Monday, October 31, 2011

Japanese Yen Weakens on Announcement

The Japanese yen had been doing quite well in relation to the other major currencies of the world.  Now, the Japanese Ministry of Finance has announced a currency intervention to weaken the yen.  This sent the U.S. dollar higher and sent stocks and gold down today, after doing quite well last week.

Back in September, I had discussed the intervention of the Swiss central bank and its effects on the Swiss franc.  I also predicted the Japanese might follow suit.  While the decision from the Japanese government is not quite the same, it is still an attempt to weaken their own currency.  This shows that all of the major governments and central banks of the world are mercantilist and Keynesian to their core.

This move is just another dumb move by politicians because they fear having a strong currency.  While this may help their exporting industry in the short term, it is a net loss for the citizens of the country in the long run.  What is so bad about having a strong currency?  It makes things more affordable for the people of that country.  And that is supposed to be a bad thing?

It actually amazes me that the Japanese yen was as strong as it was.  The Japanese central bank had done a decent job of resisting too much inflation until now.  The government debt-to-GDP ratio in Japan is over 200%.  This makes Greece look highly solvent in comparison.  The suckers buying Japanese debt have enabled their Keynesian policies to go on far longer than they ever should have.  At some point in the future, it would have been inevitable anyway for the Japanese central bank to start creating lots of new money out of thin air.  That would be the only way out of their mess, unless they were to default outright (unlikely with their culture) or severely cut back spending (unlikely with their culture of Keynesianism).

This is just another example of why we should invest in gold and avoid all of the fiat currencies (other than a portion of the currency you actually use in day-to-day life).  Gold went down a little today due to the strength of the dollar.  But the dollar only strengthened in relation to the other currencies because the others are so bad.  They are all going down in value.  It is just that some go down faster than others.  This is why gold, gold related investments, and other hard assets are still a great investment.

Saturday, October 29, 2011

This Week Began to Change My Mind

This week has shifted my mind.  I am a big advocate of the permanent portfolio as described by Harry Browne.  My mind has not changed on that.  We live in an uncertain world, especially now, and we should invest our money in a way that hedges against that uncertainty.  As Richard Maybury says, the permanent portfolio is not perfect, but it is the best strategy I know of.

With that said, my opinion shifted this week as to what the near-term future holds.  In the last couple of months, I saw more signs that the U.S. economy was heading back into recession.  It's hard to say that we ever came out of a recession, since the government never allowed the necessary correction to take place.  However, it looked as though the second wave was coming with more bad news.

I still think there is major trouble ahead in the economy, but I see it potentially playing out in a different way in the short term.  Last Thursday, the European bigwigs announced that they had a plan to deal with Greece.  They said it would involve a 50% haircut to bondholders.  I wrote about it here.

But what I saw as big news was what happened with the stock market.  The Dow was up over 400 points at one time during that day.  It finished up over 300 points and is now above the 12,000 mark.  Meanwhile, gold has come back to life and is now above $1,700 per ounce.

This is the story that began to change my mind.  It is like stock buyers were looking for an excuse to buy.  Investors do not like the small returns in the bond market.  These returns will not even keep up with price inflation.

We have to remember that the Fed has tripled the money supply in the last 3 years.  While the commercial banks have kept most of this new money as excess reserves with the Fed, it still has its repercussions.  I am wondering if this new money is finding its way into the stock market.  I never would have expected the next bubble to show up in the stock market, but I can't be absolutely sure at this point.  I still think there is a greater likelihood of seeing a bubble in the gold price or in gold stocks.

If there is new money finding its way through the economy, this might delay the effects of the next recession.  We may start to see rising prices come sooner that I thought.  If this new money holds off another recession for now and we start to see a mini-boom, then we could see higher stock prices as well as higher gold prices.

I previously said that I recommend the majority of your money be put into a setup like the permanent portfolio.  That has not changed.  I also said that a speculation strategy could be to take a small portion of your additional investment money and split it between shorting stocks and buying gold/ gold related investments.  I figured that either stocks would go down or gold would go up.  I now see a greater probability that both could go up together.

If you have any short positions in stocks, I would sell some of them if we see a brief pullback in stocks this week.  I would be a little heavier in cash and gold right now rather than having a strong short position in stocks.  I am still not betting that stocks will continue to go up (although there is that exposure in the permanent portfolio), but I am not betting as much that they will go down either.  I am less bearish on the stock market and I see a greater chance that we will see price inflation show its ugly head soon.  If that is the case, gold and gold stocks will do well.

Thursday, October 27, 2011

Agreement Reached on Greek Bonds

The European Union has supposedly reached a deal on Greek government bonds.  The announcement sent stocks soaring in the United States.  The "leaders" of France and Germany, along with the rich bankers, have reached this deal and come to the rescue again.  I'm guessing the rich bankers agreed to this deal because a 50% haircut looked better than a 100% haircut.

This will be done at the expense of German taxpayers.  It will eventually be at the expense of anyone who holds euros.  It looks like even China will be getting involved.  The stupidity of the Chinese government astounds me.  I guess it isn't good enough that they keep buying U.S. government debt.  They figured they would find another place even more insolvent and buy there too.  Of course, we also don't know if the Federal Reserve is playing any role, although there is a lot of speculation on the internet that QE2's main purpose earlier this year was to capitalize the European banks.

This whole so-called agreement just kicks the can down the road.  Not only that, but it ultimately makes the problem worse as it takes more money out of the hands of productive individuals and it throws it away for more Greek spending.  It is a giant misallocation of resources.

This agreement to cut the Greek bond values by 50% will not solve anything in the long run.  The interest on debt is only one expenditure of the Greek government.  The problem is that the government there has created a massive welfare state and has made promises that cannot ultimately be delivered.

Imagine an individual with $50,000 in credit card debt.  You bail him out and pay off half of his debt for him, which reduces it to $25,000.  That would be fine if the individual were working to pay off the rest of the debt.  But what if the individual kept spending more than he takes in every month.  Paying off half of his credit card debt would ease the burden on him temporarily by reducing his credit card payments.  But if he is still running a deficit, even without paying any interest on debt, then he will end up being back where he was before.  The individual will end up back in debt with $50,000 in credit card balances.  Meanwhile, you will have wasted $25,000 with your original bailout.

Greece has a spending problem.  To be more specific, the Greek government has a spending problem.  It has made big promises that cannot be fulfilled.  There are a high percentage of Greek citizens who are living off the government dole.  They work for the government.  They retire early with big government pensions.  Their game is coming to an end.  They are going to get one last bailout, coming mostly from Germany.  They will keep asking for the impossible.  The government there has created a massive welfare state and a welfare mentality.

While I don't have any specific numbers, I have heard that some rich people are getting out of Greece.  This would make sense.  There is no future there.  The parasites will keep trying to suck blood out of their hosts until there is none left.  I would recommend for anyone living in Greece to get out.  There is no future there, unless there is a dramatic turnaround in the mentality of the general population.

The U.S. is in trouble too, along with a whole bunch of other places.  The one good thing about the U.S. is that the welfare mentality is not as strong.  There is a welfare/ warfare state in the U.S.  In Greece, it is just a welfare state.  The U.S. can cut its warfare state.  The welfare state is not as far advanced, even with Social Security and Medicare.

It's possible there will be another bailout of Greece down the road.  I think it would involve money creation by the European Central Bank.  But there is a limit to all of this.  Eventually, I think they will let Greece go.  The citizens of Germany and other countries will revolt.  Greece will probably drop out of the EU.  Perhaps the whole European Union will break apart.

The Greek welfare recipients can keep asking for a free lunch, but the laws of economics will eventually end it.  The German taxpayers will get tired of buying lunch for others.  And the Chinese will run out of money when their own problems become more obvious.

Wednesday, October 26, 2011

Ron Paul on Social Security

Ron Paul has released his proposed plan to cut $1 trillion from the federal budget in the first year, if he were to win the presidency.  His plan claims to balance the budget within 3 years.

There are a lot of cuts in Paul's proposed budget, including ending the wars and mostly eliminating 5 departments.  One thing that Paul's plan does not change is so-called entitlement spending.  It does not address Social Security and Medicare, in the sense that it keeps the status quo with these programs.

For any senior citizen who cares deeply about receiving his Social Security checks, Ron Paul should be his man.  While Ron Paul has said that these entitlement programs are unconstitutional and should never have been started, he has also explicitly said that he does not plan to eliminate them and pull the rug out from senior citizens who have been promised these benefits.

Ron Paul is the only major candidate (if you don't count Gary Johnson) who has proposed significant spending cuts that are specific.  He is the only one (besides Gary Johnson) who comes anywhere close to a balanced budget.  Because of this, he is the only one who could actually save Social Security in a sense.  If we get any of the other candidates, then not much will change and the fiscal situation of the U.S. government will continue over a cliff.  Senior citizens will eventually be devastated when there is no money to pay out Social Security.

Of course, the Fed can always create new money out of thin air so that the Social Security checks can keep going out.  But then there will be more tampering with the CPI figures so that the checks do not reflect the actual inflation.  If the government uses the Fed to create new money to pay for Social Security, then this will be a hidden default.  The Social Security checks will be worth less in real terms.  That is already what is happening now.  So, in a sense, Ron Paul is really the only one who will save senior citizens from having a big and sudden downgrade in their standard of living.

Ron Paul has been questioned about so-called entitlement spending.  He says that he favors reform, but that his near-term spending plan does not address that.  He says that he would like to give the option to anyone under the age of 25 to opt out.  He acknowledges that he gets objections from people who are over 25 who say they would like to opt out.

I have a great deal of admiration for Ron Paul and support him.  But there is a "but" on this one.  I don't agree with him on this opting out for those under 25.  Just as he acknowledged, why not let those over 25 opt out?  Fiscally speaking, it actually makes more sense to do this.

If Paul's plan is to make good on the promises made to those who are currently retired or soon to be of retirement age, then money has to come from somewhere to pay those people.  The Social Security trust fund is made up of IOUs.  There is no actual money in there.  If you let people who are under 25 opt out, then that will be less money collected to pay for the current recipients.  Those under 25 will still be paying for current recipients, although maybe not as much.  There would be more dipping into the general fund, which would spread it around to everyone.  Those over 25 and working would actually be getting taxed more to pay current recipients.

If you let those under 25 opt out, you don't get the financial benefit until over 40 years from now when they don't get to collect anything.  Meanwhile, tax collections will be less as people opt out.  Wouldn't it be better to let someone opt out who is 50 years old?  That person has already paid into the system for about 30 years and he might be willing to give up all of his so-called benefits if he doesn't have to pay that payroll tax anymore.  You'd be surprised at how many people would take that deal.  If I were 50, I'd rather keep my money now than get some promise for 15 or 20 years in the future.

I am all for letting people opt out of Social Security, but it should be offered to everyone.  But that does not help solve the fiscal mess that we are in now.  The money paid to current recipients still has to come from somewhere.

There is no easy way out of this.  The best plan I know of is what was presented by Harry Browne when he was running for president.  He said we should sell off government assets and pay off the Social Security recipients.  The federal government owns a lot of land (some with oil) and a lot of buildings.  I think the federal government needs to go through a bankruptcy much the same way a corporation would.  Let's sell off all of the good assets and pay the creditors what we can.  In this case, let's not reorganize this bankrupt entity.  Let's keep it out of business for good.

Tuesday, October 25, 2011

Rick Perry's Flat Tax Plan and Spending Plan

Rick Perry has come out with his own tax plan proposal.  He wants to have a 20% flat income tax with deductions.  Deductions would include $12,500 for each individual in the family.  That would mean that a family of four would pay no income tax on the first $50,000 of earnings.

Perry has also said that you can stick with the current tax plan in place and pay taxes that way if it is more beneficial to you.  As a libertarian, I like choice.  I would rather the choices be much better, but I suppose that two choices are better than one.  Without knowing the details, because you would have a choice of the current tax system and his flat tax proposal, I would vote "yes" on this plan if I were in Congress, although not with a lot of excitement.

Now let's get to Rick Perry's plan to drastically cut spending.  Oh wait, there is none?  Like so many politicians, he wants to balance the budget in about 10 years.  Except Perry wants to do it by 2020, which would make it 9 years.  I guess that might make him 10% better than the average politician.  Or maybe he is lying 10% more than the average politician, if that is possible.

That is the problem here.  We can shuffle around the tax code all day long here with a 20% flat tax or some 9-9-9 plan that raises taxes on the middle class.  But our situation will not be vastly improved until something is done about spending.

The federal government is spending nearly $4 trillion per year.  About 40% of this spending is from borrowed money, whether it is from the Fed, China, Japan, or individual investors.

If we are going to have a healthy economy that has sustainable growth, the government has to drastically cut spending.  Aside from Gary Johnson who is polling at 1% or less, Ron Paul is the only Republican presidential candidate who has a plan to cut spending significantly.  He is proposing a cut of $1 trillion in the first year.

As long as the government keeps spending nearly $4 trillion a year, it won't matter much what the tax code looks like.  If the government were to cut spending to less than $2.5 trillion to equal tax collections, the economy would benefit quite significantly.  That would mean that the government would not have to borrow any further money (not counting debt rollovers).  That would mean an additional $1.5 trillion in the free market economy.  That would mean a great deal for businesses and individuals trying to save and invest.

It is easy for these candidates to propose tax plans.  I could propose a plan to eliminate all taxes and we could just borrow $4 trillion a year.  The hard part is to identify real spending cuts.  These candidates are trying to play both sides.  They don't want to upset anyone with real proposed spending cuts.  I have heard Michele Bachmann say in the past that she would like to get rid of the Department of Education.  That is a small start, but it isn't all that significant with the overall budget.  Plus, I'm not really sure if she means it.

Except for Ron Paul, none of the major candidates can get anywhere close to a balanced budget.  So they will keep proposing their tax plans that take your money out of a different pocket.

It is not the way the government is taxing me that disturbs me.  It is how much they are taking and how much they are spending.

Monday, October 24, 2011

Permanent Portfolio vs. PRPFX

I am a huge advocate of investing in the permanent portfolio plan as outlined by Harry Browne in his small book called Fail Safe Investing.  While I would encourage people to pick up a copy of the book if you haven't read it, I'll give a quick summary of the portfolio.

The permanent portfolio is an investment strategy where you allocate your funds as follows:
25% in stocks
25% in long-term government bonds
25% in gold
25% in cash or cash equivalents

The allocation does not have to be exactly 25% each, but it should stay fairly close.  If one of the investments goes up or down quite a bit and starts to get away from the 25% target, then the portfolio should be rebalanced.  For instance, if stocks go up quite a bit and the stock portion of your permanent portfolio is now 35%, you should sell some off to get back to the 25% allocation.  The 10% you have from selling off the stocks should be used to buy the other assets that fell below 25%.

This strategy is designed to perform well (or at least not too badly) in any economic environment.  During a time of prosperity, stocks should do well.  During an inflationary environment, gold should do well (and perhaps stocks to a lesser extent).  During deflation, bonds should do well (along with cash).  In a recession, it is possible that nothing does well except for cash.  However, recessions are usually short-lived and will turn into inflation, deflation, or prosperity.

I recommend putting at least half of your investment money into a setup like the permanent portfolio.  It really should be much more than half unless you are a big risk taker.  While the permanent portfolio is far from perfect, I really don't know of any other buy and hold strategy that is as safe.  Even holding cash is not safe because of the risk of inflation and a depreciating currency.

There is an alternative to setting up your own permanent portfolio.  There is a mutual fund that somewhat mimics it.  The symbol is PRPFX.

I still prefer Harry Browne's permanent portfolio to PRPFX.  The mutual fund takes some extra chances, in my view unnecessarily.  There is a small portion in silver, which is more volatile than gold.  The fund also invests in individual stocks.  Even though the stocks make up a very small percentage, I think it should just buy a broad market index fund and stop picking stocks.

The other thing I don't like about PRPFX is that it invests approximately 10% in Swiss francs.  This makes no sense for someone not living in Switzerland.  The Swiss franc has been thought of as a strong currency, but to me it is playing unnecessary games.

The permanent portfolio invests in 25% gold to protect against a falling dollar.  If you are an American, living in the U.S., then this 25% gold allocation is there to protect you against dollar devaluation.  You don't need another currency, particularly a fiat currency.

In early September of this year, the Swiss central bank announced a cap on their currency in relation to the euro.  It has essentially pegged the franc to the euro.  On that day, the Swiss franc fell almost 10%.  That means that PRPFX would have lost 1% on that day alone, just from the Swiss franc portion of its holdings.

I still think that PRPFX is the best mutual fund you can buy for safety and growth.  If you can set up your own permanent portfolio, do it.  However, some people have limitations.  If you have a 401k, you may be able to get a brokerage link account that allows you to invest in mutual funds.  If you can do this, I would suggest you use it and put most of your money in PRPFX.  While I have my criticisms of the fund, it beats the alternatives in most cases.

Saturday, October 22, 2011

State Nullification

I attended a seminar today called Nullify Now.  There were a lot of great speakers.  The last two and most notable speakers were Jack Hunter (the Southern Avenger) and Tom Woods.  They are both relatively young and very accomplished.

One thing that stood out to me was their incredible ability to speak, along with some of the other speakers.  Like so many things in life, I think the ability to speak in front of a crowd is a combination of natural talent, training, and practicing.  It helps that both Hunter and Woods are brilliant and well-versed in what they speak about.

There were many different issues discussed, but the main theme of the day was state nullification.  The tenth amendment (part of the Bill of Rights) states that those powers not specifically delegated to the federal government in the Constitution are to be left to the states or the people.  Instead of relying on the Supreme Court and other courts which are a part of the federal government (why would they rule against themselves?), state nullification consists of the states telling the federal government that their law is unconstitutional and thus null and void.  This could be for anything from Obamacare to medical marijuana.

There was a significant crowd there and it was made up of mostly libertarians and conservatives with libertarian leanings.  While there were certainly some radical libertarians in the crowd, I would say overall that the speakers tended to be more radical than many in their audience.  However, most of them were still well received.

One of the things that Tom Woods brought up was about preaching to the choir.  He noted that preaching to the choir is important.  There were a lot of people in that room that needed to hear the message.  If we can get all of the people who call themselves libertarians or claim to have libertarian leanings to actually educate themselves enough to be highly principled libertarians, then the government would be at least half the size as it is now.  These are all people who talk to friends and families about politics.  They tend to be on the right track, but they don't have the complete package and they don't always have the most principled answers.

While there was a lot of pessimism in the room (one-world government, collapse of the dollar, etc.), I have reason to be optimistic.  Just the fact that there were well over 100 people attending an all-day seminar on a Saturday about state nullification is enough to be optimistic.

While I think America would be many times better off if the federal government followed the Constitution, I am not one who goes around boasting about the Constitution.  I am more of an Articles of Confederation guy, but that is a topic for another day.  With that said, I like the idea of state nullification. I like decentralization.  We need to use different tactics to gain liberty and reduce government, and state nullification is one of those methods.

If you ever get the chance to see Tom Woods or Jack Hunter speak, don't miss it.

Thursday, October 20, 2011

Debt in an Inflationary Environment

I have previously written about the benefits of buying a house right now, if you are in the right situation.  One of the reasons I give is that you can take a fixed rate loan for 30 years and pay it back with depreciating money.  Your last payment in 30 years might be the equivalent of a nice dinner (if we are lucky).

With that said, I don't want anyone to take that as a green light to run up debt.  First, the future is very uncertain and, while I am predicting that we will see some high price inflation (10% or more), this is no guarantee.  It is impossible to predict exactly how the Fed will operate and how the politicians in DC will operate.  It is also impossible to predict how over 300 million Americans will act.

Even if we do get somewhat significant price inflation, this does not justify running up debt, particularly if it doesn't involve a house or a reasonable investment/ business.

Student loan debt and credit card debt are the worst.  You can not clear away student loan debt with bankruptcy.  Some might consider this an investment, but that is a big leap of faith right now, especially with college graduates having difficulty finding good jobs.

Credit card debt is horrible debt to have, unless you got there because of an emergency situation.  Sometimes you can get low teaser rates, but the rates end up being high.  If we end up with 10% price inflation and you have credit card debt with an interest rate of 18%, tell me how that is beneficial.

Cars are a little tougher.  Most people need a car, particularly to get to work.  Unless you live somewhere like Manhattan, then a car is probably a necessity.  In this case, it is obviously important to have one, even if it means taking out a loan.  However, if you have to take out a loan, it should be based on need and not want.  You don't need a $40,000 Acura to get to your job.

Debt is usually a horrible burden on people.  It does not give you financial freedom.  Instead, it puts you in financial handcuffs.  Even if we end up getting high price inflation, it is unlikely to end up in hyperinflation.  This means there will eventually be a severe correction.  This will mean deleveraging.  It means that anyone with a big debt burden will be in trouble.

Even as far as houses go, whether it is your primary residence or an investment property, it should be a goal to pay it off.  You can take advantage of the low interest rates now, but it doesn't mean you should always have a loan.

Stay out of as much debt as possible.  You will be happier for it.

Wednesday, October 19, 2011

October 2011 - Gold and Stocks

Both the price of gold and stocks have been trading in a fairly narrow range lately.  Gold has been in the $1,600  to $1,700 range since its big fall from the all-time highs above $1,900.  Meanwhile, just as it looks like stocks are headed way up or way down, they reverse and go the other way.

The Dow has been between 10,000 and 12,000 for a while now.  But the remarkable thing is that this range has been maintained with huge volatility.  That is a big range for sure, but it isn't when you consider that a 300 or 400 point move in one day is not really considered big news anymore because it is happening so frequently.

The other interesting thing right now is the relationship between gold and stocks.  They seem to be somewhat correlated right now.  We have seen this in the past, but then the correlation broke off for a while.  The correlation will probably break again, but it is hard to say if it will be in weeks or in months.

The biggest threat to the gold price right now is the fear of another recession.  I am still bullish on gold in the longer term because of the economic mess that DC has created, but the near term is very hard to predict at this time.

I am in safety mode and I suggest the same to everyone else.  You should have at least half, but probably most, of your investments in a setup like the permanent portfolio as described by Harry Browne.  For speculation, I would add a little bit in the way of gold related investments and a very small short position in stocks.  Also, it wouldn't hurt to increase your cash position slightly above the recommended 25%.

Again, we should be in safety mode.  We just need to protect the money we have right now and wait for the opportunities.  If you feel your position in gold and gold related investments is low right now, this is a good time to buy.  The price may go lower, but why wait?  You would be better off buying now in the $1,600 range than you would have been buying a month ago above $1,900.

Tuesday, October 18, 2011

Republican Debate in Las Vegas

The Republican debate in Las Vegas just wrapped up.  It was held at the Venetian hotel.  As a side note, for anyone visiting Vegas, the Venetian is a great place to stay.

This debate was hosted by CNN.  The moderator was Anderson Cooper.  I never thought I'd say this, but watching CNN was great compared to the disaster that Bloomberg did last week.  At least Cooper made an attempt to be somewhat fair with the time and he did not show his bias like the questioners at the last debate.

The audience seemed to favor Mitt Romney and disliked Rick Perry.  I don't know if this was rigged at all, but it almost seemed that way.  When the two were battling it out and talking over each other, the crowd clearly favored Romney and even booed Perry a few times.

The issue of illegal immigration came up and there is this strong opinion by most of the candidates that illegal immigration is such a horrible thing.  They characterize these people as criminals (as if every law is just), when a lot of these immigrants are just trying to find work and provide for their families.

Perry attacked Romney for hiring illegal immigrants.  This is absolutely ridiculous.  Romney paid a lawn service company to work on his lawn and that company had illegal immigrants.  Does this mean we are now responsible for knowing who the employees are for every company we do business with, according to Perry?  If I go and buy an iPod at Best Buy, do I have to make sure the person selling it to me is here legally?  If we find out that Perry did business with a firm that hired a child molester, then I guess we can say that Perry hires child molesters.

There was one funny thing in that exchange though.  Romney had a slip of the tongue where he accidentally told the truth.  He said he went to the lawn company and said they can't have illegal immigrants because he was planning on running for political office.  So, in other words, he was taking what he saw as the morally correct stand because he was running for political office.  If he hadn't been running for office, I guess he wouldn't have cared.

I enjoyed Rick Santorum again tonight.  He is horrendous on foreign policy, civil liberties, social issues, and even some economic issues.  However, he attacked some of the other candidates right where it hurt. He attacked Romney for Romneycare.  He attacked Romney, Cain, and Perry for the bank bailouts.  He was effective in taking them down a notch.

Michele Bachmann was ok in some areas and weak in others.  Hey Michele, most people don't really care about you wanting to make English the official language.  I am getting along just fine with others in my communications without a government law.  I wonder if anybody out there thinks, "oh, if Michele Bachmann would only make English the official language in this country, then maybe more people would read my blog."

Perhaps I am biased here, but I thought Ron Paul did an excellent job tonight.  He was quite effective on all of the questions and he is starting to hammer away on the fact that the other candidates do not have specific plans to significantly cut the federal budget.  Romney made an attempt to offer a few specifics.  I only wish that Paul had said that even if Romney's proposed cuts were enacted, it would not amount to much.

Overall, I think Rick Perry was the big loser tonight.  I am still not counting him out because he has a lot of money.  I think one of his problems is that he reminds people of George W. Bush with his Texas accent and his mannerisms.

Ron Paul keeps chipping away with his pro-liberty message.  He isn't going to have a dramatic rise in the polls like Cain did.  But he will gain a few more converts each day.  We will see if he can get his national poll numbers up to about 15% in the next few weeks.  Paul has a lot of money and there may be a lot more coming on October 19 (hours away as I write this) as there is a big money bomb happening.

Monday, October 17, 2011

Political Update for October 2011

I usually wouldn't spend half as much time focusing on the presidential election, but having a candidate like Ron Paul makes it far more interesting for libertarians to watch.

A few months ago, I was predicting that the Republican nomination was down to 4 players: Romney, Perry, Bachmann, and Paul.  With that said, I must have sensed that Herman Cain still had some hope because I was attacking him before he became the talk of the town.  I have also attacked his 9-9-9 plan more recently.

While Cain's chances have certainly improved, I still don't see a high probability of Cain being the Republican nominee, despite his current status as a front runner.

Ever since Michele Bachmann barely beat out Ron Paul in the Iowa straw poll, she has taken a beating in the polls.  She is in the single digits in most national polls now.  She is down, but I am not counting her out yet.  She seems to be a bit better than most of the other candidates on economics, but she still does not offer much in the way of specifics.  My biggest fear about Bachmann is that she turns out to be like Reagan where she speaks libertarian rhetoric on economic issues, but her policies don't reflect it.

Newt Gingrich has had a bump in the polls.  He is certainly a good performer in the debates and a lot of conservatives like him, even though they should know better after his record as Speaker of the House.  I still think it is highly unlikely that Gingrich will get the nomination because most people, even Republicans, sense that he could not beat Obama in the general election.  I think this is one thing where most everyone is right in that he wouldn't beat Obama.

I don't see Huntsman, Santorum, or Gary Johnson being major players at this point.

That leaves us with Romney, Perry, and Paul.  Romney is the establishment's choice.  He is pro big government across the board, but he will say what he needs to in order to appease the conservative base, or at least not anger them too much.  Romney is the founder of Obamacare.  If there is one thing that virtually all Republicans agree on, it is their hatred of Obamacare.  And yet the nominee for the party is going to be the inventor of Obamacare?

I am not saying that Romney can't get the nomination.  He is not being attacked by Sean Hannity or any of the other popular conservatives with big influence.  These people might be afraid to attack him in case he does get the nomination.  Another good possibility is that they really don't mind his message too much.  Regardless, most Tea Party people are not Romney supporters.  They see this as a fight for the Republican Party and a Romney nomination would mean a loss for the Tea Party.

A lot of people are starting to write off Rick Perry.  I am not.  The fundraising numbers are coming out for the third quarter and Romney and Perry have the biggest numbers by far.  Ron Paul is in a distant third.  While Romney is the choice of the establishment, Perry is probably the next choice (not counting Herman Cain).  Perry has some big backers and I would not be surprised to see him make another surge in the polls.  Regardless, don't count him out.  I actually would put him as the favorite to win the nomination right now, despite his poor showings in the last month.

If there is one thing to say about Ron Paul, it is that he does not lose many supporters.  His support stays steady.  Nationally, he is polling in the low double digits.  It varies from poll to poll, but I would put him at about 12% right now.  Remember that you don't have to win over a majority.

I still put Paul's chances fairly low at getting the nomination, only because the Republicans are too in love with war.  Paul has definitely changed some minds on this issue and others, but it is hard to say if it is enough at this point.  The educational outreach from his campaign has been phenomenal and it will make a major difference in years to come.

I think the only way for Ron Paul to get the Republican nomination is for a major event to happen in the near future.  If there is another major economic crisis (which isn't far fetched at this point), then perhaps we could see a change in the tides.  Again, the good news is that he will continue to have a solid 10% that will back him no matter what.  This means he can really only go up in the polls.

There are more debates coming and the primaries are moving up.  There should be a lot of action in the next few months.  Libertarians should enjoy the moment, regardless of the outcome.  Did you ever think you would hear Austrian economics mentioned so much on national television?

Saturday, October 15, 2011

Possibilities for the American Economy in the Near Future

One thing that Austrian economics can teach us is that the future is uncertain.  In order to understand economics at all, you have to understand the importance of human action.  Human beings have free will.  They will act according to their personality, their needs and wants, and their environment.  It is impossible to predict exactly how billions of people on this planet will act.

Based on economics, history, and our understanding of what generally motivates people, we can take some good guesses at what the future will look like, at least in an approximate way.

The future of the American economy will depend on the actions of Obama, Bernanke, their advisors, and the federal government in general.  It will also depend on foreign governments.  It will also depend on the American people and popular opinion.

With all of that said, let's look at some of the possibilities that America is facing economically.

The Federal Reserve has tripled the money supply in the last 3 years.  Most of this new money is with commercial banks, most of which is parked at the Fed as excess reserves earning the banks .25% interest.  The government is involved in military conflicts all over the place.  The national debt is about as high as the yearly GDP and the annual deficits are well over one trillion dollars.  There was a big correction that showed up in 2008, but the government has prevented this correction from fully taking place.

The previous artificial boom led to a misallocation of resources.  For example, there were too many resources (labor and material) going towards new housing.  This became obvious in the last few years and this is why unemployment tends to be higher in the housing and construction business.

I see only two ways of returning to real and significant growth.  One way is that the government could get out of the way and we could allow the correction to happen.  The second way is that we could see great technological advances, even in the face of massive government spending and regulations.

While I am optimistic for the future in the long run, I am less optimistic that the government will shrink in the next few years.  The government will eventually be forced to cut back when it faces the threat of hyperinflation or bankruptcy.

I think one likely scenario is that we keep bouncing in and out of recessions.  It is looking likely that the economy is turning down again.  If this happens, we could see another round of "stimulus" from the government and/or the Fed.  It would not surprise me to see high price inflation at some point, although, as I have said before, I don't expect hyperinflation.  Eventually, the Fed would have to pull back as it did in the late 1970's and early 1980's.  This would cause a huge correction.

I think another scenario that is possible and even more likely than I originally thought, is that the economy muddles along in stagnant mode.  Due to the internet and the Ron Paul revolution, the Fed cannot get away with things like they did in the past.  This makes severe price inflation a little less likely.  Perhaps we will see something in America that resembles Japan of the last 20 years.  This would be a scenario where the government will not allow the correction to happen all at once.  It is the equivalent of pulling a band-aid off slowly.

Another possible scenario, but one that I see as unlikely right now, is that we have another recession (or a continuation of the recession, depending on your point of view) and the government actually does little to stop it.  The only problem I see with this is that the politicians in DC are still spending massive amounts of money.  Most of the spending is on the military and entitlements.  I just don't see this spending coming under control unless the politicians are forced to, either by voter opinion or by the laws of economics.

There is one thing we can be certain about.  As long as the government keeps running huge deficits and keeps interfering with the economy, then a genuine recovery will be difficult.  The government is sucking up resources from the free market economy and it is misallocating these resources at best or destroying these resources at worst.

Barring any revolutionary technology that bursts on to the scene, the government is going to have to loosen its grip for the American economy to get back to significant growth.  People are feeling squeezed right now and it all comes down to government spending and regulation.

Thursday, October 13, 2011

Consumer Prices and Asset Prices

Monetary inflation causes several things to happen.  First, it redistributes wealth.  The government benefits at the expense of the average citizen.  Debtors benefit at the expense of the savers.  The list could go on, but it rearranges the wealth based on debts and based on who receives the new money early on.

Second, monetary inflation can cause a boom/bust cycle, particularly when the interest rates are distorted.  There is a misallocation of resources and times seem especially good during the boom phase.  When the misallocations are revealed and the lack of real savings is revealed, then the boom turns to a bust.

One thing monetary inflation doesn't do is change the amount of wealth.  However, it does cause future wealth to be less than it would have been due to the misallocation of resources.

Monetary inflation eventually translates into higher prices.  This does not happen immediately.  The Fed could create a trillion dollars out of thin air and release it into the economy tomorrow morning.  This is not to say that your lunch will be more expensive than the day before, particularly if the Fed move were not publicly announced.  It would take a little time for the money to circulate through and increase prices.

There are other factors in prices.  There is the demand for money (or velocity).  This is how quickly money changes hands.  If there is a high demand for money (lower spending), then the lower velocity will keep prices lower than they would have been.  In addition, even in an environment with a stable money supply, individual prices will always fluctuate based on the supply and demand of the good.

One thing that is not well understood by many is that price inflation is not uniform.  If the central bank inflates the money supply and the overall price level goes up, certain prices will go up more than others.  The false boom that occurs from monetary inflation will find hot spots and drive some prices up higher than others.  We can see this by looking at past bubbles, such as the tech stock bubble and the housing bubble.

When we talk about price inflation, we often talk about consumer goods such as food and clothing.  But it is actually asset prices that tend to go up higher in an inflationary environment.  For the sake of this discussion, when I say assets, I am referring to things that are commonly bought and sold and are often sold for a higher price.  For example, asset prices that go up might be stocks, real estate, or gold.

We can see this in China now.  Consumer prices are up.  However, real estate prices are flying high.  Real estate prices have gone up more than food and clothing.  Real estate is a bubble in China and it will pop like all other bubbles in history.

So while I am bearish on the American stock market in many respects, I also see the potential for higher stock prices.  There has been a lot of monetary inflation in the last 3 years and it has not shown up much in consumer prices.  Real estate is not looking like a hot spot right now.  There is definitely potential for stocks to make a run if there is not a recession in the near future.  There is also a lot of potential for gold and oil.

While I expect food prices to go up, I expect some other prices to rise at a greater rate.

One thing I don't expect to rise any time soon is wages.

Wednesday, October 12, 2011

Limbaugh on Cain and 9-9-9

I can't get away from this political stuff for now, but I promise I will comment on any major news in the economic/ investment world if and when it comes.

I heard a small part of Rush Limbaugh's radio show today.  I don't usually listen.  He mostly drives me nuts.  He is wrong on many topics including foreign policy, civil liberties, and Ron Paul.  However, he has usually seemed to be decent on economic issues.

Well, today, all of that went out the window.  I didn't realize he was so ignorant on economic issues as well.  I don't have an exact transcript of what was said (I'm sure it's on the internet somewhere), but I can pretty well paraphrase what he said.

Limbaugh was talking about Cain's 9-9-9 plan.  This plan, which I have criticized more than once in the past, was a big topic in the debate on Tuesday night.  Cain's plan is to institute a 9% corporate tax, a 9% income tax, and a 9% national sales tax.

Cain and his plan were criticized during the debate, particularly by Bachmann and Santorum, although I'm sure Ron Paul would have been highly critical too had he been given more of an opportunity to speak.  But one of the criticisms of his plan is that politicians in the future could raise the 9% income tax rate.

So Limbaugh brings up this subject on his radio show and he basically says that it is ridiculous to criticize Cain's plan in this way because you could say that about any plan to cut taxes.  He said something to the effect of, "forget the sales tax portion for a minute."  Then he said that you could never support a plan for a flat tax or lower rate with this logic because there is always a chance that it could be raised again in the future.

Do you see where the problem is here?  The problem is his statement to forget about the sales tax portion of the 9-9-9 plan for a minute.  This is a joke.  Excuse me Rush, but that is part of the package plan, so let's not forget about it for a minute.

If Cain's plan were simply to reduce the corporate tax rate to 9% and make the income tax a flat 9% and get rid of all of the other taxes with no national sales tax, then I would fully support this plan.  As a radical libertarian, I would rather these rates go to zero, but I recognize that a 9-9 plan without the national sales tax would be a vast improvement over what we have now.

But Limbaugh is either ignorant or he thinks his listeners are ignorant (which might be partially true).  He pretends that the massive national sales tax is not a part of the plan and analyzes the other part in a vacuum.  Bachmann and Santorum were absolutely correct in their criticisms of Cain's plan.  If Cain's plan passed, future politicians could raise the rates.  They could make the income tax rate progressive again.  They could make the income tax rates back to where they are today.  But here is the problem el rushbo: WE WOULD HAVE A NATIONAL SALES TAX TOO.

I have absolutely no use for Rush Limbaugh any more.  He was an apologist for George W. Bush and I'm sure he would be the same way if Romney, Cain, or Perry were president.  The only reason I will listen to him at all in the future is just to know what kind of ignorant things millions of people are hearing out there.

Tuesday, October 11, 2011

Republican Debate on Bloomberg

There was a Republican presidential debate on Bloomberg and its main focus was on economic issues.  I'm guessing it was not as highly watched as other debates, particularly because not as many households get the channel on cable.

I thought the people asking the questions were a bunch of Keynesians.  Some of their initial questions were decent, but you could get a sense of their attitude on the follow-up questions and they didn't do a good job of hiding their bias in favor of big government.

Ron Paul did not get much time to speak, but I am still happy with how the debate turned out.  It really exposed some of the candidates and showed that a majority at that table are in favor of big government.

From a libertarian perspective, Michele Bachmann was decent as usual.  I hate her foreign policy (which was not discussed) and I don't really trust her, but she definitely speaks in favor of a free market and smaller government on economic issues.  However, she is still short on specifics of where she would cut government spending and I think someone needs to challenge her on that.

Rick Santorum was bearable in the debate, probably because most of the discussion was on the economy and not on foreign policy or social issues.  I was happy to hear Santorum point out that four people at the table supported the bank bailouts in 2008.  The four people were Huntsman, Perry, Romney, and Cain.

Cain and Romney both talked about how they supported the bailouts but don't agree with the way it was implemented.  That exposes both of them right there.  It basically shows that they are either naive or they are lying.

When the candidates were allowed to ask someone else a question, I thought Ron Paul should have asked Cain what specific cuts in spending he recommends.  With that said, Paul's question about the Federal Reserve was very good, if only to expose the fact that Cain worked for the Federal Reserve and is not some political outsider as he claims to be.

I was also happy to hear Santorum attack Cain's 9-9-9 plan.  Santorum pointed out that it opens up another avenue to raise taxes.  Cain tried to argue that it won't happen and one of his reasons was because he will be president.  But isn't this always one of the problems that we face?  One administration implements these new programs and these new powers and then the next administration ups the ante and takes advantage of the new power.  Does Cain not understand that there will be more presidents in the future and that the 9% income tax could easily get raised while leaving in place the national sales tax?

As I've discussed before, Cain's 9-9-9 plan is a massive tax hike on the middle class and it does nothing to cut the size and scope of government.  Cain is nothing close to a libertarian and all genuine libertarians should run away from this man.

Romney was questioned about his calls to challenge China on its "currency manipulation".  Legislation on this topic just passed the Senate and it would cause a trade war.  One of the moronic interviewers asked a question about this and said that it would lower the price of goods going into the U.S., as if this were a horrible thing.  Does it ever occur to these people that lower prices might actually be a benefit to Americans?

Overall, the debate was fairly tame.  It probably won't change a lot of minds, but on the margin it might make a difference.  There should be a few more people aware now that Romney and Cain are both lovers of big government and any liberty minded person should hope that they are soundly defeated.  Of course, the only consistent and pro-liberty candidate continues to be Ron Paul.

Monday, October 10, 2011

Greek Debt

Last month, I wrote a piece on interest rates on Greek bonds.  I wrote that Greece will likely default on its government debt.  It was a popular piece.  People are paying attention to this.  Even Americans realize that there are ramifications elsewhere.

As of today, the interest rate on a one-year Greek bond is over 150%.  This means almost certain default, unless there is a massive bailout.  But even a massive bailout will only buy time.

This means if the government of Greece issued a one-year bond today for, say, one million euros, then it would end up paying back 2.5 million euros over the course of the next year.

Let's use an analogy for this.  Let's say there is a family with huge credit card debt.  The family makes $50,000 per year after taxes and makes the minimum monthly payments on its credit card debt, which amounts to $1,000 per month.  The problem is, after the family pays for its monthly expenses of housing, food, clothing, and other things, they only have $800 left to pay the credit card bill.  So the family uses even more credit card debt, just to pay the minimum monthly payments.  The family's debt is getting larger and larger and the interest rates keep going higher and higher.

Eventually, the credit card companies would stop lending money to this family and the family would end up in bankruptcy unless it could drastically cut its regular monthly expenses.

In the case of Greece, there is minimal cutting right now, although I'm guessing many of those on the welfare train there would disagree with me that it has been minimal up to this point.

Instead, the Greek government is trying to raise taxes and this will only result in more productive people leaving the country.

The Greek government is like the family in credit card debt.  It can barely make its minimum payment each month.  It has to borrow more just to pay the interest.  I can see no other reason why the government would be issuing debt that pays 150% interest.

Perhaps there will be another bailout, but this will only delay the day of reckoning.  The default is coming.  This is significant and yet Greece is small compared to others.  Italy's debt-to-GDP ratio is almost as bad as Greece.  Of course, Japan is far worse than both with a ratio of over 200%, yet that country is still going without default.

Greece cannot print money.  It needs the European Central Bank to do that.  But if the ECB does too much money creation, then countries like Germany will revolt.  The people will revolt, not the German government.

Greece will default.  Others may follow.  The euro may break up.

For American investors, it leaves a question of what to do.  If these events unfold quickly, the U.S. dollar may strengthen in the short term.  It is difficult to say what will happen with gold in the short term.  It depends on what people view as a safe haven.  Gold may struggle because of a strengthening U.S. dollar or it may do well as people buy it as a crisis hedge.

Saturday, October 8, 2011

Jury Nullification

I tend to be against politics for advancing liberty.  I am happy that Ron Paul is running for president, but not because I expect him to win.  He is using his platform to spread the message of liberty to millions of people.  So while he is using a political forum to do this, it is his educational influence that is most important, as thousands of more libertarians sprout up every week.

The only way to bring about lasting change in favor of liberty is by changing the hearts and minds of the people.  If a majority or strong minority of the American people withdraw their consent from the government, then the government will weaken and may eventually even collapse if the sentiment is strong enough.

One way that Americans can impose an almost immediate effect is by using the power of the jury.  In any court case that involves a jury, it is up to the people on the jury to decide the verdict.  It is basically out of the control of the judge and the government in general at that point.  While you will not be told this as a juror, it is not only your responsibility to judge the facts of the case and determine if the person violated the law, but it is also your responsibility to judge the fairness of the law in question.

If you, as a juror, believe that a law is unjust, it is your right to use jury nullification.  You can essentially nullify the law, or at least in regards to the person on trial.

Some libertarians will point out that jury duty itself is anti-liberty, because you are essentially being forced to serve on the jury.  This is a valid point, but in a libertarian society, I believe most people would be willing to serve on a jury, if in fact juries existed.  Even more so, I believe most people would be willing to serve as witnesses.  If someone declined to serve as a witness to either convict or absolve someone from a crime, then that person could be blacklisted by the private sector.  If a crime were committed against someone refusing to be a witness, then maybe that person would not have the same redress as others because they had previously refused to serve as a witness.  Regardless, this is a subject for another day.

Regardless of whether you think jury duty should be mandatory, libertarians should take advantage of being called for jury duty, particularly for cases that involve a victimless crime.

Imagine a world where 20% of the population is made up of principled libertarians.  If you get a couple of people on each jury that is willing to use nullification, convictions for victimless crimes will become really difficult. Some "crimes" to be nullified could include drug use, tax evasion, insider trading, prostitution, and selling raw milk.  I'm sure you can think of many others if you are a libertarian.

Right now, most people would be terrified to go in front of a jury on a tax evasion charge.  They end up doing a plea bargain so that they can serve less time in prison or pay a smaller penalty.  But what if public sentiment changed so much that there would be a good chance of an acquittal?  Imagine if juries started acquitting for the majority of tax evasion cases or drug cases that didn't involve violence on the part of the accused.

Even if juries were hung, it would still be a blow to the prosecution and the law in general.  If enough people started being acquitted of drug use and tax evasion, then more people would start to openly defy these laws.  Eventually, the government would see these laws as unenforceable and these laws would, in effect, be nullified.

If you have the opportunity to serve on a jury, you should take it.  You could make the difference in someone's life and you could send a message.  You will be asked questions before being picked for a jury.  You should not lie, but you can try your best to avoid answering questions or volunteering too much information.  If you do get picked for a case that happens to involve a victimless crime, you will have to stay strong against the other jury members.  You do not have to change their minds.  You do not have to give a reason for voting to acquit.  You can simply say that that is how you will be voting.

Jury nullification can be a powerful tool for libertarians.  We don't need to elect the right politicians to change the law.  We just need to stop locking people up for violating laws that shouldn't exist in the first place.

Thursday, October 6, 2011

Steve Jobs and Occupy Wall Street

There are some noteworthy news items and I would like to tie them together.

First, Steve Jobs passed away yesterday.  May he rest in peace.  Jobs was a brilliant thinker and a brilliant entrepreneur.  I don't know what kind of a person he was, but he certainly made the world a better place.

There will always be comparisons between Jobs and Bill Gates.  I think Steve Jobs was more intelligent than Gates is, but that is just my opinion.  While Gates may have been less original, he was a more successful businessman to start.  Just about the whole computer world used Microsoft.  It took more time for Apple to gain its footing.

Overall, I am bigger fan of Apple than Microsoft when it comes to computers.  The operating system on a Mac is superior.  But again, Gates was successful as a marketer and businessman with Microsoft.  Apple may win out at the end, but Microsoft certainly had its day in the sun.

It is reported that Steve Jobs was a liberal (in today's language).  While this might be the case, there are many libertarians who admire the work he did.  While his opinions may have been leftist, his actions were not.  He is one of the greatest examples of capitalism that we have.  He was a major player in the internet and technological revolution.

Meanwhile, there have been protests against Wall Street.  This new group is being called the Tea Party of the left.  If you look at their list of unofficial demands, it is horrific.  They want a "living wage", even for those unemployed.  Their ideas are anti-capitalist.  They are contradictory in many ways.  They are a dream that is impossible.

Just like the Tea Party, I'm sure that different people in this group have different ideas.  Some are worse than others.  Generally speaking though, they are a group of anti-capitalists.

I have sympathy for those who are speaking against government bailouts.  I could not agree more that these big businesses should not be handed favors by the government.  The problem is that most of these protesters go way beyond this.  The other problem is that they should be protesting big government, not big business.

While I think many Americans are upset about government bailouts, and rightly so, I don't think they are anti-capitalism like these protesters.  Bailing out corporations is not capitalism.  You can call it corporatism or anything else, but it is not free market capitalism.  In a truly capitalist society, there would be no government bailouts.  So the protesters are against the bailouts (I think) and yet they are anti-capitalist.  Their own thoughts are contradictory.

Overall, I don't see this mentality as a major threat.  Going back to Steve Jobs, he is a hero to most people.  Businessmen are often vilified, yet Jobs is not.  Jeff Tucker wrote a piece on this and speculates that it is because "he made his products elegant and made our lives more beautiful."  While I agree with this, I am hopeful that it goes beyond this.

Speaking in generalities, one thing that still makes Americans different from many others around the world is that Americans like success.  With the exception of a few on the far left, most Americans do not want to kill entrepreneurism.  Some might be a little envious of those with more money, but most Americans think it is ok to be rich, especially when it is done by creating wealth and pleasing consumers.

I think the one thing where Americans need to learn a little more is that there are millions of people working every day to help consumers.  Most people are nowhere near as savvy as Steve Jobs was.  But there are millions of people in their own little way who work behind the scenes to fulfill human wants and needs.

The things that Steve Jobs helped produce were obvious and they were obviously beneficial.  You don't see the entrepreneurs and workers who manufactured and delivered all of the little things that go into an iPad or iPhone.

I am still hopeful for the future.  Americans still want to see successful people.  As long as that attitude remains, there is hope in regaining liberty.

Wednesday, October 5, 2011

Congress, The Fed, Inflation, and Hyperinflation

With a push to have a full audit of the Federal Reserve, critics of this move (such as those with the Fed) say that a full audit could jeopardize the Fed's independence.  Of course, Fed officials and other government elitists who benefit from having a secretive central bank do not want an audit because they want to keep the party going at the expense of others.

With that said, perhaps those pushing for an audit should be careful what they ask for.  If there were a full audit and there were enough things found to cause major outrage, there is a chance that Congress could strip power from the Fed and take over the monetary controls.  In fact, Dennis Kucinich is advocating that Congress reclaim its authority (his view, not mine) and take over monetary policy.

As Gary North has pointed out, having Congress in direct control of the money supply would increase the chances of hyperinflation.  In contrast to many other libertarians, I do not believe there is a high probability that we will see hyperinflation.  I think high price inflation is possible, like what the U.S. saw in the 1970's, but I think the chances of hyperinflation (for example, prices doubling every year) are slim.  If Congress directly controlled monetary policy, I would raise the chances.

Assuming that the Fed keeps control of the money supply, I would not be surprised to see double digit price inflation in the somewhat near future.  However, I have given this whole issue some more thought and I also wouldn't be surprised if price inflation does not get as bad as we saw in the 1970's.

I have some reasons for this view.  One reason in particular is Facebook.  We live in a different world now.  While I have many "friends" on Facebook who are libertarians, the majority are not.  I have other libertarian friends who are in the same situation.

If price inflation reaches 10% or more, we just need for someone to produce a good 2 or 3 minute video that explains in simple terms how the only way there can be a sustained increase in the general price of goods and services is by having an increase in the money supply.  Then the video can explain that only the Federal Reserve can directly control the money supply (and maybe the banks with fractional reserve lending).

For every one person who posts a video like this, a hundred people or more will view it.  We live in the age of the internet.  It is harder to get by with ignorance these days.  The Fed can't hide behind the media any more.  Ron Paul has brought this issue to the public's attention and the internet users have spread the word.  With the communication lines wide open as never before, I am hoping that is enough to prevent massive price inflation.

As far as promoting policy, I think the best thing we can do as libertarians is to advocate the repeal of legal tender laws.  We should be free to use the money of our choice.  Who can object to this on moral grounds?  You can ask your non-libertarian friends if people should be allowed to do business with other forms of money without going to jail.  I'm guessing most won't object when you put it in these terms.

If we can repeal legal tender laws, then it will either force the Fed to stop inflating and buying government debt or else other money will become more popular.  We can do to the Fed what the internet and Fed Ex are doing to the post office.

Also, if legal tender laws are repealed and other forms of money begin to sprout up, then hyperinflation becomes less risky to our civilization.  If the dollar became worthless, then there would already be other forms of money to take its place to do business.  The trucks could keep delivering food to stock the shelves of our grocery stores, which is really the most important thing.

Tuesday, October 4, 2011

U.S. Government Trying to Blame China

The subject of China and its currency has been building for the last several years and now more and more government officials are pointing the finger at China for manipulating its currency and not allowing the yuan to rise.  There is legislation currently being debated in the Senate that would compel the Obama administration to make a determination if other countries are not aligning their currencies in the manner that the U.S. government deems acceptable.  Eventually, this could lead to tariffs on imports.

Several Chinese officials spoke out against this action today and said that it would start a trade war, which they (the Chinese) do not want.  House Speaker John Boehner has come out against the legislation.  Even if it did get through the House, it is unknown if Obama would sign it.

This rhetoric has been heating up more and more.  I heard it from Romney in the last Republican debate, which tells us enough right there about that man.

The latest and most interesting person to join in the party of blaming China is Ben Bernanke.  Good old Helicopter Ben is now instructing other countries on how to manipulate their currencies.  Bernanke said, "Right now, our concern is that the Chinese currency policy is blocking what might be a more normal recovery process in the global economy."

So there you have it.  Bernanke has chimed in.  Since unemployment is still over 9% and the economy shows no signs of getting better with all of the massive deficit spending, the idiot Keynesians are now going to blame China for the horrible policies of the U.S. government and Federal Reserve.  Bernanke's Keynesian policies have failed and he knows it and he refuses to take any blame.  It doesn't take a libertarian to see that he and the others blaming China are simply trying to escape responsibility for their own failed policies.

If the U.S. government were actually stupid enough to pass this legislation, China would be stupid to get into a trade war.  Instead, Chinese officials should just immediately start to sell U.S. treasuries.  If they really wanted retaliation, they should make an announcement that if the tariffs are not repealed within 60 days, then they will dump approximately one trillion dollars of government debt onto the open market.  This would send interest rates soaring in the U.S. and would immediately trigger a massive recession.

As to the actual merits of China affecting the U.S. economy, these idiots and/or liars have it completely backwards.  If anything, China is subsidizing the U.S. in a couple of ways.  The Chinese are buying U.S. government debt and doing a favor to the U.S. government.  In addition, the Chinese are subsidizing U.S. consumers with inexpensive products.

I think China should have a stronger currency and let their currency rise against the dollar.  But this has little to do with the U.S. economy, at least directly.  Chinese officials should do this for the benefit of the Chinese citizens who would benefit with cheaper goods and a higher standard of living.  It would hurt some exporters in the short term, but overall it would be highly beneficial for the average person living in China.

It seems that every major central bank on this planet is inflating extensively right now.  They are all shooting themselves in their respective feet.  Even the Swiss and Japanese are doing it.  This is mercantilism and it is bad policy.  It helps subsidize the exporters at the expense of everyone else using that currency.

This is why gold and gold related investments will continue to do well in the future.

Monday, October 3, 2011

Don LaPre

Don LaPre, an entrepreneur known for his television infomercials, was found dead on Sunday of an apparent suicide.  You can read the story here.  He was in jail, awaiting a trial.

This news is quite sad to me for various reasons.  LaPre is best known for his infomercials in the early 1990's when he sold his money making strategy.  While some may call it a scam, it was like many other money making kits that are sold today.  It doesn't matter if it is trading stocks or buying real estate.  Most people understand what they are getting when they buy these things.

These money-making strategies are not a guarantee for success.  None of them are.  However, they can give you great tips and provide motivation to take action.  LaPre's money-making system was no different. In fact, his might have been better in the fact that it gave some sound marketing advice and also provided good tips and motivation for budding entrepreneurs.

The reason he was in jail was because of his latest money-making venture selling vitamins.  The FDA (of course) went after him because he was making claims about these vitamins and he did not pay the appropriate bribe of about one billion dollars to the FDA to get it approved as a drug.  The FDA already has plenty of blood on its hands from withholding life saving drugs off the market, not to mention the drugs that never come into existence due to the major barrier of the FDA.  I suppose we could add one more death to its resume as it ruined LaPre's life and most likely pushed the man into committing suicide.

It is ironic that the federal government put this man in jail because his vitamins were not performing what was being claimed.  Yet we have the giant pharmaceutical industry, in hand with the government, pushing vaccines, cholesterol medication, blood pressure medication, depression medication, ADHD medication, and everything else you can think of.  Not only do these vaccines and drugs not always do what they claim, but they oftentimes cause more harm than good.  At least if you take a vitamin that doesn't do anything, there is no harm done.

This is just the latest example of the government being completely out of control.  Just look at all of the different counts that LaPre faced.  He was charged with mail fraud, wire fraud, money laundering and a host of other charges.  This is a joke as all of these charges stem from one thing: selling a vitamin that made certain claims that had not been approved by the FDA.

This is Martha Stewart all over again.  Luckily for Martha Stewart, it was a happier ending.

I have no idea what kind of a guy Don LaPre was, but he was not a criminal based on anything that I've read.  He was a successful entrepreneur, but he was not approved by the bureaucrats in Washington DC.  May he rest in peace.

Saturday, October 1, 2011

Adjusted Monetary Base - October 1, 2011

I try to give updates and comments on the adjusted monetary base so that we can keep up with what the Fed is actually doing and not just saying.  I haven't commented on this subject in detail for a while, mostly because there hasn't been much change.  However, that in itself is a story in which we should pay attention.

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

You can view a longer-term chart here and see the dramatic rise in the last 3 years:

Now, here is a chart of the excess reserves held by banks:

So what's the story here?  Basically, the Fed has followed through on what it is saying.  QE2 ended in June, and since then we can see that the monetary base has been flat or even down slightly.  Meanwhile, the excess reserves being held by banks has an almost exact correlation with the monetary base.  This has been the case since the fall of 2008.  It does not seem that anything is changing here.

The Austrian Business Cycle Theory teaches us that loose money and artificially low interest rates will cause an unsustainable boom.  This boom will go bust when tighter money appears.  However, one thing that is important to note is that we do not have to see a contraction in the money supply to see a bust.  Just a slowdown in the growth of money can be enough to induce the inevitable bust.

The huge increase in the money supply over the last 3 years has been tempered by the huge excess reserves and a high demand for money.  This has kept a lid on price inflation.  However, it has still caused distortions in the market.  While we may not see a huge bubble like we previously saw in real estate or technology stocks, there are still certain sectors that have benefited from the monetary inflation.

Now that the Fed has been keeping the money supply fairly constant over the last 3 months, it will not be surprising to see a further downturn in the economy.  We are already seeing a flattening of the yield curve, which is an indication of recession.  It is unlikely we will see an inverted yield curve, but that is only because the short-term interest rates are already near zero.

This "bust" may show up in different ways.  We could see another increase in unemployment.  We could see the stock market crash.  We could see gold and oil go down further.  We could see housing prices go down further.  It is hard to say at this point what sectors will suffer the most, but we should not be surprised to see trouble ahead.

It is anyone's guess what the Fed will do next.  However, if things get really nasty, it seems likely that the Fed will take further action and try to prevent the correction.  If the Fed starts a heavy dose of QE3, then we should expect a huge run in the price of gold at that point.  Stocks are a little harder to predict.

We will keep watching the adjusted monetary base and the excess reserves.  So far, the Fed's actions have reflected its rhetoric.  The Fed is not creating new money out of thin air right now, so we should not be surprised by the lower prices in many asset classes.