Saturday, July 30, 2011

Is Gold in a Bubble?

I have mentioned this before, but I thought I would share some more thoughts on this subject.  Gold is at an all-time nominal high.  As of this writing, it is near $1,630 an ounce.

There are some who are saying that gold is a bubble that will pop.  They are trying to say that gold right now is like real estate was in 2005 or 2006, or like technology stocks were in 1999.

While gold has made a consistent run for the last 10 years, I do not think it is in a bubble.  I think this may be the case in the future, but we are not there yet.  I am not making any predictions on how high gold will go, but I think a more reasonable analogy is to say that gold right now is like real estate in 2002 or technology stocks in 1997.  Again, this is not a prediction that gold will peak in 2 years.  It is a prediction that gold will go higher.

During a mania or bubble, people are trying to buy.  Because there are so many interested buyers, it drives the price higher.  When people expect higher prices in the future, nearly everyone wants to buy in the hopes of selling later on for a profit.  In 2005, you didn't see a lot of recommendations for selling houses.  Most of the stories in the press talked about buying houses as an investment.

I do not see the same situation for gold yet.  There is a lot more advertising than in the past.  In fact, if you listen to conservative talk radio or if you watch some of the cable news channels, you may hear advertising for gold.  These ads are telling you that you should have gold as part of your portfolio.  I have to admit that these ads have become far more common than they were just 5 years ago.

At the same time though, there seem to be just as many ads telling people to sell gold.  I have heard commercials on the radio saying that gold is at an all-time high and that now is a great time to sell.  There are also ads telling people to take their jewelry and scrap gold and mail it in.  In return, they will send you a check based on the weight of the gold.  This does not sound like a bubble.

There is still a very small minority of the population who own gold, outside of small amounts of jewelry. It is becoming a little more common for investors to put a small portion in their portfolios, but even here it is still a minority of investors.  Again, this does not sound like a mania to me.

Gold has gone up in the last 10 years for good reason.  There have been multiple wars.  The national debt is over $14 trillion now.  The Fed has more than tripled the adjusted monetary base in the last 3 years.  If the banks decide to lend out their new reserves and the Fed does nothing to stop them, we could see serious price inflation quickly.

The dollar has done very poorly compared to the other major currencies, even though gold has gone up against all of the currencies of the world.  Or perhaps more accurately, the currencies have gone down against gold, due to central banks inflating.

I think we may see a gold bubble before it's all over, but we are not there yet.  There are good fundamental reasons for gold going higher and I don't see the mania there right now.  The other point to remember about bubbles too is that they always seem to go on longer than they should.  We are going to see big ups and downs over the next several years, but I expect the overall trend for gold to be higher.

Thursday, July 28, 2011

Some Thoughts on 401k Plans

I recently spoke to someone regarding 401k plans.  This is her field of work.  She said that many companies have rules for withdrawing money.  If you are currently working for a company and you have a 401k through your employer, then your employer actually makes the rules regarding withdrawals.  In many cases (perhaps most), you are not allowed to simply withdraw money.

She said that the employers do this because they don't want you dipping into retirement savings.  This rationale tells me one thing: the nanny state is everywhere, not just in government.  These companies that don't allow regular withdrawals will only allow you to take "hardship withdrawals".  You have to have a good reason according to the company's policy.  For example, you may have to show that your house is being foreclosed on or that you have unusually high medical bills.

You actually have to submit an application and provide documentation for your hardship.  If you are allowed to withdraw money, then you will still owe a 10% penalty (tax) to the government, along with any income taxes.

This is supposed to be your money in your account.  Obviously that is not the case, especially when you are working for an employer that has these rules.

This makes me rethink my 401k strategy.  I have been an advocate of contributing, but only up to the employer match.  I don't think it makes sense to contribute any more than this, especially when you are locking up your money.  Any additional money would be better put into a Roth IRA (where you can at least withdraw your principle), a brokerage account, gold, silver, real estate, or any number of things.

Now I wonder if people should contribute at all, depending on your employer's rules.  I always thought that if the government were to try some kind of an additional tax or confiscation on retirement plans that there might be enough warning to withdraw some of your money.  Apparently, many people would not be able to withdraw any money if they wanted to, at least for those under the age of 59 and a half.

I think your decision should depend on your situation.  If you already have a lot of money in a 401k and you don't have a lot of liquid assets, you might consider cutting back your contribution, even if it means missing out on an employer match.  If you have a lot in the way of liquid assets and little in retirement accounts, then perhaps contributing to your 401k plan and getting a match would be beneficial.

It is not only a good idea to diversify your investments, it is a good idea to diversify where and how you hold them.

Wednesday, July 27, 2011

More Libertarian Thoughts on the Debt Ceiling

As a libertarian, I am strongly in favor of not raising the debt ceiling at all.  It would force the federal government to cut spending by about 40%.  While this would be a tough short-term adjustment for many, it would be highly beneficial in the long run.  It would mean that government would spend 40% less in the next year and hopefully it would continue.  It would mean that there would be an extra $1.6 trillion for the private sector to have instead of the government.  It would mean a much better economy in the long run.

This is why I believe that the debt ceiling will be raised.  My bet is that it will happen before the August 2 deadline, but if not, it will still be done before there are any major cuts or any major defaults (like interest payments or Social Security checks).

I heard John Boehner on Sean Hannity's radio show yesterday.  The guy is even worse than I thought (Boehner that is).  I don't much care for Sean Hannity, but one could say that his core listeners are at least somewhat fiscally conservative.  For this reason, I figured Boehner would at least put on a show for his target audience.  But he couldn't guarantee that there would be no tax hikes.

Then he started talking about some plan that would cut $1.1 trillion over the next ten years.  Hannity asked him how much of it would be in the next fiscal year.  Boehner said it would be $30 billion.  This is a joke.  That is less than 2% of just the yearly deficit.  To top it off, it looks like even this amount is a phony cut.  It would be a cut in the projected spending, which is of course higher than the previous year. In other words, Boehner wants to cut a deal that would make essentially no cuts in the next budget.  This is the only period that Boehner and this Congress can control right now.  They can't make cuts on behalf of any Congress 10 years from now or even 2 years from now.

I was getting a haircut yesterday and it is always amusing to listen to conversations in a barbershop.  There was an older guy who said he figured he would get a haircut before Obama took away his Social Security checks.  Then he criticized Obama for not wanting a balanced budget amendment.  Then he said that there are 536 clowns in DC that can't work together.  He said they should be able to get along and make a deal.

He used the number 536.  He is counting 435 House members, 100 Senators, and 1 President.  He should have said 535.  Ron Paul should not be included with this group.

This guy, unfortunately, is like the typical American.  He says in one breath that he wants a balanced budget.  Then he says they should work together for a deal.  For anyone who wants a balanced budget, they should not want a deal.  For anyone who wants a balanced budget, there is only one thing to advocate in this case: DO NOTHING!

This is why it is a joke that so many of these politicians are talking about a balanced budget amendment as part of a deal.  If you want a balanced budget right now, simply do nothing.  Just don't raise the debt ceiling and the budget will have to be balanced.

As I pointed out the other day, even if the politicians didn't want a balanced budget right now but really wanted spending cuts, then just raise the debt ceiling by a smaller amount.  If next year's deficit is projected to be $1.5 trillion, you could raise the debt ceiling by $100 billion each month for the next year.  This would force a cut of $300 billion from the projection.  I am not in favor of this, but I am just pointing out how easy it is for the Republicans in the House to cut spending if they really want to.  If the Senate rejects it or Obama vetoes it, then the ceiling will not get raised.

The Republicans in DC are a bunch of frauds.  Ron Paul is an exception.  Even most of the Tea Party politicians will sell out.  If you are a libertarian, you should be an advocate of doing nothing.  This will cut spending drastically.  Any Republican (or anyone else) who supports raising the debt ceiling is not really worth your support.

This whole debate is a good thing.  The debt ceiling will get raised, but it is serving as a good educational vehicle for the American people.  More people are realizing that the politicians are not on their side.  More people are realizing that the politicians are serving themselves first.  More people are getting fed up with big government.  As time goes on, hopefully more people will withdraw their consent from government.  The empire will come crashing down.  Don't be in the way when it does.

Tuesday, July 26, 2011

Inflation, Recession, or Both

Something bad is going to happen in the economy.  The Fed has more than tripled the monetary base since the fall of 2008.  Meanwhile, the federal government is running deficits of $1.5 trillion per year with the national debt now exceeding $14 trillion.  The government is trying its Keynesian tricks of spending its way out of a crisis.

Not only did the government not allow the full correction to take place from the recession that started a few years ago, but it is continuing to make things worse.  With all of the money creation and huge government spending, it is only distorting the market and misallocating resources.  The more this happens, the worse the future recession/ depression will be.

Something will have to give eventually.  The Fed may go to QE3 (more digital money printing) in which case we are more likely to get rising prices.  The big excess reserves held by banks have helped keep price inflation low.  The low velocity (high demand for money) has also helped counteract the inflationary policies of the Fed.  But if the Fed creates enough new money out of thin air, it will eventually send prices soaring to the sky.

If the Fed slows down or stops its money creation, we are more likely to get another recession (if the previous one ever actually ended).  If the government does not try hard to stop it, this will be a deep recession.  It will be worse than 1981/ 1982 because there has been far more damage done this time around.  This scenario is actually our best case scenario in realistic terms.

The other possibility is a repeat of stagflation of the 1970's, although I would expect this time around would be even worse.  The previous malinvestment is huge and it all needs to be flushed out.  We could see this scenario where the Fed creates new money, although at a much slower pace than we have seen in the last few years.  It would be enough to raise prices significantly but it would not be enough to send the economy into a boom phase.  We would see price inflation over 10%, while economic growth would be very low or even negative.

If the inflation scenario plays out, then there will eventually be a crash anyway, so that is the worst case scenario.  The absolute worst case would be if the Fed did not stop and we went into hyperinflation.  That could be a very dangerous scenario given our high division of labor society that uses U.S. dollars as money.

There is one final scenario that is possible, but highly unlikely.  We could see some huge technological breakthrough that makes our lives significantly better and easier.  It would have to be really big to overcome the massive malinvestment that has previously occurred.  In this case, it is technically possible to have a correction but still have positive growth due to the explosiveness of the free market.  But again, I give this a very low probability because it would have to be a huge breakthrough to overcome the massive government spending and distortion that has already taken place.

In conclusion, this economy will suffer some hard times ahead.  I am optimistic that we will eventually turn towards liberty and less government.  When this happens, we will see what happens when 21st century technology meets a truly free market.  Things will change very quickly at that point and it will be mostly for the better.

Monday, July 25, 2011

July 25, 2011 Update on the Debt Ceiling

The issue of the debt ceiling is still the top national news.  August 2 is supposedly the date that the ceiling has to be raised or else all chaos breaks loose.  In actuality, the chaos would be happening mostly in DC where the politicians would actually have to drastically cut federal spending.  This is why we are not likely to see this happen.

There are rumors of all kinds of different plans being worked up.  It is hard to know what is true and what isn't.  As we get closer to August 2 with no deal, there is reason for slight optimism (from a libertarian point of view).  However, I am not naive.  Most of these politicians want the debt ceiling raised.  Right now, they are posturing for their constituents.  Republicans know that they will be in trouble with the voters if they allow tax increases.  Democrats know that they will be in trouble if they don't demagogue the issue and play class warfare.

For all we know, there may already be a back room deal that is worked up.  Again, it is hard to tell who is telling the truth.

If the Republicans in DC actually wanted to cut spending, there would be no debate at this point.  They don't have to do anything.  They can just do nothing and the debt ceiling won't be raised.  Then the spending cuts would have to come unless Obama tried to declare himself dictator.  Instead, the Republicans are pushing for the phony balanced budget amendment.  Amendments to the Constitution are very difficult to get passed and it would take years.  If the Republicans really want a balanced budget, they just have to not raise the debt ceiling (do nothing) and the budget would be balanced.

Even if Republicans argued that they want a balanced budget in the future, but it would be too difficult to do it all at once now, they could still cut spending by just raising the debt ceiling a very small amount each month.  They could agree to raise the ceiling by $50 billion each month for the next year.  This would be $600 billion for the year.  This would force a cut of almost $1 trillion.  Why don't they do that?

I am not in favor of the debt ceiling being raised at all, but I used the above example just to show how easy it would be for the Republican majority in the House to cut spending.  They can pick any amount they want and raise the ceiling by the difference with the projected deficit.

The problem here, for anyone facing reality, is that the Republicans just aren't that interested in substantial cuts.  They will say they are to appease their constituents, but words don't mean much, especially when coming from politicians.

Approximately two-thirds of the federal budget is made up of military, Social Security, Medicare, and Medicaid.  These are the sacred cows.  Politicians don't want to touch them.  If none of these are touched, it is impossible to balance the budget, even if all other spending were completely eliminated.  This just shows how far off things are.

The Tea Party agrees on their dislike of Obama and Obamacare.  They generally agree that taxes should not go any higher.  Beyond that, there is not much agreement.  As a group, they are not demanding specific cuts in spending.

Only two things will cause a dramatic cut in federal spending.  It will either be the laws of economics or angry voters.  There are some angry voters, but most of them are not calling for significant cuts.  About half of the American people say they don't want the debt ceiling raised.  But a majority of this group do not understand the consequences.  This would mean drastic cuts in just about everything.  This is what I favor, but there is only a small minority who really want to see an end to all of the unconstitutional federal programs.  Until these demands come, or until the government officially goes broke or destroys the currency, then the debt ceiling will get raised.

Saturday, July 23, 2011

More Thoughts on Repudiating Debt Owed to the Fed

Earlier this week, I wrote a piece explaining why I am skeptical on the idea of repudiating government debt owed to the Federal Reserve.  Ron Paul suggested the idea and Lew Rockwell backed it.  These two guys are libertarian heroes and I immensely respect their opinions.  I rarely disagree with Ron Paul on issues of any significance, particularly when it comes to monetary matters.  With all of that said, I am disagreeing with his suggestion to repudiate the debt owed to the Fed.

I was having this discussion with a libertarian friend of mine.  I was saying that I thought the idea was inflationary.  I pointed out Ron Paul's position that he figures that the Fed will not withdraw this money that it has artificially created.

I think this idea is also counterproductive.  If the debt ceiling does not get raised (which I think it will), then it will force the government to cut spending drastically.  That is what I favor.  That is what the economy needs.  We need for the government to spend less so that we have more.  If this debt to the Fed is repudiated, it will give the government more room to spend money without raising the debt ceiling right now.  Why would I favor that?  I would much rather see government spending cut.

But here is the even more important point regarding this issue.  My friend and I talked through this issue and this example will really illustrate why this is a bad idea for libertarians to support.  Let's say that the government takes this idea and repudiates most of the debt that is owed to the Federal Reserve.  Let's say this lowers the national debt to $13 trillion.  The limit is currently just under $14.3 trillion.

Now the Congress can continue to spend money as it has been doing.  It will use current tax collections to fund spending and any difference is added to the debt.  Now the Fed comes along with QE3 and buys this government debt to fund the extra spending.  Now, in the matter of less than a year, the national debt is back up to the ceiling of around $14.3 trillion.  The Fed now owns another $1.3 trillion in government debt.  The government can just repeat the process and repudiate this debt and bring the national debt back to $13 trillion.

Are you starting to see the problem here?  The Fed can keep buying government bonds to fund the excess spending and the government can keep repudiating the debt.  It would be the same thing as the Fed just printing up a bunch of money and handing it over to Congress to spend.  It doesn't raise the debt because it is all done through inflation.

If the government did not want to officially repudiate debt, there is another strategy that could be used (not that I'm trying to give any ideas here).  The Fed could buy other assets and turn them over to Congress.  The Fed typically buys U.S. government debt, but the rules have changed and the Fed can actually buy anything it wants.  In 2008, it bought "toxic assets" from the failing banks.

The Fed could buy some stocks, land, art, or whatever.  It would create money out of thin air to buy these things, just as it does with government debt.  Then it could take the stocks or land or whatever and "give" it to the government.  The government could then sell it back into the market and use the proceeds to fund excess spending.  No matter how it is done, it is highly inflationary.

I hope I have illustrated why this idea of repudiating government debt owed to the Fed should not be such a great idea for libertarians.  It allows the government to continue its reckless spending without raising the debt limit and it could also be highly inflationary, especially if they were to repeat the process in the future.  I might favor the idea if it goes hand in hand with abolishing the Fed.

Thursday, July 21, 2011

The Lesson I Learned With Apple Stock

This post has more to do with investing than libertarianism, but I thought some people might benefit from it.  I am an advocate of imitating the permanent portfolio as described by Harry Browne in his book Fail Safe Investing.  This should be your core holding, making up at least 50% of your portfolio.  I also tell people that it is ok to speculate as long as you understand the risks and that you could easily lose money.

A few years ago, I decided to speculate a little.  I bought a few shares of Apple stock when it was less than $100.  At that time, everyone I knew who owned a Mac computer loved it.  I did not have one at the time, but I own one now.  The operating system seems much better than Windows.  The only thing Apple that I owned at the time was an iPod.

I knew that Apple had something going.  They are an innovative company.  We can see that now, not just with computers, but also iPods, iPhones, and iPads.  I figured that they would start taking a substantial share of the market away from Microsoft with computers, plus all of the potential profits from the other products.  So with all of that in mind, I bought some shares for speculation.

Usually mistakes are made on the buy side of an investment.  In this case, it wasn't.  My mistake was on the sell side.  The stock went up quickly after I bought it.  I can't remember the exact return, but it was something close to 50%.  I sold all of my shares.  I even thought that I would buy back on another dip.

Here is the problem.  There wasn't really another dip.  The stock has been way up for the last couple of years.  I would have about a 400% return right now if I had held it.  Of course, there was no way to know for sure.  Usually it is a wise thing to take profits.

In this case, I did not stick to my plan.  I was buying the stock for its long-term outlook.  I thought it had huge potential, not just a year into the future, but for many years.  The company has very popular products and it is constantly innovating.  I should have stuck to my plan, which when I bought the shares was to hold them for a substantial period of time.

Again, it is hard to kick myself too much for taking profits, especially when I have lost money with other speculations.  But the lost opportunity was big.  Here is what I should have done, not knowing what would happen at the time.  I should have sold off half of my shares and let the other half ride.  It is a little messy for reporting capital gains, but I should have dealt with it.

One place where investors often get into trouble is when they have an "all or nothing" attitude.  If you are not sure whether to sell stock in a particular company, then sell half.  You also don't have to go for broke when buying something.  Just dip your toe in.  Give yourself an opportunity to make a decent profit while limiting your potential losses.

This story has little to do with Apple itself.  Whether it is a good buy now, I have know idea.  It is still a great company with a lot more potential, but maybe we will see that big dip that I've been waiting for.

Wednesday, July 20, 2011

Investing for Those With Limited Money

When I write about investing, I generally try to make it applicable to a variety of people.  Everyone's situation is different, but I like to offer advice that could potentially be helpful to anyone.  So often, I will read or listen to something on investing and it seems to apply to people with lots of money.  I really find this to be the case when the topic comes up about investing overseas.  To buy real estate outside of your country and to set up a foreign bank account, you usually need a substantial amount of money to make it worth it.

The reality is that most people do not have a lot of money.  Even the average middle class person living in the U.S. does not have a lot of money, particularly outside of real estate and retirement funds.  So for this post, I would like to offer some advice for people with a real limited amount of money.

First, although I believe that price inflation will get worse due to the government's reckless policies of massive spending and massive debt, I think it is important to have some liquidity in the form of money.  Whether it is cash, a checking account, a savings account, or whatever, it is important to have some money available for emergency expenses.  If you don't have at least a couple of thousand dollars to your name, there is no point on reading up on investment advice unless it is just an interesting topic to you.  Because if you don't have much money to your name, then investing it well won't make much of a difference.

If you have almost no money, you should not be worried about investing.  You should be worried about increasing your income, paying down debt, and spending less.

If you have a little money saved up and don't know where to start, I have a couple of simple recommendations.  First, you could buy one-ounce silver eagle coins.  You can check with your local coin dealer or look on the internet.  You can buy these on Ebay too.  With the current price of silver, you should be able to buy a one ounce coin for just over $40.

My second recommendation, and perhaps better one, is something that I recommend for everyone to do if you can.  If you have some extra space where you live, buy things that you need that don't spoil.  You can buy certain grocery items like bottled water and canned foods.  You can buy soap, toothpaste, shampoo, razor blades, toilet paper, kleenex, paper towels, etc.  Make a list of things that you use.  You obviously can't stock up on milk, but there are many things that you can buy that will last for a year or more.

When you go shopping, look for those particular things that are on sale.  If it is "buy one get one free" or if there is any kind of a sale from the regular price, buy it.  Buy enough to last you at least a couple of months or more.

When it comes to storage, be creative.  Look in your closets and see if there is any room up high.  You can always add some shelving.  If you have limited space, then you might want to stock up on razor blades and toothpaste before you start buying bulkier items like paper towel.

So why do I recommend this strategy?  Because things aren't going to get any cheaper.  The Fed has tripled the monetary base in the last three years.  There is potential for huge price inflation.  If this analysis turns out to be wrong, then the worst case scenario is that you use up the items that you bought. As long as you aren't buying an electronic item, then there is a very good chance that the price of the product won't be any lower one year from now.

You can start this strategy by stocking up on some 100-watt light bulbs.  Our limited, constitutional, federal government decided to ban these under the conservative presidency of George W. Bush.  The ban will go into effect in less than 6 months.

Tuesday, July 19, 2011

Repudiating Government Debt Owed to the Federal Reserve

Ron Paul has suggested that one way Congress could avoid raising the debt ceiling is to repudiate the debt owed to the Federal Reserve.  Since the Fed "owns" approximately $1.6 trillion in government debt, this could simply be wiped away and it would give the federal government more breathing room without raising the debt limit.

Robert Murphy wrote an interesting analysis on this subject.  Lew Rockwell responded.  Robert Murphy then responded to these comments by Rockwell.  It is interesting to see the varying opinions from two of my favorite libertarians.  These are two of the biggest heavyweights you can get when it comes to libertarianism and Austrian economics.

It is very difficult for me to disagree with Ron Paul and Lew Rockwell because I have so much respect for them.  But with this issue, I am having a hard time being convinced.  I question my own opinion because it is not something that the mainstream media and the establishment favor, so how bad can the idea be?

I completely understand Ron Paul's point on this.  He is saying that the Fed will not sell off this debt anyway, so why act like it is debt.  But there are a couple of reasons that I am skeptical of this plan.

First, it actually gives an "out" for the Congress and Obama.  It would essentially kick the can down the road some more.  It would give up to $1.6 trillion in breathing room without having to raise the debt limit.  Personally, I am going to sit back and enjoy the next couple of weeks.  I am hoping that they fail to raise the ceiling and that government will actually have to be cut, although I am not counting on it.

Second, I question if this strategy would be inflationary.  Regardless of whether raising the reserve requirement is "stealing" from the banks (see the discussions on the links above), it is still not the same thing as withdrawing the money.

If the Fed creates new money to buy government debt, it is still inflating even if the money goes as excess reserves to the banks.  The effects are far less because it is not being exponentially grown through the fractional reserve process.  But the money is still there and available, even if not for loans.

The best thing to happen with this $1.6 trillion would be for the Fed to sell it and reduce the money supply by that amount.  This would have a far greater effect on our economy as it would help to keep prices down and it would help liquidate all of the malinvestment.

This whole discussion just shows all of the accounting gimmicks that take place regarding monetary policy and I think that is part of Ron Paul's point.  He is probably suggesting this just to bring attention to the issue, especially when he knows that it is not likely to happen.

With that said, I am a skeptical libertarian on this strategy.  It would let the Congress of the hook.  I would rather see no increase in the debt limit and watch the federal government be forced into making massive cuts in spending.  If we are going to suggest repudiating government debt, I would start with all of the other debt first as it would most certainly not be inflationary.

Monday, July 18, 2011

Should Ron Paul Run Outside of the Republican Party?

With Ron Paul announcing that he will not seek re-election to his congressional seat, some are speculating that this opens him up for a third-party run.  I am not sure what the consequences would be regarding ballot access if he changed from being a Republican to another party.

I have thought from the beginning that he should run outside of the Republican Party.  Specifically, I think he should run for the Libertarian Party's nomination.  He would most surely get it and the party is already well established which would make it easier for ballot access.  With the vast amount of money he has already raised, getting on all of the state ballots would not be that challenging and expensive relative to what past Libertarian candidates have had to deal with.

While I think there has been a slight mood shift in the Republican Party, most Republicans outside of the Ron Paul circles are still mostly pro-war.  While many are against Libya and some have even soured on Afghanistan, it is hard not to be skeptical and think that it is mainly because Obama is in charge and not a Republican.  Because of this sentiment, I think it will be hard for Ron Paul to win the Republican nomination.  He will probably do better than many expect and he will probably change some more minds, but I am doubtful that it will be enough.

Imagine on the other hand if he runs as a Libertarian.  This wouldn't have worked for him in 2007/2008. He was virtually unknown then, at least outside of his district and outside of the libertarian community.  Now that he has name recognition and hundreds of thousands of highly-dedicated supporters, he would still raise many millions of dollars operating outside of the Republican Party.

If someone like Mitt Romney gets the Republican nomination, it would make Paul's run as a Libertarian offer a real choice for people.  If someone like Michele Bachmann were to get the nomination, it would make a third-party run a little harder because of her fiscally conservative rhetoric.  Even though she is a statist, it would be more challenging to paint her and Obama as being cut from the same cloth.

Now I am wondering if there is any way that Paul can participate in all of the early debates, just as he is doing, and then drop out at the last minute and announce he will seek the Libertarian Party's nomination instead.  This would give him public exposure in the debates before seeking a third-party run.  I don't think this is his plan at all, but it is an interesting speculation.

I like that Paul has decided not to seek re-election for Congress.  He will deserve the break, assuming he doesn't win the presidency.  This will also allow him to focus all of his efforts on this presidential run and he can also speak freely, not that that has ever been an issue for him before.

Regardless of what he decides, it is important to support him and advocate his pro-liberty positions.  I don't think it is necessary to elect a pro-liberty person to get real change.  The most important thing is to educate others on the benefits of liberty and that is just what Ron Paul has been doing and will continue to do.

Saturday, July 16, 2011

Obama Cannot Guarantee Social Security Checks

Earlier in the week, Obama said that he cannot guarantee that Social Security checks will go out on August 3 if the issue of the debt ceiling is not resolved.  When he says "resolved", he means having Congress agree to raising the ceiling.

Actually, if you listen to the video on the link, it is not just Social Security checks that are at issue.  As Obama said, there are other checks that the government issues.  As per his example, there are checks for veterans and checks for people on disability.  But since all of the headlines have focused on Social Security, let's focus on this.

This statement by Obama can only backfire on him and it seems it already has with his poll numbers.  Of course, he is right not to guarantee anything, but obviously that is not his line of thinking here.  He is simply trying to scare people into supporting an increase in the debt ceiling.  He may have thought he was using a smart political tactic, but it was actually quite idiotic of him.

If he really wants to be a one-term president, the surest way to do that is to not have Social Security checks go out on August 3.  He could try to blame it on Congress, but the facts just don't support him and I think if it did happen (even though it won't), enough people would realize that checks could still be issued without an increase in the debt ceiling.

This goes along with the same statements we have been hearing about how the U.S. government will default if the debt ceiling is not raised.  This is false too.  The government still has over $2 trillion a year in tax collections.  It is actually about $200 billion per month right now.  This means that the federal government would still have $200 billion per month at its disposal.  This is more than enough to pay the interest on the debt and issue Social Security checks.

Of course, there would have to be drastic cuts in most other areas.  The military would be drastically cut. The wars might have to come to an end.  Many departments might have to be shut down like education, labor, housing, agriculture, etc.  The federal war on drugs might have to stop.  Foreign aid might have to stop.  This all sounds like heaven to a libertarian.

This is why the debt ceiling will be raised.  I don't know if they will come up with more accounting gimmicks.  I don't know if thugs like Mitch McConnell will hand over dictatorial powers to the president to raise the limit himself.  I don't know if they will come up with some last minute plan with some phony cuts, most of which take place years down the road when it won't matter.

The point is that politicians are not going to give up all, or even a portion of, their precious government programs.  The only way they will give them up is if the general population demands it.  There is not enough pressure right now.  The Tea Party does not want taxes raised, but the Tea Party in general does not offer significant specific cuts in government spending other than repealing Obamacare.

In conclusion, the debt ceiling will get increased at some point.  We might see some fireworks before it happens.  We could only hope for a government shutdown, but don't count on it.  The debt ceiling will not go up because of Obama's fear tactics of scaring senior citizens.  It will go up because politicians want to spend money and keep people dependent on government.

Thursday, July 14, 2011

Hints of QE3 and the Price of Gold

There has been no shortage of news regarding libertarianism, investments, and the economy this week.  I will continue to comment on some of the latest news into next week.

On Tuesday, the Fed released the minutes from its previous FOMC meeting.  It stated that some of the members said that additional monetary policy accommodation would be appropriate if inflation is low and unemployment stays high.  In other words, the Fed is hinting at a possibility of QE3 (a third round of digital money printing) and investors will start to expect it.

This news sent gold to all-time highs (in nominal terms).  As of this writing, gold is near $1,600 per ounce. It seems hard to believe that the price was around $300 just a decade ago.

The Fed is desperate and doesn't know what to do.  The Keynesian policies of the Fed, and the federal government in general, are a total failure.  The Fed has tripled the adjusted monetary base in less than three years.  The government is running deficits of over $1.5 trillion.  This has all made the economy worse.  They refuse to allow a liquidation of the bad debts and bad investments.  They refuse to allow the market to re-allocate resources to their appropriate use.  They continue to cause a misallocation of resources that will only make the inevitable crash that much worse.

This is why we must invest a good portion of our investment portfolio in gold, gold related investments, and other commodities.  Bernanke and the Fed are determined to print their way out of this.  Bernanke is not nicknamed Helicopter Ben for nothing.  We may see him up in a helicopter dropping money before this is all over.  Right now he is dropping it on the banks, which refuse to lend.  The new money is piling up as excess reserves at the banks, waiting for a trigger.

I don't think it is likely that the Fed will go into hyperinflation mode.  I differ with some libertarians on this point.  I don't think the Fed is that stupid to destroy themselves.  If you truly think there is going to be hyperinflation in the United States, then you better think about leaving or becoming self sufficient.  If there is not an alternative money ready to be used, then hyperinflation means that the trucks stop running and the grocery stores and gas stations will be closed for business.  I don't see it coming to this.

The more likely scenario is high price inflation.  This might mean 10% or 30%.  This will be good (or at least less bad on a relative basis) for people who own gold and gold related investments.  At some point, the Fed will be faced with hyperinflation and I think they will stop buying U.S. debt.  Then we will see a great depression.  The length and depth of the depression will depend on how much the government tries to interfere at that point.

Things don't look good for the next few years.  Beyond that, it will depend on the American people.  If Americans withdraw their consent from the federal government and demand to be left alone, then liberty will prevail and things will improve quickly.  If the American people keep looking for a free lunch (like many of the Greeks), then the pain will continue.

Wednesday, July 13, 2011

Ron Paul vs. Ben Bernanke

After announcing that he will retire from Congress, Ron Paul interviewed Ben Bernanke today.  The article linked makes it sound like Paul was rude and constantly interrupting.  If you watch the video, he is polite as usual.  He was just trying to make sure he didn't run out of time.

Congressman Paul was a little more aggressive than typical.  If this is the new Ron Paul, not caring about re-election to Congress, then I think it is a good thing.  I actually hope he is more aggressive in the presidential debates.  He is never rude, so we don't have to worry about that.  But I think he should challenge the other candidates more at every chance he gets.  In particular, I think he should ask how the other candidates intend to balance the federal budget.  Ask for specifics.

In this exchange with Bernanke, he asks him if gold is money.  Bernanke responds "no".  He says it is a precious metal.  I have mixed feelings about this.  In some ways, Bernanke is right on this.  Gold isn't money in a sense.  If you go to Walmart or a gas station and try to pay the cashier in gold, they will look at you as if you are nuts.  The important thing though is that gold has all of the good qualities that make up money.  The only reason that gold isn't used as money in today's society is because of the government and the Federal Reserve.  If the government hadn't monopolized money, then gold (and maybe silver) would most likely be money as determined by the free market.

The best question that Congressman Paul asks is his last one.  Paul first asks him why central banks hold gold.  Bernanke responded that it is a form of reserves.  Then Paul asked him, "why don't they hold diamonds?"  Bernanke responded that "it's tradition".

The reason that it is tradition is because when central banks started holding gold as reserves, gold was actually money.  The reason that gold was money was because it had been determined by the free market.  The market decided thousands of years ago that gold had good qualities to make it useful as a form of money.

Bernanke is feeling the heat like never before.  Ron Paul is getting at him.  Blogs and other sites on the internet are having a field day with him.  He cannot get away with what past Fed chairmen have gotten away with.  To top it off, Bernanke has flooded trillions of new dollars into the economy.  They are sitting at the banks as excess reserves and waiting to unleash massive price inflation.  Bernanke is trapped between a destroyed dollar and depression.  His Keynesian policies have failed miserably.

The next year and a half should be a joy to watch.  The economy will only get worse and Bernanke will continue to feel the heat.  With Ron Paul announcing his retirement from Congress, I do not expect him to leave quietly.  He is going to have several more chances to take his shots at Bernanke and his Keynesian policies of digital money printing.

Tuesday, July 12, 2011

Ron Paul Will Not Seek Re-election to Congress

The big news today, at least to libertarians, is that Ron Paul will not run for Congress again next year.  Lew Rockwell has given some of the possible reasons for this decision.  Ron Paul himself said, "I think you have more credibility if you run for only one office at a time."

I'm sure Ben Bernanke will be happy with his departure, although he will still have to deal with him for another year and a half.  This decision by Ron Paul does not surprise me.  He deserves a break and I'm sure he will deserve one even more after the hard campaigning he will be doing over the next year.

For personal reasons, I think it is a good decision.  But I don't expect him to crawl into a hole either.  He has used his position in Congress, not to pass or repeal legislation, but as a platform for his views.  He has helped educate millions of people on the benefits of liberty.

Now that Ron Paul is famous (what libertarian could have predicted that 5 years ago?), he doesn't need his seat in Congress to have a platform.  He has hundreds of thousands, or more likely millions, of supporters who will pay attention to what he says.  He should use this to advance libertarian thought.  I am saying all of this under the assumption that he will not win the presidency.

I don't know if he has anything in particular in mind, but one thing he could do is create a home school curriculum as suggested by Gary North.  He could use Campaign for Liberty to promote this.  I'm sure it would quickly be promoted by others.  He doesn't have to write the whole thing.  He just needs other libertarians to put it together at his direction and he can be the main salesman.  Imagine if just a hundred thousand home school children were to use it each year.  We would have a whole new generation of young libertarians with a good understanding of history and economics.

Another idea, also promoted by Gary North, is for Ron Paul to use Campaign for Liberty to specifically target local politics.  If he directed all of his supporters to start running for small local offices, then these advocates of liberty could start making a difference in their own communities.  They would gain trust locally and would have more influence than in any other way.  If liberty-oriented people lobbied their city councils like they lobby DC, then we would see a big wave of liberty from the ground up.  Gary North calls this the Dog Catcher strategy.  Washington DC is almost impossible to change right now, so why not start with something achievable?  This will lay the groundwork for changing DC later on.

Whatever Ron Paul decides to do, libertarians should be grateful for all he has done.  He has single handedly had a bigger influence on the liberty movement than any living person and perhaps anyone in history.  He has been consistent and uncompromising and he comes down on the side of liberty for all of the major issues.  We could not ask for a better spokesperson or a better role model.  Let's enjoy the next year of seeing him get under the skin of the establishment one more time.

Monday, July 11, 2011

Social Security and the Inflation Factor

With the deficit being the number one issue in the national news, there is actually some talk of cutting Social Security benefits (thanks to Scott for the link).  The first plan in cutting Social Security costs is to change how the government determines the cost of living adjustment.

Many libertarians already believe that the consumer price index (CPI) is understated.  It is difficult to say because it is impossible to measure overall prices.  People consume different things in different amounts, so price inflation will vary from person to person.  In addition, it is always hard to take into account the changes in quantity and quality of a product.  Obviously a computer or television that is made today is far superior to that of 10 years ago, but how can we measure this?

The definition of inflation used to be an increase in the money supply.  This was changed by the advocates of big government.  When most people talk about inflation today, they are talking about prices.  Price increases are actually a result of inflation (an increase in the money supply).  By changing the definition, it allows the political hacks to blame other things for increasing prices.  They can blame greedy businessmen and high oil prices.

If we really want an accurate adjustment for Social Security, how about we use the adjusted monetary base for the cost of living adjustment?  Of course, that would mean that Social Security recipients would receive triple the amount that they were receiving just 3 years ago.  The government would already be bankrupt or we would have hyperinflation.

This talk of cutting Social Security does not surprise me (and yes, it would be cutting).  While I don't want to see more monetary inflation, I think it is appropriate to start cutting these entitlement benefits.  The age to collect should also be raised and I'm sure that will be coming in the matter of a few years.

As a libertarian, I believe the whole Social Security program is a Ponzi scheme.  Why should senior citizens be living at the expense of younger people?  Yes, they were forced to pay into the program, but that still isn't a reason to force the younger generation to pay.  If person A steals money from person B and person A is not longer around, it doesn't make it right for person B to then steal money from person C.

Although the younger generation does not vote like their elders, the non-retirees of this country still have the numbers.  It was once politically suicidal to speak anything of cutting entitlement benefits for senior citizens.  It is no longer taboo.  As the debt gets worse and the dollar loses more value, the government will have to start cutting its spending.  If the younger generation has a choice between longer work hours and higher taxes or a huge cut in Social Security payments for seniors, which do you think they will choose?

Again, it is not the obligation of the younger generation to provide for the older generation.  It should be voluntary.  The younger generation should not be forced to pay for other people to retire while they struggle to pay their own bills.

The government is very slowly defaulting.  It defaults every time it prints money.  What was once political taboo, is now openly talked about.  The idea of cutting Social Security is finally out there.  The politicians are lying (what else is new) in trying to imply that the inflation adjustment is overstated.  But regardless of the rhetoric, Social Security is no longer off the table.

We should continue to expect more of this as time goes on.  The senior citizens of the U.S. will learn the lesson that the Greeks are learning.  There is no such thing as a free lunch.  And if you try to take someone else's lunch, you always run the risk of a revolt.

Saturday, July 9, 2011

Some Thoughts on Real Estate Investing

There are some good opportunities out there for people looking to invest in real estate.  Of course, this isn't for everyone and you should definitely consider some factors when deciding.  For example, if you have a career in which you are likely to move around, then real estate investing is probably not a great idea.  It can be difficult to manage property when you live far away.  You can hire a management company, but this may eat into your potential returns.

I also wouldn't recommend real estate investing to someone with little or no money in the bank (or other liquid assets).  Problems can arise.  You may have repairs or you may have a time period between renters where you are not collecting any rent.  You need a little cushion to get through these times.

For people with significant savings who are not planning to move out of their current city, then there really are some great opportunities for a good return on your money.  I would not recommend investing in real estate if you live in a big city that is really expensive (like New York).  I also wouldn't recommend investing where prices are so depressed that it makes you wonder if the city will ever recover (like Detroit).

So if you live in a good place to invest in real estate and it seems like something you want to do, start doing your research on the internet.  The internet has made it so much easier for the average guy.  You may still benefit from getting a real estate agent, but at least you can look and narrow things down on what you want to seriously look at.

One thing you should seriously consider is paying cash (not literally) for an inexpensive place.  While I would more typically recommend buying a 3 bedroom 2 bathroom house as a rental property, you may live in an area where condos are depressed in price.  If you can pick up a small condo for, say, $50,000, it might give you a good return on your money.

Now I understand there are arguments against paying cash.  Libertarians usually understand the nature of inflation and there is a legitimate argument that you should take out a mortgage and pay it back in depreciating dollars.  But, also consider that if there is high inflation, owning a rental property will still have its advantages without having a mortgage.  You may get appreciation in nominal terms on the property.  In addition, you can raise rents as they tend to go up with inflation, at least over time.

Let's run some numbers for an example.  Let's say you have been saving your money for a while.  You have $50,000 available.  You buy a one or two bedroom condo for $50,000.  By paying cash, this may enable you to get a better deal.  You can offer the seller to close within a week.  You may get a better price because of this.

Now let's say that property taxes will be $100 per month (the purchase price is only $50,000).  Let's say that association fees are $175 per month.  Let's say that insurance is another $25 per month.  Let's say that you can rent it out for $800 per month.  On a normal month where you have it rented and don't have any extra expenses, you will net about $500.  On $50,000, this is an annual return of 12%.  Someone please tell me where I can get a 12% return, on an almost continuous basis.

Another advantage of paying cash is that you don't have a mortgage and therefore have less risk.  In the above scenario, even if you go for a month without renting it, it will only cost you $300.

Perhaps my numbers are too optimistic for where you live.  Either way, I spelled it out to make a point that real estate investing is something to consider right now with all of the bargains out there.  You can take your time and shop around for the right deal.  If you live in a good area and you are in the right financial situation, this might be something to consider.

Thursday, July 7, 2011

Economic and Investment Outlook for the Summer of 2011

I do not like to make predictions.  If there is just one thing to learn from Austrian economics, it is that humans act freely.  It is impossible to predict what every individual on this planet is going to do.  This makes it impossible to accurately predict what the economy will do and what investments will do.  The best we can do is to forecast what people are likely to do based on current conditions.

With all of that said, I would like to review some possibilities of what is to come for the rest of the summer.  QE2 has ended.  I thought there was a good possibility of another major downturn in the stock market and the economy.  A stronger U.S. dollar would most likely go along with this scenario.

It looked like this might play out a few weeks ago.  The Dow Jones dipped below 12,000.  Then, all of a sudden, it popped back up.  As of this writing, the DJIA is over 12,700 and not showing much in the way of weakness.  Meanwhile, gold and silver have been up significantly in the last few days.  While, this doesn't make a trend, it does make it look more probable for gold to go up again and look for new highs.

I think things could easily go either way right now.  QE2 is over and the market knows it.  Greece and other European countries are on the verge of default.  In the U.S., the unemployment picture does not seem to be getting much better.  These are all potential arguments for a sharp downturn in the economy in the near term.

On the other hand, there is just as good of an argument for stocks and commodities to go higher while the dollar continues to be weak.  The debt is out of control and there is little promise of it getting any better.  We also have to remember the biggest elephant in the living room.  The Fed has tripled the monetary base in less than three years.

Although the increase in the monetary base has mostly gone into the banks as excess reserves, it is still a tripling of the money supply.  This money is available to people.  In addition, the banks could start lending it at any time unless the Fed increases the reserve requirement substantially.

So as far as which way the markets will turn this summer, flip a coin.  There are good arguments for both scenarios.  I still think the best strategy is to have a majority of your investments in the permanent portfolio as outlined by Harry Browne in Fail Safe Investing.

For speculation, I recommend additional investments in commodities and perhaps a small short position in the stock market.  The reason for this last part of the strategy is because if the stock market continues to go up, then I suspect it is mostly because of the big increase in the money supply.  This means that commodities should go up even more because commodities tend to do very well in an inflationary environment.

If there is a sharp downturn, it would not surprise me to see commodities go down, but at least you would have a small short position in the stock market to help offset any losses in your commodities.  And again, this is just for speculation.  If you are a conservative investor, just stick with the permanent portfolio.  You will sleep better at night.

Wednesday, July 6, 2011

Is Platinum a Good Investment?

Among libertarian investors, gold and silver related investments tend to be popular.  It is because hardcore libertarians do not trust the Federal Reserve and the federal government.  They understand that money can be created out of thin air and it is done on an almost continual basis for the benefit of the large banks and to enable the government to deficit-spend.

So what is the difference with platinum and would this also make a good investment?  First, I think it is important to realize the differences between the metals.  Gold and silver have a history of being used as money.  Platinum does not.  Platinum has uses as an industrial metal.  Silver does too.  Gold's uses are more limited outside of being used for jewelry and being used as a store of value/ investment.

Central banks do not buy platinum.  Then again, central banks do not buy silver either, at least to my knowledge.  So again, it all comes back to the fact that the market has chosen gold and silver over thousands of years as having good qualities for money.

I am an advocate of setting up a permanent portfolio, as described in Harry Browne's book Fail Safe Investing.  I think that at least half of your portfolio should be in something similar.  As a hedge against inflation, I am mostly a proponent of using gold and gold related investments.  I think it is safe to have a small percentage in silver, but it should only be about 5%.  Silver tends to be much more volatile than gold.

For speculative purposes, I see nothing wrong with owning a little bit of platinum, especially now.  Although it is not a monetary metal, it will still have a certain correlation with other metals and with commodities in general.  It will also benefit from a weak currency.

The price of platinum, in terms of U.S. dollars, was double that of gold a few years back.  Now the spread is only about $230 as of this writing and that is with gold trading just above $1,500 per ounce.  The gap between the two metals has narrowed significantly.  It just shows that gold has gone up partially because of its monetary qualities.

With the ratio of platinum to gold going from about 2 to 1, to less than 1.2 to 1 in just a few years, it makes platinum an attractive buy.  Platinum is not near all-time highs like gold right now.

So if you are looking for a speculation right now outside of your permanent portfolio, platinum might be a place to look.  I don't know of any ETFs that invest solely in platinum like there are for gold and silver.  You can easily buy platinum eagles from most reputable gold dealers.  It is a speculative play that is another investment option for a falling dollar that is continually being devalued by the Fed.  I would recommend that platinum be less than 5% of your total portfolio if you are going to pursue this strategy.

Tuesday, July 5, 2011

The One Question to Ask Republican Candidates

With the Republican presidential primaries coming soon, the race for the Republican nomination is heating up.  There is one particular question that should be asked to all of the candidates.  A lot of libertarians want to know the answer.  Democrats should be asking the question to show the hypocrisy of most of the Republican candidates.

It is unlikely that this question will be asked in any of the debates.  If it is asked, most of the candidates will not answer the question.  Their hands should be forced to answer the question or else look really bad.  The question is this:

What specifically would you cut from the federal budget to balance the budget for the first budget year that you would be responsible for as president?

I do not recall hearing any of the candidates saying that they would not balance the budget.  This question would force them to admit this.  It is true that Congress is responsible for spending, but that is 535 people.  The president is one person who can veto spending bills.  The Congress needs a supermajority to override a presidential veto.  In addition, the president can influence the American people, and thus Congress, when it comes to spending cuts.

Here is the problem for the Republican presidential candidates.  They say they want a balanced budget.  They say they will not raise taxes.  Yet, it would be impossible to balance the budget unless you significantly cut military spending or cut Medicare and Social Security.  Cutting military spending would mean ending wars and bringing troops home.  Cutting Medicare and Social Security would mean severely cutting benefits for those already collecting.

Of course, there are a lot of departments that can and should be cut from the federal budget.  But even if all of the unconstitutional departments and programs were cut, it would still fall short.  But the candidates are not proposing this anyway, except for one person.

Ron Paul (and Gary Johnson to a much lesser extent) is the only candidate who is serious about making deep and significant cuts.  Ron Paul has said that he would end the wars currently going on.  They would end almost immediately on his watch.  He would like to get rid of all of the unconstitutional departments.  He would like to end foreign aid.

Ron Paul is the only candidate who has been specific enough to come anywhere close to a balanced budget. In fact, Ron Paul should be asking this question to the other candidates.  It would show that the other candidates are closer to Obama than they want to admit.  They have no plan for a balanced budget.

Balancing the budget it just one of the major issues of this campaign.  But most people know where the candidates stand on the other issues.  It is obvious that Ron Paul ( and again, Gary Johnson to a much lesser extent) is the only anti-war candidate in the race.  But when it comes to spending, the Republicans are trying to have their cake and eat it too.  There is simply no way to balance the budget without big cuts in military spending or entitlement spending.

Monday, July 4, 2011

Happy Secession Day

Today is July 4, otherwise known as Independence Day to Americans.  Americans celebrate by barbecuing, going to the beach, and lighting off fireworks, among other things.  While I am hopeful that at least a majority of Americans understand that July 4 is a celebration of the American colonists declaring independence from the British Crown, I don't think that most Americans realize that the colonists, in effect, seceded.

As a libertarian, I think there are basically only two wars in American history that come close to being just by one side.  One is the Civil War (which really wasn't a civil war).  I believe the South was justified in seceding from the North and Lincoln and the North was completely in the wrong for starting a war.  But even with this war, I can only defend the South so far.  They used conscription and fiat money to fight the war, which is any libertarian's nightmare.  And, of course, the South was absolutely wrong for having slavery, even if that wasn't the main reason that Lincoln started the war.

The only other war that comes close to being just was the Revolutionary War.  Again, I have the same problems with the colonists as I do with the South in the 1860's.  But overall, the colonists were fighting for liberty from a king.  Although their level of oppression paled compared to what Americans today experience under their government, the colonists were justified nonetheless to want independence.

Great Britain should have allowed the colonists to peacefully go their own way.  But like the U.S. today, there was an empire to maintain for the British.

It is funny how many people speak against secession today, particularly when you are talking about states' rights.  I always ask those people, "so you believe that we should be part of Great Britain now?"  These people simply don't understand that the colonists seceded.  If secession had never occurred, Americans would all be British citizens.

So on this July 4th, I hope you are able to enjoy some time away from work and that you can have some fun with friends and family.  In addition, give someone a little history lesson if you can do it without disrupting the mood.  Oh, and Happy Secession Day!

Saturday, July 2, 2011

The Labor Theory of Value

The labor theory of value, as stated by Wikipedia, is a theory which argues that the value of a commodity is related to the labor needed to produce or obtain the commodity.  This has been refuted by Eugen von Bohm-Bawerk and the Austrian school of economics.  Austrians believe in the subjective theory of value.

Basically, the subjective theory of value says that things are valued based on the opinions of people.  This whole thing has always kind of puzzled me.  You're telling me that it took hundreds of years of theorizing to come to this conclusion and even now it is still debated?

For anyone who works in an office, you should know that the labor theory of value is not true.  You might observe someone who sits at his desk all day and seems to work hard.  He may even work overtime.  And yet that person may not be the most productive person in the office.  It can even be the case that there are some people who seem to be hard workers and yet are some of the least productive people.  Bottom line is, productivity is not determined just by how hard someone works.

Of course, there can be a relationship between labor and productivity.  If someone doesn't work at all, he is not going to produce something of value.  But even for someone who is seemingly productive, it doesn't mean that what he is producing is of value to anyone else.  That is for other people to determine.

I think the one important thing to take away from the subjective theory of value is that consumers dictate prices.  It doesn't mean that costs don't matter.  It doesn't mean that the labor spent on things doesn't matter.  But, ultimately, what matters the most is how much consumers are willing to pay.

When a business takes on higher costs (let's say because of a government regulation or tax), we often hear people say that the business will just pass the cost on to the consumer.  Sometimes this is true.  The business will certainly try to charge more if it thinks it can get more.  But it doesn't always work this way.  The consumer may not be willing to pay more.  The consumer might find a replacement product or just decide that it is not a necessary item to have.

If oil prices go up, food may or may not go up in price due to higher transportation costs.  If Coke and Pepsi get hit with a new corporate tax or accounting rule that drives up their costs, the price of their products may or may not go up because of this.  There are a lot of things that can contribute to prices, including costs and competition.  However, ultimately, it is the consumer who decides the price by how much they are willing to pay.