  I agreed with Dave Ramsey on this.  The reason for this is because it is a guaranteed return on your investment.  If you have a 5% interest rate on your loan, then you are getting a guaranteed 5% return on your money by paying down the principal on your loan.

It is amazing how many people disagreed with me on this strategy.  The most common comeback was, "well, what about the tax deduction on the interest paid?"  First, the tax deduction is overrated.  There are some married people with a small enough loan who don't even benefit because they can't itemize their deductions.  The mortgage interest deduction is not in addition to the standard deduction, it is instead of it.  So in many cases, people are not benefiting nearly as much as they think.

In addition, the tax situation works both ways.  The guaranteed 5% return (or whatever rate) is a return that you don't owe taxes on.  To get a 5% after-tax return on other investments, you would actually have to earn around 6% to 8%, depending on the type of investment, how long you owned it, where you live, and what tax bracket you are in.

So why have I changed my mind (somewhat) on this strategy?  My only answer is because of the political environment.  With quantitative easing (money creation) by the Fed and huge deficits by the politicians in DC, inflation (monetary or price) is a huge threat.  If we are going to experience massive inflation, why not pay off your debts in depreciated dollars?  If your mortgage payment is currently the equivalent of 10 weekly grocery bills and in 20 years it will be the equivalent of one weekly grocery bill, why would you want to hand over 10 weeks worth of groceries now instead of one week worth of groceries 20 years from now?

If you are retired or near retirement, I would suggest using your Social Security checks or some other fixed income to make your fixed monthly mortgage payments.  If you get an increase due to inflation, then I'm sure you can find something to do with your extra money.

If you are younger, and assuming you aren't wealthy, then you should take out a 30-year fixed rate mortgage if you buy or refinance a house.  I would not recommend anything shorter (like a 15-year) because it is like paying it off early, without the flexibility.

I understand the appeal of paying off your mortgage and owning your house free and clear (even though you will continue to have property taxes).  It can be a powerful feeling.

So for someone with an extra $1,000 per month who wants to pay down their mortgage, why not split the difference?  Investing and managing money isn't an all-or-nothing game.  Take $500 per month and make an extra payment toward the principal on your home loan (assuming you have an emergency fund and other debts are paid off).  This will give you a guaranteed return and a good hedge against deflation.

Take the other $500 per month and put into an inflation hedge to offset your deflation hedge of paying down your mortgage.  Use this $500 to by gold, gold investments, silver investments, oil stocks, etc.  Then you will be covered either way.

If you have money and you are heavily invested in things that do well in an inflationary environment, then take extra money and pay off your mortgage.  But for the vast majority of people who are very vulnerable to inflation, paying off their mortgage is probably not the best thing to do with any extra savings.  Of course, there are a lot of worse things they could do with it too.

UPDATE:  I have written a special report on this subject.  You can buy it for your Amazon kindle for just $0.99.  It will take the average reader about half an hour to read.  It goes further into depth on whether you should pay down your mortgage.  There is no definitive answer on whether paying down your mortgage is a good idea.  It depends on your personal situation and your goals.  In this special report, I discuss both the advantages and disadvantages of paying down (or paying off) your mortgage.

Thursday, March 17, 2011

Our Standard of Living in the 21st Century

It is really a bizarre time in history for Americans and for many others throughout the world.  The standard of living for Americans has increased over the last 200 years almost continuously.  There were a few setbacks with Lincoln's war and the Great Depression, but life got easier for most Americans throughout the 19th and 20th centuries.

The growth in the 1800's was really unbelievable.  It was a relatively peaceful time (with exceptions) and there was a relatively stable monetary system.  The federal government played a very small role in the lives of most Americans.  Progress continued greatly in the early 20th century, building off of the capital and technology of the 19th century.  Unfortunately, the 20th century also brought us much bigger government. The Federal Reserve, the income tax, and the 17th amendment (dictating that U.S. senators would be directly elected instead of chosen by the state legislatures) all came about in 1913.  Then Americans had to endure World War I.  Then there was alcohol prohibition.  Prohibition was repealed by FDR (about the only good thing he did), but he gave us a continuation of Hoover big government policies.  We saw FDR make holding gold illegal for Americans.  He gave us the New Deal, including Social Security.  Then he got the U.S. into World War II.

The growth of big government has been relentless since then.  Every president has been a disaster for liberty since before FDR.  Some have been worse than others.  Carter is seen as a disaster, but looking back he did less bad things than most others.  Reagan is seen as the closest thing to a libertarian.  While much of his rhetoric was libertarian, his policies were mostly a disaster as he approved big spending and big deficits.

It is really amazing that we saw as much progress as we did in the later part of the 20th century.  This is a tribute to the free market, or at least what is left of it.  Despite government interfering in virtually every aspect of our lives, the market has still found ways to flourish.  The electronics industry has been the most remarkable as we have seen prices drop with technology increasing at an exponential speed.

The areas with the most government involvement (healthcare, education) have seen the worst results.  Health insurance and medical care get more expensive.  The same goes for education.  Meanwhile, we see little improvements with quality compared to earlier times.  With education, we actually see it getting worse in government schools.

It is hard to compare our standard of living with previous times.  It has been said that the people of America of 200 years ago would have more in common with the people living when Christ walked the earth than they would with us today.  This really is an indication of the massive exponential growth in the last 200 years.

When you compare our living today with the 1950's it gets a little tougher.  Our basic needs are more expensive today in some ways because of government.  That is why there are far less stay-at-home moms.  They need to work to pay the tax bill and the expensive health insurance.

But we also need to acknowledge the great things that we have today.  The families of the 1950's did not have flat panel televisions.  They were lucky to have one TV at all.  They did not have microwave ovens.  They didn't have computers.  They didn't have internet and cell phones.  They did not have information at their fingertips.

It really is amazing what we can do today.  If you are curious about something, you can solve your curiosity in seconds by doing a google search.  You can use wikipedia.  You can look up directions, or the weather, or the latest sports scores, or what is happening on the other side of the planet.  You can use skype to see your friends and family who are hundreds or thousands of miles away.  You can communicate with the world almost instantly.

There are a few areas where we are worse off today than generations before us.  These can be attributed to big government.  But big government will not stop the technology train.  It can't be stopped at this point.  While we may experience some setbacks in the near future, our long-term outlook should be bright.  Technology will continue to increase exponentially.  It will eventually phase out big government.

Wednesday, March 16, 2011

The Libertarian Position on Unions

With all that has happened with the unions in Wisconsin, and now spreading to other states, some people are wondering what the libertarian position is on unions.

First, let's distinguish between what are referred to as private sector unions and public sector unions.  Private sector unions are made up of union workers in the private sector (think General Motors, although this may be a bad example now that it has been bailed out by the government).  Public sector unions are made up of union workers who work for the government.  The battle in Wisconsin was over public sector unions.

A consistent and principled libertarian would actually have no problem with private sector unions if they were not supported by the government.  Libertarians are often viewed as "anti-union", but it doesn't give the whole picture.  The reason most libertarians are anti-union right now is because the unions, in general, push for government protection, in this case meaning government force.

The unions have been known to use violence themselves against other workers trying to replace them.  But aside from this, even the so-called peaceful unions are advocating that the government use force on their behalf.  Libertarians have no problem with a group of co-workers getting together and demanding better wages or better working conditions from their employer.  If they are not obligated by any contracts, they can even go on strike.  The problem is that the government uses force against the employers in not allowing them the option to fire the employees.  Freedom of association is a two-way street.

Things get trickier with so-called public sector unions.  An anarchist libertarian does not believe in any government, so there is no issue there.  A panarchist libertarian does not really care what any other governments do, as long as they or any other individual is not subjected to any governments in which they don't want to participate.  The issue could arise for a minarchist libertarian, but even there you are really only talking about judges and police officers.  No government school teachers would exist in a minarchist society.  If you only had to deal with police officers and judges in a minarchist society, the total spending would be so small that unions would not be that much of an issue.

But let's deal with the situation we are currently in.  Although consistent libertarians are against having government schools, the reality is that we have them right now.  So should the teachers be able to unionize and bargain collectively?  It really is very hard for a libertarian to answer, but I would think that if the government is spending taxpayer money, it should find the best deal it can (with what is considered acceptable for quality).  If a government is putting a contract out for bid, it should go to the company with the lowest bid that can meet the acceptable standards, so why can't the same thing be done for government school teachers?  I know, you can hear the wailing that teachers are underpaid and under appreciated, etc.

The whole problem goes back to government schools.  There are probably many teachers that are overpaid and many that are underpaid.  We don't know because there is no free market.  If teachers had to compete in the marketplace, the best teachers would be those who would tend to get rewarded the most.

In conclusion, libertarians believe in freedom of association.  When it comes to so-called public sector unions, it is difficult for principled libertarians to take a position because they already oppose the state.

Tuesday, March 15, 2011

Would There Be Unemployment in a Free Market?

The unemployment rate has been high for the last couple of years.  The Austrian Business Cycle Theory helps explain why the rate has been so high and has remained high.  The Federal Reserve, under Greenspan, artificially lowered interest rates and created new money out of thin air.  This sent false signals to the market and injected money into places where it most likely wouldn't have otherwise gone.  For example, money flowed into stocks and real estate.  When Bernanke became Fed chairman, he actually stopped the loose monetary policy for a while.  This revealed that much of the previous investment could not be sustained.  It revealed a misallocation of resources.

The reason for the high unemployment is that these resources are trying to realign with consumer demand.  Some of the people that became real estate agents and construction workers due to the housing boom should not have gone to those jobs in the first place.  This error, caused by the Fed's monetary policy, has to be corrected (without government interference).  To make matters worse, the Fed has been printing money like crazy since 2008 with very low interest rates.  In addition, the government is bailing out certain businesses as well as running huge deficits.  With all of these things and all of the uncertainties, it has prevented the unemployment problem from correcting itself.

Now let's forget about the Federal Reserve and monetary policy for the sake of discussion.  If the Fed kept a neutral stance and did not change the money supply (I know this is virtually impossible over the long-run), what would unemployment look like?  Now we have to consider all of the other interference by government.

In a completely free market, there would be virtually no unemployment for anyone wanting a job.  I wouldn't say it would be zero, because there would be temporary unemployment for those in between jobs.  It is also the case that there may be a very tiny percentage who are too sick or disabled to work at all.  But in a truly free market system, unemployment would be close to zero.

The government causes unemployment in a number of ways.  Regulations on businesses cause unemployment.  Taxes cause unemployment.  Labor laws cause unemployment.

If you are willing to wash my car for $10 and I am willing to pay you $10 for my car being washed, then I can employ you to wash my car.  Let's say that the government imposes an income tax of 20%.  Now you will only make $8 to wash my car, but that may be too low for it to be worth your time.  I could pay you more so that your take home pay is $10, but I may not be willing to pay over $12 to get my car washed.  My time is not worth that much, so I would rather do it myself than pay that much.  So, because the government instituted the income tax, it broke our deal.  It caused unemployment.

Of course, minimum wage laws are the biggest job killer.  If there were no minimum wage, just about anyone could find a job at any time.  I would be willing to pay someone $1 a day to be my personal assistant.  Sure, the wage is extremely low and most people would be foolish to do it, but it is a job offer.  But I can't make that job offer because of the job destroying minimum wage.  With no minimum wage, I'm sure someone else would be willing to pay someone at least $20 per day to be their assistant.  If you were unemployed, you could at least do this until you found something better.

To top it all off, not only does government do things to destroy jobs, it actually subsidizes not working.  Unemployment "benefits" encourage people not to work.  I have personally heard stories of people intentionally collecting unemployment benefits with no intention of getting a job.  I heard of one person who got displaced and was about to retire anyway, but collected unemployment because it was there.

There are people that have been on unemployment for over 2 years now.  While we can certainly sympathize with people who lose their jobs, it is hard to sympathize with someone who has been out of work for over 2 years.  You can work in a fast food restaurant if you have to.  If it is beneath someone to do that, then it should also be beneath them to collect unemployment.  I don't blame people who collect unemployment as many of them are just getting some of their money back from the government.  But the system is horrible and it just encourages people to stay unemployed.

To summarize, there are a lot of reasons for unemployment and they all go back to government.  In a truly free market environment, there would be work for anyone who wanted a job and was willing to work.

Monday, March 14, 2011

The Economic Story of Japan

With the tragic disasters in Japan, there has been a lot more talk of the country in general.  Japan has an interesting economic story and it is important to review.

After World War II, Japan was devastated.  There were two cities that had nuclear bombs dropped on them and the country as a whole experienced a great loss in life and property.  But along with Germany, a miracle seemed to take place.  That miracle was the free market.  Japan and Germany both adopted relatively free market policies that laid the path to huge growth.

Japan became one of the richest countries in the world.  By the 1980's, there was paranoia in the United States and other western countries that Japan was taking over the world.  Japanese companies were buying assets in the U.S. and were becoming big manufacturers.  People were worried that the Japanese were undercutting the competition by selling cheap products.  My response was to point out that we shouldn't complain if they want to sell us inexpensive products.  Would we complain if they were giving them away for free?

Then the 1990's came.  The Japanese stock market hit a high of over 38,000 in 1989.  In March 2009, it hit a low just above the 7,000 mark.  Perhaps the lost decade should be referred to as the lost 2 decades.

So if you invested in Japanese stocks in late 1989, you would still be down by well over 50%.  So much for the theory of buy and hold.  But Japan really is a mixed picture and it is important to look at both sides.

The Japanese people in general are hard working and highly educated.  Unfortunately, the government is mercantilist.  The government in Japan, while not the worst, is not exactly an example of free enterprise.  This has stifled growth.  There is much more bureaucracy and spending now than compared to 50 or 60 years ago.

Although Japan has seemingly struggled in the last 20 years, it is important to remember that it is the second richest country in the world (per capita) out of the major countries.  The U.S. is still the richest.  For this, I am not including small countries like Singapore, Hong Kong, and Dubai, which are examples of the most economically free places on earth.

The Japanese government has an enormous debt.  The debt to GDP ratio is around 200%.  This is by far the highest of any industrialized nation.  But at the same time, the Japanese central bank is not creating money out of thin air like crazy as other places are.  This is why the yen is still an attractive currency.  The only reasoning I can think of behind this is that there are a lot of suckers in Japan buying government debt.  Maybe they can't be considered suckers yet because interest rates have remained low, but at some point the holders of government debt will be suckers.

The Japanese government and Japanese central bank will be faced with a decision similar to that in the U.S.  Either the government will have to drastically cut back or the central bank will have to inflate.  If neither of these happen, then the Japanese government will default on its debt outright.  It cannot be sustained.

If there is one lesson to be learned from Japan, it is that the government can kick the can down the road for a long time if it can find enough suckers.  It really is amazing that the debt to GDP has gone to 200% without seeing rates skyrocket.

Japan will face the inevitable just like the west.  The government's spending is not sustainable.  The earthquakes and tsunamis are a further setback for the Japanese people.  However, it is still a rich country with hard working people.  If the people there ever get the government to pursue free market policies like it did after World War II, the economy there would take off.

Saturday, March 12, 2011

March 10, 2011 Update of the Monetary Base

The latest chart of the adjusted monetary base is showing that the Fed is continuing to create new money at an unbelievable pace.  You can view the latest one-year monetary base chart here:

http://research.stlouisfed.org/publications/usfd/page3.pdf

If you want a broader and much scarier view, you can view it here:

http://research.stlouisfed.org/fred2/series/BASE

When QE2 is done, the monetary base will have more than tripled from 2008.  If this money gets out into the system and is loaned out via fractional reserves, then we will see massive price inflation that has never been seen in modern America.  The 1970's will look very tame.

The Fed says it has an exit plan, but that exit plan would mean a crushing depression.  I think we are years away from that.  We may have another recession (or a continuation of one) before we get to the point of high price inflation.  Normally, upon seeing the adjusted monetary base skyrocket, it would be easy to predict price inflation on the horizon.  This time is different though because banks are taking the money of depositors and keeping it as excess reserves.

You can view the chart of excess reserves here:

http://research.stlouisfed.org/fred2/series/EXCRESNS

The excess reserves have gone up in almost perfect correlation with the monetary base.  This has kept a lid on price inflation.  However, this won't last forever.  Either the Fed will reverse course or this money will eventually get out in the form of new loans.

The Fed continues to walk on a tight rope that is getting narrower and narrower.  On one side is inflation and on the other side is depression.  It will keep shifting from side to side and overcompensating so that it does not fall.  Eventually, when it is faced with hyperinflation and can't hold on any longer, the Fed will choose to fall on the side of depression.  Things will not be pretty until we get through this.

Thursday, March 10, 2011

Real Estate, Timing, and Interest Rates

After my last post regarding buying a house, I received a comment from someone saying their sister is looking at buying a house.  Specifically, the issue of interest rates was raised and there was a question of whether someone should hurry up and buy now.

As far as interest rates, nobody really knows for sure if they will go up or down in the near future.  Regardless of one's knowledge of Austrian economics, the future is unpredictable because of human action.  Austrian economics can help us make forecasts based on certain conditions, but even then the timing is almost impossible.  Of course, if any of us knew what interest rates would do next week or next month, we would be rich.  If we could do it on a consistent basis, we would be richer than Warren Buffett.

While I think interest rates will go up over the longer term due to Federal Reserve inflation and the government running up debt, it really is impossible to say what they will do in the short-term.  There were people 6 or 7 years ago saying that interest rates just couldn't go any lower and yet they did.  If the stock market crashes again and people get scared of another recession (or the recession not ending, depending on how you look at it), then rates could easily go down more.

The good thing is, I don't think interest rates should really dictate to anyone whether they should hurry up and buy a house.  For the person's sister who will be looking, my advice is to look, but not hurry.  Unless you live outside of a big city in the Midwest, then chances are that there are some good deals in your neighborhood.  This really is a buyer's market and you can afford to be patient and wait for a good deal.  In some areas, there are a lot of short sales.  While these can be really frustrating, they can also pay off.  While some foreclosures are good deals too, you have to be careful not to get into any bidding wars with other people.

The good news is that if there is a jump in interest rates, it will probably just drive prices down commensurate with the rise in rates.  If rates fall, then housing prices may tick up, but there should still be some deals out there.

You obviously can't time the short-term moves in interest rates.  This is just a game of luck.  You can get a contract on a house and rates may go up or down the day before you were planning to lock in.  But I wouldn't make a big decision based on a quarter point of interest.  And if for some reason you buy a house and rates fall after that, you always have the option of refinancing.

So for buying a house, my advice is that you should do it if it is right for you and you can afford it.  Be patient and don't feel rushed because of interest rates.  When you do buy something, make sure you lock in a 30-year fixed rate mortgage so that you can pay back the bank in depreciated dollars later on.

Wednesday, March 9, 2011

The Permanent Portfolio and Your 401k

Yesterday I received a nice comment and was asked about setting up a permanent portfolio via a 401k plan.  As a side note, I don't always respond to comments as I don't want to get bogged down in debates and get sidetracked, but if someone asks an interesting question, I will post a response if I think I can contribute something insightful (I'll have another response to another comment tomorrow).

For a 401k plan, it is hard to set up a permanent portfolio (as described by Harry Browne in his book Fail Safe Investing).  It is even harder to recommend something because every company is different in what they offer.  Some companies offer plans that limit you to just a few mutual funds, while other plans may offer hundreds of funds.

If your 401k plan is limited and only offers a few funds, then it will be impossible to set up anything close to the permanent portfolio.  My best advice in this situation is to split up your money between stocks, long-term bonds, and a money market fund.  Hopefully your plan at least includes these options.  The problem here is that you don't have anything in gold or even related to gold.  This leaves your portfolio vulnerable to inflation and if you are going to be short on something right now, an inflation hedge is the last thing you want to leave out of your investments.

In this circumstance, take any non-emergency money that you have saved up and invest it in gold or gold related investments to make up for the shortfall in your retirement plan, if this is possible.

If your 401k plan offers a lot of choices, then you may be able to work with it.  I have seen plans that offer all of the Fidelity mutual funds and Fidelity offers a lot of select funds.  The stocks, bonds, and cash portions should be easy.  For your inflation hedge, you can at least invest in a precious metals mutual fund. Now understand that this is not the same as owning the metal.  Gold stocks are actually much more volatile than the price of the metal.  So if you can't invest in gold directly, you should go lower with a mutual fund of gold stocks.  In this case, it might be good to put 10% in a gold mutual fund.  For more inflation protection, you could also add in 5% for an energy mutual fund.  If you were to put a full 25% in a gold mutual fund (made up of gold stocks), your portfolio would get hammered if something happened like the fall of 2008.

In some Fidelity plans (and I suspect others offer similar options), you can use "brokerage link", which allows you to invest in most mutual funds and maybe more depending on your plan.  If this is an option, you can take most of your 401k money and put it into the permanent portfolio mutual fund (PRPFX).  If your plan allows you to buy exchange traded funds (ETFs), then you can buy TLT (bonds), GLD (gold), and an ETF of the broad market like the S&P 500.  The cash portion is always easy to find something.  In addition, you could always take your gold percentage down to 20% and put the other 5% in SLV (silver).  Silver is more volatile, but can be very profitable in a commodity bull market.

Explore your choices with your 401k plan and adapt as necessary.  Just make sure you find some protection against inflation.  The Fed is creating new money like crazy and having all of your money sitting in cash is actually a huge risk right now.

Tuesday, March 8, 2011

Do Service Jobs Count as Jobs?

Yesterday, Paul Craig Roberts had an article on the latest jobs report that said there were 192,000 new jobs last month.  In the latter part of the article, he discusses how these figures are determined.  I can't really confirm or deny his comments there.  If his claims are accurate, it almost makes you wonder why anyone would pay any attention to such a report.

The part of his article that I would like to discuss in more depth is at the beginning where he points out that most of the added jobs were service jobs.  Paul Craig Roberts is a good writer and has been a great advocate for civil liberties.  He has taken a principled anti-war position and has been very libertarian in these respects.  Although he can provide interesting information when it comes to economics, this is the area where I disagree with him on a lot of issues.  He does not understand the free market.

He says in his article, "How can Americans, who had no growth in their real incomes and who are foreclosed from their homes and maxed out on credit card debt, car payments, and student loans, spend more every month in bars and restaurants?  How can a few service areas of the economy grow when nothing else is?"

This is representative of things he has written before.  He has a lot in common with Pat Buchanan.  Now, I agree with Roberts up to a certain point that, generally speaking, things are a mess right now.  There are a lot of distortions in the economy and government interference is preventing the proper allocation of resources according to consumer demand.  But who is he to say that there should be less jobs in the service area and more in some other area.

Back in January, I wrote a post on a classic article by Harry Browne dealing with economic fallacies.  In Browne's article, he addressed this exact point.  For decades, people have been complaining that the U.S. does not manufacture enough.

What Paul Craig Roberts and others fail to realize is that there is nothing wrong with service jobs if that is what is being demanded.  Last time I checked, there was no shortage of food and clothing in the United States.  Now I understand that we don't have a free market in the U.S., but it is still free enough that there is some natural aligning of resources with their proper use.

In an advanced civilization, more services mean more luxury.  There is nothing wrong with this.  It takes less people and less resources to make food, clothing, shelter, and other basic needs.  This is due to a variety of factors within the free market.  The high division of labor allows people to specialize.  There is comparative advantage which means that an American might be better off allowing someone in South America or Asia to make food, clothing, and other goods.  The CEO of McDonald's might be the best cashier there is, but it doesn't mean it is a good value of his and the company's time to have him working the register.

In addition, technology gets better and there is more capital investment over time.  This allows more and better goods to be produced at cheaper prices (if there wasn't monetary inflation) and it frees up human capital to focus on other things.  If consumers have all of their basic needs met, then they will demand other things.  Those things might be restaurants, spas, hair dressers, massage parlors, etc.

Again, I'm not saying that the economy is great right now (it's not) and I'm not saying that all resources are being properly allocated (they're not).  But if there really are service jobs being added, there is nothing wrong with this, especially when it seems that other industries (cars, construction) are being the most subsidized by government.

Monday, March 7, 2011

Is Now the TIme to Buy a House?

Housing prices have gone down across the United States in the last 5 years.  In some areas, prices are down by 50% or more.  Of course, other areas have seen smaller declines and there might even be a few areas that haven't seen declines.  But where will housing prices, in general, go from here?

This analysis is a generalization as housing prices can vary and do different things from region to region.  For example, I wouldn't recommend buying a house in Detroit, regardless of what the overall housing market does in the U.S.

There are a lot of pros and cons for buying a house today.  There was a huge bubble in real estate and we have seen the bubble pop.  The question remains if the bubble has completely deflated yet.  It is hard to say because the government has worked hard in trying to prop up prices or at least decreasing the rate of decline.

There are a lot of people underwater in their homes now.  They owe more for their mortgage than what their house is worth.  There a lot of short sales and foreclosures.  A good portion of these need to be cleared before housing prices will go up again.  In addition, it is hard to say how many people would like to sell but aren't even trying right now because of the depressed market.

There are certainly a lot reasons to be bearish on housing right now.  With that said, there may be one very good reason to be bullish.  That reason is the Federal Reserve's monetary policy.  While it is the Fed's policies that caused the original bubble in the first place, the Fed is creating new money like never before and it will continue at least through June, unless they cancel QE2.

If you are looking to buy a house as your primary residence, I don't think you should be too concerned about the short-term outlook on housing prices.  Instead, you should be asking yourself other questions.  Can I afford the payments each month?  Do I have money for a down payment?  Can I afford all of the other expenses with home ownership?  Do I plan to stay in the house for several years?

If you are answering yes to all of these questions, then perhaps you should buy a house for your primary residence, as opposed to renting.  Interest rates are not quite as low as 6 months ago, but they are still very low by historical standards.  If you can lock in a 30-year fixed rate mortgage, then you will pay it back in depreciated dollars.

If you are looking to buy an investment property, then the most important thing to look at is your payments vs. the rent.  When you consider your payments, you have to factor in the mortgage, the property taxes, association fees, homeowners insurance, repairs, and possibly a management company.  If you add up all of these things and average them on a per month basis and you can collect rent that is higher than this amount, then it is probably a good investment property if it is in a decent area.

The biggest indicator of a bubble five years ago was rents vs. prices.  You could rent a place for far less than your monthly mortgage payments on a similar place.  It meant that prices either needed to come down or rents had to go up.  In a situation where rents are higher (as we are beginning to see in some areas), then either rents will go down or housing prices will go up.

I think we will see some more in the way of price decreases in the near future.  But interest rates are a wild card right now and there are more signs of price inflation.  Even if housing prices don't go up in real terms, they may go up in nominal terms due to the falling dollar.  This will be good for people with a fixed rate mortgage.  You can pay off your lender in money that is worth less and less each passing day.

Saturday, March 5, 2011

Why Are There Protests in Only Certain Middle Eastern Countries?

As far as investments, I have warned about the possibility of uprisings in Saudi Arabia.  As far as oil is concerned, Libya is small peanuts compared to Saudi Arabia.  If major protests begin in Saudi Arabia, you can look for the price of oil to double or more if oil supply disruptions are threatened there.

This is an example of where international events affect the entire planet, both short-term and long-term.  Overall, the events should be positive for liberty in the long-term.  People are tired of oppression by thug dictators and are beginning to rebel.  We can thank technology for a large part of this.

It is interesting to observe where these uprisings are occurring.  There is a theme of protests happening in Middle Eastern countries, which are mostly dictatorships.  In addition, most of these dictators get money from the U.S. government, which makes it easier for them to suppress opposition.

We shouldn't ignore the demographics of the countries that are experiencing these protests.  These are mainly poor countries where a lot of the people are living on a few dollars a day, if that.  Some of them have computers and cell phones because of the inexpensive technology industry.  But many of them are struggling just to put food on the table each day.

Saudi Arabia is different.  The Saud family are dictators and they are oppressive.  There is very little social freedom in Saudi Arabia.  But it is an oil rich country and there is a little bit of free enterprise there.  Although it is nothing like the U.S., there is somewhat of a middle class there.  In addition, there are a lot of foreigners working in Saudi Arabia.  The Saud family recently said they would spend $36 billion to help the people there.  If they were smart, they would have just offered it all in checks directly to everyone, but instead it looks like it will be more like an Obama stimulus on government programs.

Although there is certainly a possibility of revolution in Saudi Arabia, it is a different country that Egypt, Tunisia, or Libya.  There is more for people to lose there.  Sometimes when you have more wealth, you don't take as much risk because you don't want to lose what you have.

I had seen earlier stories listing several countries that could face revolution.  I saw the United Arab Emirates on this list a few times.  I don't think the people who wrote these stories thought things through.  They have obviously never been to a place like Dubai.

Dubai and other parts of the United Arab Emirates have freer markets than the U.S. and almost everywhere else.  Dubai is an example of a benevolent dictatorship.  There are still problems with social freedoms, but even here it is a far better place than Saudi Arabia.  Economically speaking, it is a booming place.  Sure it had some problems a couple of years ago, probably because of its ties to the U.S. dollar, but Dubai has a lot going for it.  Despite what many people think, it is not a wealthy country primarily due to oil.  It has a huge tourist industry and it is a great place for international businesses.  There is very little in the way of taxes and regulations.

In addition to all of this, the majority of people there are immigrants.  People go there for jobs.  These people are not going to hit the streets and protest.  They know they have a better life there than the third world country from which they came.  I see the prospects of revolution in Dubai and the rest of the U.A.E. to be low.  I don't see a revolution happening in a place that has indoor skiing.

Saudi Arabia is the wild card right now.  It could go either way.  If big protests do begin there, I hope you own some oil stocks or futures.

Thursday, March 3, 2011

U.S. Government Involvement in Libya

There is more and more talk of U.S. government intervention in Libya and other countries with protests.  There are calls for humanitarian aid and some are even saying the U.S. military should set up a no-fly zone.

Let's examine the libertarian position on this issue.  First, it is wrong for anyone to initiate violence.  It was amazing how much restraint protestors in Egypt showed.  Even in Libya, it seems that most of the violence is coming from the government or in response to it.  It gets more complicated when a third party enters the picture.  Oftentimes, it can make things worse when an outsider steps into the picture as it can just cause more conflict.

This situation gets even more complicated because it is not one individual against another individual.  It is millions of people protesting the government, while the government is trying to retain power.  It is likely that there are also millions of people who support the Libyan government, even if tacitly.

It is important to realize that the same government that runs trillion dollar deficits, wastes tons of money, lies, cheats, steals, kills, and messes up everything it touches, cannot do anything right.  I am talking about the U.S. government here, although the same could be said for most or all governments.  But the point is that the U.S. government can't magically make things better in Libya or anywhere else.  Washington D.C. is one of the most crime-ridden cities there is.  Let's see the politicians clean up that one city from poverty and crime before it tries to remake the world.

From a libertarian standpoint, any individual should be free to donate money to protestors or even go over there and help them.  But it is not for the U.S. government to decide for Americans what to do.  The most that Obama and his administration should do is encourage non-violence (which would be hypocrisy of course).  The U.S. government should not spend one dime doing anything in Libya or any other countries for that matter.

With a bad economy and price inflation becoming a bigger concern, it would not be surprising for the politicians in DC to look for a distraction.  This could mean a minor war.  Another war would be horrible, but it would certainly serve as a distraction.  It could also be used as a scapegoat for high oil prices and a down economy.  Don't rule anything out at this point.

Also, let's keep an eye on Saudi Arabia.  If things start to erupt there, look for oil prices to spike a lot more than they already have.

Wednesday, March 2, 2011

Bernanke on Oil Prices

Yesterday, Ben Bernanke was in front of Congress and he spoke about the rising price of oil.  He said that a prolonged rise would pose a danger to the economy.  However, he said, "The most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation."

It is ironic that the man most responsible for rising oil prices is discussing this issue.  Although the news out of Libya and the rest of the Middle East have triggered a run-up of oil prices in the last few weeks, we shouldn't ignore the importance of monetary policy.  First, as I discussed the other day, higher oil prices do not cause price inflation.  Monetary inflation is what causes higher oil prices.  If oil prices go up without monetary inflation, then we should expect to see other prices (especially those not directly tied to oil) go down.

When there is new money injected into the economy, this new money does not get spread around equally, especially at the beginning.  It goes into hot spots.  In the late 90's, it went into stocks, particularly technology stocks.  In the 2000's, it went into real estate (among other things).  Now this new money (whether it is from QE1 or QE2) is looking for hot spots.  There are disturbances in the Middle East where there is a lot of oil, therefore new money is used to bid up the price of oil.

When there is a general rise in prices over time (ignoring short-term effects of velocity), there is only one thing to blame.  It is from an increase in the money supply.  The Federal Reserve and the government that gives the Fed its power are solely responsible for this.  The central bank has been granted a monopoly over the money supply in the U.S.  Only the Fed can legally create new money out of thin air.  So for Bernanke to be sitting there talking about higher oil prices with a straight face is something to be seen.

This is why it was important for the government and bankers to change the definition of inflation.  Inflation used to be an increase in the money supply.  Now they define inflation as an increase in prices.  This is so that they don't have to take the blame for inflation.  When there are higher prices, people like Bernanke find others to blame.  They can pick the enemy du jour.  Right now, they can blame Libya.  Then they can claim that the higher price of oil is causing inflation.  Don't buy this nonsense.  Don't even buy it with your depreciating dollars.

Tuesday, March 1, 2011

Harry Browne, 5 Years Later


Harry Browne passed away 5 years ago on March 1, 2006.  He died at the age of 72.  Harry Browne was the Libertarian Party’s presidential candidate in 1996 and 2000.
Browne wrote many books, including two books on libertarianism for his campaigns.  His 1996 campaign book was Why Government Doesn’t Work.  His 2000 campaign book had a more positive sounding title called The Great Libertarian Offer.  In addition to other libertarian books, he also wrote a self-help book in 1973 called How I Found Freedom In An Unfree World.  It offered advice on not falling into different traps in life and pointed out that individuals have choices to make in their lives, even if they aren’t always optimal.
In addition to these and others, Harry Browne wrote numerous books related to investing and economics.  His 1970 book, How You Can Profit From The Coming Devaluation, successfully predicted the devaluation of the dollar and the high inflation of the 1970’s.  Later in his career, he wrote Fail Safe Investing, which was some simple investment advice, along with a portfolio to weather any type of economic condition.
Later in his career, Browne wrote many articles that he published on the web.  They covered a wide array of topics like war, economics, the war on drugs, insider trading, and education, just to name a few.  One thing about Harry Browne is that much of his writing is timeless.  You could read something he had written 20 years ago and it would seem like it could have been written yesterday.
His original investment book in 1970 started with an explanation of money.  The first 70 pages are like an easy-to-read primer on free market economics or Austrian economics.  He always had a knack for making things easy to understand for the layman.
When Browne ran for president, his campaigns were not about winning.  He openly stated that he had almost no chance of winning.  His goal in running for president was an educational one.  He wanted to spread the word of liberty.  In his words, he wanted to show people the benefits of more liberty.  He had a way of appealing to people’s self-interest and showing them why libertarian solutions were the way to go.  When he hosted his own radio show broadcast over the internet, it was always impressive to hear him sound so principled without coming across as too overbearing.  He was not one to compromise his principles in any way, and yet he knew how to set the right tone for a conversation.
Browne was a libertarian who found it important to emphasize both the moral arguments and the utilitarian arguments for freedom.  He stood for liberty on moral grounds by pointing out that government had a monopoly on the use of violence.  At the same time, he appealed to individual self-interest.  In The Great Libertarian Offer, he advocated eliminating the income tax.  He asked the question, “would you give up your favorite federal programs if it meant you never had to pay income tax again?”  He would often ask this in conversations too, followed by asking, what would you and your family do if you had an extra $10,000 every year?
Right after September 11, 2001, Browne wrote a series of articles addressing the terror attacks in the U.S.  He basically wrote that it was inevitable due to the previous bullying of the U.S. government around the world.  A lot of people, even so-called libertarians, denounced him for his position.  It was a tough thing for him to publish when emotions were running so high at that time.  Looking back, these articles are incredibly accurate with prescient warnings that should have been heeded.  He did not want a rush to war and he did not want to see innocent people killed.  The terrorists were wrong for killing innocent people for the actions of the U.S. government, so why should more innocent people have to be killed for the actions of the terrorists?
Harry Browne had a tremendous influence on the libertarian community.  He converted many people to the cause of liberty and he helped radicalize some who already called themselves libertarians.  While he ran for president twice, he understood that winning elections was not the key to long-term victory for liberty.  He understood that it took work convincing others and Browne was somebody who practiced what he preached.
One speech that Harry Browne liked to deliver was that of hope.  He said he doubted that 1 out of 100 libertarians understood that human nature was on our side.  He said that the only time in the recent past that Americans seemingly had a clear choice for liberty was in 1980 when Ronald Reagan soundly defeated Jimmy Carter.  Browne was quick to point out that Reagan vastly expanded government, but the rhetoric made it seem like a clear choice at the time and Americans overwhelmingly chose the pro-liberty side.
He also liked to use the example of the collapse of the Berlin Wall and eventually the Soviet Empire.  Browne pointed out that, one day, they all of a sudden opened up the gates and let people out.  It was not a violent revolution.  The totalitarian system simply collapsed.
It’s not hard to imagine that Harry Browne would be pleasantly surprised today.  Certainly there are a lot of negative things going on and the U.S. government has gotten vastly bigger.  But today we are witnessing a move towards liberty.  People in the Arab states are protesting and withdrawing their consent from the dictators that have ruled over them for so long.  Meanwhile, in the U.S., Ron Paul is now a household name and has garnered a large following of young people.  The internet has revolutionized the liberty movement as it spreads truth and information like never before.
One thing that Harry Browne might be surprised about today is the strength of the anti-Fed campaign.  While he was highly critical of the Federal Reserve, it was not something he thought would appeal to the average American.  With Ron Paul crowds cheering “end the Fed”, Harry Browne would have been pleasantly surprised had he been around to see it.
Harry Browne was right that human nature is on our side.  People want to be able to live their own lives and make their own choices.  We are in the midst of a libertarian revolution and we owe a lot of thanks to people like Harry Browne who lived and promoted a life of liberty.
Harry Browne’s wisdom has been missed for 5 years now.  Fortunately, his legacy and his influence live on.