Thursday, September 29, 2011

Paul Up, Obama Down

Yesterday, there was a report of a new poll that showed Ron Paul beating Barack Obama in a head-to-head matchup, 51% to 49%.  Today, there is a report of a poll showing Ron Paul in virtually a statistical dead heat with Obama in the state of Florida.  Florida tends to be a good cross-section of the country, except that it has a higher percentage of seniors.  This just shows that the Medicare/ Social Security issue is not scaring a lot of seniors to turn away from Paul.

This is quite significant.  While I think Paul could conceivably win the Republican nomination, I wouldn't bet even money on it right now.  While there has certainly been a shift in public opinion, the Republican Party is still too pro-war and that will make it difficult for him to get the nomination.  However, if Paul did get the nomination, I think his chances would be quite good against Obama.  I think there would be a lot more independents and Democrats receptive to his anti-war message.

So while I'm not exactly banking on a Ron Paul presidency at this point, I still think these polls are very significant and should give us great reason for optimism.  This shows that there has been a dramatic shift in public opinion.  With Paul running as a Republican and getting into the debates, it has helped spread his message and reach people that have never heard this message.  And of course the internet has been absolutely wonderful for the advancement of liberty as it has opened up the lines of communication.  We can now circumvent the mainstream media.  We are now at a point where a majority of people do not trust the mainstream media and more people are getting their news from alternative sources like the internet.

The best news in all of this is that Ron Paul draws a large portion of his support from young people.  While he has a diverse group of followers, the largest demographic seems to be people in their twenties.  Many of these people will be libertarians for life, which should really give us great hope for a few decades down the road.

There is still a lot of work to do for libertarians in trying to convince others of the benefits and morality of liberty.  But this just shows that progress has been made.  Ten years ago, most people didn't know who Ron Paul was.  Not only do people know him now, but he is polling about even with the sitting president.  I think we will eventually win this battle of ideas.

We don't need to elect Ron Paul to become free.  We just need to change the hearts and minds of the people and that is starting to happen.

Wednesday, September 28, 2011

Gold and Velocity

After the price of gold fell off a cliff last week, the metal continues to look weak for the short term.  It was down significantly again today after bouncing up yesterday.  Silver has taken an even bigger beating than gold, showing us all why it is better to have the majority of your core holdings in gold.

I would not be surprised to see the metals fall a little further still.  We have to look at it all in context though.  The price of gold has been up every year for the last 10 years.  It is still up significantly for this calendar year.  It was hitting new all-time nominal highs and it should not be surprising that there has been a big pullback.

The current environment looks ripe for another recession, or a continuation of the recession depending on how you look at it.  The Fed has pumped in all of this money in the last 3 years and we still see relatively small price inflation.  The banks have piled up this money as excess reserves and the American people remain fearful (and rightly so).

Since the American people have been more conservative with their money, it has kept velocity low.  There is no actual way to measure velocity, but it seems that there is a high demand for dollars due to fear and uncertainty.  Since money is changing hands less frequently, it counteracts a large portion of the Fed's loose monetary policy.  In other words, the low velocity keeps a lid on price inflation, along with the massive excess reserves.

When there is fear and a looming threat of recession, people tend to flock to the American dollar.  For a while there, people were flocking to gold.  I expect people will return to gold, but the short term is more questionable.

As far as your investments go, you should maintain a buy and hold strategy of gold and gold related investments for your permanent portfolio.  If your investment portfolio does not include at least 20% in gold and gold related investments, then this is a great time to accumulate more.  If you are a short-term speculator with gold, then good luck because I have no idea what you should do right now.

Don't let the latest fall in the precious metals scare you.  It is going to be a roller coaster ride.  Nothing goes straight up.  There will continue to be run-ups and corrections.  The low velocity of money may keep things down for a while, but I expect the Fed to start QE3 if things start to look too gloomy.

Tuesday, September 27, 2011

Gary Johnson, The Fair Tax, and a Balanced Budget

Since Gary Johnson was allowed to participate in the last debate that was hosted by Fox News, I figured I would comment on a few things he said, since he has gained a little bit of attention.

Johnson's best line and the funniest line of the debate was when he said his neighbor's dogs have created more shovel-ready jobs than Obama.  He obviously had this line ready to go before the debate, but it got a good laugh and that can sometimes draw attention.

While I personally like Ron Paul's version of libertarianism far better than Johnson's, it is still good for libertarianism when he is in the debates.  Sometimes his comments can enhance the message being sent by Paul.  If Paul weren't in this race, Gary Johnson would be by far the best candidate on foreign policy, social policy, and fiscal issues.

One thing that Johnson said several times during the debate was that he had a plan to balance the budget and he wanted to institute the Fair Tax.  As a libertarian, I am against the Fair Tax and I am against a lot of the versions out there for a balanced budget amendment.  However, when you combine the two ideas into one, then they are not as bad.

The worst thing about the Fair Tax is that it is "revenue neutral".  In order to be revenue neutral, we would need a national sales tax of around 30%.  While I don't like the complications of filling out income tax forms, that is not the really bad part of having an income tax and all of the other taxes we pay.  The really bad part is that it takes way too much money from us and the Fair Tax doesn't help this situation at all if you don't address spending with it.

If we had a balanced budget by cutting spending in the neighborhood of $1.5 trillion per year, then we still might need a national sales tax of 30% to pay the bills.  But at least it would neutralize the Fed as there would be no need for the Fed to buy any more government debt.  This would help the economy tremendously.

The reason I get skeptical of a balanced budget amendment is because a lot of people want to balance the budget with tax increases.  To paraphrase Ron Paul, I would rather see an unbalanced budget of $2 trillion than a balanced budget of $4 trillion.  But I am certainly in favor a balanced budget if it means getting there by dramatically cutting spending and not raising any taxes.

I am still hesitant on the Fair Tax, even with a big cut of 43% as Johnson is suggesting.  I might be more prone to liking it if it meant a national sales tax of 10% or less.  That would only be acceptable with the repeal of the 16th Amendment.

I think Johnson should stick with his cheerleading of a balanced budget through a 43% reduction in spending.  He should drop the Fair Tax.  Ron Paul should take a lesson from this and come out with his own plan to balance the budget.  In fact, he should one-up Johnson and get the federal budget below $2 trillion and advocate tax cuts along with a balanced budget.  He should start being more specific.

Next, the two of them should team up on the other candidates.  Michele Bachmann says she wants a balanced budget, but I have no idea how she is going to get there without cuts in military spending.  She should be challenged.  Herman Cain and Rick Perry should be challenged too.  Ask them how, specifically, they would balance the budget.  How would you cut $1.5 trillion out of the budget this year?  Not next year or ten years from now, but right now.

If the moderators of these debates and the mainstream media won't ask these tough questions, then Ron Paul and Gary Johnson should start asking them.  Unless you cut military spending significantly, which means ending the wars, then it is almost impossible to balance the federal budget, unless you want to start cutting Social Security payments.  Bachmann, Perry, and Cain should be pinned down.  We shouldn't bother with Romney as he is out in left field.

Monday, September 26, 2011

Herman Cain and His 9-9-9 Plan

I was planning on writing a post this week on Herman Cain.  Now that he won the Florida straw poll by a substantial margin, it makes it that much more important.  While the Florida straw poll tends to be tilted towards the more establishment figures (I knew Ron Paul had little chance of doing well) because of the way it is run, it is still significant for Cain because he is getting a little more attention now.

I wrote a post about Cain a few months ago.  He is a statist.  He claims to be a political outsider and yet he was chairman of the Federal Reserve Bank of Kansas City.  He has some libertarian rhetoric and that is why I focus some attention on him.  Romney is a statist too, but it is more apparent to those with libertarian leanings.

While Cain has previously supported the so-called Fair Tax, he is now advocating a plan that he calls "999".  It is a proposal to have a flat tax rate of 9% for businesses, 9% for individual income taxes, and 9% for a national sales tax.  He claims it is revenue neutral, just like the Fair Tax.

I am against the Fair Tax for various reasons, particularly because it is revenue neutral.  (I really don't like the term revenue, since government is not a business and this money is obtained through the threat of force and not through providing goods and services.)

However, Cain's 999 plan is much worse than the Fair Tax.  At least the Fair Tax is supposed to repeal the 16th Amendment and abolish the federal income tax.  With Cain's plan, we would have both a national sales tax and an income tax.  What is to stop the next congress and president from raising the income tax rates on high-income earners, while leaving the sales tax in place?

In addition, this 999 plan would be horrible for the middle class.  It would be a massive tax hike on the poor and middle class.  Many lower to middle income families pay very little or nothing at all in the way of income taxes.  They just pay the payroll taxes.  Now they would also have to pay an additional 9% on everything they buy?

Cain's income tax plan also doesn't allow for any deductions, except for charitable donations.  His website says it would be "gross income less charitable deductions".  Then it says "Empowerment Zones will offer additional deductions for those living and/or working in the zone", whatever that means.  This sounds like more central planning from a former Fed official.

This 999 plan would be an absolute disaster.  It would raise taxes on the poor and middle class and it would leave higher income earners more vulnerable in the future.  It would not cut anything out of the budget.  It would leave us with the IRS and it would have to create another IRS or another division of the IRS just to collect the sales tax.

It doesn't matter how abysmal Cain is on all of the other issues.  This 999 plan alone should tell every libertarian to run in the opposite direction.  If Cain were at all a libertarian, he would be advocating at least some spending cuts.  I am no fan of Michele Bachmann, but she is far better than Cain on fiscal issues.  And Gary Johnson is far better than Bachmann.  And Ron Paul is far better than Johnson.

Saturday, September 24, 2011

Gold Plummets This Week

On Wednesday, I wrote a short piece on the Fed's announcement that it would buy longer-term government debt.  In the comments of that post, I received a question asking, "Can you provide some insight as to why this would have caused gold to lose value?"

I was going to defer this question until later in the week, but gold had a huge down day again on Friday, this time dropping about one hundred dollars in one day.  This was mild compared to silver in percentage terms, which has basically crashed this past week.

First, I should point out that in a somewhat free market, all prices are determined by buyers and sellers.  This is no different for gold and silver.  There were obviously more anxious sellers of gold this past week than there were buyers.

With that said, I can speculate on some of the reasons that gold had such a terrible week.

On Friday, there were stories about an increase in the margin requirements in the gold market.  Many believe that this caused the sell-off and there is probably something to that.  In addition, this happened after it had already had a fairly big sell-off during the week.

As to the drop in the price of gold on Wednesday, there was apparently something that did not please gold owners about the Fed's statement.  I think one possibility is that the market expected more from the Fed.  Many investors were hoping, or at least expecting, that the Fed would announce some mild form of QE3.  But the Fed's announcement to rearrange its portfolio does not add any base money.  For the longer-term government bonds that are bought, an equal number of short-term bonds will be sold (or retired).  We should not see any significant increase in the adjusted monetary base based on these actions.  In other words, gold investors were counting on more loose money from the Fed and they didn't get it with that announcement.

Another possibility in contributing to the gold price decline this week is that the economic outlook is gloomy.  This was confirmed by the Fed's statement.  If we enter into another recession (even though I'm not sure we ever left the first one), this may be very bad for gold in the short run.

For some reason, investors still flock to the U.S. dollar during recessions.  I'm not saying they should flock to the euro or some other fiat currency, but it is fairly obvious that the U.S. dollar is in a long-term decline.  But economics and investing is based on human action, and a lot of individuals still like to park their money in U.S. dollars during down times.

This means that the velocity of money may slow down even more.  There is a higher demand for dollars (more liquidity and perceived safety), so dollars are not changing hands quickly.  Banks are not loaning money like they used to and consumers are not spending money the way they were 5 or 10 years ago.  This puts a downward pressure on prices and this will include gold and silver.

Although the gold market suffered greatly this week, I am still bullish on the metal right now.  In the not-so-distant future, we will start to see days where the metal is also going up one hundred dollars or more in a day.  It won't just be on the down days when we see these big moves.  That is when you will know that we are getting close to bubble territory.  But even when we get into a gold bubble, we can expect it to last for a while and see prices go to the moon.  There will be a time to sell some gold (not all) and take some dollar profits.

If this crazy week in the markets confirmed one thing for me, it is the wisdom of the permanent portfolio.  It showed us that it is better to put more in gold than silver.  It also showed us it is important to have some exposure to bonds, as that was the only thing (besides cash) that didn't get hammered this week.

Thursday, September 22, 2011

Libertarian Thoughts on the Republican Debate in Orlando

I normally would not care about these debates as much, but it is rare that someone like Ron Paul is running for president and getting some attention.  Here are a few random thoughts on the debate in Orlando, Florida.

The first notable thing is that Gary Johnson, former governor of New Mexico, was permitted to participate in the debate.  He is no Ron Paul, but he does have a lot of libertarian leanings and it is nice to see someone else on the stage who is at least decent and makes some sense.

It is interesting to compare the debates from this year to the debates from 4 years ago.  The candidates of this election cycle sound much more fiscally conservative and anti-big government.  I don't believe most of them, but it is still notable.  I think one difference is who is occupying the White House.  The candidates in 2007/ 2008, with the exception of Ron Paul, felt compelled to defend Bush's abysmal record.

On the last question about choosing a running mate on the stage, it was nice of Gary Johnson to pick Ron Paul.  I like Paul's answer to the question too, but I thought he should have acknowledged Johnson as at least being the closest one to his views.  Another addition to Paul's answer could have been him stepping outside of the box and naming a few potential running mates not on the stage.  If he had mentioned Lew Rockwell, Tom Woods, Robert Murphy, Judge Napolitano, etc., I'm sure a few people out there would have "googled" those names out of interest.

It was a little disappointing to see such a short discussion on foreign policy.  I always enjoy seeing the contrast of Ron Paul against the other candidates and we didn't get to see that in this debate.  It is important for Paul to keep making this distinction.

Overall, a lot of the debate was more of the same.  But I am going to enjoy it because we are not likely to see another Ron Paul running for president as a major party candidate any time soon.  I can only hope that if Ron Paul does not get the Republican nomination that the Libertarian Party puts up someone good this time.

Wednesday, September 21, 2011

The Fed to Buy Longer-Term Government Bonds

The Fed had one of its regular meetings on Tuesday and Wednesday and the FOMC announced today that the Fed would be buying long-term treasuries, while selling an equal amount of short-term treasuries.  This should have no effect on the monetary base.  It is simply an exchange for longer-term government debt.

This move by the Fed is meant to lower the long-term interest rates.  By buying longer-term government bonds, this drives down the long-term rates.  The announcement today caused the yield on the 10-year treasuries to drop below 1.90%.  The mortgage rates are highly correlated with this interest rate, which means that mortgage rates are at or near all-time lows.

If you have procrastinated on refinancing your mortgage, you still have a chance to do so now.  If someone will lend you money for 4% interest over 30 years, why not take it?  With the massive debt and quantitative easing programs, we can expect for the dollar to be devalued.  Why not pay off your loan in depreciating dollars?

Today's action reinforces the power of the permanent portfolio as described in Harry Browne's book Fail Safe Investing.  The stock market tanked today and gold also fell substantially.  Bonds did well, which caused less of a down day for anyone investing to imitate the permanent portfolio.

There will come a day to speculate in the bond market (on the short side).  I have held off on recommending this speculation, and it is a good thing.  If the economy falls back into recession (if we ever left recession) and the velocity of money stays low to keep price inflation in check, then we could continue to see bonds do well as interest rates drop.  There are ways to short the government bond market (symbol: TBT), but we need to be patient.

This move by the Fed today just shows more desperation.  I didn't expect an announcement of QE3.  Perhaps the stock market did, since it dropped heavily this afternoon after the announcement.

The Fed will continue to support the banks (as it will also be buying mortgage-backed securities).  It will continue in its attempts to prop up housing prices and the economy in general.  It will do this in stages.  The free market is trying to liquidate the bad investments, but the Fed and the government are not letting this process take place.  We will continue to see this tampering by the Fed until it faces a scenario of massive price inflation.

Tuesday, September 20, 2011

Obama's Millionaire Tax

Obama is proposing a new tax as part of a proposal to cut $1.5 trillion from the long-term deficit.  From a libertarian standpoint, there are a lot of points that need to be cleared up about this subject.

First, most of the politicians and mainstream media pundits, and even most Americans, start with the wrong assumption.  They assume that it is morally acceptable to take people's money with the threat of force, as long as it is done through the government.  This is the sham that is democracy.  As Gary North says, "thou shalt not steal, except by majority rule".

Second, why is this being called a millionaire's tax?  It is not a tax on wealth.  It is a tax on income.  If someone makes a million dollars in one year, he is not necessarily a millionaire.  First, he has to pay all of the taxes that already exist.  Then he has to spend at least part of this money on sustaining his life and lifestyle.  If someone is working in a sales job and has one big year or if someone happens to win the lottery or if someone happens to have one extremely valuable asset that is sold, then these people might have one big year with a high income, but it doesn't necessarily make them rich.

Third, one thing that some Republicans and supply-siders get right is the Laffer Curve, named after Art Laffer.  It basically says that at some point, if you keep raising taxes, that it will actually lead to less tax collections by the government.  This is the same as all socialist and big government policies.  More taxes lead to a worse economy (relatively speaking) and to less incentive to work, especially when the marginal tax rates get really high.  So even if Obama were to get his proposal passed (which it won't), it might not even cut the future deficits by one dollar.

Fourth, as Laurence Vance recently pointed out, Obama's proposal is supposed to cut $1.5 trillion over ten years, which is equal to $150 billion per year.  Obama could just end the wars and bring the troops home and this would cut the deficit by that amount without having to raise taxes.

Democrats want to play class warfare and tax the rich (more accurately, high income).  Many Republicans actually want to tax the poor because almost half of Americans pay no federal income tax.  I am in agreement with Ron Paul that we are almost halfway there.  We should not want to tax the rich or poor more.  We should want to reduce taxes for everyone.  Even poor people pay many taxes.  Inflation is probably the worst thing that hurts the poor.

The only way to solve the economic mess we are in is to get the government out of our lives.  Taxes should be reduced drastically and government spending should be reduced even more drastically.  Regulations should be reduced drastically, instead of continually adding them.  We need to end the empire.  We need to end federal involvement in education, healthcare, energy, and every other aspect of our lives.  We need to end the federal monopoly on money.  We need for Americans to stop relying on government and to stop seeking government to solve our problems.  As Reagan said, "government is not the solution; it is the problem".

Obama's so-called millionaire tax will not pass.  If it did, it would only make things worse.  He does not understand economics at all.  He is also a demagogue.  If he wins re-election, it is only because the Republican nominee is just as bad.

Monday, September 19, 2011

Once In A Lifetime

Many people in the libertarian community do not realize just how lucky we are.  Although government continues to grow at great speed, we are in the midst of a turning.  Ron Paul has played a huge role in this process.  As libertarians, we should be thankful for having such a great representative.

From a libertarian standpoint, Ron Paul is easily the greatest congressman of the last hundred years and perhaps ever.  We have this man running for president and we couldn’t really ask for a better scenario.

Politics, ultimately, is not a solution in moving our society towards greater liberty.  But most people think politics and voting are the mechanisms we need to roll back government.  Go talk to an average guy on the street and tell him that if he becomes more educated about liberty and some others do the same, then that in itself will achieve greater liberty.  He will think you are nuts.  He is under the assumption that you have to vote in the “right” people.

If you tell the average guy on the street that withdrawing consent from the government will ultimately cause it to collapse, he will not understand the concept.  In fact, many libertarians do not understand this, so how can we hope for non-libertarians to understand this?

This is why Ron Paul is so important.  He has a platform right now to reach millions of people.  The grassroots from his 2008 campaign are all over the internet spreading his message.  Meanwhile, it almost seems as if a day doesn’t go by that Congressman Paul is not making an appearance on television or radio.

There are some issues in which there will always be disagreements between libertarians, such as immigration and abortion.  There will also be disagreements about just how small government should be.  But could libertarians ask for a better person to represent their viewpoint that Ron Paul?  He is consistent, honest, and principled, and he takes the libertarian position on all of the major issues.

This is especially important.  If you get into a discussion with someone about politics, or specifically about Ron Paul, you don’t have to make any excuses for him.  You don’t have to say, “well, he is good on this particular issue, but don’t pay attention to him when he talks about this other thing.”  Again, libertarians can disagree, but on all of the major issues, you can count on Ron Paul to take a principled and consistent position.  It is helpful when you don’t have to be apologetic for someone you are trying to defend.  You don’t have to make any excuses for Congressman Paul.

Although politics is not the ultimate solution, Ron Paul and his devoted followers will continue to chip away at people’s beliefs.  It is impossible to say if he has a good chance of getting the Republican nomination, but it is a testament to the libertarian community that it is even possible.  Remember that most people, outside of libertarians and those in his district, did not even know who Ron Paul was just 5 years ago.

Libertarians now have a great opportunity with the internet and social networking to spread the message of liberty and we have a great spokesperson to represent us and our ideas.

Regardless of what happens in this election, there will be far more libertarians than there were before it started.  This will slowly have its effects.  It may not be noticeable to many, particularly when the government is getting bigger and more intrusive.  But the pedestal of the American empire is being chipped away.  It may not be noticeable, but the foundation is starting to give way.

If enough people begin to withdraw their consent, then the empire can come crashing down quickly.  Very few people expected the Berlin Wall and the Soviet Union to fall apart like they did.

Libertarians will often complain about the times we live in due to an uneducated populace and a huge national government.  But there is one freedom that we mostly still have and that is freedom of speech.  As long as we are mostly free to communicate with each other and spread ideas, then government can be stopped.  Ideas are a powerful thing.

It is interesting that many libertarians like to point to the Founding Fathers of the United States and their wisdom, but today’s libertarian leaders are far more wise and radical than the Founding Fathers.  Libertarians of today have the benefit of more history and more open communication.  But regardless of the reasons, I will take Tom Woods over Thomas Paine.  I will take Gary North or Anthony Gregory or Robert Murphy over Adam Smith or Patrick Henry.  I will take a President Ron Paul over a President Thomas Jefferson.

In conclusion, libertarians should be thankful for the time period we live in and we should be thankful that we have a wonderful spokesperson for liberty in Ron Paul.  While his chances of winning the presidency might still be small, we are making huge progress.  When hearts and minds are changed, liberty will eventually follow.

Saturday, September 17, 2011

Investing in Foreign Currencies

While I'm not against investing in foreign currencies, it is not something that I advocate on a long term basis.  If you are going to buy foreign currencies, it should be for speculative purposes and for the short term.  It seems that a buy and hold is not the best strategy for holding foreign currencies, especially since there are none that are backed by gold or any other commodity.

I am an advocate of the permanent portfolio as described in Harry Browne's book Fail Safe Investing.  Part of that portfolio consists of gold.  There is no place for foreign currencies.

There is a mutual fund (symbol: PRPFX) that is supposed to somewhat mimic the permanent portfolio.  However, the mutual fund changes the formula a little and puts a small percentage in silver and Swiss francs.  I think the big difference is that the mutual fund is actively managed.  If the Swiss central bank started creating new money like crazy, the mutual fund could change its position.

The permanent portfolio (not the mutual fund) is supposed to be an "investing for dummies" portfolio for those who don't have the time, interest, or knowledge to actively manage their investments.  However, the permanent portfolio is also there for active traders who just want to keep a portion of their money safe and sound from the uncertainties in the world.

There are a couple of reasons that I suspect on why Harry Browne did not include any foreign currencies in the permanent portfolio setup.  First, as just mentioned, what if a particular central bank changed policy?  It would be easy to say that the yen and Swiss franc have been the best currencies due to a tighter monetary policy by their central banks.  But things can change over time and this would mean that the permanent portfolio would not be very permanent.

Second, all major currencies are fiat currencies.  They are not backed by gold or silver or anything else.  This means that there is virtually no limitation on central banks in creating more new money.  If you buy yen and the Japanese central bank is devaluing at a rate of 5% per year while the U.S. central bank is devaluing at a rate of 10% per year, you will still be losing money in yen.  You just won't be losing as much as those who hold U.S. dollars.

Gold makes up 25% of the permanent portfolio.  This is your protection against inflation.  It makes it unnecessary to invest in foreign currencies.

There could be a few possible exceptions to this.  If you live in the U.S. and your income is all in U.S. dollars, then it would seem unnecessary to invest in foreign currencies as long as you have gold as an inflation hedge.  However, let's say you do business in another country and buy a lot of goods from there.  Or let's say that you are retired and you spend 4 months a year in another country.  In these special scenarios, it might be beneficial to hold a portion of your cash/ cash equivalents in the currency of this other country.

In conclusion, other than certain special situations, I see no need to own foreign currencies.  With that said, I am not against the idea for speculation for short-term gains.  Just remember that, at least as of right now, all of the major currencies in the world are fiat currencies.  That makes gold a better hedge against a depreciating currency, rather than another depreciating currency.

Thursday, September 15, 2011

Gold at $10,000 Per Ounce?

This is what an article on Bloomberg said gold should be worth now or at least is putting its "fair value" at $10,000.  Of course, the price of anything is determined by buyers and sellers in the market, but these scenarios drawn up are always interesting to look at.

If gold does go to $10,000 per ounce within the next few years, it either means that it is in major bubble territory or else we are on the verge of hyperinflation.  Let's hope, even for those with substantial gold holdings, that the price doesn't go this high.  If it does, that means that there is major trouble in the economy.

If gold goes to $10,000 in the next few years, then it will be especially important to pay attention to the Fed.  If the Fed does not show signs of tightening, then a complete collapse of the dollar really could be coming (which I predict is not likely).  If the Fed is tightening and allowing interest rates to rise as it did in the late 70's and early 80's, then we can expect a major correction/ depression to occur that will make 1981 and 1982 look mild.

We must also keep in mind that velocity will continue to play an important role in the dollar and gold.  If there is a perception that prices will continue to rise dramatically, then this will just make things worse as people try to dump their cash for hard assets.  Velocity is one area of economics where perception really does play an important role.

Gold has pulled back in recent days, going below $1,800 per ounce today.  Again, this is not surprising considering what it has done in the last few months and over the last 10 years.  This presents a potential buying opportunity for those who do not have substantial holdings in gold and gold related investments.  You never know which time will be the last train out.  For all we know, the next phase up could be the final blast to the moon.

I have said before that I don't think we are in anything close to a bubble yet.  There are too many people advertising for you to sell your gold.  We need to get to a point where most of the commercials are telling you to buy gold before it is too late.

Maybe when we hear about coin flippers (as in house flippers), then we will know we are in gold bubble territory.

Wednesday, September 14, 2011

Some More Thoughts on Real Estate

Although the focus of this blog is mostly on economics, politics, and investing, I do like to discuss real estate from time to time.  If you are in the right position, I think you should seriously consider getting into investing in residential real estate.

If you are broke, I wouldn't recommend it.  I also wouldn't recommend it if you move around a lot, although this situation could be overcome.

Some people say that they don't want to be landlords.  It is understandable that some people don't want to deal with finding tenants and collecting rent each month.  They also don't want to deal with other problems that arise.  However, it is easy to find a company that will manage your property.  They will typically charge you an upfront fee to find renters for you (maybe a month's rent) and then will charge you a fee each month to manage the property.  This might be about 10% of the rent.

Of course, you will have to pay for anything that needs to be fixed, but even here the management company can help you.  They may have a handyman who will do things for a reasonable price.  If there is something more expensive, then the management company will notify you to get your approval.

I said above that it helps if you are not moving around, but even if you are, you can still hire a management company.  I still think it is preferable to be close to your properties, but some people just don't have this option.

It is important to have some extra money to make it easier to buy a property and to give you a cushion for any additional expenses, particularly if there is a month or two in which it is not rented.

If this is something that interests you, I would recommend buying something inexpensive, but in a decent area.  I would recommend something simple like a 3 bedroom/ 2 bathroom house.  You don't want to buy too much house.  You will not recover the extra cost as the rent will only be slightly higher.

Also, be sure to lock in a fixed rate mortgage, unless you are paying cash.

You should only buy something if it will give you positive cash flow, not counting months where it is not rented or you have additional expense.  Overall, you don't want to be digging a hole for yourself.  It should be something that will usually put extra money in your pocket each month.  If you can find such a place, it might be worth considering.

You don't have to buy a whole neighborhood or apartment complex.  Just start with one house and see how it works.  You can always buy more later.

Tuesday, September 13, 2011

Libertarian Thoughts on the Republican Debate

The Republican presidential candidates had another debate last night.  This one was in Tampa, Florida and it was hosted by CNN and the Tea Party.  The media is making a big deal about Mitt Romney and Rick Perry, as they are the proclaimed front runners.

Unfortunately for the establishment, Ron Paul keeps telling the truth and his poll numbers are showing him in third place and not going anywhere but up.

Rick Perry took a bit of a beating on the stage last night and deservedly so.  His executive order to vaccinate young girls is an outrage to anyone who believes in liberty.  Ron Paul also pointed out that taxes and spending went up in the last ten-plus years under Rick Perry.

It is good to hear the candidates continue to bash Ben Bernanke.  I'm not sure if one candidate would reappoint Bernanke as Fed chairman.  Bernanke is very unpopular and we can credit Ron Paul and his supporters for a big part of this.

I was thinking about Herman Cain's so-called 9-9-9 tax plan.  He wants a 9% corporate tax, income tax, and national sales tax.  This is worse than the so-called Fair Tax.  At least the Fair Tax attempts to repeal the 16th Amendment and do away with the income tax.  With this latest plan from Cain, we would have an income tax and a sales tax.  And I'm sure there is no way that Congress would ever attempt to raise the rates on these in the future (this is sarcasm).  With Cain's 9-9-9 plan, many middle class individuals would be paying far more in taxes, assuming that many deductions are done away with.  This is just one more example of how Cain is a statist.  I also get the feeling that he is not that bright.

Rick Santorum, once again, challenged Ron Paul on foreign policy.  Some of the audience booed Congressman Paul as he tried to explain that the terrorists don't hate Americans for freedom but because of U.S. government foreign policy.  Unfortunately, this is going to be the roadblock for Ron Paul from getting the nomination.  He is absolutely correct in what he is saying and he should continue to say it, but there are too many militaristic Republicans who want more war and more foreign entanglements.

The good news is that Ron Paul continues to change minds.  This is reflecting in the polls, even if slightly.  Just think, every time Paul goes up one percentage point in the national polls, that means there are hundreds of thousands of more supporters than there were before.  Last night, he talked about shutting down the Departments of Education and Energy.  He also talked about letting young people opt out of Social Security.  These things can get people's attention.  For some people, they might say, "how can he be so good on all of these issues and yet wrong on foreign policy?  Maybe I should examine his foreign policy more to see if he has a point."

This is how minds are changed.  Ron Paul should just keep telling the truth and whatever happens, happens.  He will continue to convert more people to libertarianism and this will help save our future, even if we don't have a President Ron Paul.

Monday, September 12, 2011

The Swiss Franc and Japanese Yen

Last week, the Swiss central bank announced that it would put a cap on how high the Swiss franc could go in relation to the euro.  This drove the Swiss franc down over 10 cents in one day against the U.S. dollar.  This is unprecedented.  It is rare to see a currency move almost 10% in one day.  This is basically a formal devaluation.

The Swiss National Bank has only one way to ultimately put a ceiling on the franc.  The only way to do this is to create new money out of thin air.  This is unfortunate because the Swiss franc has been one of the most reliable currencies.  Even though it is no longer backed by any gold and is a fiat currency like the rest of them, there has always been this sense that the Swiss central bank is tighter with its monetary policy and less political.

Assuming this announcement works and the Swiss franc stays capped, then it would not surprise me to see the Bank of Japan try the same thing.  The yen is another fiat currency that has been more reliable in relation to the others and some are saying that the yen is appreciating too far and too fast.  It astounds me that the yen is as strong as it is, considering that the debt-to-GDP ratio of the Japanese government is over 200%.  This makes Greece look good.

The Japanese central bank has been able to maintain a relatively tight monetary policy because the moron investors keep buying Japanese government bonds for some reason.  With the massive debt that the Japanese government has run up, the rates on bonds there should be somewhere near the Greece level.  That is, the rates should be indicating a default is near.  Instead, rates in Japan are extremely low, despite a lack of buying from the central bank.  This means that private investors are funding this massive debt.

This move by the Swiss central bank is stupid, assuming that they weren't being threatened with a nuke by the U.S. government or something crazy (although not that far fetched) like that.  Why does the Swiss government feel like they can't let their currency appreciate?  Why is this the same with other governments?

Basically, these are a bunch of mercantilists making this decision.  Their excuse is that they cannot have too strong a currency or it will hurt their export sector.  But what about their import sector?  If you have a strong currency, you can import goods and services from other countries for cheaper prices than otherwise would have been the case.

Although weakening their currency might benefit the export sector, overall it will hurt the Swiss people more.  It means that people will have to pay more for goods and services.  The Swiss central bank will be devaluing their currency now like most of the other central banks around the world.

The U.S. dollar is losing its status as the reserve currency of the world.  I don't think there is any other currency likely to take its place.  I think that either there will be no reserve currency or else a commodity or basket of commodities will serve this purpose.  Gold may become money again faster than we think.

Later this week, I will discuss my thoughts on investing in foreign currencies.

Saturday, September 10, 2011

9/11 - Ten Years Later

Tomorrow marks the 10th anniversary of the September 11, 2001 terrorist attacks.  As a libertarian, I have a lot of mixed feelings on the event and what has taken place since.

First, I don't believe these attacks happened because America is free or America is a democracy (although America is not free and it is not supposed to be a democracy).  The reasons given by the terrorists have been consistent.  It is mainly due to U.S. foreign policy.  These attacks were revenge for U.S. wars, U.S. occupations, U.S. sanctions, U.S. aid to dictators, U.S. aid to Israel, and other related reasons.

Of course, all or most of the victims of September 11, 2001 had little to do with U.S. foreign policy.  These were innocent people.  It is the U.S. government responsible for foreign policy.  Although one could sympathize with people in the Middle East suffering the consequences of U.S. foreign policy, it is wrong of the terrorists to target innocent people, regardless of their lack of options.

Although, by the same token, it is wrong of Americans to want to hurt or kill anyone who was not directly responsible for the terrorist attacks.  You can call it collateral damage or anything you want, but it is still morally wrong to have people in Iraq, Afghanistan or anywhere else die because Americans are seeking revenge.  The terrorist acts should have been treated as criminal acts.  If a criminal runs into a building, you are not morally justified to blow up the whole building if there are innocent people inside.

Unfortunately, September 11, 2001 gave the U.S. government an excuse to vastly expand with war and infringements on civil liberties.  America is less free in 2011 because of it.  The good news is that more people are waking up to this, with much credit due to the internet and Ron Paul.

You will mostly hear patriotic rhetoric if you watch television tomorrow.  If you go on the internet, you will find other stories.  There is a movie being released tomorrow that discusses the falling of the towers. It is not being called a conspiracy theory movie, but that is basically what it is.

I also have mixed thoughts on the conspiracy theories.  Some of them really are way out there.  However, I have always been suspicious of how the twin towers fell.  They both fell, basically into their own footprint.  But to make the whole thing worse, is the falling of World Trade Center 7.  WTC 7 was a 47 story building.  While that is much smaller than the twin towers were and typical in Manhattan, a 47 story building would be considered a skyscraper in most cities.

WTC 7 fell at close to free fall speed.  Go on YouTube and watch a video if you haven't seen it.  This building supposedly collapsed because of fired ignited from when the twin towers fell.  WTC 7 collapsed just after 5:00 in the afternoon of September 11, 2001.  It is only the third big building I know of to have ever collapsed like that due to a fire.  The first two happened that morning.

If WTC 7 fell due to explosives, which is what appears to have happened, then that leads to all kinds of questions.  It means the explosives had to have been planted before that morning.  It means that insiders knew an attack was going to happen.  It means that a few elites knew the attacks were coming and did nothing, allowing almost 3,000 people to die.

The only thing that makes me go the other way is that it is hard to believe that a few government elitists could pull off this whole thing.  The whole thing probably could have been done with just a couple of dozen people knowing.  While government as a whole is incompetent, certain individuals in government and connected to government can be intelligent enough to plan something like this.

Regardless, if WTC 7 was taken down by explosives, it leads to hundreds of more questions on what happened and who knew.

I don't push this subject all that often, except for those who show interest.  The crazy thing is, even if people believed that the government was complicit in the 9/11 attacks, they still wouldn't be libertarians.  That is another reason I don't push the conspiracy theories all that often.  While I think it would help liberty in the sense that less people would be as trustful of their government, it still would be far from a victory for a libertarian agenda.

I know socialists/ leftists who believe in these conspiracies.  At the very least, they believe the U.S. government is fighting illegitimate wars and responsible for killing hundreds of thousands of people.  Yet, these same leftists want the government to provide our healthcare.  What?  So you think that the government starts wars and kills people, yet you want these same people that you call murderers to oversee the healthcare system in the name of helping the poor?  If you think there are a bunch of murderous thugs running DC, why would you want them running the healthcare system?  Do they all of a sudden become honest and genuine in what they say about helping the poor?

In conclusion, I would like to know what happened to WTC 7.  If I knew, it would probably lead to a bunch of other questions.  While exposing this would help the general public become more skeptical of government, it also won't magically turn them into libertarians.  I do hope we eventually get answers though and I hope that Americans start withdrawing their consent to be governed.  The sooner the wars and occupations end, the safer we will become.

Thursday, September 8, 2011

Obama's Unemployment Plan

Obama delivered his speech to Congress this evening.  It is called a jobs plan, but it is more of a plan to keep unemployment where it is.  It was mostly typical Obama stuff, with more Keynesian economics.  However, there are a couple of bright spots with his proposal.

Obama is proposing to extend the tax cut on payroll taxes.  In fact, he is even proposing to lower it more.  This is good for anyone working as it will mean more money in their pocket.

As I have said in the past, if Obama really wants to help unemployment, he needs to lower the cost of labor for employers.  This means that it would be far more effective to have a payroll tax cut on the employer's portion.  Well, Obama's advisers must be reading my blog or the website of the Mises Institute.  He proposed this very thing tonight.  He is proposing to lower the employer's portion of the payroll tax and to even eliminate the tax for wages in the form of raises and new hires.  If he really wanted to make this good, he would propose to make it permanent.

The overall plan he delivered was for about $450 billion.  The yearly deficit alone is $1.5 trillion, so even if his proposals were all good, this is not significant enough to make a big difference, particularly with unemployment.  If he came out with a plan to eliminate the entire deficit, then it would make a huge difference in the economy, freeing up capital for the voluntary sector.

Of course, Obama's plan also consists of spending on schools and infrastructure and unemployment benefits.  It is typical Obama and Keynesian economics.  It will just do more damage to the economy in the form of misallocating capital.

Obama said that his plan will be paid for, but he was short on specifics, other than playing his typical class warfare.  He will continue to advocate taxing the rich more and it is unlikely that he will advocate anything in the way of significant spending cuts.

In conclusion, we should be happy about the tax cut portion of Obama's proposal.  If it goes through, you should take your extra money and put it into gold or residential real estate (things that can't be created out of thin air).  Obama's proposal for a tax cut on the employer portion of payroll taxes may have a minimal positive effect on jobs.  Unfortunately, the rest of his garbage more than offsets any good from this.

Wednesday, September 7, 2011

Comments on the Republican Debate

There was a Republican presidential debate on MSNBC this evening and I thought I'd share a few comments about it.

It was Rick Perry's first appearance in a presidential debate and he certainly got the most time.

I thought Ron Paul did a better job in this debate than in the last one, although that is just from my point of view.  While he didn't get to speak a lot on foreign policy (which is where he did best the last time), I thought he did a good job of explaining his libertarian views.  He came across radical, yet reasonable.

I was happy to see that Paul finally went on the offensive a little.  He went after Rick Perry, particularly on his executive order to vaccinate young girls.  Congressman Paul got Governor Perry to essentially admit that he should not have done it through executive order.  A few of the other candidates also got their jabs in at Perry on this issue.  While Perry was strong on some issues (even though I don't believe him), he also took a little beating from the other candidates.  Hopefully he is a little more well known now among Republican voters (and I don't mean that in a positive way for him).

I would still like to see Congressman Paul challenge the other candidates, particularly Bachmann, on spending.  I want him to challenge her and the other candidates on how, specifically, they would balance the budget.  How would they cut $1.5 trillion out of the budget?  This could only be done by drastic cuts in either (or both) the military or so-called entitlement spending.

I also found it interesting that two candidates said they would get rid of Bernanke and Ron Paul wasn't one of the candidates asked the question.  Bernanke took another black eye.  He was put in his position by Bush (with Senate approval) and yet most of the Republicans have turned against him.  This is unprecedented as the Federal Reserve is being partially blamed for some of the problems we have.

I don't think Gingrich, Santorum, Huntsman, or Cain have any real chance at this point.  The race is down to Perry, Romney, Paul, and Bachmann and I'm not even sure about Bachmann.  Ron Paul is actually ahead of her in several national polls at this point.

One more thing to note: Isn't it ironic that Rick Santorum called Ron Paul an isolationist when just about every other candidate besides Paul wants to build a giant fence on the entire southern border of the United States?

Tuesday, September 6, 2011

Interest Rates on Greek Bonds

The interest rate on the two-year government bond for Greece has gone above 50%, as of this writing.  The rate on the one-year Greek bond is over 88%, as of this writing.  This is incredible.  This means that investors think a default is coming.

Usually interest rates are higher for the longer-term bonds.  When interest rates are higher for the shorter-term bonds, this is an inverted yield curve, which can often indicate a recession is coming.

In the case of Greece's bonds, these rates are indicating an imminent default.  A lower rate for a two-year bond versus a one-year bond (at these levels) indicates that the probability of default is the highest within the next year.  With an interest rate of 88%, investors are counting on a default.  If I thought there was "only" a 10% chance of default, I would gladly drop some money down on a bond paying 88% interest.  But obviously with a rate like that, investors are betting there is a high chance of default and that, if it does come, it will be coming shortly.

While Greece does not have an overall rich population as compared to the United States, it is not a third-world country either.  This coming default (unless there is a major bailout) is significant.  And what makes this even more significant is that Greece has been a precursor for the other PIIGS (Portugal, Ireland, Italy, Greece, Spain).  If Italy and Spain end up anywhere near as bad as Greece, then there will be big ramifications.

The problem here is that a lot of this debt is owned by other countries and banks in other countries.  The banks in Europe have a lot of power, just as they do in the U.S. (which we saw with the bailouts in 2008).

From a libertarian standpoint, Greece should default.  There should be no bailouts.  Some complain that Greece would no longer be able to get loans, as if loaning out money at 88% interest is a good deal.  But really, that is the whole point.  If the Greek government can no longer borrow any money, it will either have to abandon the euro and print money like crazy or else it will have to dramatically cut its welfare state.  Hopefully it will choose the latter.

The bottom line is that the Greek government has been running up debt and making promises that couldn't be kept.  They have tried to delay the inevitable and the interest rates on government bonds are indicating that there is no more delay possible.

At an 88% interest rate (who knows what it will be tomorrow), I wouldn't recommend buying any Greek debt right now.  I believe a default is coming very shortly.  Hold on for a wild ride.  We could see the U.S. dollar get a boost from this.  It is harder to say what will happen with gold in the short term.

Monday, September 5, 2011

Labor Day and Unemployment

Since today is Labor Day, it is a great opportunity to talk about unemployment.  Back in March, I had a post discussing unemployment.  I said that in a truly free market system that unemployment would be close to zero.  I did acknowledge that it would not be zero because there will always be some people in between jobs and a very tiny percentage who are unable to work.

After my post, there were a couple of statists who commented.  The first person did not write much and did not write anything intelligent enough to respond to.  The second person wrote more and I thought I would respond, not to convince that person, but just for the benefit of everyone else.

In my original post I wrote that I would be willing to pay someone $1 a day to be my personal assistant.  The commenter wrote, "I would find this funny if you weren't being so serious."  Of course, he left out the part right after that where I said, "I'm sure someone else would be willing to pay someone at least $20 per day to be their assistant."

This person obviously doesn't understand a reductio ad absurdum.  I said "$1 a day" to make a point.  The point is that without a minimum wage, there would be jobs available.  I could use a reductio ad absurdum on the other end of the spectrum too.  If the minimum wage is so great and doesn't cause unemployment, why not make the minimum wage $100 per hour or more?  Why be so stingy?

Next, the commenter says, "Abolishing the minimum wage and other 'restrictions' might create a few more jobs- but the jobs created will be paying very low wages and likely offer a lack of job security."  So he concedes that abolishing the minimum wage "might" create a "few" more jobs.  These are just word games to put spin on the whole thing.  But to his point about the jobs being low wage, he would like us to forget about history.  19th century America, while not perfect, was more free market than virtually anywhere else in history.  During this time, real wages for Americans rose dramatically and Americans saw a dramatic increase in their standard of living.

Next, the commenter writes, "Unemployment benefits also would be abolished in a true Libertarian economy."  Correction - government unemployment benefits would be abolished in a true libertarian economy.  In a free market, there is nothing to stop employers or outside insurers from offering unemployment insurance.

Next, the commenter says, "So what you would get is a situation where a bunch of people are forced to work hard for low wages.  They would have to work their butts off because they could be easily replaced and yet their wages may be so low they could be in poverty."  First, nobody would be "forced" to work for low wages.  Nobody would be forced to do anything in a free market economy.  Right now, you are forced not to take a job at certain wages.  You might want to get a job right now for $7 per hour, but a voluntary contract between you and a potential employer cannot take place because you want to hold a gun to the employer's head.  My scenario is not force.  Your scenario is force.  As for the latter part, you are again ignoring economics and history as real wages go up in a free market environment.

Next, the commenter says, "I also use the word 'might' create jobs- because you do not consider that existing jobs might simply lower wages instead, in order to increase the wages of employers."  This is such a foolish comment.  If this were the case, why don't all employers simply lower all wages right now to the minimum wage?

He concludes this post saying, "Yeah.... that sounds like a GREAT system you've thought up there."  Oh, you mean like the system of the late 19th century that created the greatest growth in history?  How is your system working out right now with over 9% unemployment?

In a second post, the commenter is back.  He says, "Please point to a single real world example where this has been the case, to prove that your claims are backed by solid real world evidence."  First, his request is not necessary to make my point.  All you have to do is study economics a little and use a little rational thought.  While it is impossible to find a real world example because there are no truly free markets, we can still see a correlation.  While there are not really unemployment statistics for 19th century America, it is reasonably well known that unemployment was not really an issue at that time.  And, of course, there were no government unemployment benefits or minimum wages.

For a more modern example, I think it is useful to look at Hong Kong.  Compared to the rest of the planet, Hong Kong has had a relatively free market economy.  From 1982 to 1997, the unemployment rate there averaged only 2.5%.  I think this shows a pretty good example of a relatively free market economy producing very low unemployment rates.

The commenter then says, "Can you please explain how 'Labor laws cause unemployment'."  This is exactly what I have already done.

To wrap up, the commenter writes, "Certainly in the UK, there has been no proven connection between the minimum wage and unemployment.  In fact, unemployment was much higher in the 1980's under the 'free market' policies of Margaret Thatcher and went DOWN after the minimum wage was introduced."  This is more leftist garbage.  The UK was anything but a free market in the 1980's.  Just like Reagan, Thatcher spoke in favor of liberty, but the policies did not usually represent free markets.  This last sentence by the commenter was just a partisan attack on Thatcher without any specifics on her supposed free market policies.

In conclusion, it won't matter what you say for some people.  They will never understand economics properly and they really don't want to understand.  This is what we are dealing with.  Fortunately, I think the majority of people are more logical than this guy.

Saturday, September 3, 2011

Harry Browne on the Economy in 2003

I like to go back in time on occasion and get a dose of Harry Browne.  He is perhaps the person who influenced me the most in my development towards libertarianism.  One article, in particular, that I would like to discuss today is a piece in which he comments on the slow growth of the economy.  This article was written over 8 years ago.

For anyone who follows this blog on a regular basis, you will know that I am an advocate of Harry Browne's permanent portfolio plan as laid out in his book Fail Safe Investing.  In this 2003 article, he mentions this investment advice in his conclusion.

However, I would like to emphasize what he wrote at the beginning of this piece.  Harry Browne points out that "the economy was very strong for the 24 years from 1949 through 1973, but it has become more and more sluggish since then."

He then goes on to say, "From 1949 through 1973, the median income rose an average of 3.1% per year.  Since then the increase has been only 0.2% per year - barely any gain at all.  If the earlier trend has continued, the typical American family's income today would be more than twice as large as it is."  Again, this was written in 2003.

Browne then asks, "What's so special about the year 1973?"  He responds to his own question saying "nothing".  There was no particular thing that happened in 1973 except that the burden of government had finally gotten to a point where the free market economy could not take it any more.  Again, this was written in 2003.

So where are we now?  The federal budget is near $4 trillion per year.  The annual federal deficit is running at about $1.5 trillion.  The overall national debt is close to $15 trillion dollars.  Just to add some perspective, the first trillion dollar budget did not happen until Reagan was in office.  And now we have yearly deficits bigger than the entire budget was in the 1980's.

Since this article was written in 2003, we have seen the continuation of two major wars, plus other minor ones.  We have seen Bush's Medicare prescription drug plan.  We have seen a housing boom and bust.  We have seen the financial meltdown from 2008.  We have seen massive stimulus bills.  We have seen massive bailouts of major corporations, including car companies and banks.  We now have Obamacare and more financial regulations.  We have seen a tripling of the adjusted monetary base in the last 3 years alone.  We currently have unemployment above 9%.

Reading what Harry Browne said in 2003, it is easy to see why the economy is struggling so much now.  In fact, it is almost surprising that it isn't worse.  The government at all levels takes about half of the income from the free market economy.

As long as the government keeps spending and regulating us to such a large degree, this economy will keep struggling.  We might see growth again sometime, but it will be anemic.  Unless there is some new technology or invention that is absolutely life changing, then the only way we will see robust growth again is by drastically reducing government interference.

I think even Harry Browne would be shocked by how out of control the government in DC has become.

On one positive note, I think Harry Browne would be pleasantly surprised by the Ron Paul revolution.  While the government continues to make our lives difficult, people are starting to awaken.  Harry Browne always retained hope that human liberty would flourish, but I think even he would be surprised at how fast things have changed in just the last 5 years.

Ron Paul and his followers, along with the internet, have helped changed the dialogue.  So while the economy continues to look bleak, there is hope and Harry Browne could see that hope before it became more apparent to others.

Thursday, September 1, 2011

The 1930's, the 1970's, and Our Current Economy

We are currently experiencing the worst economy since the 1970's or perhaps since the 1930's and early 1940's.  There are similarities and differences between our current mess and the mess during the Great Depression and the mess of the stagflation of the 1970's.

I find the biggest similarity between now and the era of the Great Depression is in the presidencies.  Herbert Hoover is disliked by historians and they blame his laissez-faire policies for the Great Depression.  Of course, Hoover was in favor of big government and his policies reflected this.  Roosevelt simply continued the policies of Hoover and exacerbated the situation by instituting even more big government.

In much the same way, the media and the establishment refer to Bush as a conservative.  Even many Republicans go along with this.  It is assumed that Bush was pro-free market, as some of his rhetoric may have indicated.  Unfortunately, Bush was and is in favor of big government in almost every arena.  He started two major wars and occupations, he centralized education more, he destroyed civil liberties, he instituted more socialized medicine with his prescription drug plan and he oversaw numerous new regulations on business.  These things are just a few of his big government policies from a long list.  The only positive thing a libertarian could say about Bush is that he reduced the marginal income tax rates.

Despite Bush's abysmal record, the media makes him out to be some kind of free market guy.  This is ridiculous, just the same as the claim for Hoover is ridiculous.  After Bush's massive bailouts of banks and car companies right before he left office, Obama stepped in and upped the ante.  He passed a massive "stimulus" and instituted Obamacare.  He has also presided over more regulations on businesses, some of which haven't even taken effect yet.  Basically, Obama has done the same thing as Roosevelt in that he inherited a mess and he has made things even worse.

One of the biggest differences between now and the Great Depression is that we now have the FDIC.  At the start of the Depression, there was no FDIC and there were a lot of bank runs.  This meant a lot of banks went under and this had a deflationary effect as it reversed the fractional reserve process.  One of the major mistakes that people make in economics today is that they think lower prices were a cause of the Great Depression.  Unfortunately, these people are confusing cause and effect.  The lower prices was probably the only blessing of the Depression as it allowed people to at least afford essential goods.

Bernanke claims to be a student of the Great Depression.  He thinks the Fed is to blame because they did not print enough money (seriously).  He is possibly half right.  The Fed is partly to blame, but only because there was too much money printing in the late 1920's, which caused the artificial boom.  Not many people look at this, except of course for the Austrian economists.

One other thing to note about the Depression is that most people think it ended with the beginning of World War II.  While the war "solved" the unemployment problem, the economy was horrible until after the war ended.  There was major rationing and times were not fun.  It wasn't until the war ended and government actually shrank (one of the few times in history) that the economy recovered and prospered.

As for the 1970's, I think the biggest similarity (and one we will see more of) is that the Keynesians are being proven wrong.  In the world of a Keynesian, there is supposed to be a trade-off of inflation and unemployment.  The Fed can print more and this will reduce unemployment.  If the Fed pulls back, this will cure price inflation but may cause higher unemployment.  The Keynesian theory was proven wrong in the 1970's as there was high unemployment, a stagnant economy, and high price inflation.

The Keynesians are being proven wrong again as all of the monetary inflation and government stimulus has not helped unemployment and the economy continues to struggle.  The only thing we are missing right now in comparison to the 70's is the high price inflation and high interest rates.  Although the monetary inflation has been huge, interest rates and prices have not spiked due to fear.  This fear is with the bankers and with the general public.

As this economic crisis continues, I expect we will see a combination of both periods.  If anything, I think things will look a little more like the 1970's, particularly if and when price inflation turns up.

It is hard to compare all of these eras beyond this because times change so much.  There aren't soup lines like there were during the 30's because now people get food stamps and government checks.  Today's technology also complicates things (in a good way) as communication and the internet allow people to prosper more.  Some things are much cheaper now due to technology (and maybe Walmart), but some essential needs like healthcare are more expensive.

If the government and the Fed continue to be reckless, then things will be worse than the 1970's.  If all of the monetary inflation and reckless spending get under control quickly, then things could get better a lot faster, particularly with today's technology.  There is going to be pain no matter what.  It is just a question of when the American people demand that their government get out of the way.  The quicker that this happens, the less pain there will be.