Tuesday, May 31, 2011

Austrian Economics and Forecasting

Robert Murphy wrote a blog post last week that I thought I would comment on.  He commented on Paul Krugman's analysis on inflation and how Krugman hadn't expected the current developments of an uptick in inflation.  The more interesting part comes after that when Murphy comments on his own analysis from the past.  Murphy had expected a much higher CPI at this point and was admitting that he was wrong, or at least that his timing was off.

Bob Murphy is really one of the best Austrian economists there is, if not the best.  He knows his stuff and he is also a good teacher.  If he cannot make accurate economic predictions based on Austrian economics, what hope does that leave for the rest of us?

His analysis does give us some benefits of seeing where he may have gone wrong.  Murphy says, "What I can say for now is that the specific mistake I made, was in thinking that other people would see the end-game as I perceived it."  He says later in the post, "I thought other investors would start agreeing with my views by now, whereas I still think most of them are being incredibly optimistic."

This provides us some great insight for followers of Austrian economics who also happen to be investors.  As I've said many times before, we have to remember the number one thing about Austrian economics and that is that humans act.  Because of human action, it is impossible to predict anything with certainty.  We could see all of the stars align for a particular investment, but if other people don't see it that way, then it won't pan out the way you think it should.

As investors and free market thinkers, we must remember that not everyone else thinks the same way that we do.  And even if more people did start following and understanding Austrian economics, there is also a perception of what other people think.

For example, if everyone turned into an Austrian follower overnight, yet nobody knew it, then things might not change right away.  I personally think government bonds are a ridiculous investment in a lot of ways, given the huge monetary inflation and the massive debt. Yet I own some funds that invest in government bonds only because I know that not everyone else sees the world the same way that I do.  If there is a stock market crash, investors will likely flock to government bonds.  As long as there are idiot investors, idiot mutual fund managers, and idiot foreign governments who are willing to continue buying bonds, then I will be an idiot myself and join them.  I just want to be the first idiot out the door when the selling actually begins.

Bob Murphy has admitted that he made a mistake in his timing because others did not see things the same way as him.  Learn from his mistake.  Don't assume that things are obvious to others that are obvious to you.  Fundamentals matter in the long run, but we should not discount human action in the short run.  This is why I think everyone should take a somewhat conservative approach in investing and speculate with only a small portion of their portfolio.

Monday, May 30, 2011

Will We See $5 Gasoline in 2011?

Apparently, Goldman Sachs is predicting $5 gas this summer.  Goldman Sachs is also proclaiming that oil will hit $135.  Meanwhile, JP Morgan Chase is predicting oil at $130.

This should not come as a surprise and it should not come as a surprise if it actually happens.  With the way the adjusted monetary base looks over the passed few years, we are lucky we don't have $20 per gallon gas right now.  The only thing that has saved us is the huge increase in excess reserves held by commercial banks and the high demand for cash that typically comes with a struggling economy.

Although problems in the Middle East have certainly exacerbated the situation, the rise in oil prices is primarily a monetary phenomenon.  When the Fed creates new money out of thin air by buying assets (typically government bonds), this new money will raise prices as there is more money chasing the goods and services already in existence.  This new money does not spread out uniformly though.  It often goes into certain sectors, which is why we have bubbles.

I don't think highly of Goldman Sachs and JP Morgan Chase, mainly because of the elitist bankers tied to the government.  But just because I don't like the companies, it does not mean I would bet against them.  In fact, assuming they are not trying to mislead anyone on this subject, they probably know a lot more than you or I.  This puts the chances of $130 or $135 oil prices as a good possibility for this summer.

Until we see some reason that the Fed will pull back and execute its so-called exit strategy, I see more monetary inflation in the short-term and mid-term.  There may be a break after QE2, but we could easily see QE3 if the economy shows more signs of weakness.

You should continue to implement a strategy of safety and a strategy of hedging against inflation.  For safety, I recommend the permanent portfolio as described in Fail Safe Investing.  For hedging against inflation, I recommend hard assets that can't be made on a printing press and I recommend against U.S. dollars and U.S. bonds.  We should look for price inflation to rise and for Americans to feel more pain at the pump and in the grocery store.

Saturday, May 28, 2011

Set Up Your Own Permanent Portfolio

I am a strong advocate of Harry Browne's permanent portfolio, as described in his short book Fail Safe Investing.  I believe you should have at least half of your investments in the permanent portfolio or something similar to it.  If you are a more conservative investor, I would suggest at least 80%.  As Richard Maybury says, it is not the perfect plan, but until we find something better, it is the best thing out there.

One easy way to invest in something similar to the permanent portfolio is to simply buy the mutual fund PRPFX.  It is not an exact match, but it is the closest thing you can get in one package.

With the popularity of exchange traded funds (ETFs), you can easily set up a permanent portfolio with a typical online brokerage account.  The set up of the permanent portfolio is to put 25% in stocks, 25% in gold, 25% in long-term government bonds, and 25% in cash or short-term instruments.  You can easily do this with ETFs.

For the stock portion, you can buy the ETF with the symbol SPY.

For the gold portion, you can buy the ETF with the symbol GLD.

For the long-term government bond portion, you can buy the ETF with the symbol TLT.

For the cash portion, you can leave it in the money market fund of your brokerage account, or simply hold it in a money market fund or cd in a bank.

I am not saying this set up is ideal.  I think you should own some gold coins before you put money into GLD.  I think you should consider tax consequences and also the options of your 401k or other retirement plan if you have one.  You may also have other factors in your financial life that come in to play.

The point is though, between PRPFX and the new popularity of ETFs, there is no excuse that you can't set up a good permanent portfolio plan, at least outside of your 401k.  These are risky and uncertain times and you should make sure that you have your financial ducks in a row.

Thursday, May 26, 2011

Imagine the Unseen

Frederic Bastiat, a French economist and theorist of the early 19th century, wrote about that which is seen and that which is unseen.  Much like Henry Hazlitt wrote about in his book Economics in One Lesson, Bastiat said that a good economist does not just look at the seen benefits, but also the unseen costs of a government program.

It actually makes me a little sad to think of this in regards to today's society.  Just imagine what life could be like in today's world without big government.  Imagine if we didn't have all of the piles or regulations, taxes, and other violations of our liberties.  Imagine if we didn't have a central bank tampering with our money.  Imagine if we lived in a free world.

I suppose I should look at the glass of milk being half full.  We do live in the best of times.  Although the economy is rough (and probably getting worse) and it is expensive to fulfill our basic needs, we are still much better off than anyone before us.  I wouldn't trade this time period for, say, the 1950's.  Although life was simpler in a way back then, we still have many luxuries that we take for granted that did not exist 50 or 100 years ago.  We have washers and dryers, dishwashers, microwave ovens, central air conditioning and heat, expanded cable, ipods, cell phones, and big screen televisions.  Of course, we also have high speed computers that would have been unimaginable a couple of decades ago or less.  The internet revolution has been life changing, and mostly in a good way.

All of these great things happened, not because of government interference, but in spite of it.  It is hard to imagine what we would have now if we had lived the last 50 years with minimal government.  We literally might be living something close to the Jetsons.  We might have backpacks that we could strap on to fly to the store.  We might be able to order things from the store and have it delivered within minutes with little or no cost for delivery.  We might have 6 hour work days, instead of 8 or 9 hour work days.  Bottom line is, we would have more free time (if that is what you wanted) and we would have more wealth.

Wealth (not to be confused with money) provides more freedom to do what you want.  It provides more luxuries.  It provides better overall health.  It provides more safety.  It can make life less stressful.  This is a generalization of course, but it is all true.  Who would give up a life of living in a first world country of today to live in a world 100 years ago or even in a third world country today?

It really is sad to think how much better and easier our lives could be if people would just stop consenting to more and more government.  If we ever gain our freedom back and we see a free market economy combined with 21st century technology, the sky is the limit.  We are already seeing an explosion in technology with big government around.  Instead of missing out on more unseen benefits in the future, let's withdraw our consent from the government and seek freedom where we can enjoy many more benefits that can be seen.

Wednesday, May 25, 2011

Volatility in Precious Metals

It seems that precious metals have been bouncing around all over the place.  I have written before on silver being far more volatile than gold.  It has shown that in the last few months.  Silver went up to almost $50 per ounce and then tumbled in the matter of days to below $35.  I has been slowly creeping back up.

Gold also went down, though not nearly as much.  It is back above $1,500.  Gold and silver usually move in tandem, with more volatility from silver.  The last few days has been a little strange in that they seem to be almost alternating days on which one does well.  One day silver will be up with gold flat.  The next day gold will be up with silver flat or even down.

The precious metals market is trying to find some direction.  If we don't get hit with a hard recession with the ending of QE2, then I expect both metals to go up.

When there is high volatility in the stock market, it is often very bearish for the market.  I don't see the same thing with precious metals.  When there is high volatility with gold and silver, there is as good of a chance or better that the prices will go up instead of down.  The high volatility can be frightening to investors, but it can be beneficial to those with a strong stomach for risk.

As far as precious metals go, it may also be worth looking at platinum.  I generally advocate that you get your exposure to precious metals through gold and, to a lesser extent, silver.  Platinum used to be double the price of gold.  With gold over $1,500 and platinum at under $1,800, there is less than a $300 spread between the two.  If you are looking to speculate a little, platinum might be worth a look.

Precious metals may take a big hit if there is another big correction like we saw in the fall of 2008.  Barring that, I expect them to go up.  However, it will not go straight up.  It will be a roller coaster ride.  We are not in a bubble yet.  I still see way too many ads trying to convince people to sell their scrap gold.  If we were in a bubble, you would see more advertisements telling people to buy gold.

Look for the day when gold goes up $100 per ounce in one day.  Maybe then we will be in a bubble.  We won't see an end to the bull market in metals until the Fed decides that it cannot risk the complete destruction of the dollar and tells Congress that it will stop buying government debt.

Tuesday, May 24, 2011

Your Money and Your Location

There are many decisions to be made in your life regarding money.  The big questions tend to revolve around things like making money, saving money, investing, etc.  One thing that does not get discussed as often is where to live.  I don't just mean a decision of whether to buy or rent, but a decision of what city to live in or even what country to live in.

Everybody's situation is different.  Some people really have little choice in where they can live.  Many people are tied down by family, real estate, businesses, or jobs.  There are others who have far more flexibility.

If you have flexibility, particularly if you are young, you should really take this decision seriously on where to live.  I am not a big fan of moving to another country unless you live in a third world country that doesn't have much opportunity.  If you are young and flexible, it is not a bad idea to see the world, but I would advise against moving somewhere until you have seen it and spent some time there.  It may sound like a great idea to move to some exotic location for someone living in the U.S., but you may be surprised at the culture shock.

Within the U.S., I would recommend staying away from the really big cities.  New York City, Chicago, and Los Angeles are all expensive with high taxes.  Of course, there are always exceptions.  If you are a big-time banker on Wall Street or a movie star in L.A., then you will probably want to stay where you are. But for most people, it really isn't worth it.

It is hard to stay away from bigger cities because that is where the most opportunity tends to be.  Your profession will play a big role in your location.  For someone who works at home, you should really take advantage of your flexibility.  If you want to be near a big city, live in the suburbs.  Keep a distance from downtown.  It will be safer, cheaper, less crazy, and more family oriented.

Try to stay away from states that are in big trouble, fiscally speaking.  California, Illinois, New York, and New Jersey are just a few of the states that come to mind.  They are deep in debt and they already have really high taxes.

There are currently 9 states without an individual income tax.  They are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.  You can view the list here:

You should consider each one with your own situation.  For instance, if you are retired and have income from stocks and bonds, then Tennessee may not be that good since they do have a tax on that.  New Hampshire, home of the Free State Project, does not have an income tax or sales tax.  There is a tax on interest and dividends.

Of course, climate and lifestyle will also play a huge role.  But when researching a place to live (if you have the flexibility), you should research the taxes, regulations, and cost of living.  Again, I understand that it is easier for some than others, but you really should take time to see some of the great places to live if you have the option.

Monday, May 23, 2011

Libertarianism vs. Austrian Economics

Austrian economics is a term used for free market economics.  It is named so not because Austria had or has a free market economy.  It is named so because the people who originally studied and advocated it were from Austria.  The best place to read up on Austrian economics is the Mises Institute, which is named after Ludwig von Mises.  Although there were some that came before him, Mises is really the epitome of Austrian economics.

So what is the difference between Austrian economics and libertarianism?  Can you advocate Austrian economics without being a libertarian?  Can you be a libertarian without advocating Austrian economics?

There is a difference between the two, besides the obvious.  Obviously Austrian economics just deals with economics, while libertarianism deals with all issues political.  But the differences do go beyond that.

First, there are some people who call themselves libertarians, but they don't necessarily follow Austrian economics.  It could be contested whether these people are actually libertarians, but they are going to call themselves whatever they want.  For example, there are followers of Milton Friedman who would describe themselves as libertarians, but these people obviously aren't the radical libertarians that would be more likely to follow Austrian economics.

But there is another point to be made here.  It is possible to be a follower of Austrian economics without being a libertarian.  It is a strange thing to think because it is so rare.  I have seen this pointed out before, but don't have a link available right now.  I believe it may have been Walter Block who made this point.

With libertarianism, it is really just an advocation of what the law should be.  If you are a libertarian, you think there should be laws against murder (whether this is a government law or private law).  You think that laws should prohibit the initiation of force and perhaps enforce contracts.  You don't think there should be laws which redistribute wealth or make things a crime where there is no victim.

Austrian economics is the study of free market economics and uses human action as its basis.  Most followers of Austrianism would advocate laws permitting a free market environment.  But you could technically be a follower of Austrianism and still advocate statist policies.  You could have a politician who understands the Austrian Business Cycle Theory and also understands the other evils of monetary inflation.  Yet, he might care more about his job and pleasing his constituents and advocate statist policies.  He understands that these policies are not good for most people (although he probably wouldn't say that), but he acts in his own short-term self-interest by advocating bad policies.

I see morality playing a big difference between the two.  Libertarianism really involves moral principles. You can certainly advocate utilitarian outcomes with libertarian policy, but it tends to be backed by moral arguments as well.  While many Austrians will, for example, call taxation theft, it really does not go to the heart of Austrian economics and is more of a libertarian argument.  Austrian economics tells us that humans act freely and that government interference in the marketplace will likely lead to bad and unintended consequences for the general populace.

So while these two terms overlap, there can be a difference.  You could have someone study Austrian economics to help them with their investing and yet they may not care one iota about living in a free society.

Saturday, May 21, 2011

Excess Reserves and the Federal Funds Rate

There was an article on LewRockwell.com by Michael Pollaro.  The full article can be read here.  He is obviously a supporter of Austrian economics, or at least he likes to use it for his analysis.  I think he makes many valid points and I certainly don't want to step on someone's toes who is promoting Austrian economics.

With that said, I would like to point out a disagreement I have with something he wrote and I believe it is relevant in studying the current economy.  About halfway through his article he writes, "First, the Federal Reserve may be ending its current QE II asset monetization program, but it's not it seems looking to hike its zero to 25 basis point targeted federal funds rate any time soon.  And that means it will more than likely be having to supply at least some base money to the banking system (whether that be through Federal Reserve loans or asset purchases) to keep the federal funds rate in check."

He goes on to say, "Second, and far more important, the private banking system will by June's end be sitting on somewhere between $1.6 and $1.7 trillion in excess reserves, meaning the fuel for the banking system to expand the money supply is in a word explosive."

This guy knows what is happening on the one hand, but then contradicts himself on the other.  Let me explain.  He is right that there are massive excess reserves held by the commercial banks.  Usually, banks are only required to keep about 10% of deposits on reserve.  They would typically loan out the rest and hope that not everyone comes to withdraw their money all at once.  This is fractional reserve banking.

Since the Fed started creating massive amounts of money in the fall of 2008, most of this new money has gone into banks as excess reserves.  In addition, the Fed now pays interest on money held at the Fed as excess reserves.  Although the rate is currently .25%, it is still better than nothing for these banks.  With the economy still shaky, banks are afraid to lend and are keeping huge excess reserves instead of what they have typically done, which is lend out 90% of the money on deposit.

Now, what is the federal funds rate?  It is the rate charged on overnight borrowing for banks.  If a bank falls below their required reserve ratio of 10%, then it will borrow money overnight to settle its accounts and remain in compliance.

But since most of these banks have huge piles of reserves, why would they need to borrow money so that they don't fall below their reserve requirement?  The answer is, they wouldn't.  Therefore, contrary to what Pollaro says, the Fed will not have to supply base money in most cases to the banking system.  The Fed doesn't have to do much of anything right now to keep the federal funds rate near zero because most banks don't need overnight loans as long as there are huge excess reserves.

This point was made in an article by Kel Kelly.  He says that "the banks - not the Fed - are in charge of interest rates."  He basically says that the only way the Fed can raise rates is by paying the banks significantly higher rates on their excess reserves.  He also points out that this would likely cause a recession.

I think the biggest thing to take away from this whole thing is that we should not pay too much attention to the federal funds rate right now.  This is not driving the Fed's monetary policy.  We should pay attention to what the Fed is doing directly and what the banks are doing.  In other words, monitor the adjusted monetary base and the excess reserves held by banks.  Don't pay much attention to the federal funds rate, especially now with the banks holding huge amounts of excess reserves.

Thursday, May 19, 2011

Adjusted Monetary Base as of May 19, 2011

You can view the short-term chart of the adjusted monetary base here:

It had pulled back slightly for a few weeks, but it has resumed up.  It should go up some more through the end of June at which time "QE2" is set to expire.

We should continue to monitor this closely.  The Fed is playing with fire here.  The central bankers must really be scared of falling back in to recession (if we ever actually got out).

It will be even more interesting to see what happens after June.  I think it will depend on price inflation and the overall economy.  If price inflation picks up even more, then we should expect the Fed to stop expanding the monetary base for a while.  If the economy turns down again and unemployment starts going back up, then we should expect more money creation.

The most interesting scenario will be when we have high price inflation along with a down economy.  Then the Fed will really have to choose on whether to save the economy or save the dollar.  The economic crash will come eventually.  We just don't know when it will be and how big it will be.

Wednesday, May 18, 2011

The American Economy

Things are tough right now in the U.S. and throughout much of the world.  In some ways, things have never been better.  We have access to more information than ever.  We can communicate with anyone, even if they are on the other side of the earth, and there are many ways to communicate.  We have computers that are exponentially greater than those of just a few years ago.  We have big screen televisions with great picture quality at a price that would have been unimaginable just 10 years ago.

Yet, with all of these new great technologies, our standard of living is going down in other ways.  Our basic needs are more expensive.  These include medical care and food.  You could also include housing if you ignore the peak of the boom from 5 years ago.  In the 1950's it was common for the man to go off to work and for the woman to stay home and take care of the kids and keep up the house.  This has become increasingly difficult for families to do.

Part of this can be attributed to the fact that we want our gadgets like televisions and cell phones.  But it is hard to believe that this is the main reason, especially when these new technologies get cheaper and cheaper.  I believe the primary reason is government.  In the last 50 years, government has grown by leaps and bounds.  Some periods have been worse than others, but it has been a continuous trend of more laws, more regulations, and more taxes.  In addition, the U.S. has been completely off the gold standard since 1971.  This has allowed more tampering by the Fed.  Inflation redistributes wealth and it misallocates resources.  This is harmful to production in our society.

If you add up government at all of the levels (federal, state, and local), we fork over about half of our income to the government and this doesn't even account for all of the things made more expensive due to government mandates and regulations.  It is not hard to believe that the average American is struggling financially.  Until the American people stop allowing politicians to have so much power, there will be more of the same.  There is certainly an economic limit as to how far the government and the Fed can destroy things, but the day of reckoning won't be pretty.

The Fed has tripled the adjusted monetary base since 2008.  This is unprecedented.  The federal government is running deficits of over 1.5 trillion dollars.  This is also unprecedented.  The national debt is almost 100% of GDP.  There is no sign that any of this madness will stop.  The only thing that will stop it is the laws of economics.  The government will eventually have to tighten its belt or risk destroying the dollar completely.

The government surpassed the debt limit this week.  Now they are playing accounting games and borrowing money from government pensions.  They are adding problems to the already existing ones.  The politicians want to try to delay the day of reckoning.  They may succeed for a little while longer, but it seems that they are running out of tricks and don't have much more time.

You should take every precaution you can at this point to get your financial house in order.  You should be prepared for some rough times ahead.  Don't get caught off guard.  Most Americans can sense that something is wrong, but most don't understand the magnitude of the problems we face.  I think with technology and an increasing awareness among Americans, we will see a rollback of government eventually.  Until then, you should be prepared for some hard times.

Tuesday, May 17, 2011

How to Read a Political Candidate

With the Republican presidential primary starting to heat up, now is a good time to discuss supporting political candidates.  I am doing this from a radical libertarian viewpoint.

First, the most difficult thing for most people to realize is that our solutions will not be political.  Solutions to our problems and movement toward a more peaceful society and more free market society will not come about with political candidates.  It will come about with a change in public opinion and with technology.

Ron Paul has had a big effect in favor of liberty.  He has been mostly ineffective in getting legislation passed up until this point.  His big impact has been educating others, whether he realizes it or not.  I say that we should not rely on political solutions and yet Ron Paul is a politician (although not a typical one).  But he has used his political position not to pass legislation, but to use it as a podium.  It has given him a platform from which to spread his message of liberty.

My next point is, that while I don't think we should rely on political solutions, I am not against voting or supporting political candidates.  Even if you consider yourself an anarchist, there is nothing wrong with voting if you think it will further the cause of liberty.

With all of that said, if you are going to support a political candidate, you should make darn sure that he or she is really on your side.  In most elections, you simply should not vote or else you should write in a name that is not on the ballot.  Although it will vary depending on where you live, I would say that you shouldn't be voting in at least 90% of races.  Voting for the lesser of two evils will not usually get you very far.  Besides the fact that your vote probably won't make a difference, the lesser of the two evils will most likely turn out to be evil.

If you are going to support someone, I understand that the person doesn't have to have the exact same thoughts and opinions as you.  I do not agree with Ron Paul on 100% of the issues, but I will support him.  When I say "support", I mean that I will encourage others to support him and donate money to him.  Whether I switch my party registration to Republican and actually vote for him, I don't know.

The reason I will support Ron Paul is because I know he is real.  He does not back down and give you some political garbage that he thinks you want to hear.  He has a track record of consistency (in a good way) and he is specific in what he will do.

I don't think I could support any other Republican candidate for president and I certainly would never support Obama.  Therefore, I will most likely vote third party or not at all, if Ron Paul does not get the nomination.  I would only consider Gary Johnson if he starts offering specifics that I like and he is saying it with force.  For example, if he said he would end the federal war on drugs and pardon all non-violent drug offenders convicted of a federal offense, then I would support him if I thought he was serious.

There are no other Republicans worthy of support if you are a libertarian.  Herman Cain is a fraud.  He will support the bankers.  He is in favor of the Fair Tax because he is not interested in dramatically cutting spending.  If he did want to cut spending, he could advocate eliminating the income tax and replacing it with nothing.

Newt Gingrich is a total fraud.  He sat there with Nancy Pelosi and talked about the dangers of global warming.  Mitt Romney instituted Obamacare in Massachusetts before Obamacare even existed.  Even Michelle Bachman, who sometimes sounds half decent on fiscal issues, cannot be trusted.  She is a militarist and she is not specific and forceful enough on domestic issues.

If you are a libertarian,  I would suggest you support Ron Paul.  Aside from him, there are not many candidates to support for other offices.  Only concern yourself with politics in that it can affect your life and your money.  You should know what is going on so that you will know what is coming.  However, if you want to make an impact in advancing liberty, then try to stay away from too much political activity.  Instead, concentrate on educating yourself and becoming a better spokesman for liberty.  Continue to spread the word and try to live your life in the best way that you can so that you are not dependent on the state.

Monday, May 16, 2011

Austrian Economics and Investing

Austrian economics is a valuable tool in understanding the economy.  There is a lot of bad information in the mainstream when it comes to economics.  The establishment is made up of mostly Keynesians or some variation.  The government school system is much the same way.  That is why we have to hear these ridiculous claims that we need more spending to help our economy.

The policies instituted by the government and the Federal Reserve dramatically affect the economy as a whole.  In turn, the economy dramatically affects your investments.  Can understanding Austrian economics help you be a better investor?

I think the answer is "yes", but in a very limited way.  There are some good investors out there who do not understand Austrian economics and there are a lot of people who have a decent grasp of Austrian economics who are not good, or at least not above average, at investing.  Warren Buffett is certainly no Austro-libertarian, but he has certainly done well with his money.  Perhaps this is a bad example since his father, Howard Buffett, actually was a libertarian.  Maybe Warren picked up a few things, even if he doesn't admit it and sounds like a statist most of the time.

If you understand Austrian economics, then the most important thing you should understand is human action.  I'm not talking about Mises' book, but just the fact that humans act.  The government constantly comes up with some new law or program that is supposed to achieve something and it turns out to be bad.  Often, it turns out that it does the exact opposite of what it was supposed to achieve.  Part of this is because of the nature of politics and the inherent corruption.  But part of this is also because of human action.

The government can double a particular tax and expect to pay for some new program as the politicians expect that twice the amount of money will flow in.  But that is in a static world where nothing changes.  If you double the taxes on some good or service, people may find alternatives or buy it in the black market.

It is important to remember the concept of human action when you are investing.  In fact, this should always be in your mind.  If you think that a particular investment has to be a winner, you should think again.  You may have done some great research and analysis.  The so-called fundamentals may all look favorable for your investment.  The problem is, your prized investment may still end up losing you money.

Just look at the bubbles that occur (primarily due to monetary policy).  If you looked at the fundamentals, housing should not have continued to go up after 2004.  Tech stocks should not have continued going up after 1997.  Yet, these things kept going for a while longer.

At the same time, you might think that some stock just has to go up in the near future.  But if few other people become as bullish as you, then it won't go up.  It all depends on the thoughts and actions of millions of other people.  It really doesn't matter what you think should happen.  What matters is how others act.

Austrian economics can definitely help us with our investing.  Most people, including investors, have little understanding of monetary issues.  If the Fed is creating new money out of thin air and the government is running up massive deficits, we can take a good guess that commodities will probably do well.  Again, there is no guarantee because it is all subject to human action.  But we can make a reasonable prediction that most humans will act rationally and the additional money and debt will likely motivate others to buy gold and other commodities.

We should use our understanding of Austrian economics to our advantage in the investing world.  Most others do not understand it or even know of it.  Just remember the most important point that humans act and because of human action it is impossible to predict the future with certainty.

Friday, May 13, 2011

Confiscation of Retirement Accounts

The Irish government has announced plans to tax its citizen's private pensions.  Ireland has a lot of problems, like many others of Europe, in that the government has been spending way beyond its means.  The government is desperate and is trying to come up with ways to narrow its deficits.  Since some people want a free lunch and the government wants to continue spending, it only makes sense for the politicians to raise taxes (at least from their perspective).

Since raising income taxes does not necessarily result in additional taxes collected by the government, taxing retirement accounts is actually a creative way to tax people without losing too much productivity in the short-term.  In other words, it is a sleazy way for politicians to get their hands on your money.  Since Ireland can't print money like Washington DC, the politicians there have to resort to tactics like these.

So what are the possibilities that something like this could happen in the U.S.?  Simon Black has written an article on this (linked from LewRockwell.com).  He sets up a scenario on how it will come about.  First, he says there will be some sort of financial event where a big crash occurs.  Then the government will step in, all in the name of protecting people.  They will mandate that a portion of all managed retirement funds be invested in "safe" U.S. treasury bonds.

If a confiscation of retirement accounts did happen in the U.S., I basically agree with the scenario he has laid out.  The only difference I have is that I think it would not be mandatory at first.  I think the politicians would be less bold to start off and would call it optional.  Eventually, they would start to match people's contributions who invested in treasury bonds.  Or maybe they would give them a more favorable tax status.  They would slowly change it from optional to virtually mandatory.

While I think this is a real threat and something that everyone should be aware of, I don't think the chances are quite as high in the U.S. of this happening as in other places.  There is certainly a lot of wealth in 401k's and IRA's and I have no doubt that there are many politicians who would like to get their hands on this money.  But because they are so popular and so common, it makes it more difficult, politically speaking, for the government.

If there is a hint of the politicians trying something in the U.S. like what is happening in Ireland, I really think people would take to the streets.  Although the U.S. empire has grown in to something bigger than anything in the history of this world, there is also still a good streak of individualism in the American people.  Although there is certainly class envy, there is also a general acceptance that it is ok to make money and that entrepreneurism is a good thing.  I think this attitude will prevent a confiscation on retirement accounts.

Wednesday, May 11, 2011

Libertarian Thoughts on Gary Johnson

The first Republican presidential primary debate was held last week.  Only 5 candidates participated, two of whom were Ron Paul and Gary Johnson.  For anyone following politics and particularly for libertarians, Ron Paul is fairly well-known now.  That should give us a lot of reason for optimism, but that is a subject for another day.  Gary Johnson is not as well-known by most Americans and even many libertarians.

Gary Johnson was the governor of New Mexico from 1995 to 2003.  During that time, he vetoed about 750 bills, which was more than the other 49 states combined.  He is in favor of legalizing marijuana and is an advocate of lower taxes and less spending (state and federal).

So what is not to like about that record for a libertarian?  First, I think he did do an excellent job as governor when you compare him to anyone else in the last 15 years.  My criticism of him in regards to his time as governor is only that he did not leave a more permanent mark.  New Mexico is certainly in better shape right now than many other states, especially when you look at nearby California.  But New Mexico is not exactly a libertarian paradise either.  I understand that the governor (just like a president) only has so much power and that the legislature is a major piece of the puzzle.  However, state education continued to be funded along with many other government programs that do not come close to fitting into the libertarian view of things.

This is similar to the way I view the Reagan presidency, although I'm much harder on Reagan because government actually expanded quite a bit on his watch.  But even if Reagan had kept spending under control (which he didn't) and he had balanced the budget (which he didn't) and he had not started any wars (which he did), it would still be hard to give him a lot of praise.  If the person leaves office and things go right back to where they were before, how much good did they really do?

If a libertarian is going to become governor or president, I want him to dismantle the government.  If the legislature is not cooperative, then just veto every single spending bill that there is.  In addition, take your case to the American people on an almost daily basis, talking about the proper role of government.  Repeat often that it is not the government's job to provide education, to eradicate drugs, to provide healthcare, etc.  This is what I would expect from a good libertarian governor or president.

I think Gary Johnson's presence in the debates will be good.  It adds confirmation to some of what Ron Paul is saying.  I think most Ron Paul supporters will stick with Ron Paul.  Most people who support Ron Paul want someone who is radical in the defense of liberty.  They will not sell out to someone who has a watered-down message.  Ron Paul and Gary Johnson both present common sense viewpoints on why government doesn't work.  Ron Paul adds in morality.  He is not afraid to point out that government is force.  Ron Paul will speak more philosophically as well.

I don't think Gary Johnson has much of a chance of getting the nomination.  I think Ron Paul has a better shot, but unfortunately I think there are too many pro-war Republicans to allow this to happen.  Either way, it is good news that both Paul and Johnson are getting some attention.  It is time that Americans start to hear a more libertarian message.

Tuesday, May 10, 2011

Update on the Current U.S. Debt Ceiling

The current debt limit is 14.294 trillion dollars.  You can view the U.S. national debt here.  Right now, it is showing the U.S. national debt and the U.S. public debt subject to limit.  The debt subject to the limit is slightly lower.  It is projected to hit the limit in mid-May, sometime next week.

If the debt ceiling is not raised, the government can keep things going for a few more months using accounting gimmicks.  The politicians are good at accounting gimmicks.  They can continue to run up debt a little while longer while not really counting it as debt.

Many of the politicians are screaming right now that refusing to raise the limit is not an option.  They are wrong.  It just isn't an option that they like.  It would not necessarily mean default.  It would mean that they would have to drastically cut spending.  This is why the limit will be raised.

If you didn't have enough evidence already, the next few weeks should tell you all you need to know about the Republicans.  They will demand a few spending cuts.  The actual cuts will just be a small fraction of the total bloated federal budget.  Both sides will compromise on more debt and more spending and the party will live to see another day.

It is even hard to judge your congressman by his individual vote.  Congress has this trick of vote counting.  They just need to come up with enough votes to raise the limit.  They will allow some of their colleagues to vote "no" if they are fighting hard for reelection and they need to prove to the voters that they are tough on spending.  The whole game is rigged.

Obama voted against raising the limit when he was a senator.  He has now changed his tune.  The Republicans (with a few exceptions) are frauds too.  The Republicans have the majority in the House of Representatives right now and could refuse to raise the limit.  This will not happen.

As a libertarian, I believe the federal government should sell off its assets and pay off its debts.  Anything remaining should be repudiated.  I understand this is a radical stance, even for a libertarian.  But for any libertarian, you should at least be demanding that the limit be held where it is.  This would force immediate and dramatic cuts.  If the politicians started shutting down whole departments and dismantling the empire overseas, then the government could probably continue to pay interest on the debt and continue to hand out money for Social Security and Medicare, at least for now.

There is no hope of a balanced budget.  It is going to take a crisis in the dollar.  We will end up in a situation like Greece or we will end up with massive inflation and then we will end up like Greece.  Until the American people make serious demands about drastically cutting spending, including entitlements, the military, education, and virtually everything else, then the politicians will continue to spend as long as the Fed keeps buying debt.  This really isn't going to be a pretty ending.

Monday, May 9, 2011

Gold and Silver Bounce Shows Promise

After the violent downfall last week for gold and silver, things turned around today.  Gold had fallen below $1,500 and silver had dropped about 30% in less than two weeks.  This was not surprising as silver's run toward $50 was rather quick, but I think it still scared a few people.

The little bounce back up today is a promising sign.  We will see if it holds or if there is more of a correction to come.  Either way, I still see gold and silver both going to new all-time highs, most likely this year.  If they don't see new all-time highs soon, that means there is likely to be a severe correction in the stock market.

That is why I like a strategy of owning gold and silver related investments along with a short position in the stock market.  I should emphasize that this is for your speculation money.  If you want to minimize speculation and keep your money as safe as possible, just put it all in a permanent portfolio setup.

But again, for speculation purposes, a long position in gold and silver investments along with a stock market short is a decent bet right now.  If the stock market crashes, your short position should do better than the loss you will get from your gold and silver investments.  If gold and silver do well, then your position there should do better than your loss from your stock market shorts.

The only way this strategy won't work is if the stock market continues to go up and gold and silver go down.  While anything is possible, I don't see a high likelihood of this happening over a long stretch.  I suspect the stock market is going up due to the hot money being created by the Fed.  If this continues, then gold and silver should do even better as they are natural inflation hedges.

If the Fed puts on the monetary brakes and the new money stops flowing, I would suspect that the stock market would collapse rather quickly.  Silver and gold might also go down quite a bit in this scenario, but at least you would be making money on your short positions.

There is a possibility that stocks might stay flat for a while or even trend down while gold and silver go up. You would really be a winner then, but just remember to take profits along the way.  As we saw last week, things can correct rather quickly and rather severely.

This strategy is easier than ever with ETFs.  You can buy an ETF that shorts any of the broad stock markets indices.  Again, this should be for your speculative money only.

Saturday, May 7, 2011

What are the Chances of Hyperinflation in the U.S.?

On Friday, Lew Rockwell ran a piece on his site in which The Gold Report interviewed John Williams of Shadow Stats.  Williams predicts that there will be hyperinflation.  In the interview, he does not define hyperinflation.

While I understand that different people have different definitions for hyperinflation, it is nice for them to define it if they are predicting it.  Some people would say that hyperinflation is when prices are going up 20% or more per year.  Others would say 100% or more per year.  Others would say we are in hyperinflation now because of the huge increase in the monetary base.  Others would say that hyperinflation is occurring only when consumer prices are going up every single day.  This last case would be like Zimbabwe or Weimar Germany where people receive their pay from work and they immediately run to the store to buy food or anything else before prices go up again.

It is certainly unprecedented what the Fed has done in the last few years.  The adjusted monetary base has approximately tripled.  This has never happened since the creation of the Fed in 1913.  But while we are in uncharted waters, I don't think we will see hyperinflation.  Anything is possible, so we can't say that it can't happen, but it seems unlikely.

I do find it plausible that we could see price inflation of 20%.  I would not consider this hyperinflation.  If we define hyperinflation as prices going up every day, then it is highly unlikely.  If we define it as prices doubling in a year, then I might give it a 5% chance at best.

The reason I think hyperinflation (as defined by the more extreme cases) is highly unlikely is because the bankers (who control the Fed) would lose too much themselves.  In a severe case of a currency collapse, the division of labor would break down.  If there are no alternative monies readily available, there will be major chaos.  I don't think that is likely.  Why would the bankers want to destroy their own pensions and create a world in which trucks stop delivering food to the grocery stores?

In addition, the U.S. dollar is still the reserve currency of this planet.  While that may be slowly changing, I don't think foreigners will be too happy if the U.S. goes into hyperinflation mode.  I believe that is one of the major reasons that Volcker slammed on the monetary brakes in the late 70's and early 80's.  I'm sure foreign governments and other elitists pressured him and the Fed into saving the currency.

Again, I won't say that anything is impossible, but people should be careful not to be so loose with their language.  To just say that we will have hyperinflation without defining it and without telling us why the Fed and the bankers would allow this to happen, is really shooting from the hip.

The Fed will slam on the monetary brakes again one day, just as Volcker did three decades ago.  When that happens, congress will finally be forced to cut spending and we will experience a very difficult recession/ depression.

Thursday, May 5, 2011

Silver vs. Gold

I have talked before about investing in silver in comparison to gold.  Silver is referred to as the poor man's gold.  It is a lot easier for the average American to buy a one-ounce silver coin than a one-ounce gold coin.  In fact, many Americans could not even buy an ounce of gold today with their liquid savings.

Another difference is that, while both have a history of being money, gold still has a better reputation as money.  Silver has a lot of uses in electronics and other things.  Gold has a few uses, but it is mainly used for jewelry and savings/ investment.  I don't know of any governments/ central banks that hold silver in any significant way.  On the other hand, many governments hold large gold reserves.

This past week has really shown the biggest difference in gold and silver when it comes to your investing.  Silver is far more volatile than gold and that has been demonstrated in a major way.  In the matter of just a few days, silver fell about 30%.  That is a huge drop.  If the stock market dropped like that in such a short period of time, there would be panic and headline news.

While silver crashed, gold has pulled back more gently.  Of course, silver also just had a huge run-up in a very short period of time, so it makes sense that it pulled back as violently as it went up.  Gold has shown itself to be much more stable.

For your investments, I recommend that you have most of your precious metal holdings in gold.  If you want to keep a small percentage in silver, that is fine as long as you can take the bigger swings.  For speculation purposes, silver is actually more fun (as long as you are on the winning side).  There is more risk with silver and there is also more reward.

This pullback in silver will be a great speculation opportunity for those who can handle some high risk.  We are still in a huge bull market in precious metals and the Fed keeps creating new money out of thin air and the government keeps spending like crazy.  There is great reason to believe that the metals will continue to go much higher with big pullbacks along the way as we have just seen.

It is hard to say where silver will bottom out on this pullback, but it really will be a great opportunity for risk takers to do a little speculating.  If silver goes right back up from $40 to $50, that is a 25% return.  That would be a great return considering that your savings account is probably paying a fraction of one percent.

Wednesday, May 4, 2011

The Adjusted Monetary Base and Trouble Ahead

There was an article that appeared at Mises.org titled "Charting the Course to $7 Gas".  The author hit on some of the points that I have hammered on, particularly the tripling of the adjusted monetary base and the increase in excess reserves.

I found it amusing where he pointed out the blip on the chart of the adjusted monetary base back in 2000.  This was Greenspan and the Fed responding to the dot-com bust.  It is circled in red.  If you look at the recession in 2001, you can also see a small blip there too (just to the right of the red circle).  I believe this increase in the monetary base was a response to 9/11.  It just shows how tiny it was compared to what has happened since 2008.

If the gradual increase in the monetary base from the 1980's all the way to 2008 could cause a major tech bubble and then a major housing bubble, just think what might happen now.  This is why we could see oil, gold, silver, and other commodities double, triple, or more in a short period of time, even from where they are now.  I'm not making a prediction, but I am saying that it is not unlikely at this point given what the Fed has done in the last three years.

The excess reserves held by banks has slowed down price inflation.  Likewise, unemployment and uncertainty in the economy has increase the demand for money (slower velocity) to a certain extent, which has also slowed down price inflation.  We could easily see this shift quickly.  When more people perceive that their dollars will be worth less tomorrow than today, then more and more people will start rushing to spend those dollars, thus driving up prices.  The Keynesians will get what they want in more spending and the American people will get it good and hard with dramatically increasing prices.

In listening and reading the people I respect the most when it comes to economic analysis, it is scary how much consensus I find.  Certainly people have different ideas on how things will progress (or maybe regress is a better word), but it is almost unanimous that there is major trouble up ahead.  We should hope that the American people (along with the rest of the people on earth) start withdrawing their consent from the federal government and that the troubles ahead will be short-lived.  We should hope that the trouble ahead caused by current policies is the start of a new era; an era of peace and prosperity with more liberty.

Tuesday, May 3, 2011

Devaluation, Depreciation, Debasement

Here is what Wikipedia says about devaluation:

Here is what Wikipedia says about depreciation:

Here is what Wikipedia says about debasement:

Devaluation actually occurs within a fixed exchange rate system.  The last time there was a formal devaluation of the U.S. dollar was in 1971 when Nixon told foreign governments that they could no longer redeem their dollars for gold.

Depreciation occurs in a system of floating exchange rates.  Wikipedia says that depreciation refers to a decrease in the value of a country's currency with respect to one or more foreign currencies.

When we look at debasement, Wikipedia says it is the practice of lowering the value of a currency.  It goes on to say that, "It is particularly used in connection with commodity money such as gold or silver coins.  A coin is said to be debased if the quantity of gold, silver, copper or nickel is reduced."

All of these words seem to be used interchangeably.  In the entry for "devaluation", Wikipedia says this is incorrect, but that they always refer to values in terms of other currencies.  But my question is, how do you refer to an increase in the money supply?  This used to be called inflation, but the definition of inflation was changed by the statists to refer to prices (which is actually just the effect of inflation).

I use these terms interchangeably with the knowledge that it is not technically correct in the financial world.  But I don't really care about other currencies.  You could say that the dollar is not depreciating against the euro, yen or some other currency at some particular time, but that is not helpful if all of the central banks are creating new money and every fiat currency is becoming worth less in purchasing power.

I am not sure why Wikipedia says that debasement is used particularly in connection with gold and silver.  While these metals have a long history of serving as money, the major governments of the world have changed all of that and most money used today is paper money with no backing.  So just as the kings debased money by clipping coins, today the central banks of the world debase our money via money printing (or the modern version of creating digits on a computer).

Although the term devaluation was generally used with fixed exchange rates (which we don't have any more), I really don't think there is anything wrong with this term to describe monetary inflation.  When you "devalue" something, you are reducing the value of it.  This perfectly describes monetary inflation as far as I'm concerned.  The Federal Reserve or some other central bank creates new money out of thin air.  This reduces the value of the money that we already have.  It really is that simple.

Monday, May 2, 2011

Osama bin Laden and Your Investments

The news has come that Osama bin Laden was shot and killed by U.S. Navy seals.  The conspiracy theories are already going strong and I'm not talking about Obama's speech interrupting Donald Trump's Celebrity Apprentice (although that is amusing).  The U.S. government is claiming that it dumped bin Laden's body into the sea according to Islamic practice.  Since when has the U.S. government cared anything about Islamic culture or practices?  Ok, the U.S. government kills hundreds of thousands of people and wrecks the lives of millions more in Iraq and Afghanistan, but let's make sure we give a proper burial (which it wasn't) to the person who was on the FBI's most-wanted list.  I'm starting to think the government likes seeing all of these conspiracy theories.

But let's assume that the story is true.  Even if it's not true, let's assume bin Laden is dead and the story is accepted by most people.  What are the political ramifications, the economic ramifications, and the investment ramifications?  Unfortunately, while I wish this meant the end of the war on terror and the Patriot Act and all of the other horrible violations of our liberties we have had to endure, I think we will see more of the same.  This was just one man.  Give me over a trillion dollars and I could find one man on the planet too.  But there will be someone to take his place.  If that person is captured or killed, then someone else will take his place and on and on it goes.

Back to the conspiracy theories, there are certainly a lot of reasons that Obama and others would wish for a story like this.  The American people have been quite upset with their government and unfortunately many will give the government credit for this (again, who couldn't catch someone with a trillion dollars at their disposal?).  Obama's poll ratings have been low and there will be a certain segment of the population who, like idiots, will all of a sudden support Obama again.

But another theory is that this would give Obama an excuse to withdraw from Afghanistan.  During most times, governments and presidents like wars.  But the U.S. is in major fiscal trouble and will not be able to afford these big expensive wars much longer.  The Fed can't keep printing money like crazy or it will risk hyperinflation.  If the government is forced to cut, I'm sure they would rather reduce military spending than cut Social Security and make voters even more angry.

I do not predict an end to the wars any time real soon, but having bin Laden out of the way certainly makes it easier to get out, politically speaking.  For now, I would count on more of the same.  We can expect the deficits to continue until the Fed is forced to stop creating new money.  Until that happens, it seems unlikely that the wars will end.  This story should not change our investment strategy of favoring hard assets over paper money.