Thursday, June 30, 2011

QE2 is Over

Today, June 30, 2011, officially marks the end of QE2.  You can look at the adjusted monetary base to see what happened.  It is up around $600 billion, just as the Fed had said it would be.  There was actually a slight retreat in the last week.

You can also see the excess reserves held by commercial banks.  They have gone up with the monetary base.  That last line up is QE2.  This means that all of this new money is being held by the banks.  The banks are parking this money at the Fed to earn .25%, which is close enough to zero.  I don't think it is a quarter percent of interest that is keeping this money tied up.  I think a more logical conclusion is that the banks see more trouble down the road and are building up reserves to deal with those problems.  I have read that much of QE2 went into European banks.  The speculation is that the Fed was helping to capitalize these banks because of the threat of defaults by Greece and other European countries.

It looked like the stock market was in for a major correction, but things reversed quickly this week.  Meanwhile, gold retreated to just below $1,500 per ounce the other day.  Gold has been going down slightly over the last couple of weeks, but it isn't anything big.  I still think a good strategy for speculation is to have some gold assets and to short the stock market (to a lesser extent).

I just cannot picture a scenario right now where the stock market will go up and make new highs while gold goes down or even stays flat.  If there is not a big correction in stocks, then I see gold going much higher.  I think low interest rates and loose money is the primary reason for the stock market moving higher.  These conditions, along with huge deficits, should be even more positive for gold.

The big question remains: what will the Fed do next?  My guess is that it will keep the monetary base stable for a while.  It could keep buying government debt and not actually announce QE3, but I don't think this is likely.  If we see more major signs of a downturn (stock market crash or higher unemployment figures), then many people on Wall Street will start demanding another round of digital money printing.  Then we can expect QE3.

It is likely that we will continue to see a roller coaster ride.  Gold has been very quiet lately, so I would not be surprised to see it start moving fast in one direction or the other.  This is a tough environment for investing.  The name of the game right now is to keep what you have, including its purchasing power.

Wednesday, June 29, 2011

A Libertarian Perspective of Michele Bachmann

I have already given my perspective of Herman Cain, a best friend to bankers.  Since Michele Bachmann is moving up in the polls, it is now time to take a look at her from a libertarian point of view.

Bachmann has only been in Congress since January 2007.  She is from Minnesota and is considered a supporter of the Tea Party movement.  Some libertarians are sympathetic towards her and her views.

She may actually be the worst of all worlds for libertarians.  The problem is that she has some libertarian rhetoric and she sounds like she is a supporter of capitalism most of the time.  She even throws in states' rights on some economic issues.  The problem will come if she is elected to the presidency.  Just like George W. Bush and Ronald Reagan, I am fairly convinced that her policies would not reflect her rhetoric.

When she favors special interests and big business and she does nothing substantial to help the average American who is being choked by big government, then capitalism will get the blame.  We hear it now with previous presidents.  We can even go back to the 1920's and 1930's and people talk about Herbert Hoover as if he was a big supporter of the free market when it is just about the opposite.

Bachmann sounds just good enough to appeal to conservatives (and even some libertarians).  I have heard her say that she wants to get rid of the Department of Education.  I don't hear her say it often though.  But why should we believe her?  She is part of the Republican establishment.  If she gets the Republican nomination, she will be surrounded by insiders (if she isn't already).  Just how the Republican revolution in 1994 turned out to be nothing, so will Michele Bachmann.

The Republicans tinkered around the edges after their major victory in 1994.  They were less disastrous than other congressional periods before and after.  But overall, there was no significant change that took place in the direction of liberty.

The last debate on CNN was horrible.  The candidates were only given 30 seconds to answer the questions, which is not a lot of time for someone wanting to become President of the United States.  But all of the candidates talked about cutting taxes and cutting spending.  Other than Ron Paul talking about the military, none of the candidates offered anything specific of substance.

That is the question I want posed to Michele Bachmann.  How will you balance the budget?  Where specifically will you cut $1.5 trillion from the federal budget.  In fact, every candidate should be asked that question.  It is impossible to balance the budget unless you cut military spending and/or so-called entitlement spending.

Of course, when it comes to foreign policy, Bachmann is a nightmare for libertarians.  She is a typical pro-war Christian who wants to bomb the Middle East and spread democracy throughout the world.  She doesn't quite put it in those terms, but you can certainly tell that she will not be ending any major wars any time soon.  She never seems to explain how she will spend trillions on military spending and yet remain a fiscal conservative.

Libertarians, beware of Michele Bachmann.  With Obama in the Oval Office, it is easy to see what he stands for (bigger government).  It is a little trickier with Bachmann, which makes her more dangerous.  Do not mistake her for a friend of liberty.

Tuesday, June 28, 2011

Understanding Velocity in Our Economy

The velocity of money is a huge factor in our economy and yet many investors do not understand it or even know what it is.  I find that even many libertarians and followers of Austrian economics do not understand velocity.

The velocity of money is the demand for money.  It is how quickly money is changing hands.  If there is a high demand for money, then velocity is low.  This means that people are not spending as much.  Therefore, money is changing hands less frequently.  This has the same effect as monetary deflation.  With everything else being equal, a reduction in velocity will push prices down.

The opposite is true for high velocity.  There is a low demand for money and money is changing hands quickly.  This pushes prices up.  The most extreme example of high velocity is during a period of hyperinflation.  People get their paycheck and they run to the store and hurry up and spend it before prices are even higher.  When overall prices are rising every day, this is extreme hyperinflation and it means that the money being used will be worth nothing soon.

Velocity is determined by the attitudes of the people.  Right now in the U.S., velocity seems to be quite low.  It is almost impossible to measure, but you can usually take a good guess based on other factors.  With the economy down, unemployment high, and uncertainty high, people are afraid of the future.  They have cut back on their spending and are trying to pay down debt.  They are trying to save for a rainy day, or in this case a rainier day.

The adjusted monetary base has approximately tripled since 2008.  But consumer price inflation has been relatively mild.  I attribute this to two things.  First, the excess reserves held by commercial banks have dramatically increased.  Second, the velocity of money has been low.  The two of these things are even related in a way.  Banks are not lending due to fear and people are not spending due to fear.  This has kept us from having massive price inflation.

For some reason, people still run to the U.S. dollar in times of uncertainty.  I think is beginning to change and will continue to change.  Eventually, people will start running away from the dollar and will run to hard assets like gold and silver.

Because of velocity, it is possible to have rising prices without monetary inflation.  It is not likely, but it is possible.  If everyone became an Austro-libertarian tomorrow and knew that everyone else did too, then people might start dumping their dollars for hard assets.  High velocity alone could kill a currency.  If people no longer have faith in their money, it won't matter what the government does.  It will quickly become worthless.

Although it is impossible to measure velocity, it is important to keep it in mind when examining the economy and prices in general.  Human behavior plays a big role in our economy.  If velocity turns higher one day, we should watch out for big price inflation.  Then the Fed will have to decide if it wants to save the dollar.

Monday, June 27, 2011

China to Save the Euro?

There is an article (linked via Drudge) that discusses China's role with Europe.  The Chinese premier, Wen Jiabao, is visiting Europe.  With all of the problems with Greece and the other "PIIGS", the euro is in some trouble, but China is saying that it will support the euro.

The article quotes the Chinese premier as saying, "China is a long term investor in Europe's sovereign debt market."  He goes on to say, " In recent years we have increased by quite a big margin our holdings of government bonds.  We will consistently continue to support Europe and the euro."

Assuming this did not get translated incorrectly and assuming he means what he is saying, this man is an imbecile.  The Chinese government is still labeled communist.  I'm not sure if that is true anymore when it comes to economics, but it is still mercantilist.

China has made wonderful improvements over the last 3 decades.  When you are starting from just about the lowest point possible, it is not hard.  Economically speaking, China is not really communist anymore.  In some ways, China is more free economically than the U.S. (although still much poorer).  There are less regulations on business in China.

Although China has improved, it is still being centrally planned by a bunch of morons.  They continue to invest in currencies like the euro and the U.S. dollar.  There is little doubt that there will be some form of default with both in the future.  If there is not an outright default, the Chinese will be paid back with money that has been devalued considerably.

Why does the Chinese government have to "invest" all of this money?  Why can't they allow the citizens of China to have this capital?  It would lower their consumer prices.  It would help their standard of living.  Instead, these complete idiots prefer to subsidize Americans (and apparently Europeans too).  It may help their export sector, but they are hurting themselves far more by making things more expensive within China than they otherwise would have been.  Instead, rich Americans get cheaper products at the expense of the poor Chinese.

The people of China tend to be huge savers.  Even with relatively small incomes, they save a high percentage of their earnings.  The same cannot be said for Americans.  But the Chinese people are not reaping all of the rewards they should be from their frugality.  Their stupid government continues to squander part of their savings.  Of course, the same thing could be said for Americans who don't save as much (relatively speaking), but still have a government that spends huge amounts.

China will be experiencing huge problems in the near future.  The central bank inflated like crazy.  There is a huge real estate bubble.  There are cities there that are practically empty.  China cannot escape the Austrian business cycle theory.  They will have a bust.  It is too bad.  If the Chinese government would get out of the way and keep a stable monetary system, the Chinese people would become rich very quickly with their high savings rates.

Saturday, June 25, 2011

The Relationship Between the Fed Funds Rate and the Rate on Excess Reserves

Last month, I posted a piece on bank excess reserves and the federal funds rate.  I was basically saying that the Fed was not really holding down the fed funds rate.  It makes this announcement after every FOMC meeting that it is keeping the rate at between zero and .25 percent.  This has been going on for a couple of years.  But because the banks have massive amounts of excess reserves, there is very little need for overnight lending.  Therefore, this keeps the federal funds rate low and the Federal Reserve's monetary expansions or contractions have little to do with their target rate right now.

In my piece, I also cited an article by Kel Kelly.  In his article, he says that the only way that the Fed can raise rates is by paying the banks significantly higher rates on their excess reserves and that this is unlikely because it would lead to a recession.

I received a comment in response to my post.  The comment says, "The Fed can [lower] rates only by paying banks interest on reserves.  In your article, you addressed it as 'raising' rates, which is not the case."

I understand this comment, but I maintain what I said in my post and that Kel Kelly is correct in his article.  It is a bit counter intuitive, so let's go through it.

If the banks had virtually no excess reserves, as was common before 2008, then the Fed could more easily control its target rate.  Therefore, the commenter is right in one sense that if the Fed put a negative interest rate on excess reserves (charged banks for holding money instead of lending it), then this would force down the excess reserves.

But it does go the other way too.  The reason that the Fed started paying interest on excess reserves was so that it had more manipulation power.  It is no coincidence that the rate paid on excess reserves right now is a paltry .25%.  Let's say that the Fed raised this to 5% tomorrow morning.  What would happen?  The banks would tie up their money in excess reserves and there would be very little money there for banks to lend overnight.  This would actually increase the Fed's target rate.

Ben Bernanke himself is quoted as saying, "In principle, the interest rate the Fed pays on bank reserves should set a floor on the overnight interest rate, as banks should be unwilling to lend reserves at a rate lower than they can receive from the Fed.  In practice, the federal funds rate has fallen somewhat below the interest rate on reserves in recent months, reflecting the very high volume of excess reserves, the inexperience of banks with the new regime, and other factors.  However, as excess reserves decline, financial conditions normalize, and banks adapt to the new regime, we expect the interest rate paid on reserves to become an effective instrument for controlling the federal funds rate."

The rate paid on excess reserves actually puts a floor on the federal funds rate.  It is not an exact science as even Bernanke struggled with this when the tool became available.  The Fed did not know exactly where to set the rate on excess reserves and it was throwing off their target rate.  So if the Fed announced a significant increase in the rate paid on excess reserves, this would in fact raise the fed funds rate.

So the Fed can control the federal funds rate, but it is unlikely to do so right now.  If it raises the rate on excess reserves, this would really hamper lending and it would likely lead to a quick and sharp recession.  If the Fed puts a negative interest rate on excess reserves (charges a fee), then banks will start to lend out their reserves and we will see massive price inflation very quickly.

The Fed will keep walking a tight rope between recession and inflation.  It will eventually run out of room and we will probably get both at the same time, if we don't already.

Thursday, June 23, 2011

An Economy Grows on Production

With all of the economic problems we face today, there are a lot of myths out there.  These myths are promoted by the media and politicians and even some so-called economists.  They are Keynesians.  One of the biggest myths of all is that spending drives our economy.  When you think about it, this is really childish and yet many people believe this nonsense.  It is a mix up of cause and effect.

An economy grows because of production.  We get increased production from savings, capital investment, and increased technology.  An economy is not more productive because of consumer demand.  We can have all of the consumer demand we want, but it doesn't make things appear out of thin air.  I'm sure that people living in third world countries would like to have ipods, flat screen televisions, and be able to dine out at fancy restaurants.  But they simply don't have the wealth accumulation to have these things.  They can demand these things all they want, but they won't appear until there is production.

There is more consumption in a place like America as opposed to a place like Ethiopia because there is more to consume.  There is more to consume because America is wealthier.  There is more wealth because of the prior savings and investment that has taken place.  This is because of stronger property rights and freer markets.

Remember that you can't consume that which isn't produced.  The excessive consumption of Americans in the last decade does not exactly mean that people consumed future goods.  It means that they consumed more in place of saving.  Due to the lack of savings, it will hurt future production.  We are beginning to pay for that now as we can see with the economy.  Unfortunately, the government continues to exacerbate the problem.

Look at this from an individual standpoint.  Let's say that you have saved up $100,000 over the last several years.  You earned more than you spent each year and the difference was put into savings.  Now you decide to take an extravagant vacation.  You rent out your own private island for a month and get the best service available.  You have a great vacation, but you squander all of your savings of $100,000. Now you are left with nothing, except for your job.

This doesn't mean that you will starve.  You still have the income from your job.  But your lifestyle will have to take a hit from your one month vacation.  You will have to go back to work and live within your means again.  If you want to save money again for the future, you will have to live below your means.

There is nothing wrong with consumption from an individual perspective.  We need some consumption on a daily basis just to survive.  But most people realize that we can't always live for just today.  We do have to plan for the future.  This means saving money.  This allows capital investment, which increases future production.  It means we can have a higher standard of living in the future than what is possible today.

Government spending does not stimulate an economy any more than the person taking an extravagant vacation.  It might appear that your standard of living has increased, but in reality you are substituting savings for consumption.  You are simply living for today and not worrying about tomorrow.  The problem is, tomorrow is here now for Americans and for governments here and around the world.

Wednesday, June 22, 2011

The Latest From Bernanke and the Fed

The Federal Reserve met yesterday and today and Ben Bernanke held a press conference, which is a new gig designed to fight off Fed critics.  The FOMC said that it is keeping rates the same.  Of course, this is in reference to the Fed funds rate, which is almost at zero.  But the Fed is not really controlling that rate right now anyway because most of the banks do not need to borrow overnight money because they have a massive pile of excess reserves from all of the quantitative easing.

Other than some little changes in their forecasts for growth and inflation, there was not much new coming from the Fed.  Bernanke is saying that the Fed will continue to reinvest expiring bonds.  This means that the money supply should remain stable with the ending of QE2.  He did not make any promises for a QE3 and that is probably the reason that the stock market pulled back today.

It should not matter what one man says or does.  It should not matter what one small committee does.  Unfortunately, because they control the money supply of the money that is used in the largest economy on the planet, every little word by Bernanke has an effect.  It shouldn't be this way, but it is.  Therefore, as investors, even if we don't like the central bank, we still have to pay close attention to what it is doing.

It is impossible to predict what the Fed will do next.  If I had to guess, I think the most likely scenario is that they keep the monetary base steady for the next few months.  When the stock market does poorly, the economy continues to struggle, and unemployment doesn't get any better, then the Fed will have an excuse to go forward with QE3.

Meanwhile, we have to continue to monitor all of the variables in our world.  There is continuing war, there are revolutions going on in the Middle East, there is a disaster still going on in Japan, there is the good possibility of default by Greece and other European countries, and there is the health of the economy in the U.S.  There are a lot of things that could go wrong right now and any one thing could trigger a financial panic.  Continue to play it safe with your money.  Playing it safe means putting a good chunk of money in the permanent portfolio and the rest in cash, gold, and silver (or equivalents).

We will also continue to monitor the adjusted monetary base and the excess reserves held by banks.  This will clue us in if we should expect serious price inflation in the next several months.

Tuesday, June 21, 2011

The Gold Standard vs. Free Banking and Money

We often hear that libertarians advocate the gold standard.  This is certainly true, but it is important to understand why and what the true position is for a radical free market advocate.

As a libertarian and a follower of Austrian free market economics, I am in favor of a completely free market in money and banking.  Would we be better off under a government run gold standard?  Probably yes.  Would we be even better off if the government didn't involve itself in money at all?  Yes.

For someone who holds radical free market beliefs, then the maximum role, if any, that the government should play in the money business is to protect people from force and fraud.  Anything beyond this and the government will use this power for evil purposes.

The reason that you will hear so many libertarians advocate a gold standard is because gold would most likely be the money of choice in a free market.  Gold and silver have been used as money for thousands of years.  Paper money is a recent thing in a long history of money.

Gold was chosen by the market to serve as money because of its properties.  It has a high value (this is why bricks or iron are not used as money).  It is divisible without ruining the value (this is why diamonds aren't used as money).  It is durable.  It has longevity (this is why milk is not used as money).  For these and other reasons, gold (and to a lesser extent silver) have great qualities to be used as money.

The most important quality of gold and silver to distinguish them from paper currencies is that they cannot be created on a computer or on a printing press.  The government can simply create fiat money out of thin air.  To obtain gold and silver, it usually involves intense labor and the supply tends to be very limited.  So while you can have inflation of gold or silver (an increase in the supply), it is not controlled by politicians.

So as libertarians, we really shouldn't advocate a gold standard as it might imply that we think the government should manage it.  For a truly free market, it is the marketplace that should decide on what will be used as money.  Most likely, I would bet my fiat money that the market would choose gold again.

Monday, June 20, 2011

Libertarian Reading List

Below is my libertarian reading list.  I am only mentioning some of my favorite libertarian books.  There are now thousands of libertarian books to choose from.  I am just listing some of my favorites that have had an influence on me in the past.

Atlas Shrugged by Ayn Rand
This is my favorite fiction book and maybe my favorite overall.  I am not a big fan of Rand's writing style.  I don't completely agree with her philosophy.  I don't think the book is that realistic and I think it gives a little too much credit to businessmen.  With all of that said, it really is a must-read for any libertarian. It will take you a while, but it really is a great journey.

Fail Safe Investing by Harry Browne
For anyone who follows this blog should know, I am a big advocate of putting some of your money in a permanent portfolio as outlined in this book.  I'm not sure if the book is libertarian, but it is written by a great libertarian.

Why Government Doesn't Work by Harry Browne
It's Harry Browne.  Enough said.

The Great Libertarian Offer by Harry Browne
This book is more important than ever.  As libertarians, we need to offer radical solutions to today's problems.  We need to make Americans an offer they can't refuse.  Would you be willing to give up your favorite federal programs if you never had to pay income taxes again?

How I Found Freedom in an Unfree World by Harry Browne
This is a self-help book that may be a great benefit to some people who feel trapped in their life.

How You Can Profit From the Coming Devaluation by Harry Browne
The fist 70 pages of this book was published again under the title of "99% of All You Need to Know about Money".  If everyone read and understood this book, then we wouldn't have the monetary problems that we have today.  It is very basic and very informative.  Don't worry that this book was written so long ago.  Just add a few zeros to the numbers and it's like it was written today.

Economics in One Lesson by Henry Hazlitt
A good primer on economic thinking.

The Law by Frederic Bastiat
Although this book was written over 160 years ago, it is a good short book on economics and liberty.

The Real Lincoln by Thomas DiLorenzo
It is important for all libertarians to be educated in the War Between the States (more commonly known as the Civil War).

Whatever Happened to Penny Candy by Richard Maybury
This is a great basic book on economics.  Although it is appropriate for high school students, most adults would benefit tremendously from reading it.

Meltdown by Thomas Woods
This is a good explanation of why the economy crashed in 2008.

Rollback by Thomas Woods
I will admit that I haven't read this yet.  However, Tom Woods is great.  I have read excerpts and all of the libertarian reviews I have read have been complimentary to say the least.  I don't think you can go wrong with Tom Woods.

End the Fed by Ron Paul
I can't complete a libertarian book list without including Ron Paul.

This list is by no means complete.  It is just a few of my favorites that I thought I would pass along.  Overall, I would recommend most everything by Harry Browne, Richard Maybury, Tom Woods, Robert Murphy (who I didn't mention above), and Ron Paul.

Saturday, June 18, 2011

The Economy Under President Ron Paul

Ron Paul's chances of becoming president are not great.  He could beat Obama, but he will have difficulty getting the Republican nomination because of the pro-war mentality of a majority of Republicans.  However, Paul's chances are a lot better than they were the last two times he ran for president.

I was having a discussion with a libertarian friend of mine the other day.  He is fairly radical, like I am.  Our topic of discussion was the economy and a Ron Paul presidency.  Hypothetically speaking, if Ron Paul were elected president and served for 4 years, what would happen?

My friend is afraid that the Republican establishment would immediately surround him and try to influence his cabinet picks and his policy.  I have no doubt they would try, but that is one of the reasons that I support Ron Paul and almost never support anyone else.  He has proven himself time and time again to ignore lobbyists and the establishment.  He has kept his principles.  Reagan could not do this.  You can see this by his pick for vice president and his cabinet picks.

If Ron Paul were to get the Republican nomination, it is imperative that he pick a vice presidential candidate who is at least as radical as he is.  If the CIA knocked Kennedy off, then I cannot imagine they would be happy about a true anti-establishment candidate.

My first thoughts were, that we might not actually want Ron Paul elected.  Perhaps it would be better if he came really close, but lost.  This way, when the depression hits, he would not get blamed for it.

But I was talking and thinking through this with my friend.  If we have a President Paul, it would mean that public opinion had changed significantly.  It means that the economic depression was probably already in full force.  It means that, for those who supported him, they would be forgiving of an economic depression because they would realize that he didn't cause it.

Ronald Reagan took office in 1981.  The country went through deep recessions in his first couple of years in office.  Then the economy started to recover.  Reagan won re-election by a landslide.  The situation we are in now is a lot worse than when Reagan took office.  Price inflation is not as bad yet, but the level of malinvestment is probably worse and the debt and so-called obligations are much worse.  Regardless of what the government does, there will have to be a severe correction to flush out all of the previous malinvestment.

In my discussion with my libertarian friend, he pointed out that the economy could recover in 6 months if dramatic changes were made.  He is usually a pessimist.  I am not sure I agree with 6 months.  It could be longer because of the huge debt and the huge misallocation of resources that has already taken place because of the government and Fed policy.

So let's say that Ron Paul becomes president.  If he governs like Reagan, then the economy will continue to struggle.  But what happens if a President Paul makes significant changes?  Some things he can do just because he is president.  He can stop the wars.  He can pardon all non-violent drug offenders convicted in federal courts.  Essentially, he could end the federal war on drugs, at least while he's president.

The president is not a dictator, even though the last several presidents have acted like it at times.  A President Paul could not simply eliminate all unnecessary spending.  Congress could override his vetoes. But if Paul were elected president, we have to believe that there had been a major shift in popular opinion.  He would have a mandate to cut government.  He could use his platform to influence Americans, who would in turn influence their congressman and senators.

If a President Paul could make significant cuts, the economy really would recover fairly quickly, even with all of the debt and malinvestment.  Let's say that he ended all of the wars and ended all foreign aid.  Let's say he ends several departments that are unconstitutional.  Let's say he can get rid of the departments of education, labor, energy, housing, and agriculture.  Let's say that he can balance the budget and still reduce taxes.

The economy is starving.  The economy needs savings and investment.  This is how an economy grows.  The government is sucking up resources with its huge spending and borrowing.  Since the fall of 2008, Americans have saved more and paid down debt.  Unfortunately, the federal government has done the opposite, which has negated the benefits of what a lot of Americans have done.  The government is using resources that should be used as savings and investment to increase our future standard of living.

If a President Paul, or any other president, were able to get spending way down, the economy would recover.  If the budget were cut from $4 trillion to $2 trillion, this extra $2 trillion a year would be used to increase capital investment.  It would lead to an increase in our standard of living.

I like to use the example of Germany and Japan after World War II.  These countries were devastated by the war.  After the war, the two countries adopted relatively free market policies.  Miraculously, because the governments did not interfere with their economies, the two countries saw tremendous growth and eventually became two of the richest countries on earth.

This whole discussion is not a prediction of any kind.  I am simply pointing out that, given a dramatic decrease in the size and scope of government, the economy could recover quite quickly and we could once again see a strong rise in our standard of living.

Thursday, June 16, 2011

The End of QE2

Here is a chart of the adjusted monetary base:

Here is a chart of the monetary base with a longer time frame.  It shows the picture even clearer:

With the ending of QE2, we should expect the monetary base to stabilize.  There will still be mild fluctuations.  As of right now, there has been no announcement for QE3, even though some analysts are calling for it.

Bernanke really is in a box.  What will he do when the economy visibly turns down again?  Why will QE3 accomplish what QE2 didn't?  What happens if price inflation goes higher while the economy continues to struggle and unemployment stays high?

Ron Paul asked him this question one time.  He essentially asked Bernanke what he would do if we have 10% (price) inflation along with bad economic growth.  Bernanke responded that that scenario would be unlikely.  Of course, Bernanke has been wrong with just about everything else, so why stop being wrong?

The federal government and the Federal Reserve continue to make things worse.  They not only do not do the right things, but they do the opposite.  The policies coming out of DC will continue to make things worse.  The only way we will see a robust recovery is if the government dramatically cuts spending and the Fed stops buying huge amounts of government debt.  The two go hand in hand.  We need private investment and savings, not more government spending and money creation.

Wednesday, June 15, 2011

Investing with QE2 Ending

QE2 is almost over.  If the Fed is going to create significant amounts of new money out of thin air, then we will move on to QE3 or some other name.  Either way, there is a lot of uncertainty about what the Fed will do and what is going to happen.  There are a lot of variables to consider.

Today was another big down day for the stock market.  Oil was down almost 5%.  The dollar strengthened considerably against the other major currencies.  The one notable thing is that, despite the strong dollar, gold was actually up a little today.

It is anyone's guess as to which way things will go in the next couple of months.  Some of the variables include the Fed's decision on QE3, Greece, the debt ceiling, revolts in the Middle East, and war, just to name a few.  There is, of course, always the possibility of some other unforeseen event occurring.

While I maintain my prediction that the Fed will continue to help Congress in a backdoor default by devaluing our money, the short term outlook is far more uncertain.  If the Fed starts pumping more money or if the banks decide to start loaning out their massive amounts of excess reserves, then we will see significant price inflation sooner, rather than later.

If the Fed stops its money creation for a while and the banks continue to hold their excess reserves with the Fed, then we could see consumer prices stabilize and we could see a significant drop in the stock market with a strengthening dollar.

Right now, investors should just concentrate on wealth protection.  I would recommend that at least a majority of your investments go into the permanent portfolio fund, the mutual fund PRPFX, or something similar.  For the rest of your money, I would put a little extra into investments related to precious metals and I would hold some cash or cash equivalent that you can use to buy up bargains later, if that time comes.

This will continue to be a roller coaster ride.  There will be ups and downs with stocks, gold, oil, the dollar, price inflation, and even real estate.  For the longer term, I still expect more inflation from the Fed and would not be surprised to see stagflation like the 1970's.  If that is the worst that we get, we will be very lucky.  I do not expect the Fed to go to hyperinflation.  I think it will choose a depression over the complete destruction of the currency.  At that point, Congress will be forced to cut spending.

Tuesday, June 14, 2011

Ron Paul in the New Hampshire Debate

I watched most of the Republican presidential debate last night.  There were seven participants, which included Ron Paul.  The media, while paying more attention to him, continues to discount him being a contender.  I think he will have trouble overcoming the pro-war majority in the Republican Party, but it would not surprise me if he won some primaries/ caucuses.

Ron Paul made a better showing than most would have imagined four years ago.  He is starting way ahead from where he was then.  Most people outside of his district and outside of the libertarian movement had never heard of him before 2007.  Now he is a household name with a big following.  With the internet and his new notoriety, he has gained even more of a following since then.

One thing I found interesting about last night's debate was the stance the candidates were taking on war.  Ron Paul is, for sure, the only anti-war candidate.  He is the only one who would begin troop withdrawals immediately.  But I couldn't help but notice that the other candidates were far less hawkish than what we saw in 2007 and 2008.  Part of this may be the candidates themselves.  There is no John McCain or Mike Huckabee.  A little part of it might be because of Ron Paul.  In addition, these candidates are running against Obama and do not feel the need to defend Bush.

One other significant factor in the less hawkish war stance is public opinion.  The majority of American people have soured on the wars in Iraq and Afghanistan and most of them were never on board for Libya.  Perhaps the Republicans are starting to realize that they can't advocate endless war and still expect to win.

One thing that surprised me about the debate was just how nice everyone was.  If I have one criticism of Ron Paul from last night, it would be that he is just too nice.  I think the candidates should be attacking Romney (the supposed front runner and establishment favorite).  They should point out that the Republican nominee cannot be someone who invented Obamacare before Obamacare even existed.  The other candidates should be asking if this election should be Obamacare vs. Romneycare, or about a real choice.

I think Ron Paul should also try to distinguish himself more (if that is possible) on economic issues.  He spoke about monetary policy which no other candidate touched and that is good.  But he is letting these other people get away with deceiving their audience with generalities.  Just about every Republican candidate is saying we need to cut spending and cut taxes.  But where, specifically, would they cut?

Since the debate moderators won't hold them accountable, I think Paul should point out that these calls for spending cuts are not specific.  He should say that he would abolish the departments of education, agriculture, housing, labor, energy, etc.  He would end all foreign aid.  He would end all corporate welfare.  Try to force the others to take a position.

Overall, Ron Paul is a great representative of the libertarian philosophy.  Libertarians should be so thankful that we have someone who is consistently on message and who is principled and intelligent.  His many years of advocating liberty has made him into one of the best.  It is not easy in a debate when you have no idea what specific question will be asked.  He can hold his own and he will continue to help educate others on the benefits of a free society.

If I were a betting man, I would bet that Ron Paul will not win the Republican nomination, but he will surprise many.  He will probably come in second or third and he may actually win some states.  I don't completely discount him taking the nomination, but it is still a long shot at this point with the party being so pro-war.  If Paul did win the nomination, he would have a good chance at beating Obama.

In conclusion, if Ron Paul takes second place or better in the primaries, I think libertarians should be very optimistic about the future.  If he places third, then I think there is reason for some optimism with the realization that there is still a lot of work to do.  If he does worse than third, then Galt's Gulch becomes more appealing (a reference to Atlas Shrugged).  I think we will be pleasantly surprised.

Monday, June 13, 2011

The U.S. Dollar and Real Estate

Many in the libertarian camp believe that the U.S. dollar is headed towards zero.  Some of these same people also believe that real estate has yet to hit bottom and may stay down for many years to come.  In fact, this isn't just a position by some libertarians, but also by many others in the investment world.

While they have been somewhat correct over the last few years and may be right for a few more, there is a limit as to how much they can be right.  If you are arguing that the U.S. dollar will continue to go down, then it should favor hard assets, one of which is real estate.

The dollar has done poorly over the last decade.  This is in relation to other currencies and this is with other currencies being devalued as well.  The price of gold has gone up in terms of all of the major currencies, but it has gone up even more in terms of U.S. dollars.  It should be noted though that there have been exceptions to this trend.  In the fall of 2008, the dollar strengthened quite a bit due to the major downturn in the economy and the flight to safety (which for some reason, people still view the dollar as safe).

It is certainly possible for the U.S. dollar and real estate to both go down some more in the short-term.  The reason for this odd circumstance is because of the previous huge bubble in housing.  The prices in real estate went up so far and so fast that they are still trying to correct, even with the government's interventions.  Real estate is not liquid like stocks.  Therefore, it can take some time to clear the excess inventory.  In addition, the government has been trying (without much success) to prop up real estate due to the major hits that banks would take if there were even more foreclosures and short-sales.

Long-term, let's say more than 5 years, this trend is unlikely to continue.  The U.S. dollar will not continue to go down while real estate goes down too.  Just to clarify, I am simply talking about real estate prices in nominal terms and not in real terms.

If the U.S. dollar goes down by 50% compared to other currencies in the next 5 years, then it would be 50% cheaper to buy a house for a foreigner if housing prices stayed the same.  If housing prices continue to go down, then it would be even cheaper.  And this isn't even accounting for the fact that the foreigner's currency probably experienced some depreciation of its own.  At some point, housing will be a bargain that just cannot be ignored.

I expect that there is a strong likelihood that the dollar will strengthen again in the near future, especially with the problems in Europe and a likely default by Greece.  Once the Fed goes ahead with QE3, then we may start to see the dollar fall again.  At some point, when velocity picks up, there will be a rush away from U.S. dollars.  People will be looking for hard assets.  Since a house is a hard asset and everyone needs a place to live, it would not surprise me to see housing prices go up again in a few years, at least in nominal terms.

Saturday, June 11, 2011

Does a Boom Have to go Bust?

The Austrian Business Cycle Theory teaches us that when we have an artificial boom, usually caused by a central bank, a correction must follow.  The artificial boom is a misallocation of resources that will eventually be corrected when the rate of increase of the money supply goes down.  The actual money supply does not actually have to decrease as the bust can come just from a slowdown in the monetary inflation.

To answer the question of this post, there are a couple of scenarios to deal with.  First, if there is a boom that is not caused by an increase in money and credit, then there doesn't have to be a bust and there probably won't be.  The boom would probably look nothing like what we are accustomed to in our modern world of inflation.  Most of 19th century America was a boom, but it didn't mean huge gains in the stock market or real estate market.  In fact, consumer prices actually when down gradually during this time. (I am not counting the problems during and after Lincoln's war.)

19th century America was far from perfect.  Even aside from slavery and the war, it was still not a completely free market economy.  But it was one of the closest things we have seen in history and it meant an increase in the living standard for the average American.  A boom in a free market economy means that living standards are rising.  Life is getting easier for the average person.

The next question is: Is it possible to have an artificial boom without a bust?  The question certainly seems relevant to our situation today.  In an article earlier this week, Robert Murphy discusses the fact that we will have to experience a bust in our current situation.  I basically agree with everything he says, except I would like to clarify one thing from his article.

In an earlier part of his article, Murphy says, "According to the Mises-Hayek theory, the preceding boom makes the corrective bust inevitable.  The goal, therefore, is not to keep the boom going, but to avoid it in the first place, rendering the bust unnecessary."

I completely agree with the latter part of that quotation.  The boom phase is actually the bad part where mistakes are being made.  It is a misallocation of resources.  The bust phase is more painful, but it is actually trying to correct the previous mistakes.  If there was no artificial boom in the first place, then a bust wouldn't be necessary.

But what about the statement that the preceding boom makes the corrective bust inevitable.  I agree with this in a sense, but only with clarification.  As long as the bust does not necessarily mean negative growth, then I agree with this.  The previous mistakes are going to be corrected by the market.  But just because there is an artificial boom, it doesn't necessarily mean negative growth sometime ahead.  It could simply mean less growth than what would have otherwise happened.

To use an extreme example, let's say the Fed expanded the money supply by $1 million.  In a $15 trillion economy, this is literally a drop in the ocean.  Conceivably, it could cause some kind of a misallocation of resources on the margin in some insignificant way.  Maybe the price of a particular good was one cent higher because of this monetary expansion.  But it would be absurd to think that this would cause any kind of noticeable bust.  Perhaps resources would realign themselves in the same insignificant way that they were misallocated, but it wouldn't cause negative growth for sure.

Even if the Fed's expansion were bigger, it would still be a race between the free market and the artificial tampering of the money supply.  The damage done by the Fed's monetary inflation might be overcome with technology, investment, and growth.  In today's situation, that scenario seems unlikely due to the unprecedented monetary inflation by the Fed, along with the huge government debt.  Technically it would still be possible to avoid negative growth if there is some huge technological discovery that can overcome the previous damage done, but it would have to be something really big.

A good analogy for this is price inflation.  Just because the Fed prints money (or creates it on a computer) doesn't mean that there has to be a rise in prices for everything.  The electronics industry is a good example of this.  Television, cell phones, and computers get cheaper despite monetary inflation.  Technology in these areas is actually more powerful than the Fed's damaging inflation.  However, prices would have gone down even more if it hadn't been for the Fed's monetary inflation.

In conclusion, the Fed's tampering with the money supply means that resources are being misallocated.  With a slowdown in the growth of money, the free market will try to correct this misallocation and try to realign resources to their best uses.  The market it always trying to do this regardless of the central bank's policies.

An artificial boom will make things worse than they otherwise would have been.  You can call the correction a bust, but it doesn't necessarily mean negative growth.  Technology can overcome this, but it doesn't seem likely in our current scenario where the government and the Fed have intervened in an unprecedented manner.

Thursday, June 9, 2011

Rand Paul on the Debt Ceiling

Today, I heard Rand Paul on Sean Hannity's radio show.  They were talking about the national debt and the vote to raise the debt ceiling.  Rand Paul said that he wants some kind of a plan to pass a balanced budget amendment if they are going to raise the debt limit.

First, Rand Paul is not Ron Paul and you can tell that just by how much Sean Hannity is sucking up to him.  Ron Paul is a principled libertarian and does not usually hold back in what he has to say.  His son Rand on the other hand is less radical and less principled, at least in his talk.  He is not anti-war like his dad.  Don't get me wrong here.  Rand Paul is by far the best senator in the U.S. Senate.  He is more fiscally conservative than any of the other 99 clowns and he has been great on certain things like the Patriot Act.  But he is still not his dad.

So Rand Paul wants a balanced budget amendment.  But do you know what is required to pass a constitutional amendment?  You have to get two-thirds of the House and Senate to approve it and then you need three-fourths of the states.  You would have an easier time getting a libertarian revolution than getting this done.

The next thing is, do we really want a balanced budget amendment.  If that were put in place right now, it would probably mean that our taxes would go up.  Now I certainly want a balanced budget, but I'm afraid that the view of Congress and many of the American people won't be quite the same.  As a radical libertarian, I want a balanced budget with a government that is, at minimum, a fraction of the size of what it is now.  I don't want a balanced budget with a $4 trillion annual budget or even a $2 trillion annual budget (although the latter would be an improvement).

Now for my last and most important point in all of this.  If you really want a balanced budget amendment, why would you even consider raising the debt ceiling?  By not raising the debt limit, it is doing the same thing as what a balanced budget amendment would do, at least temporarily.  The only thing an amendment does is make it more permanent.  But if you really want a balanced budget, then simply refuse to vote in favor of raising the debt limit.  It really is as simple as that.  The only reason I can see for advocating a balanced budget amendment but voting to raise the debt limit is because the person wants to kick the can down the road.

If the government did not raise the debt ceiling, it doesn't necessarily have to default (although I think it should).  It could reduce spending dramatically.  It could eliminate all federal funding for education, agriculture, energy, housing, etc.  All of these things are unconstitutional.  It could end all of the wars overseas.  It could end all foreign aid.  It could start reducing Social Security and Medicare, even on a small scale.  It could sell government lands and government assets.

The problem is that the American people do not want this yet.  They keep putting the same clowns into office and keep demanding a free lunch.  Luckily the general public opinion is not like Greece, but it is not exactly like the American colonists of 1770 either.  I think attitudes are changing for the better, but we still have a long way to go.

As for the debt limit, it will get raised.  There will be some phony spending cuts so that the Republicans can appear to be concerned about the debt.  But this whole balanced budget amendment idea is a joke.  For anyone who cares about a balanced budget, they can simply vote no on raising the debt limit.  If the debt limit isn't raised, that will automatically balance the budget, unless Obama declares himself a dictator and does it anyway (which is certainly a possibility).

Wednesday, June 8, 2011

Doug Casey on our Future

Doug Casey has written an article, linked via, on the prospects of our future.  He outlines three possible scenarios and says that we could see any one of them or a combination of pieces from each of them.  I would like to comment on this and add to it.  If you haven't read it, it is a long piece, but Doug Casey is always worth the read.

First, he runs through the last 100 years in 20 year increments.  It really is amazing what this planet has been through in the last 100 years.  It is really the best and worst of human history.  It is the worst because of the world wars and all of the people that died at the hands of government (mostly their own).  We saw 2 major communist empires (China and the Soviet Union).  We also saw the end of the Soviet Union.  We have also seen communist China change towards more economic freedom, at least by action and not by name.  The 20th century also saw the rise and fall of the Nazis.  One other unfortunate event was the dropping of two atomic bombs that killed tens of thousands of innocent people.

The last 100 years has also been great in other ways.  We would not recognize the world of 100 years ago when there was no air conditioning, no television, no cars as we know them today, no microwave ovens, etc.  We could make a list pages long.  In just the last 20 years we have seen the amazing technology of computers and cell phones and the internet revolution.  The last 100 years really has been a combination of great and horrible things.

Doug Casey lays out three scenarios for what things will look like in 20 years.  He has a best case scenario, a middle of the road scenario, and a worst case scenario.  His worst case scenario involves war, which is hard to argue with.

While hyperinflation is certainly a possibility, I don't think people understand the ramifications of this.  If there is little warning for the market to prepare with an alternative form of money, we could literally see massive devastation that could wipe out much of the population.  Hyperinflation in the U.S. would mean that food is no longer shipped to the grocery stores.  It means most people staying home from work.  It means a total breakdown of the division of labor, unless there is another form of money that is legal to use and has already been established in the marketplace.  This is why I don't think the Federal Reserve will purposely put us into hyperinflation.  They would be granting their own death wish.

In Casey's best case scenario, it actually isn't too rosy.  I think another possibility, that isn't too far fetched, is new technology getting us out of the mess we're in.  Let's say that someone invents a car that does not run on oil, but is just as cheap or cheaper to buy and to operate than what we have now.  This would be huge and would help our standard of living tremendously.

In Casey's best case scenario, he says, "most governments decide to endure the pain of allowing interest rates to rise and limiting increases in the money supply."  I'm not sure that he quite stated that part correctly.  It would actually be the general population that would decide this.  Most or all governments will seize power if they think they can get away with it.  The only check on government power, when it comes down to it, is public opinion.  They will not just relinquish power.

Politicians can make a difference, but they aren't going to voluntarily give up their power.  For example, Gorbachev would not have voluntarily given up power if public opinion had stayed in his favor.  He saw the writing on the wall and gave up.  The good thing is that he was decent enough not to fight public opinion with violence and start a massive war.  But ultimately, public opinion is what matters.  He could not prevent the collapse of the Soviet Union.

I would lay out a best case scenario that Ron Paul gains tremendous popularity in this election cycle.  He doesn't need to win, but we need for a sizable minority of people to become strong libertarians.  If this were to happen, it would actually be possible to start rolling back government and moving towards liberty.  We would still have to go through a correction from the massive increases in the money supply and the massive debt built up.  But if government were significantly reduced from our lives, the correction from the previous misallocation of resources would not be too bad.

If you need some optimism, just think of Japan and Germany after World War II.  They were both a mess.  As Casey says in his history part for 1951, "Who imagined that Germany and Japan, although literally leveled, would be perhaps the best investments of the century?"  These two countries turned to free markets and they became two of the richest countries on earth in a fairly short amount of time.  If they can recover from that, the U.S. can certainly recover from high debt and bureaucracy.

Tuesday, June 7, 2011

The Fair Tax

Yesterday, I discussed Herman Cain and how he is a lover of big government, even if he doesn't admit it.  He is also a supporter of the Fair Tax.  Today, I want to discuss the "fair tax" from a radical libertarian's perspective.

The fair tax is proposed legislation to eliminate income taxes, payroll taxes, corporate taxes, capital gains taxes, and estate taxes at the federal level.  It calls for the repeal of the 16th Amendment.  In place of all of these taxes, the fair tax would institute a national sales tax of 30%.  The fair tax proponents will say that the tax is only 23%, but they are calculating it as an inclusive tax.  For us people living in the real world, it is 30%.  If an item costs $100, you would pay an additional tax of $30.

This tax would be on all new goods and services with few exceptions.  Every family would get what is called a pre-bate check each month.  It would cover the cost of the tax of what is calculated to be essential needs.

The fair tax is appealing to many libertarians.  It has been pushed by former congressman John Linder and radio talk show host Neal Boortz.  The two wrote a book to promote the fair tax.  It was also supported by Mike Huckabee in the primaries for the last presidential election.

The biggest problem with the fair tax that I see is that it is revenue neutral.  In other words, it is set up for the government to collect the same amount of money that it collects now.  It would not touch the Federal Reserve.  It would not balance the budget.  It would not reduce government spending at all.

Filing income taxes is annoying.  It can eat up several hours of your time during tax time each year.  But even though that time spent is bad, the amount of money being taken from the American people is far worse.  The biggest issue with the income tax isn't that it takes a long time to complete a tax return each year.  The biggest issue is that it takes money out of our pocket and money out of the private sector.

As a libertarian, I don't want to see legislation that merely rearranges the tax code but does nothing to actually shrink government.  This is why it is easy for hacks like Herman Cain to advocate the Fair Tax.  He can push for tax reform and yet he doesn't have to name one program that he would cut because the purpose of the fair tax is not to cut government spending.  Why would I want to spend so much time and energy promoting something that will only save me a few hours each year and does nothing to save me any money?

I attended an event in which the speaker was explaining and advocating the fair tax.  When he was taking questions, I asked about someone who had to have heart surgery that might cost $100,000 (hypothetically).  I asked if the person would have to pay $30,000 in taxes on top of that.  His response was (and I'm paraphrasing) that he would expect for people to have health insurance.  I then said, "so could you say that fair tax supporters are in support of Obamacare because people should have to buy health insurance?"  I said I was only kidding, but I think my point was made.  The presenter was kind enough and he actually laughed at my comment.  I don't think the two women behind me were quite as amused.

I find that most strong advocates of the fair tax are not very good libertarians, let alone fiscal conservatives.  They do not really want to cut government significantly.  Otherwise they would not be spending so much time and energy promoting something that does nothing to cut government.  I also find that fair taxers push moderation.  When they get critiques, they say things like, "don't let the perfect be the enemy of the good."  The only problem is, the fair tax isn't good.

The fair tax will never pass.  If you can come up with enough support to repeal a constitutional amendment (the same as passing an amendment), then you have most of the country on your side.  If you can gain this much support, then you may as well just repeal it without replacing it with anything.

A libertarian position of dramatically reducing government has a much better chance of gaining widespread support.  The fair tax people are wasting their time.  It is a distraction.  Most of them are not supporters of a libertarian agenda.  Ron Paul has a better chance of being elected president than the fair tax has of passing.

There are many libertarians from the past who opposed the fair tax or something similar.  People like Murray Rothbard and Harry Browne not only did not support the fair tax, but they strongly opposed it.

If you are a libertarian, don't waste your time on something that has almost no chance of passing and that, even if passed, would do nothing to reduce the burden of government on society.  The fair tax people can continue to rearrange the chairs on the sinking ship.  I would rather fix the ship or abandon ship.  I would rather push for dramatic cuts in spending and regulations.

Monday, June 6, 2011

Libertarian Thoughts on Herman Cain

With the Republican primary continuing to heat up, I would like to share some thoughts on Herman Cain, from a libertarian point of view.  Cain ijs known by listeners of Neal Boortz's radio show and probably a few other conservatives.  He is becoming more well-known now that he is a presidential candidate.

Herman Cain was the CEO of Godfather's Pizza.  This makes him attractive to conservatives.  Many conservatives believe that government needs to be run more like a business.  Unfortunately, they never consider the fact that the two are not similar.  Government relies on force or the threat of force.  Businesses rely on persuasion and customer satisfaction.  Businesses want to maximize revenue.  They do this by pleasing customers.  Governments also want to maximize revenue.  They do this through taxes and inflation.

Unfortunately, many libertarians and so-called libertarians are attracted to Cain.  He sometimes fills in for Neal Boortz on the radio and is definitely supported by Boortz, at least implicitly.  For those unfamiliar with Neal Boortz, he is a popular radio host who calls himself a Libertarian.  While he is good on some issues, he definitely does not take a libertarian stance on foreign policy and he does not have much interest in monetary policy.

Boortz is also a huge advocate of the Fair Tax.  It is a plan to replace the national income tax, payroll taxes, corporate taxes, and other taxes with a national sales tax.  I will comment more on the Fair Tax tomorrow.  But for now, I will just say that Herman Cain has come out in support of the Fair Tax.

If you are a libertarian, or even if you lean libertarian, then Herman Cain should not be for you.  If your only goal is to see Obama defeated in the next election, then perhaps you should support him.  Obama and the Democrats would not be able to play the race card (or at least not effectively), since Cain himself is black.

The problem with Herman Cain, from a libertarian perspective, is that he is not for small government.  He may sound good sometimes and even have some libertarian rhetoric, but he is not a friend for liberty lovers.  While Cain is somewhat known for being the CEO of Godfather's Pizza, it is less well-known that he worked for the Federal Reserve Bank of Kansas City.  If you look at Cain's resume, he is not exactly a political outsider.

In 2008, Cain was a supporter of the TARP bailouts.  That should be enough said for libertarians.  The guy is not in favor of small government.  He talks that game to get support, but he is another political hack who will dole out favors to his favored groups.  In his case, it would be the powerful bankers.

If you are a libertarian, you should be running away from Herman Cain.  He may be more dangerous than Obama.  At least with Obama, and even someone like Mitt Romney, it is obvious to anyone paying a little attention that these people want big government.  With Cain, someone trying to get Tea Party support, he will say that he favors smaller government on the campaign trail, but in actuality the guy is a lover of big government and central banking.

There is a libertarian candidate in the Republican primary.  His name is Ron Paul.  There is also a quasi-libertarian and his name is Gary Johnson.  The rest of the candidates and potential candidates are hacks who only want to expand government and expand the U.S. empire.

Saturday, June 4, 2011

Will There Be QE3?

The economy is in rough shape and more people are starting to see that.  The unemployment numbers got worse this week and there were a couple of big drops in the stock market this past week.  Now that QE2 will be finishing up at the end of this month, some are already suggesting that we should prepare for QE3.

Quantitative easing is the new politically correct term for monetary inflation.  QE1 started with the fall of 2008.  QE2 and its eight month run is almost up.  Between QE1 and QE2, the adjusted monetary base has approximately tripled.  This is unprecedented in modern American history.

The Federal Reserve obviously sees major trouble ahead.  Otherwise, I can't see the point of QE2 (from their standpoint).  The Fed has created all of this new money out of thin air, yet most of it has gone into the banks as excess reserves.  This has helped keep a lid on price inflation.

The bottom line is that I see a good possibility for QE3.  It may not happen immediately after QE2 ends, but even that is hard to say.  It may also be less dramatic than QE2, but eventually a straw will break the camel's back of inflation.

It is very hard to predict what will happen to the economy and your investments in the near future.  It is all dependent upon the Fed's decision on what to do.  If the market doesn't expect a QE3 right away, we could see a lot more down days for the stock market.  We could see the dollar strengthen in the short run which would be bad for precious metals.  On the other hand, if the Fed announces QE3 coming up, then we could see a huge boom in gold and silver.  It is harder to say with the stock market, but it could certainly resume its path higher with more monetary inflation.

I am an advocate of putting at least half of your investments in a permanent portfolio setup as described in Harry Browne's book Fail Safe Investing.  You should put an even higher percentage if you are risk averse.  For speculative purposes, I would put your extra money into cash and gold.  You might even consider a small short position in the stock market or else you could lighten up your stock portion of the permanent portfolio by just a little bit.

I expect that we will eventually get more monetary inflation and gold, silver, and oil will continue to do well in the longer run.  But you should expect a roller coaster ride with a lot of ups and downs.  There may come a day when you will want to sell some of your gold and silver holdings.  We are not even close to that day yet.  It is likely several years away.  That will be the day that the Fed refuses to create any more new money and the federal government is forced to cut spending.  This will cause a Rollback in government and it will also cause a depression.

Thursday, June 2, 2011

Peter Schiff on the World's Reserve Currency

Peter Schiff has written a piece on the dollar and its declining status.  He has been bearish on the U.S. dollar for quite a while now and expects it to continue its decline.  However, he points out that the euro, the yen, and the yuan have flaws (besides being fiat currencies) that will make it unlikely that any one of them will replace the dollar.  I generally agree with his reasoning and his critiques of these currencies.

Schiff goes on to say that he sees signs that the world is moving back to gold.  I like his optimism and he may certainly end up being right.  As fiat currencies continue to fail and as 21st century technology helps spread the reasons why, then there should be more of a push for using gold (and possibly silver) as money. If the governments of the world are forced to loosen their grip and at least get rid of legal tender laws, then the market may head in the direction of gold.

I would like to offer another scenario too.  While I like the idea of gold being used as money and think that may be the ultimate outcome, I see another possibility developing.  With our current technology, most money is transferred with digits instead of actual bills.  It is easy to make an entry on a computer, just as banks do all the time.

So my question is, why do we need a world's reserve currency?  In the past 65 years or so, the U.S. dollar has been considered the world's reserve currency.  This means that countries around the world use dollars in major trading.  For example, if Japan buys oil from Saudi Arabia, they will use U.S. dollars.  But again, why is it necessary to have a world's reserve currency, whether it is official or unofficial?

Let's say Japan wants to buy oil from Canada (and this example works whether we are talking about private companies or governments).  Instead of using U.S. dollars, Japan can just use their own currency.  Japan can buy the oil in yen.  Then, Canada can convert the yen into Canadian dollars on the open market. If Canada (again, a private company, individual, or government) wanted to keep the yen and save it for a rainy day, that would be fine too.

With our current technology and open trading of currencies, it is easy to trade and convert currencies in the open market.  Countries like China that have currency controls would either have to loosen those controls or else they could continue to use dollars or any other currency of their choosing.

Peter Schiff is right that the U.S. dollar is losing its status as the world's reserve currency.  It won't matter much in the long run except that the U.S. government and the U.S. consumer will no longer be subsidized.

The central banks around the world have done a horrible job of managing their currencies (not that a currency should be "managed").  Fiat currencies are beginning to blow up in their faces.  The average person will pay a price for this.  The price will be higher consumer prices.  It will hurt.  Hopefully, it will be beneficial in the long run if enough people realize that we should not allow governments and central banks a monopoly over our money.

Wednesday, June 1, 2011

Pre 1965 Silver Coins

If you are looking to invest in silver, you have several options.  There are certainly silver stocks, but these will not necessarily mimic the price of silver.  You can buy the silver ETF (symbol: SLV).  Another option is, of course, to buy the actual metal.

If you are going to buy actual silver, you should buy coins.  For one ounce coins, the U.S. silver eagle is the most recognizable.  You will pay a slight premium above the price of silver.  If silver is going for $40 an ounce, you may pay $43 or $44 for an eagle.

An even better way to buy silver coins is to buy dimes, quarters, and half dollars that were minted before 1965.  These coins are made up of 90% silver.  If you want to figure out the weight of silver for these coins, take the face value and multiply it by .715.  The actual content of silver was a little higher when they were minted, but due to wear and tear, the .715 figure is generally accepted.  Because the half dollars were not circulated as much and because they are not quite as common, they may demand a slight premium.

For an example, let's say that you have 4 quarters dated 1964 or earlier.  The face value is one dollar.  Multiply one by .715.  This is how many ounces you have.  If the going price of silver is $10 per ounce (I know, that seems ridiculously low now), then the 4 quarters would be worth $7.15.  If the price of silver is $40 per ounce, then the 4 quarters would be worth $28.60 (.715 x 40).

The same calculation would hold for 10 dimes (one dollar face value).  If you have 10 dimes dated 1964 or earlier and the price of silver is at $40 per ounce, then they would be worth $28.60.  The same would be true of two half dollar coins, although it might be slightly more due to the premium.

Collecting these coins is easy and convenient.  If you don't have a lot of money to invest in silver and you want to accumulate slowly, this is an easy way to do so.  It is also a good investment because you don't have to pay much of a premium right now.  There may be more of a premium in the future, but then you would benefit if you own some already.  If any coin dealer is trying to sell these coins for a high premium, then you should go elsewhere.  They are not marked up to the same degree that a one ounce eagle would be.

These coins could actually be used as money in a breakdown of the system (which we should all hope will never happen).  They are in a small denomination and are easily recognizable.

I don't see much of a downside to owning a few of these coins except the possibility of the price of silver going down in the short run.