Wednesday, November 30, 2011

Bernanke and the Fed Hate Americans

American taxpayers and holders of American dollars got the news today that they are getting ripped off again.  Not that many people pay attention, but the Fed announced today that it will be providing liquidity for the European financial institutions.  The stock market loved the news and soared.

It wasn't enough that the Fed bailed out American financial institutions in 2008.  It wasn't enough that they subsidized foreign banks and foreign governments.  Now they are doing it again.  The Fed is acting as a lender to European banks.  Americans and holders of American dollars (are you paying attention China?) are subsidizing European banks.  In a sense, Americans are actually subsidizing the irresponsible European governments and their welfare recipients.

The main reason that the European banks are in so much trouble is because they stupidly bought government debt from countries like Greece and Italy.  Now that these countries are on the verge of default, the banks in Europe are in major trouble.  Here comes Helicopter Ben and the Fed to the rescue.

The Fed teamed up with the central banks of Europe, Canada, England, Switzerland, and Japan, although it is likely that it will be the American central bank that does most of the subsidizing.  I guess Germany could not serve as the host any more.  The parasites have to keep sucking the hosts dry before moving on to someone else.

While this might temporarily save the European banks, it kicks the can down the road again.  It props up the profligate spending of countries like Greece.  These countries should declare bankruptcy and they should be forced to dramatically cut back on their welfare states.

With the Fed essentially subsidizing loans to European institutions, it will once again harm the American economy.  It is another misallocation of resources.  The voluntary free market economy in the U.S. (at least what's left of it) is starving for capital and investment.  With the Fed doing this move and others like it, it is hurting the overall savings pool.  This hurts economic growth.  In order for the economy to grow sustainably, there must be savings and the government/ Fed are not allowing this to happen.

Nothing should be a surprise any more.  If there is one lesson from today, it is that the future is unpredictable.  I continue to say that we can't predict the economy and investments with any absolute certainty because the economy is made up of millions of people acting.  In this case, the human action is just coming from a few elitist individuals who are affecting virtually the entire world economy.

As Ron Paul would say, "End the Fed."

Tuesday, November 29, 2011

November 29, 2011 Republican Presidential Update

Since it is political season and a great libertarian happens to be running for president, I am spending a little more time than usual on here discussing politics, rather than purely economic and investment issues.  With that said, here is a little report card on what is happening.

Herman Cain is just about done.  A woman has come out saying that Cain had an affair with her for 13 years.  While Cain originally denied it, his lawyer was a little less convincing with his statement.  The latest report is that Cain is reassessing his run for the presidency.  By the time you read this post, perhaps he will be done.

As I have said several times before, Cain is a jerk and he is a moron.  People could not see the first part about him before.  They were starting to see that he wasn't that bright.  Just watch this video on his discussion about abortion with John Stossel.

Rick Santorum has no chance, and for good reason.

Jon Huntsman has almost no chance.  If Romney weren't in this race, he might have a shot as the establishment favorite.  But I just don't see Huntsman going anywhere right now.  I am not 100% writing him off, but I am 99% writing him off at this point.

The same can be said for Michele Bachmann.  I am mostly writing her off at this point.  While I despise her foreign policy, I understand that many Republicans do not.  She can also be quite articulate on economic matters.  The problem for her is that people don't think she can beat Obama.  She doesn't have as much money as the other top candidates and she can't seem to get people excited the way she did 6 months ago.

That leaves four people: Mitt Romney, Newt Gingrich, Rick Perry, and Ron Paul.

Perry keeps sticking his foot in his mouth over and over again.  He also sounds too much like Bush (the accent).  I think people want to like him, but they don't think anyone else will.  While I think Perry is a fraud and he was exposed early on in the debates for his big government policies on several things, he is still going to have an appeal to many Republicans.  He still has a lot of money.  While he is down, I am not counting him out yet.  If Newt implodes, we may see Perry surge again.

I still think there is a good chance Newt will implode.  He is a good debater.  He is good at fooling people.  But with the internet, there are certain things he can't hide.  He is also questioned by conservatives for his past personal history.  He is also divisive, much like Hillary on the other side.

Romney is the establishment candidate.  He is a pure politician.  He will say whatever it takes to get elected.  He does not have the personal problems that some of the other candidates have.  He is a Mormon, but that will only bother a small number of religious conservatives in the primaries.  He has not been able to break above 25%.  So-called conservatives like Sean Hannity are hedging their bets.  They are not coming out against Romney.  They are being nice to him in anticipation that they will have to support him if he becomes the nominee.

Then there is Ron Paul.  He is polling quite well in Iowa.  He has to get at least second place (or within a percentage point of second place) to still have a shot at the Republican nomination.  Actually, he really almost needs to win Iowa to get the momentum and the recognition.  He needs to keep talking about foreign policy.  As Tom Woods has said, nobody is going to be tricked into voting for Ron Paul.  He needs to articulate his position the best he can and hope that he changes enough minds to give himself a chance.  The good news is that he has quite a bit of money and his supporters are very dedicated.  His poll numbers may or may not go up, but they will not likely go down.

Paul is not running for re-election in Congress.  He can focus most of his attention on this race.  He can stay in it until the end.  I still don't know if he can win, but he is sure making things interesting.

Monday, November 28, 2011

Trouble in Pakistan

Over the weekend, there were 24 Pakistani troops killed as the result of NATO bombings.  It is not all that well known that the U.S. government is at war with Pakistan, at least in a sense.  While the governments get along to a certain extent, the U.S. government has been bombing Pakistan and killing innocent people for a while now.  While it isn't an outright occupation like we see in Afghanistan, it does tend to irritate the people living there.

Many of the facts of what happened over the weekend are still up in the air.  Regardless of what happened, the incidence has angered a lot of Pakistanis.  The government of Pakistan closed off supply routes that the U.S. military relies on to transport supplies into Afghanistan.

This whole situation is quite important as it relates to U.S. foreign policy.  This can have a big effect on the economy, which can have a big effect on your investments.

While I don't claim to be an expert on foreign policy, I do know that these supply routes between Pakistan and Afghanistan are quite important to the U.S. military in its efforts in Afghanistan.  If Pakistan keeps all routes closed, it will make it even more difficult to fight the war.

I see one of three scenarios happening from all of this.

The first scenario is that Pakistan takes a hard stand and does not let any American supplies cross borders.  This makes it too difficult for the U.S. to fight a war in Afghanistan and the U.S. military pulls out.

The second scenario is that Pakistan takes a hard stand and the U.S. government retaliates by escalating the war in Pakistan.  This scenario could be very dangerous.

The third scenario (and probably most likely) is that the Pakistani government talks tough against the U.S. and maybe even symbolically makes the war effort a little tougher for Americans.  However, the Pakistani government, while talking tough, still does Washington DC's bidding (in secret) as the U.S. government continues to use bribes in an attempt to get what they want.

I am not making any big predictions on what will happen with Pakistan, but it is something to keep an eye on.  It will have major effects on the overall foreign policy of the U.S. and it will eventually have economic effects one way or the other.

Saturday, November 26, 2011

An Appeal to Morality

Martin Luther King Jr. did not say, “I have a dream that one day we can join hands so that we can have greater economic growth.”

Rosa Parks did not take a seat in the front of the bus and say that others should be happy because the back of the bus is actually quieter and more enjoyable.

Thomas Jefferson did not start out the Declaration of Independence saying that the King of England should let American colonists have more freedom as it would be more beneficial for free trade.

Gandhi did not live his life preaching utilitarianism.

All of these people advocated their cause by appealing to the moralities of others.

Libertarians have two main ways of advocating liberty.  There is an argument based on pragmatism and there is an argument based on morality.  Luckily, for libertarians, the two things rarely conflict.

While it is important to argue the benefits of liberty from a utilitarian/ pragmatic point of view, it seems that the morality argument often gets overlooked.  And while it is certainly important for libertarians to understand and to be able to articulate the major issues, we also cannot win this fight for freedom without appealing to the morality of others.

Whether it involves domestic issues or foreign policy issues, it seems that the opposing sides always try to win the moral argument.

On foreign policy, it is common to hear conservatives say that we need to fight this war or intervene in this country because we need to stop a madman dictator or we need to help spread democracy.  They ask questions such as, “do you support having a madman running that country?”

On economic issues, it is common to hear those on the left say that we need certain government programs to help the poor and less fortunate.  They ask rhetorical questions such as, “so you just want to see poor people starve?”

Now, libertarians can certainly go into common sense arguments saying that we don’t have the money to fight wars overseas and that we will be bogged down in an unwinnable war.  We can also argue economic issues saying that the best way to help the poor is by having less government and more capital investment, which will eventually lead to more economic growth, which will then trickle down to the poor.  All of these arguments may be true, but are they really going to convince someone to consider the libertarian viewpoint in most cases?

Instead of trying to use only common sense arguments, appealing to someone’s morality can oftentimes have a more powerful effect.

When someone talks about foreign policy, libertarians should immediately talk about the human death toll of wars, and not just on one side.  When that same conservative is boldly talking about disposing of some madman overseas, we can ask if little children deserve to die because our government wants to start a war.  We should be quick to point out that two wrongs do not make a right, particularly when an innocent person will be the one to suffer.

On domestic issues, it is important to point out the government guns.  For the leftist who wants to tax and redistribute wealth, he should always be asked why he wants to point a gun at someone and use the threat of violence to takes other people’s money.

Ask someone if he thinks it is acceptable to go to a neighbor’s house and demand money at the point of a gun.  When he says “no”, tell him that it would be for a good cause like providing homes for homeless people or feeding the hungry.  If he thinks that is acceptable, then leave him alone.  If he does not think that is acceptable, then help him understand that using the force of government is essentially doing the same thing.

The majority of Americans and the majority of people around the world are basically good people.  They would never think of using initiated violence against others.  If they can understand that virtually all of government involves the initiation of force, this will change minds and people will start to withdraw their consent.

It is not to say that utilitarian arguments should be abandoned.  They are very important.  But different people have different journeys towards libertarianism and we should not underestimate the moral arguments to be made.

When more people understand the moral arguments for libertarianism, their minds will open up to the other benefits of liberty.  The detailed understanding of the issues will eventually follow.

Libertarians have morality on their side and they should not be afraid to use it.

Wednesday, November 23, 2011

Happy Thanksgiving

Happy Thanksgiving!

I don't have any rants about economics or politics today.  I don't have any investment advice.  I know it sounds cliche, but truly give a little bit of thought about what you are thankful for.

If you are living a middle class lifestyle in America, you really do have a lot to be thankful for.  In the past, life was brutal.  The people that lived here 200 years ago, or even 100 years ago, had a tough life.  We have a lot of stress in our lives today, but at least most of us don't have to worry about having enough food to eat for the week or having to worry about being able to stay warm.

Even today, there are a lot of people suffering in the world.  If you are living a middle class lifestyle in America, you are in the top 20% of the world.  You may even be in the top 10%.  We hear the Occupy Wall Street protesters talk about the top 1%, but many of these people would fall into the top 10% of the world.

So be thankful for the good things in your life and try to improve on the things that aren't as good.  And enjoy some turkey or whatever your favorite food happens to be.

Tuesday, November 22, 2011

CNN Republican Debate on Foreign Policy

There was a Republican presidential debate this evening that was hosted by CNN.  The main topic was foreign policy.  Wolf Blitzer was the moderator.  I think he actually does a reasonably fair job when you compare him to most of the rest of the mainstream media.

The participants of the debate consisted of 7 pro-war candidates and one peace candidate.

Jon Huntsman, while no peace candidate, is a little less awful on foreign policy than the rest of the other pro-war candidates.
Rick Perry is still a horrible debater.
Mitt Romney is still an establishment stiff.
Rick Santorum is still irrelevant.
Michele Bachmann is still far worse on foreign policy than she is good on economic issues.
Newt Gingrich is still a snake.
Herman Cain is still dumb as a rock.  If you don't think so, just ask Cain if he is dumb as a rock and he will answer that he has to check with his expert advisors first before he makes any judgement.

Then there is Ron Paul.  He is the peace candidate.  He was absolutely brilliant tonight.  He may not be perfect in his delivery, but he was driving every point home.  His words were accurate and well put.  His analogies were great.

Gingrich was talking about how we have to distinguish terrorism from criminal acts.  Who will decide this?  Gingrich?  The word terrorism is thrown around by Republicans as much as the word racism is thrown around by Democrats.

There was a report that came out of Missouri in 2009 from the Department of Homeland Security that was labeling people as potential terrorists who were "right-wing extremists", veterans, and those who supported third-party candidates.  If they are terrorists, then according to Gingrich, you can just go ahead and execute them without any proof or any trial.

I loved Ron Paul's response to Gingrich's comment about Timothy McVeigh.  Paul said that the government can install video cameras in the homes of every American in an attempt to prevent wife beatings and child abuse, but then the American people are the victims.  This was a great analogy that he made.  He was pointing out that Gingrich's policies would turn us into a police state (if we aren't there already).

While many pro-war Republicans will despise Ron Paul after the debate, his performance probably changed a few more minds and opened a few more eyes.  He is chipping away.  Also, I'm sure there were probably a few Democrats out there that liked what he was saying and will perhaps start paying more attention to what he is saying on economic issues.

I still don't know if Ron Paul has a chance to win the nomination.  He is doing well in polls in Iowa.  He is in this thing for the long haul.  He will continue to change minds and influence the debates.  This is very encouraging for libertarians.

Monday, November 21, 2011

The Super Joke Super Committee

The big news today is that the so-called super committee could not come up with $1.2 trillion in "cuts" (see articles here and here).  The stock market went down significantly today and many are blaming its poor performance on the news.  This is a tough sell though, given the major volatility of the market lately.

This whole super committee was a joke.  It was put in place when the Republicans sold out on raising the national debt ceiling.  It was kicking the can down the road.  They just kicked it again today.  Now, automatic cuts are supposed to happen.  Whether they will or not, we shall see.

The super committee was supposed to come up with $1.2 trillion in cuts.  This was a joke to begin with.  This is over a 10 year period.  The government could cut $1.2 trillion from this year's projected budget and the budget still wouldn't be balanced.  Spread out over 10 years, it would only be $120 billion per year.  And these aren't even really cuts.  They are just cuts in the projected spending, which is of course projected to increase.

Now here is the biggest joke of all.  The reason the super committee supposedly failed was because they couldn't agree on the right amount of new "revenue enhancements".  This is lingo for tax increases.  The Republicans were already willing to agree to some tax increases.  The Tea Party should be so proud.

The Republican hacks in DC were not labeling these tax increases.  They were saying they wanted to eliminate some loopholes and deductions.  One example is the deduction for the interest on your home mortgage.  It doesn't really matter whether you call it a loophole or a deduction because the bottom line is that it is a tax increase.  By eliminating certain deductions, it will mean more people will pay more in taxes.  That is a tax increase.

The best part about this whole thing is that they consider raising taxes a spending cut.  We are truly living in a bizarre world.  So I guess the politicians in DC could just double all tax rates and claim that they have cut spending by $2 trillion.  This is what we are dealing with.

Anyone who favors small government who is still supporting and voting for Republicans on a wide scale is simply delusional.  They never learn.  They are Einstein's definition of insanity, doing the same thing over and over again and expecting different results.

I am not talking about people who support Ron Paul.  I am talking about people supporting most of the other politicians in DC.  The Republicans in DC do not want small government any more than Obama wants to restore peace and civil liberties.

The politicians in DC will continue to spend until there is some kind of a major revolt or until the laws of economics forces the situation (like what is happening in Greece).  For now, they can still rely on the Fed and the Chinese to buy U.S. government debt.  When the dollar sinks more and eventually faces the threat of hyperinflation, the Fed will have to make a choice.  If and when it chooses not to buy any more government debt, then Congress will have to massively cut spending.  Be prepared.

Saturday, November 19, 2011

How Do We Fix the Banking Problems and the FDIC?

Usually when I ask a question as the title of my blog post, I go on to answer the question.  With this post today, I am actually struggling to answer this question with a solution that is consistent with my strong libertarian beliefs.

On Monday, November 14, I wrote a post on the problem of the FDIC.  I am completely against having an FDIC that is run by government.  I would not be against the idea of having banking insurance if it took place through the voluntary marketplace.  As I previously said, I am in favor of abolishing most government programs and departments almost immediately.  However, I see major problems with eliminating the FDIC immediately as it would probably cause bank runs almost instantly and really would threaten to take down our whole financial system.

I am certainly in favor of dismantling the current financial system, as it is bogged down with bureaucracy and major government interference.  But I don't want to see it happen with total chaos as millions of people lose the money that is in their checking accounts.

So how do we end the FDIC in an orderly fashion?  We definitely need some kind of a market solution.  We need to somehow phase it out.  The post office is being phased out.  Email and the internet are helping to do this.  The loosening of previous regulations and allowing companies like FedEx and UPS to compete was a big step.  We need to continue to free up competition.  In the case of the post office, the last step is to end the monopoly on delivering first class mail.  Private enterprise will eventually close the government post office.

It is a little harder with banking.  Banks should be allowed to start up without having to abide by government regulations, other than those that strictly relate to force or fraud.  Even here, these laws should come from the state and local levels.  They should not come from Washington DC.  These banks would not have the backing of the FDIC.  The problem here is that it would be difficult for these new banks to thrive.  The FDIC acts as a subsidy to the current banks.  It allows them to take excessive risk and not being held accountable by their customers.  Customers don't really care who they bank with from a safety perspective as they know the FDIC will bail them out.

If legal tender laws were also repealed (a very important thing), then more people might start using gold, silver, or other currencies.  Banks could then operate the way they should in a free market environment, acting as a storage house.  Banks would probably not pay depositors interest on their money, unless the depositor was in agreement that their money was being lent out and that it might not be available upon request.

The amount the FDIC insures was increased three years ago, during the financial crisis, from $100,000 to $250,000.  This needs to stop.  If the FDIC would just stop raising the amount, it would eventually be phased out by the Federal Reserve's inflation.

So I am still not sure how to answer my question of how we fix the whole situation.  It is quite astounding because for all of the things I read on LewRockwell.com, Mises.org, and other libertarian sites, I have not really seen this addressed.  The only idea I remember seeing was that of George Reisman.  He advocated that the Fed increase the monetary base and capitalize the banks, but then force the banks into having 100% reserves (no fractional reserve lending).  I don't like this idea for the long term, but I do give him credit for being one of the few people to offer a solution, at least for the short term.

One thing I do know is that the free voluntary market has a way of solving problems.  We need to repeal as many government laws as possible, particularly those in DC.  Laws should exist to protect people and their property from force or fraud.  From a constitutional standpoint, most of these should be coming from the state and local level.  Once these regulations are repealed, the free market will find a way of providing honest banking services.

Thursday, November 17, 2011

Libertarian Investments and Government Interference

As long as governments tax, spend and regulate and the Fed controls the money supply and manipulates interest rates, there will continue to be misallocations in the economy.  As long as this is going on, I can keep writing about the things I write about.

Most investment advisors will focus on individual stocks and make them fit into their clients' portfolios.  I don't spend a lot of time analyzing individual companies.  There is certainly nothing wrong with this and some money can be made with this strategy (look at Warren Buffett), but I prefer to look at the overall economy and the investment implications.  In order to understand the economy in our world today, it is impossible to avoid politics.

Government policies and central bank manipulation of money (which is granted this power by government) drive the performance of the economy as a whole.  The central bank causes boom and bust cycles by creating money out of thin air and by artificially influencing interest rates.  Government spending also distorts the economy by redistributing wealth and by misallocating resources that do not satisfy consumer demand.  If a product were desired by the public enough for them to spend money on, then the government should not need to subsidize it or protect it from competition or to favor it in some other way.

Since the government plays such a significant role in our everyday lives with its taxing, spending, and regulating, it has a huge negative effect on the economy.  This has a huge effect on investments.  This is why it is important to understand the consequences of these government policies as it can and will determine how your various investments perform.

Virtually all government spending and regulation causes some kind of a misallocation of resources.  The challenge is to figure out the most likely possibility of how humans will react to these policies and how it will direct money and resources.

As long as these dislocations are taking place, I will always have something to write about.  If we ever achieve a fully libertarian society, then I can write about the brutal history of government and all of the unnecessary misery that it caused people in the past.  This will be to make sure that it never happens again, so that free human beings can prosper.

Wednesday, November 16, 2011

The Consequences of Cutting Government Spending Immediately

Back in September, I wrote about Gary Johnson and his proposals for a Fair Tax and a balanced budget.  I said that I am not a fan of the so-called Fair Tax, but that I do like his idea of immediately balancing the budget by cutting spending by 43%.

I recently received a comment regarding that post.  I will not quote the whole thing here.  It has bad language at the end, but you can read the whole thing here if you wish.  The commenter says to me, "So you want to cut fed spending almost in half?  Sure.  Go for it.  Just don't cry about the depression from hell that would follow."

While the comments were strong and more rude than your typical person, they do reflect a certain mentality that permeates our society.  It is Keynesianism.  While I think Keynesianism has been somewhat damaged in the recent years with the economic troubles and with the internet replacing the mainstream media, there is still a large faction that believes this stuff.  Some people think that if we cut government spending drastically, that major chaos would follow.

The comment about having a depression is not completely wrong.  If the government were to drastically cut spending all of a sudden, we would have a sharp downturn in the economy.  It would be quite painful for the American people.  But at least it would be temporary pain and we could look forward to a real recovery.

The big question is, what are the other options?  The other options involve more spending, more inflation, higher taxes or some combination of the three.  They will all lead to things far worse than the above scenario and they will all end in a far greater depression.  The voluntary economy is starving for savings and capital investment.  It is being sucked up by governments at all levels, but particularly the federal government in DC.

Most people don't know there was a severe economic downturn in 1920/ 1921.  The government did not come up with any grand stimulus plans.  It cut taxes and spending.  Most people don't know about it because there was a quick recovery.

On the other hand, people know about the Great Depression.  It dragged on and on as the government continued to spend money like crazy and prop up the bad investments.

We could eliminate the Department of Education tomorrow and the effects would be minimal.  Sure, the government school workers would be screaming like crazy.  But the education system is a complete disaster anyway.  Federal funding represents less than 10% of funding for most schools.  It would not be the end of the world.  While I'm against having to pay for government schools at any level, ending federal funding is quite modest.

Education is just one small example of the overall budget.  One easy cut would be to end the wars and bring troops home from all over the world.  This would save hundreds of billions of dollars almost immediately, without even firing people from their jobs.

After World War 2, there was a massive influx of soldiers returning home to America.  The economy was a mess.  The Great Depression didn't end with the start of the war.  The war brought rationing and misery to millions of people.  It was a continued depression.  The men got jobs, but it is hard to imagine they were any happier.  The depression ended with the end of the war.

The troops came home and, while there was clamoring to do something, the government didn't really do much of anything in the way of stimulus plans or a jobs bill.  Government spending decreased dramatically in 1946 and we basically saw an economic miracle.  Japan and Germany had their own miracles too.  This so-called miracle is called the free market.  When the government gets out of the way, prosperity happens.

We will not see a true and sustainable economic recovery until the government gets off of our back.  This means repealing taxes and regulations.  It means stopping the money printing machines.  Most of all, it means a drastic cut in government spending.  When government spending is cut dramatically, we can look forward to a quick and sustainable recovery and a return to the American dream.

Tuesday, November 15, 2011

Ron Paul - A Top Tier Candidate

A new poll was released showing a virtual 4-way tie in Iowa.  The poll showed Cain at 20%, Paul at 19%, Romney at 18%, and Gingrich at 17%.  CBS News released a story saying that Ron Paul has moved into the top tier.  Both articles were featured on Drudge Report.

Just the fact that both of these stories appeared on Drudge, help the Ron Paul campaign.  It makes people realize that he is a serious candidate with a legitimate chance of getting the nomination.  It also makes it difficult for the media to portray Ron Paul and his supporters as a bunch of wackos.  Are they going to keep saying that if he starts polling at 50%?

If you look at the 5th paragraph of the CBS News article, it says that Paul is the leader, with 32 percent support, from likely caucus-goers who say they've made up their minds.

If you look at the 4th paragraph of the Bloomberg article, it says that Paul's support is more solidified than his rivals.

This is quite significant.  A lot of the potential Republican voters are switching with whichever way the wind is blowing.  They either don't like the candidates, don't know enough yet, or are just afraid to make up their minds without being part of a big crowd.

Ron Paul's supporters tend to be quite devoted.  The majority of his supporters will not change their minds.  This means that Ron Paul's poll numbers will not plummet like we have seen with Bachmann or Perry.

Romney is still the favorite to get the nomination, particularly since he is the establishment's choice and he has the most money.  But Romney has his problems.  He is still the founder of Obamacare and there is nothing he can do to change that.  He is still not that well liked with Tea Party people and other fiscal conservatives.

Gingrich has the same problem that Bachmann has.  He does not poll well against Obama in a head-to-head match up.  Republicans are concerned that he can't win the general election and rightly so.  We will see if it turns out for him the same as it turned out for Howard Dean in 2004.

Cain, as I continue to say, just isn't that bright.  His latest gaffe was about Libya.  He is practically incoherent on foreign policy.  His 9-9-9 plan is a massive tax hike on the middle class.  And if you have any doubts on what I'm saying about his lack of intelligence, just watch this video.

Because of all of these flaws of the candidates and because a lot of Republicans can't support Ron Paul's foreign policy views, I am not counting Rick Perry out yet.  He has been horrible in debates, but he still has a lot of money and may still make another run by default.

We will see what happens, but today was good news for libertarians.  Ron Paul's message is getting out there and is being received well by many people now.  It really gives me great hope for the future of this country.

Monday, November 14, 2011

The Problem of the FDIC

The Federal Deposit Insurance Corporation (FDIC) was created in 1933 during the Great Depression.  It is not really a corporation as the name says.  It is a government agency which guarantees people's deposits in banks.  The amount of insurance has increased over time.  Just a few years ago, it insured up to $100,000 per depositor per bank.  That amount was increased to $250,000 during the fall of 2008.

The agency was created due to the large number of bank runs taking place in the 1930's.  This caused the equivalent of monetary deflation, as bank runs reversed the fractional reserve process.  This was one of the reasons that prices fell during the Great Depression, even though the central bank was engaging in monetary inflation (although not nearly enough according to Helicopter Ben Bernanke).

As a libertarian, I am completely opposed to the FDIC.  Only the government could run such an agency.  No private firm would find it profitable to insure banks in the current system of huge risk taking and massive fractional reserve lending.  I don't think it is inconceivable that there could be insurance companies for depositors in a free market environment, but it would look a lot different than it looks today.  There would be no central bank, far less (if any) fractional lending, and we can also assume that most banks would be far more careful with their lending standards.

With the current system we have now with fiat money, central banking, and government granted privileges, only the government can really run a deposit insurance agency.  That is because only the government and the Fed have a legal monopoly over the money supply and can always create new money out of thin air if necessary.  No private insurance company could do this.

I am a hard-core libertarian and I am in favor of abolishing most government programs and departments immediately.  However, the FDIC might be one exception where I can envision major problems if the FDIC were abolished overnight.  There would be massive bank runs immediately, and the last ones to arrive would be stiffed out of all of their money that was in a bank.

I hated the bank bailouts that happened in 2008.  The politicians in DC really demagogued the issue.  With that said, there may have been one relevant point when they were saying that we would see Armageddon if we didn't pass the bailouts.  For some reason, most politicians were afraid to come out and say the obvious, which was that they feared massive bank runs.  They threw all of these threats at the American people (including martial law), but I didn't hear many say that we needed to pass the bailouts so that you could still access your checking account and withdraw money out of the ATM on Monday morning.

The American people would have actually supported the bailouts if they were told this and thought it was their only choice.

However, it really wasn't the only choice.  The government could have actually let the banks go into bankruptcy and just refunded depositors their money.  The bank executives would have lost their jobs and their pensions.  The government/ central bank would have had to use the printing press to do this, but it probably would have been less than what was handed out with TARP.  Then the banks and all of their assets (for the ones that had to go into bankruptcy) could have been sold to the highest bidders.  Any money collected by the government could have been immediately used to pay off the new bonds held by the Fed, thus reversing the previous monetary inflation.

This whole FDIC thing is a major problem that we need to get rid of.  It is the ultimate moral hazard.  Depositors do not really care what bank they use in terms of safety.  Banks use excessive risk with this backstop.  The only regulation on the banks is occurring by government.  It should be done by the marketplace.  Private insurance companies could play a big role in keeping banks sound.

I am not sure about how to end the FDIC in an orderly fashion.  But as long as there is an FDIC, there will continue to be bailouts.

Saturday, November 12, 2011

CBS Republican Debate on Foreign Policy

I like to make some comments after each Republican debate, especially with Ron Paul being involved.  After tonight's debate on CBS, it is hard to call it a debate and it is hard to say that Ron Paul was actually involved.  If he had actually been asked more than two questions, maybe I would be able to comment on his performance better.

This "debate" was only nationally televised for the first hour.  After that, it was only aired in certain regions, unless you wanted to watch it via the internet.

CBS did a hideous job of hosting the debate and the candidates (with the exception of Ron Paul) did a hideous job.  Perhaps Jon Huntsman was a little less hideous and Rick Santorum is the worst of the worst, but overall, they are all bad.  Ron Paul is the only candidate on that stage who has anything near a rational foreign policy.

All of the others think the world revolves around the United States government and that the U.S. government should be calling all of the shots.

I found it interesting that some of the candidates think we need to be careful with Pakistan because Pakistan has nuclear weapons.  In other words, they don't want to go to war with them.  Meanwhile, they want to go to war with Iran (some more than others) because Iran might possibly be developing nuclear technology.  So basically, that says to every country out there that if you don't want to be invaded and blown to smithereens by the U.S. government, then you should acquire a nuclear weapon.  Now that is incentive.  It is also the law of unintended consequences.

Now I'm not saying the U.S. should go to war with Pakistan.  It is quite the opposite.  The U.S. should not worry about Iran and the U.S. should stop getting involved everywhere.  There should be no intervention in the world.  Perhaps there could be exceptions if two parties both agree to a mediator, but even this could be done privately without the involvement of the U.S. government.  The only thing that the U.S. government should do is to keep trade open so that Americans are free to do business with anyone in the world, so long as they are not directly inflicting violence on us.  If someone does inflict violence, then that person alone should be held liable and not a whole country or group of people.

These Republican hacks may sound decent on some economic issues, but they are awful on foreign policy.  Herman Cain is even dumber when it comes to foreign policy as he is on economic and social issues.  Bachmann is horrible with just about everything she says regarding foreign policy.  It seems that Santorum, the so-called Christian, is in competition to kill as many Muslims as possible.  Newt  is also pro-war and could potentially be worse than both Bush and Obama.

Mitt Romney and Rick Perry are both bad too, although maybe there would be a slight glimmer of hope that they would not be quite as bad as the others on the issue of war.  Meanwhile, as I wrote earlier, Huntsman is probably the least bad out of the seven of them.  Ron Paul, of course, is by far the best, even though he barely spoke for two minutes in the first hour of the debate, which was the only hour that was nationally broadcast.

Not much changed after tonight's debate, except that it solidified my opinion that I have no use for CBS other than for watching football, Survivor, and Amazing Race.  It certainly does not qualify as a news organization.

Thursday, November 10, 2011

Market Volatility and Italian Bonds

The volatility in the stock market has continued this week.  The market was down big on Wednesday as there was increased concern about Italian debt, as rates on Italian bonds rose.  The stock market gained back some today (Thursday).

Gold, after showing a lot of strength and getting back near the $1,800 level, pulled back significantly today.

There is a continuing tug-of-war between the bears and the bulls.  I expect this to continue.  There is a tug-of-war between another artificial boom and a recession.  For a while, it looked as though the recession was going to win out in the short term.  But the stock market has done well in the last month and it points to the possibility of a short-term boom.  A short-term boom would not necessarily drive down unemployment significantly, but it might give people some false hope with rising asset prices, particularly in the stock market.

I thought that Wednesday sent an interesting signal with the concerns about Italian debt.  We have been hearing about Greece a lot, but I think the big fear all along has been that other countries would follow right behind Greece.  We have heard about the PIIGS (Portugal, Italy, Ireland, Greece, Spain), but now we are actually seeing the markets react negatively to all of the big government debt.  Before it was just Greece, which is a small and relatively poor country.  Italy is another story.

Wednesday was interesting because the U.S. stock market tanked.  It shows that major trouble in Europe will affect U.S. markets to a large degree.  While I still see a mini-boom cycle as possible in the near term, the situation in Europe makes it a little less likely.  A partial or full default by a country the size of Italy will send shock waves around the world.  It will be bearish for U.S. markets.  It will be bullish for the U.S. dollar, at least in the short term.  It is harder to say how gold will react.

The Republican candidates in the debate last night were saying that what happens in Italy is their business and that the Fed should not bail out anyone.  The candidates say that, but they are simply pandering to their audience (with the exception of Ron Paul of course).  If a default on Italian debt or any other debt jeopardizes banks in the U.S., you can count on a bailout.  Several of the Republican candidates, including Mitt Romney and Herman Cain, were big supporters of TARP (the bank bailouts) in 2008.  Of course, it may not matter because this may all blow up in the next year while Obama is still in office and we know that he will not stop a Fed bailout.

I expect continued market volatility.  I continue to recommend the permanent portfolio, as described by Harry Browne.  The name of the game right now is asset protection.  You have to keep what you have.  Any investment growth should be icing on the cake.

Wednesday, November 9, 2011

Republican Economic Debate on CNBC

There was a Republican presidential debate on CNBC featuring the 8 major candidates (no Gary Johnson).  The debate focused specifically on economic issues.  I am biased on who did the best, based on my libertarian beliefs.  With that said, I will first try to give a quick rundown of who I thought performed well, even if I didn't agree with them.

Aside from Ron Paul, I though Romney and Gingrich had the best performance.  I disagree with Romney on many issues and I believe he is a phony when it comes to the things that he says in which I agree.  However, he did hold his own tonight.  Libertarians don't like him and most Tea Party people don't like him.  He is a mercantilist as he showed when he advocated slapping tariffs (those are taxes) on Chinese products.  But I don't think he hurt himself as far as his supporters go, who tend to be less fiscally conservative.

Newt Gingrich has had a brilliant strategy and it has worked in getting his poll numbers up.  He is very careful not to criticize the other candidates.  The few times he has done so in past debates, he has done it respectfully.  But he doesn't just make Obama the target.  He goes after the media, including the moderators of the debate.  He basically tells them that they are asking dumb questions, without being quite that blunt.  He is calling out the so-called liberal media, even if he doesn't use that term.  Maria Bartiromo was about to blow a gasket at one point in the debate and I think that is what Gingrich wanted.  Conservatives like it and that is why he is doing it.

I think Gingrich is a fraud, but he is a smart man.  I don't think he will get the nomination.  He is the Howard Dean of 2004.  The Republicans would like to nominate Gingrich (just as the Democrats wanted to nominate Dean in 2004), but they sense that he could not win the general election.  I think the Democrats were wrong in 2004 and made a blunder in putting up John Kerry.  I think the Republicans are right though, in that Gingrich probably cannot beat Obama.  The Republicans are not going to nominate someone who most likely cannot beat Obama.

I thought Michele Bachmann was a little stronger as compared to previous debates.  She is much better on economic issues than foreign policy.  She also didn't use any stupid lines tonight about making Obama "a one-term president".  Maybe her advisors finally told her how dumb she sounded whenever she said that line.  Bachmann has the same problem as Gingrich in that people question whether she could beat Obama.

Some people will say that Herman Cain did well tonight.  He deflected the questions about his personal past.  When it comes to the issues, I will continue to say that the man is just not that bright.  He has absolutely no grasp of foreign policy, little grasp of economic issues, and has no plan to cut one dime in spending.  The Republican voters need to wake up and start seeing through this man.  He is absolutely horrible on all of the issues and he might even be worse than Obama, if that is possible.

Rick Perry had another poor performance.  He actually listed some specific departments that he would get rid of, even though he couldn't think of one of them at the time.  He isn't a good debater, but I'm not sure who people will turn to when Cain falls.  Perry has a lot of money and backing and I would not count him out yet.

I thought Ron Paul did a good job overall in the debate.  I wish he would have been more bold when he was talking about healthcare.  Michele Bachmann may have actually done a better job on that topic.  But Ron Paul is forcing the other candidates to take positions that I don't think they would have taken otherwise.  He is talking about his plan to cut one trillion dollars in his first year and he hit the nail right on the head when he said that taxation is just a symptom of the spending.  Everything revolves around spending.  It is pointless to talk about tax reform if you don't address the out-of-control spending.  The only other thing I wish he would have done is to challenge Herman Cain specifically.  He should have pointed out that Cain has not identified one specific spending cut of any significance.

In conclusion, it looks like things still have a way to go before they play out.  I believe that Cain will slip, as people realize that he is full of slogans, but short on specifics.  It will become a race between Romney, Paul, and probably one other person.  I'm not sure if that other person will be Perry, Gingrich, or Bachmann.  Right now, I am still betting on Perry, despite his poor debate performances.  He has a lot of money.

We will see if Ron Paul can get any pro-war Republicans to defect to his camp.  He will not really lose supporters as other candidates do.  His current supporters are strongly on his side and not going anywhere.  If he gains some more momentum, he could actually make things very interesting.

Tuesday, November 8, 2011

Energy Independence

I have to return to this topic every now and then, just to say how crazy it is.  In bipartisan fashion, you will hear both Republicans and Democrats talking about how we need energy independence in our country.

This is an absurd idea to push.  Why is there this great focus on oil?  If we want energy independence, do we also want car independence?  How about computer independence?  What about independence for gold and diamonds?  What about food independence?  Surely that has to be important enough that we not depend on other countries.

The only difference I can see with oil/ energy is that there seems to be a finite amount of it, whereas with food, you can continue to grow more.  But even here, there is a massive amount of oil contained in this planet.  It just so happens that the stuff that is the easiest to get to and use is mostly in the Middle East.  If there begins to be a shortage in oil, then the price will go up.  If the price goes up, then it becomes profitable to start extracting oil from the tar sands and other places that are more costly.  In addition, if the market is left free, then there will be replacements so that we don't have to use as much oil.  Perhaps we will see electric cars become profitable and cost effective.  Of course, if we had a true free market, we might already have something better and safer to use than gas guzzling cars.

Sometimes I think that the people living in the Middle East would be much better off if there was no oil there.  The dictators running Saudi Arabia wouldn't be better off, but most of the people would be.  It would keep the American empire away from them and allow them to prosper more naturally.

This whole idea of energy independence though is just ridiculous.  All we need is free trade.  Even if the pro-war Republicans were correct that Iran is run by a madman, there is still no reason not to buy oil there.  The dictators in the Middle East can't drink the stuff.  It does them no good unless they use it themselves or sell it.  And with free trade, there is far less of a chance for conflict or war.

If Americans could produce enough oil and gas so that there is no need to buy from people in other countries, that is fine.  But that should be left to the market to decide.

I am all for opening up ANWR for oil drilling.  In fact, I think the U.S. government should sell it to the highest bidder (maybe a company like Exxon Mobil would bid on it) and the proceeds can be used to pay off Social Security recipients so that the program can be ended.  Meanwhile, we will also get cheaper gas.

In conclusion, there is nothing wrong with buying oil from other countries.  Just as Americans buy lots of different food items and electronic gadgets from other countries, it is also beneficial to buy energy from other countries.  It is called free trade and it allows us to have a higher standard of living.  Americans should tell these politicians in DC to get a new job and to stop telling us what to buy and who to buy it from.

Monday, November 7, 2011

Herman Cain and the Allegations

It seems that the top political story in the U.S. for the last week has been Herman Cain and accusations by several women that he made unwanted sexual advances on them back in the late 1990's.

I have mixed opinions on this story.  It does seem kind of ridiculous that the media would spend so much time on this story when America has troops fighting all around the world, the national debt is $15 trillion, and the official unemployment rate is at 9% and showing little signs of improvement.

On the other hand, Herman Cain is now one of the supposed front-runners for the Republican nomination to become president.  If these allegations are true (and my guess is that they are), then it does speak to his character.  Of course, I already thought Cain was a jerk before these allegations came out.  A lot of people seem to be suckered into his seemingly pleasant personality, but I can see right through him and I do not see much good about him.

Some polls are showing that Cain and Romney are each at about 25%.  That means that half of Republicans are supporting a candidate who founded Obamacare (Romney) or a candidate who supported the bank bailouts (Cain and Romney both).

Herman Cain is a statist.  He headed up the Federal Reserve of Kansas City.  He is not an outsider.  He is an outsider only in the fact that his campaign team is unorganized.

I think when it comes down to it, Cain will not get the nomination.  The man is a moron, and I mean that sincerely.  His views on foreign policy are horrendous.  Read this article that was linked via LewRockwell.com today.

If you haven't seen this video of Cain talking to John Stossel about abortion, watch it.  Like I said, the man is a complete moron.  It is possible to be against abortion, but not think it should be illegal.  The first time I saw the beginning of this clip, I thought maybe that was what he was saying.  But no.  The man is a moron.  How could he possibly get the nomination?  He actually makes George W. Bush sound somewhat coherent.

Cain is fooling a lot of people right now who are fed up with the status quo.  He is offering them garbage.  His 9-9-9 plan is terrible, as I have written about before.  He offers no specific spending cuts.  He is a demagogue.  He is a liar.  He is also a moron and he will be exposed sooner or later.

I would rather have Obama as president.  At least there is a chance we won't have war with Iran with Obama in office.  Obama's foreign policy has been horrible, but it could actually get worse with Cain.

Saturday, November 5, 2011

Survivalist Mode

I run this blog on libertarian investments.  I talk politics, economics, money, and investment strategies.  Occasionally I get challenged on my commentary and I even get challenged on the investment strategies.  One particular challenge is that if I am giving suggestions from a libertarian point of view, that the number one goal should be survivalism.

The interest in survivalism is immense.  With the economic troubles starting in 2008 and the election of Obama, combined with the internet, the interest in this topic is enormous.  There are literally tens of thousands of people who believe that there is going to be a complete breakdown in our civilization.

I do believe there is major economic trouble ahead.  There could be massive rioting, particularly in big cities.  There could be a significant increase in crime.  There could be higher unemployment, more poverty, and an increase in homelessness.  However, I think the chances of seeing a complete breakdown in civilization are very low.

One investment strategy I have recommended that the survivalists out there should like is one of my hedges against inflation.  I recommend storing up on extra food and other necessities when they are on sale.  You can't buy extra milk and other things with near-term expiration dates, but there are a lot of things you can store up on.  You can buy extra soda, bottled water, canned foods, frozen foods (although they wouldn't last without power), cereals, rice, etc.  You can also buy extra toilet paper, paper towels, deodorant, shaving cream, shampoo, soap, etc.  As long as they are things that you will eventually use, then I figure you can't really lose anything with this strategy.  The prices of these things will most likely not be any lower one year from now.

I give this strategy as primarily an inflation hedge.  But it is also a good idea in a survivalist sense.  If there is a hurricane, snowstorm, or some other natural disaster, then having extra food will be important.  You should always have enough extra food to last you at least one week, at a minimum.

The survivalists will not like this.  They will tell me I have to get a second house in the country and raise my own food and prepare for the worst.  While I can't be one hundred percent sure that something won't happen, I am not going to turn my life upside down to prepare for something that will most likely never happen.

I only see two things that could realistically happen to cause a breakdown in civilization.  One is hyperinflation and the other is some kind of a terror attack.

I have said before that I think hyperinflation is unlikely.  While I can definitely see high price inflation happening, I don't see the Fed and the rest of the bankers promoting a policy that would destroy themselves.

As to a terror attack, this is a little more likely, although it would have to be really bad to disrupt society that much.  It would have to be something major, like an airborne illness.  Unless, there was a major pandemic, society would find a way to continue on.

I don't think many of the survivalists understand what they are saying.  If there was a complete breakdown in the division of labor in our society, then most of the survivalists would perish too.  Maybe they could hold on for a little while longer, but not by much.  How would they protect their gardens or farms?  How will they get any medical care?  What happens when their shoes are worn out?  Can they survive the heat and cold of the seasons?  How will they protect their property?

These questions could go on and on.  We take so many things for granted, we don't even think about them.  We are talking about a society where you can't go anywhere (there would be no gas and it wouldn't be safe).  We are talking about all stores being shut down.  We are talking about staying in your house for the rest of your life or until most of the population dies off.  We are talking about the need to have several people bonded together.  They would have to take shifts in order to guard their property 24 hours a day.

If you believe there is going to be a breakdown in civilization like this, then you must turn your life upside down to prepare for it.  Tinkering around the edges will not get you far.  Tinkering around the edges will allow you to survive a hurricane or a short-term breakdown.  This is why I will not go to full-fledged survivalist mode.  It is not worth the costs.  It won't be much of a life to live anyway if it ever did happen.

Thursday, November 3, 2011

All-or-Nothing Money Strategies

I have seen and heard this so many times, it is something I feel like I need to write about every so often, just so that others don't make this mistake.

So what is this mistake?  It is an all-or-nothing attitude when it comes to money and investing.  It actually amazes me how often I see it.

Let's say someone has $10,000 and they don't know what to do with it.  They inevitably say something like, "maybe I should put it all in stocks or maybe I should put it towards my mortgage or maybe I should buy some gold."  My response is, "why not do all three?"

It is even worse when it gets to larger sums of money.  If someone stumbles into, say, $200,000, then all of a sudden they have to do something with it.  They say, "I could buy a restaurant or I could use it as a down payment for 5 investment properties or I could put it all in a Swiss bank account or buy an annuity."  My response is, "slow down."

If you have some money burning a hole in your pocket, you don't have to put it all in one place.  It is called diversification.  For the above example of coming into $200,000, why not take a quarter of it and buy one investment property, take another quarter and open a Swiss bank account, take another quarter and invest it, and take the last quarter and keep it as an emergency fund?  Again, it is called diversification.

If you come into some money (a situation everyone would like to have) and you already have an emergency fund, one suggestion I have is to put half of it into a mortgage and the other half into gold.  Paying down your mortgage on a primary residence is a hedge against deflation.  You are locking in a return of whatever your interest rate is.  Buying gold is a hedge against inflation.  Why not balance the two out and split your money down the middle?

In conclusion, if you have money, spread it around.  Don't put all of your eggs in one basket.  I like the permanent portfolio for investing.  I also like the idea of buying residential real estate and renting it out, especially with the current housing market.  But do it slowly and don't dump all of your money into one area at one time.

Wednesday, November 2, 2011

The Permanent Portfolio with a Twist

These are crazy times right now.  The stock market is a roller coaster.  The gold market is trending up, but then we have to put up with steep drops of 10 to 20 percent every few months.  And who knows what is going to happen with interest rates and the price of bonds?

There are major troubles in Europe.  There are major troubles in the U.S.  The banks still have a lot of bad debt on their books, whether they admit it or not.  The Fed has tripled the monetary base in the last 3 years, while most of this money has been stashed away as excess reserves by the commercial banks.

Will we see huge price inflation in the near future?  Or will we see massive deleveraging and a bigger slowdown in velocity, leading to something resembling a depression?

These are hard questions to answer, even for someone well versed in Austrian economics.  It is impossible to know exactly how the politicians and central bankers will act in the future.  It is also impossible to know how other people will react.  Economics is all about human action.

The number one goal of investors right now should be the preservation of capital.  Safety should be your top priority.  That is why I recommend setting up a permanent portfolio as described in Harry Browne's book, Fail Safe Investing.

For those looking for a little more risk without having to manage your investments too much and without having to play too many guessing games, I will offer a suggestion to you.  Try setting up the permanent portfolio with a twist.

The regular permanent portfolio goes like this:

25% stocks
25% gold
25% long-term government bonds
25% cash or cash equivalents

If you want to increase your risk/reward while staying relatively safe, change your cash portion.  Keep the stocks, gold, and government bonds all equal, but put less in cash for a little more risk.  For example, you could put 30% in stocks, 30% in gold, 30% in bonds, and 10% in cash.

With this setup, there will be greater swings, particularly in a recessionary environment.  I would not try this strategy if you will need to tap into your investments in 5 years or less.  Also, I would not go lower than 10% in cash.  If we do go into a deep recession, you need some cash on the sidelines to buy the things that are "cheap".

If you are looking for something even safer than the permanent portfolio, it is going to be hard to do.  If you need to tap into your investments in one year or less, then you should have most of it in cash.  If you will need to tap into your investments in, say, 3 or 4 years, you could use the permanent portfolio and lighten up in stocks.

If you are a really conservative investor, you will have a hard time in this market.  Unfortunately, because the government and the Fed create inflation, even having your investments in cash is not safe in the long term, as it is vulnerable to losing its purchasing power.

If you are a really conservative investor, here is the best allocation I can think of for you:

15% stocks
20% bonds
30% gold
35% cash

You will not get as high of a return, particularly during prosperous times.  But you will be less likely to see huge swings, particularly in a recession.

Bottom line though, if you are investing for the long run and you want to keep your money relatively safe, I would just go with the regular permanent portfolio.  To paraphrase what Richard Maybury says, the permanent portfolio is not perfect, but it is the best thing I know of right now to keep your investments safe.

Tuesday, November 1, 2011

More News From Greece

Today was another day that was not exactly dull for the world financial markets.  Stocks tumbled again today after news that there may be a public vote held in Greece on the "deal" that was recently reached.  It looks like the market has its doubts that the welfare statists of Greece will accept it.  These people have had a near free lunch for too long and they don't intend to go down without a fight for one last free lunch.

Meanwhile, I am having second thoughts on my second thoughts.  On Saturday, I stated that I began to change my mind about an imminent recession and was wondering if we weren't in for some major price inflation instead.  That was after a big week for the American stock market.  Since then, the market has plummeted for two days straight.

This continues to be a fight between the market trying to liquidate all of the malinvestment and the Fed trying to prevent it through inflation.  I believe this is why we are seeing these roller coaster swings.  We can expect more of this.

I thought it was kind of a joke that the market reacted so positively last week on the news of a deal reached to cut the Greek bonds by 50%.  That is why I am wondering if stock market investors are just looking for any old excuse to buy stocks.  There is a lot of excess money out there somewhere and it is not with the average Joe who, not only doesn't trade stocks, but barely has two nickels to rub together.

As for Greece, it doesn't really matter whether there is a public vote.  The only thing it affects is timing.  It is a matter of when investors realize that the Greek government is going to default on a full scale.  They can give bondholders a 50% haircut now, but the other 50% will not be far behind.

As I explained the other day, cutting the Greek government's interest payments in half does little to solve its problem.  You could relieve the Greek government of all of its interest payments, but it will still be in the hole.

Think of the United States as an example.  The government is running a deficit close to $1.5 trillion per year right now.  The actual interest payments on the debt are "only" a couple of hundred billion dollars.  Even if you relieved the U.S. government of all of its interest payments on bonds, it would still be running a deficit of $1 trillion or more due to the vast spending and all of the previous promises that were made (think Medicare and Social Security).

The Greek government is in the same position with all of its government employees and all of its pensions that have been promised.  The "problem" for the Greek government is that it does not control its own currency.  In the U.S., there is the Federal Reserve, which can always buy government debt.  In Greece, they have to depend on the European Central Bank to create money (which it isn't supposed to do) or they have to rely on investors to buy their debt.

If and when Greece fully defaults, who is going to buy their bonds?  Nobody is.  Then they will be forced to balance their budget, which will mean a massive lifestyle change for many of the Greek people.  This may mean a major revolution (and not in a good way).

I think the only solution they will find in Greece is to withdraw from the European Union and to stop using the euro.  Greece can go back to having its own central bank, which can be used to buy the Greek government debt.

The big question after that is, will Italy, Portugal, and others follow?  It would not surprise me to see a total breakdown of the European Union in the next couple of years.