Thursday, May 31, 2012

Facebook IPO

Facebook, the extremely popular social networking site, went public recently and made big news.  Its IPO (initial public offering) price was $38.  On the first day of trading, the stock went up above $40, but then retreated back before the day was over.  Since then, the stock has taken a big hit, losing about $10 per share, which is well over 25%.

Investors are suing Morgan Stanley, Goldman Sachs, and JP Morgan, alleging they were misled in their purchase of the stock.  This is because the banks didn't reveal lower revenue estimates before the shares started selling.

As a libertarian, I don't have much sympathy for the big banks.  They are mostly in cahoots with the federal government.  They get protection from the FDIC and the Federal Reserve.  They get to take big risks and make a lot of money, but then when the tides turn, they will get bailed out.  The big banks in America are not free enterprise institutions.  They rely on cronyism.

With that said, I think these lawsuits are bogus.  It just shows that people will sue over anything.  The reason I am not that sympathetic to investors is because they are acting just like the banks they are suing.  They think they should get all of the upside of a winning stock.  But then when it doesn't pan out, then they are all of a sudden suing and using the force of government to intervene.  They don't want to take responsibility for their actions.

When I heard that Facebook's initial public offering would value the company at about $100 billion, I knew to stay away.  I am not one of those people who is negative on Facebook.  A lot of people think the company is a joke and can't understand how a website that doesn't really sell anything can be of any value.  These people are wrong.  Facebook will probably have a billion users soon.  Take the entire population of the United States and triple it, and that is the approximate number of Facebook users.  With that volume, the company makes money and is going to continue to make some money, even if it is just from Google ads.

However, I think a $100 billion or more valuation seems quite high.  I could have been wrong.  The stock could have gone up quickly, particularly with people wanting to get in on the action.  But I thought it was a huge risk and I stayed away.  Nobody forced me to invest in it.  Nobody threatened me to buy some shares.  I can continue to use Facebook and pay nothing and not own a single share.

These investors who are suing knew the risk they were taking.  Any time you buy shares in a single company, you are taking a significant amount of risk.  But now that the investors are losing money on what was supposed to be a winning stock (at least to them), they are blaming others and using the courts to try to settle the score.  While I'm not exactly cheering for the big banks, I hope the investors lose in this battle.

As far as the banks, the market should be allowed to work.  Unfortunately, we don't live in a free market world right now.  The big bankers are part of the establishment.  In a free market environment, the market would determine if these banks did anything wrong in not disclosing revenue estimates.  Customers and investors would not continue to do business with these firms in a free market environment, if they thought the banks were doing something wrong.  This is a situation where the markets should decide and not the courts.

Wednesday, May 30, 2012

10-Year Yield Hits New Low

The yield on 10-year U.S. treasuries has hit a new low, at least for the last 60 years.  The yield dropped as low as 1.62% earlier today.  The 30-year rate is also down, although not at record low levels yet.

This is interesting for a lot of reasons.  First, the 10-year rate is highly correlated with mortgage rates.  This means that mortgage rates are now at or near an all-time low.  It doesn't seem to be doing much for the housing market, but maybe on the margin it will encourage a few more buyers.  Anyway, if you can lock in a 30-year fixed rate for under 4% right now, that really is the bargain of the century.

The next interesting thing about the super low rate is the bond market's defiance of the bond bears.  There are a lot people, libertarians included, who have been predicting higher rates for quite some time.  I remember when Harry Browne was talking about the permanent portfolio about 7 years ago and there were people challenging him on the bond portion of it, saying that rates couldn't possibly go any lower.  Yet bonds have been one of the best investments of the last 30 years.  While gold has done better in the last 10 years, bonds have been more consistent since the 1980's.  I'm not saying that it will remain that way, but just that the bond market has proven a lot of people wrong, at least in timing.

Another interesting thing about the low rates is that it is allowing the Fed to stop its quantitative easing (money creation).  Since QE2 ended about 11 months ago, the Fed has been tight.  It can remain tight with low yields.  That means the U.S. Congress can continue to rack up huge debts without relying on the Fed to buy the debt.

So when will rates finally go up significantly?

I think the answer depends on price inflation.  And price inflation will depend on several factors including the general health of the economy, bank lending, and Fed policy.  If price inflation remains relatively low, then I don't see interest rates going up.  If rates start to tick up and there is relatively low price inflation, then the Fed can step in and buy.

The only scenario I can see where the Fed would refuse to buy more government debt in the face of rising interest rates is if price inflation is also high.  If there is price inflation of 2 or 3 percent like we have now (at least according to government statistics), then the Fed has no problem creating new money out of thin air.

On the other hand, if we had a scenario where interest rates were rising significantly and we had price inflation of 10 or more percent, then the Fed would have difficulty stepping in and lowering rates, out of fear of triggering massive inflation or even hyperinflation.

Until we see a significant rise in price inflation, I don't expect a significant rise in rates on U.S. government debt.  There will probably be a good time to short the bond market, but we are not there yet.

Tuesday, May 29, 2012

Romney Clinches with Texas

It looks like Mitt Romney is the winner in the Texas primary and it looks like he will be the Republican nominee for 2012.  The media is saying that he officially clinches the nomination with his Texas win.  Of course, this is ridiculous because the whole delegate count that the press is using is just a guess.  We won't really know the delegate count for sure until the convention in Tampa.

This does not mean that I think Ron Paul and his supporters will miraculously snatch the nomination away using a delegate strategy.  I have already said that this would be extremely unlikely.  If the situation were reversed and Ron Paul were winning, then I would worry about Romney and the establishment stealing the nomination away.  But the Ron Paul people are too honest to make a serious challenge at this point.

I never really expected that Ron Paul would get the Republican nomination.  Things would be far more interesting if he were on the Libertarian Party ticket.  But I am still impressed by his vote totals.  He will get about 2 million votes when everything is done.  However, unlike the other Republican candidates, he has a great deal of support outside of the party.  He gets just as much support (sometimes more) from independents and Democrats.  Someone like Rick Santorum would get very few independents and almost no Democrats.

Things have changed a lot in America.  While government has gotten bigger, the lines of communication have opened up.  The number of liberty-minded people has to be larger now than it has been in the last hundred years or more.  It is no longer completely crazy to support someone like Ron Paul.  It is far more socially acceptable now.  It makes it easier for others.  It opens up people's minds when they know they won't be called a lunatic for supporting a particular position.

The Ron Paul group, combined with other libertarians, anarchists, etc., are a significant group now.  They can't influence policy in the direction of smaller government yet, but they can slow down big government.  There will come a tipping point where things shift and it could happen quite quickly, particularly with the fragile state of the economy.

The number of principled libertarians does not have to reach a majority status.  If 10% of the population is strongly libertarian, this might be enough.  I think 15% would mean a radical change in the direction of this country.  20% would just about seal the deal, as change would be inevitable whether it would be through repealing legislation at the federal level or secession.

While Romney vs. Obama is a depressing thought, I am optimistic for the long run.  The libertarian direction that America is starting to take cannot be stopped.

Monday, May 28, 2012

Run On Greek Banks

There has been a lot of news in the last couple of weeks about runs on banks in Greece.  It is reported that bank customers have withdrawn euros in total of the equivalent of over a billion U.S. dollars.

There are a couple things that are a little surprising about this news.  First, 800 million euros (or one billion U.S. dollars) is really not a lot of money in today's world.  In the U.S., we talk about trillions now. One billion dollars is only 0.1% of a trillion dollars.  While the total amount is not insignificant for Greece, it is also not exactly earth-shattering news.  I suppose the symbolism of it is bigger than the actual amount of money.

The second notable thing is just how long it took for this to happen enough that it is headline news.  I was forecasting a Greece pullout from the euro zone last year.  Greece has been a mess for years now.  It is amazing how long people wait until they finally take action.  These people withdrawing money from the banks in a panic remind me of shoppers looking for canned foods and bottled water on the day that a hurricane is about to hit.  They can only hope at that point that there will be something left for them.  The problem is that these people should have known that a hurricane was coming days before if they had paid any attention.  Yet, they waited until the last minute.

The more amazing thing is the shoppers who just deny that a hurricane will hit at all.  They don't even bother trying to do some last minute shopping in preparation.  Are there really still people in Greece who have their money in Greek banks?  This is just the epitome of foolishness.

There is definitely a lesson here.  Most things, particularly when it comes to economics and government policy, do not happen all at once.  There are usually warning signs.  Some Jewish people living in Germany in the early 1930's saw the warning signs and got out.  Some saw the signs in the later 30's.  Some were able to get out and some weren't, but at least they had a shot.  Meanwhile, there were some that were in denial right until the end.

It is good to keep an eye on the big picture.  If you were living in Greece during the last few years, what would you have done?  Hopefully you would have left the country, where the government is trying to seize wealth any way it can.  If you stayed, hopefully you would at least have the sense to not leave any significant amount of money in a Greek bank.

Americans should pay attention to the same warning signs.  It is not just about banks or even economics.  It is everything political.  As times get tougher, the U.S. government and state and local governments will be looking for ways to fund their own operations.  Hopefully Americans will do a better job of turning their backs on big government than the Greek people.

Saturday, May 26, 2012

Gary North on the Future

Gary North, a prolific libertarian writer, has written two pieces recently on the future.  In the first one, he says that we are not on the road to serfdom, but on the road out of serfdom.  In the second piece, he says that our kids will have it better than us.  I like his optimism and I wish more people had it.

I find that the majority of people who are new to the libertarian movement are pessimistic.  In fact, I could say that even the majority of older libertarians are pessimistic.  They think we are at the breaking point.  They think that if things aren't turned around immediately and dramatically, that we will be in full-fledged tyranny, if we aren't there already.

I am relatively young, but I have been a libertarian much longer than most of the young Ron Paul supporters.  I was a child of the Reagan era.  I had libertarian leanings as a child and into young adulthood.  I really became interested at about the age of 25.  It was about 9 years ago at the age of 28 that I became a more hardcore libertarian.  If anything, I have become even more radical since then.

I heard Harry Browne give a speech in 2004 on the prospects of liberty.  He said that he doubted that one in a hundred libertarians understood this one simple thing in our fight for liberty: that human nature is on our side.  The natural state of human beings is not to live under tyranny.  Most people want choices in their lives and they want liberty.

In 2004, there weren't a lot of libertarians.  But from everything I have read, there were far more libertarians in 2004 than there were in 1954, 1964, or 1974.  I can safely say that there are far more libertarians now than there were 8 years ago.  In fact, I'd venture to guess that the number has at least quadrupled.

I think Gary North has it right.  Barring something disastrous event like a nuclear war, the next generation should be better off.  I warn people about the next several years and the economic trouble ahead.  But long term, I am an optimist.  With technology and the free flow of information, I don't see how the libertarian movement can be stopped at this point.

There may be certain areas where we are less free in America today.  We have the TSA at airports.  Business regulation is probably as bad as it has ever been.  There are surely other examples, but there are also examples of where we are more free.

There is no more slavery in America (although we could argue that we are all slaves to the state).  With the internet, the news media is no longer monopolized by a small number of networks.  While there are wars going on, there is no full draft as we saw during many past wars.  The top tax rate is far lower now than it was during much of the 20th century.

If there are two things that really symbolize our hope for liberty, it is free speech and guns.  They are both related to the first two amendments to the Constitution.  While there are gun laws and restrictions, most Americans can own guns.  Not only that, but a large portion take advantage and do own guns.  Americans may not be armed to the teeth like the Swiss, but there are tens of millions of American households that have firearms.

As far as speech, we are as free as ever.  That is why I think the best hope for liberty starts in America.  While I can't say that free speech is 100%, it is pretty close.  Just use google and you can see for yourself.  I laugh when I hear people talk about how great the Founding Fathers were and how they defended all of our liberties.  Have these people never heard of the Alien and Sedition Acts?  If Barack Obama tried to do what John Adams did, he would have a revolution on his hands.  Of course, with the internet, there would be no way to enforce the Sedition Act today, unless the government tries to arrest 50 million Americans.

While there are no guarantees, I think we will move toward liberty over the next few decades.  Technology will help a lot.  The current group of Ron Paul supporters will help a lot.

It is ironic because there are many Ron Paul supporters who are pessimistic, not knowing that the libertarian movement has grown by leaps and bounds because of them.  Yet, it is because of the Ron Paul supporters that I am so optimistic.

Thursday, May 24, 2012

Adjusted Monetary Base - May 24, 2012

You can view a short-term chart of the adjusted monetary base here:
http://research.stlouisfed.org/publications/usfd/page3.pdf

You can view a longer term chart for a broader view here:
http://research.stlouisfed.org/fred2/series/BASE/

You can view a chart of the excess reserves held by commercial banks here:
http://research.stlouisfed.org/fred2/graph/?chart_type=line&width=800&height=480&preserve_ratio=true&s[1][id]=EXCRESNS

The increase in excess reserves has closely mimicked the increase in the monetary base since the fall of 2008.  I have seen little to indicate a change in this scenario.  This means that the creation of new money by the Fed has gone into excess reserves at banks.  It is not being lent out.  This is helping to keep a lid on price inflation.

The Fed has not really inflated since the end of QE2.  It is hard to believe, but it is almost 11 months since QE2 ended at the end of June of 2011.  The monetary base is actually slightly lower from that point.

The Fed is keeping its powder dry for right now.  It is walking on a tightrope and it doesn't want to lean too far in one direction.  It does not want to trigger severe price inflation and it also doesn't want the economy to fall off a cliff.  Eventually, I see it falling one way or the other.

I am guessing there will eventually be a QE3, but not until the economy gets visibly worse.  It is hard to read the minds of central bankers, but I don't see them sitting on their hands if price inflation is relatively low and the economy is falling off a cliff.

We will continue to watch the adjusted monetary base to see if the Fed is doing what it is saying.  So far this year, the Fed has not been doing much.  Hopefully that will last, but I wouldn't bet on it.

Wednesday, May 23, 2012

Dave Ramsey on 529 Plans

Dave Ramsey is a money guy.  I have written about him before.  I agree with much of what he has to say about money.  I don't often agree with him when it comes to investing and anything political.  He does not understand the monetary system, which is rather critical when you are offering investment advice.

With that said, I was surprised to hear what he said this morning on a morning television show.  He was warning people about having state 529 plans.  He pointed out that many states are in financial trouble and that you should avoid contributing to a state prepaid college plan (or something like that) if your state currently has financial difficulties.

This is surprising because I consider Dave Ramsey as part of the establishment.  He has little clue about the monetary system while being a popular personality talking about money on television and the radio.  Yet, with this statement he made about being careful with state 529 plans, he is saying in a not-so-subtle way that some states are headed for bankruptcy.

That is all his statement can mean.  He is saying that states in financial trouble are at least somewhat likely to default on their promises.  This means that you could make contributions for your child's college education and then see it all evaporate because of politicians spending too much and promising too much. If Dave Ramsey is suggesting something like this, then we can be almost certain that it is going to happen, because I don't see him as someone who questions the system very often.

I completely agree with him on this topic.  I would go further and say that you should avoid these state plans no matter where you live.  First, college is way too expensive in most places and I would try to find a cheaper way to pay for your child's education.  There are more choices now with community colleges and online courses.  You can also encourage your child to take college credit classes while in high school and maybe even test out of some college level classes.

Second, if you are going to save some money to help pay for your child's college, then you don't need to contribute money to the politicians in your state.  You can save your own money.

I would not contribute to any state plans, as things can change quickly.  Most of the 50 states are in financial trouble.  It is all relative.  But the worst ones that come to mind are California, New York, New Jersey, and Illinois.

Not coincidentally, the states with the highest taxes have the worst problems.  This could be for several reasons.  First, high taxes tend to drive productive people away.  Second, the high taxes meant high government "revenues" during the so-called good times.  When good times went to bad (the bursting housing bubble), then government tax collections went way down.  But the politicians had already made big promises and were already accustomed to spending huge amounts.  Third, the states with the highest taxes also tend to be the states most likely to elect big government politicians.  (I know "big government politicians" is redundant, but it is all relative.)

In conclusion, you should actually take Dave Ramsey's advice on this.  Stay away from the state college savings plans.  If and when the economy turns south again, we could see a wave of state bankruptcies.  Don't be one of the victims.

Tuesday, May 22, 2012

Hyperinflation and Expectations

Yesterday, I wrote a piece giving three reasons why I think hyperinflation is unlikely.  Today, I want to add a key point about the subject.

Hyperinflation (or even inflation) is not all about the money supply, when we define it in terms of prices.  Supply and demand affect each individual price in the market.  For the overall general price level, it is affected by just a few things.

First, productivity and technology play a role in the overall price level.  We can see this in the computer and electronic industry today.  You can have falling prices, even in the face of monetary inflation.  In a world with a stable money supply, prices would most likely decline gradually as production increases.

Second, the overall price level is obviously affected by the money supply.  If you increase the money supply, then the overall price level will increase, assuming other factors stay the same.

Third, the overall price level is affected by the banks and lending, particularly in a fractional reserve environment.  Prices will tend to go up with more fractional reserve lending.

Fourth, and this is the main point I wanted to touch on, is that prices are affected by the demand for money.  This is also called velocity, which is the speed at which money changes hands.

The demand for money changes based on people's thoughts and actions.  If people spend more, then velocity will increase (the demand for money goes down) and prices will tend to rise.  If people save more, then prices are not bid up as much and prices will tend not to rise or even go down.

One thing that affects the demand for money is people's expectations.  This ties in with the subject of hyperinflation.  If people expect that the Fed (or any other central bank) will continue to inflate, then people may be more anxious to spend their money quickly before prices go higher.  This can just trigger even more expectations of higher prices and cause them to go up even faster.

In a hyperinflation type environment, the money in use can be destroyed quickly.  Prices will often go up faster than the money supply is increasing due to people's expectations.

On the other hand, prices can also go up slower than monetary inflation.  If people expect that the increasing money supply will slow down, stop, or even go down, then more people are likely to save their money.  This will cause prices to go down, or at least go up slower.

If we hit a scenario where there is high price inflation, the Fed can most likely slow it down very quickly. The Fed just needs to tell everyone that it will stop monetizing debt.  If people believe the statement is credible, then price inflation will most likely slow down quickly.  You could have 50% price inflation go down very quickly if the Fed makes a credible statement that it will halt its increasing of the money supply.

Keep these thoughts in mind, particularly if we hit a scenario of high price inflation.  Things can change quickly, depending on the actions of the Fed and also the actions of millions of people in the marketplace.  Price inflation is not just about the money supply.  It is also about the future expectations of the money supply.

Monday, May 21, 2012

3 Reasons Why Hyperinflation is Unlikely

There are many Austro-libertarians who think that hyperinflation in the U.S. is practically inevitable.  There are certainly some good arguments to be made for the scenario.  The government debt is enormous, now exceeding 100 percent of the measured GDP.  The Federal Reserve has loaded its books with toxic assets that cannot be sold for what they are "worth" on the Fed's books.  The banking system is still a mess, despite the massive excess reserves built up from the Fed's monetary inflation over the last 4 years.

While I don't think the threat of hyperinflation can be discounted, I still believe that it is unlikely.  I will offer three reasons why.

Before listing my reasons, let's define hyperinflation.  The definition can vary.  Some people would say that 50% or more annual price inflation is hyperinflation.  Some might say that prices have to double or more every year.  Some might say that prices have to be rising every day.  Others would leave prices out of the equation and define it using the money supply.

For the sake of this discussion, we will say that hyperinflation is general prices rising 100% or more per year.  This would mean that prices are doubling each year or more.  (Note: I understand that Austrian school economists define inflation in terms of the money supply, but I would prefer to use prices for this discussion.)

So here are the top three reasons I see hyperinflation as unlikely:

1) The Bankers

The big bankers (and this includes the Fed) do not really want hyperinflation.  It does not benefit them.  It would destroy their pensions.  It would destroy their incomes.  It would destroy their standard of living.  It would probably remove them from their own power.

Why would the bankers commit financial suicide?  Even if they all had a stash of gold (which they probably don't), they would still be worse off.  The bankers like to redistribute wealth from the average American into their own pockets.  But they should know enough not to kill the goose that lays the golden eggs.

I hear people casually talking about how we are going to have hyperinflation.  I tell them that if they are serious and if they really think it is going to happen, then they should be making major preparations.  They should be a hard-core prepper.  They should really consider moving to another country, preferably somewhere with a lot of farmland.  Hyperinflation in the U.S. would mean a breakdown in the division of labor.  It means that your paycheck would be worth almost nothing.  It would mean that trucks would stop delivering gas to the gas stations and food to the grocery stores.

2) Ron Paul Supporters

When the Republican primaries and caucuses are over, Ron Paul will have received about two million votes.  Sure, this is out of a population of over 300 million, but it is still a significant number.  While a few of those two million may not be libertarians in the slightest, there are also some Ron Paul supporters who never changed their voting registration to Republican to vote for Paul.  So there may be more than two million Ron Paul supporters.

Of course, one of the big issues that Ron Paul has continued to hammer away on is the issue of the Fed.  He wrote a book called "End the Fed".  His supporters have a basic enough understanding of monetary policy.  They understand that overall price inflation is caused by monetary inflation, which is caused by the Fed.  They can explain to others that it is Fed policies that cause higher prices at the grocery store and gas station.  While some may not believe it right away, more people will be searching for answers if overall prices start going up like they did in the late 1970's, at a 10 to 20 percent annual rate.

Ron Paul supporters are a big enough group now that they can be a check on Bernanke and the Fed.

3) The Internet

The number three reason goes hand-in-hand with number two.  Open information and communication is the enemy of big government and central bankers.  This is why big government relies on propaganda.  They need the consent of at least the majority of the people, if not more.

The internet spreads information.  Ron Paul supporters on the internet really spread information.

Imagine a scenario where prices start going up at more than 10% per year.  Imagine grocery bills going up at 20% per year.  Now imagine someone with 300 Facebook "friends" complaining about their high grocery bill on Facebook.  Out of 300 people, there will probably be at least one Ron Paul supporter.  Now that Ron Paul supporter can post a message, or maybe even a video.  It could be a two minute cartoon video.  It would briefly explain that a general rise in prices is because there is more money chasing goods and services.  The only way there can be more money (aside from fractional reserve banking) is because the Fed is creating more money.

If this Ron Paul supporter had posted this on Facebook before, it might not have gotten much attention. But when people really start feeling the pinch, they may pay attention.  The person complaining on Facebook also has 300 friends who will see the response.

Now extrapolate these results over millions of people.  If we all of a sudden have tens of millions of people who understand that general price inflation over time has to be caused by the Fed, then the Fed cannot get away with it.  It will have to stop creating new money or risk a complete revolt by the populace.

In conclusion, while hyperinflation is possible in the U.S., I don't think it is likely.  I think high price inflation of 10 to 20 percent is somewhat likely.  The Fed cannot get away with things like it could in the past.  If you disagree with me and think hyperinflation is likely, then I hope you are making plans to get out of dodge.

Thursday, May 17, 2012

Libertarian Movie List

Last year, I wrote a post on my "Libertarian Reading List".  It covered books on libertarianism that were influential on me and that I recommend to others.  I was asked recently if I have a libertarian movie list.  While it differs quite a bit from my reading list, I do have some movie favorites.

There is a big difference between my reading list and movie list.  The reading list is mostly non-fiction and is overtly libertarian in most cases.  The books I recommend are for people who specifically want to learn more about libertarian philosophy and want to be able to better understand it and also defend the pro-liberty positions.

My movie list tends to be different.  I don't know of many non-fiction libertarian movies.  If you want to watch a video of libertarianism, you are probably better off going to YouTube and finding what you want.  But there are some good movies that have very subtle libertarian messages, even if it is often unintended.  Many of these movies are good for non-libertarians.  They may plant a seed in the person's head without them knowing it.

Joyeux Noel
This movie is based on a true story.  It is about soldiers fighting in World War I, who decide to call a truce during the Christmas holiday.  They come out and socialize with the "enemy".  It shows the absurdity of war.  It shows that these soldiers had more in common than they realized and that they were fighting each other only because of their respective governments.

The Village
I enjoy the psychology of this movie.  The people in the village have basically been brainwashed, but they don't really know it.  (Does anyone being brainwashed ever know it?)  The main character questions authority.  He is a thinking individual.  He questions the world around him.  I don't want to spoil anything in case you haven't seen it.  Again, there is no overtly libertarian theme, but there are messages about thinking outside of the box and questioning authority.

Star Wars
Most people are quite familiar with the Star Wars movies.  It is a story of good vs. evil.  It is a story of redemption.  It is a story of tyranny trying to rule the world.  It is a story of a group of freedom fighters (rebels) trying to defeat the evil empire.  These movies are not for everyone, but there is definitely an aspect appealing to libertarians.

The Patriot
There are some good libertarian lines in this movie.  Mel Gibson does not want to fight an American Revolution, but he changes his mind when tragedy strikes his family.  While I am anti-war and I even think there are legitimate questions about the Revolutionary War, this movie still deserves to be on my list.

V for Vendetta
This isn't a purely libertarian movie.  I am against the use of violence unless it is strictly in self defense.  The methods used by the main character go beyond this.  However, this movie still deserves a place on my list due to the overall story of fighting for freedom against tyranny.

Lord of the Rings
I have to admit that I have not seen the entirety of these movies.  This is like Star Wars in that it is not for everyone.  But there is definitely a libertarian theme in that people cannot be trusted with great power.

Atlas Shrugged, Part I
This is completely different from the other movies on this list.  This movie is not subtle in its message.  It is libertarian and it doesn't hide its message.  I would recommend the book over the movie first.  With that said, I was actually pleasantly surprised when I saw this movie.  For a low budget movie, it was actually decent and I look forward to seeing part II.

If I think of any other movies, I will update my list.

Wednesday, May 16, 2012

May 16, 2012 - What is Happening with Gold?

The price of gold, at least in terms of dollars, has been in a rut.  As of this writing, it is down to around $1,540 per ounce.  After 11 straight years of gains, many are wondering if this is the end of the gold bull market.

Of course, some of the weakness is due to the U.S. dollar.  It's not that the dollar is that great, but with all of the problems in Greece and Europe in general, the euro has been down quite a bit.  Therefore, for Europeans, the price of gold is not down as much.

I think these retracements in the price are always a good test for people who own gold or gold related investments.  The true believers stay in the game.  The ones who don't really understand why it is important to own some gold are the ones who are scared off.

Sometimes I am asked if I think gold will continue to go lower.  To be honest, if I knew the answer with any precision, I would be incredibly rich.  I would be trading futures every day and raking in money like Warren Buffett.  But there is no way that I can predict the short-term price movements of gold or anything else.

If there is one thing that Austrian school economics teaches us, it is that economics depends on human action.  I cannot predict how billions of people in the world are going to act tomorrow and I therefore cannot predict what the price of gold will be.  Maybe some futures trader in Singapore decides to get into a huge position tomorrow.  Maybe a whole bunch of Indians decide to buy gold for their daughters.  Maybe Ben Bernanke makes a special announcement that the Fed is changing its policies.

Because of all of the variables, it is impossible to predict the short-term price movements.  But we can make some predictions with a certain degree of accuracy.  We can predict that the U.S. federal government will continue to run up debt and spend money like crazy in the short term.  We can predict that the Fed will continue to monetize debt in the future if it feels it is necessary to keep interest rates down or to keep a major crash from occurring.  We can predict that an increase in the money supply will likely lead to an increase in prices, especially in things like gold.

I can't even be certain that the Fed will continue to inflate.  Strange things can happen in this world.  Maybe Bernanke will resign and someone new will come in and stop monetizing debt.

While I can't be certain that gold will go up in terms of U.S. dollars, I think it is highly likely to happen over the next few years, given the circumstances.  With that said, if you have been a procrastinator in buying gold and gold related investments, now seems to present a good opportunity.  Again, it may go down more in the next few weeks or months, but if I could call the exact bottom, I would be really wealthy.

Tuesday, May 15, 2012

An American Idol Nation

I have often heard people talking about politics and they refer to others as being dumb, out of touch, or apathetic.  Then they say something like, "some Americans just want to watch American Idol while they let their nation get destroyed."  You can substitute "American Idol" for other activities like reading celebrity gossip, watching football, playing video games, etc.

I use American Idol here because I happen to watch American Idol.  I am not at all ashamed to admit it and I don't think there is anything wrong with that.  I don't really care for people who like to pass judgement on others in such a way.  Just because someone likes to watch American Idol or do some other activity, doesn't mean they necessarily don't care about the political system or the world we live in.

Of course, some people who watch American Idol may not take any interest in politics or anything related.  They may be apathetic when it comes to discussing the latest legislation or the latest scandal with a politician.  In some ways, who can blame them?

But here is the most ironic thing.  Oftentimes, when I hear someone talk about our "American Idol nation of people who don't care" (or something like that), it is usually the accuser who is way off base.  This person, instead of watching American Idol, listens to Sean Hannity or Rush Limbaugh and is mostly backwards in their thinking.  They may understand a few things and know current events better than the average American Idol watcher, yet I think I would prefer the American Idol watcher.

The American Idol watcher is oftentimes less brainwashed than the accuser of others being ignorant.  The American Idol watcher does less damage, in at least not explicitly consenting to big government and empire.  It is often the accuser who is more ignorant in many ways.

I have also heard libertarians make comments like this and I don't really like to hear it.  They are perhaps correct that people should not be so apathetic.  Yet, from an economist's point of view, the person watching American Idol may actually be making a rational decision.  He may derive more benefit from that than spending his time trying to get the "right" people elected, which never seems to matter anyway.

People are always going to have their hobbies and their interests.  If reading celebrity gossip or watching certain television shows is part of that, then it is no big deal.  You can watch American Idol and still understand the political process and current events.  For those listening to Sean Hannity, I would actually say that you are better of watching American Idol.  At least you won't get brainwashed into promoting big government policies.

Monday, May 14, 2012

The Media is Finally Admitting that Greece Will Withdraw

I have hit on this theme several times in the past.  I wrote about it last fall.  I wrote about it a few months ago.  It is inevitable that Greece will withdraw from the euro zone.  The country will no longer be part of the European Union.

The media and the establishment (that is partially repetitive) are finally admitting this fact.  Some of the people in the media may be dumb, but I can't imagine they all are.  The elitist politicians, lobbyists, bankers, etc. are not that dumb.  Some of them may be, but most of them are more evil than dumb.

The headlines for the last couple of days in the financial markets is screaming that Greece may depart from the grand experiment that is called the European Union.  It was another step forward for the one-world government promoters.  Now they are seeing their dreams shattered.  The ironic thing is that their own socialist/ fascist policies have helped lead to the break up.  I assume that since the establishment is admitting that Greece may leave, that it will happen quite soon, maybe in the matter of days.

Look at what the interest rates were on one-year and two-year bonds from the Greek government.  The yield on the one-year went over 1,000%.  It is no longer tracked, presumably because it went into default.

All of those bailouts from Germany and others and where did it get them?  They basically just propped up the Greek system for a little longer than it needed to be.  It was wasted resources.

If and when Greece leaves, one of two things will happen.  The government has made promises in the past that simply cannot be kept.  It can deal with these by directly defaulting on them (just as they will do with their official government debt, also known as bonds).  It can also default on them by printing money.

Greece does not control a printing press right now.  It is much like the state of California.  That is why their day of reckoning has arrived sooner than others (like Washington DC).  When Greece leaves the euro zone, it will go back to its own currency.  It will have its own central bank again.  It will be free to use money creation as a tool to pay off some of its promises.

I hope that Greece does not do this second option.  It will lead to severe price inflation and will only continue the great malinvestment.  Greece needs to start with a clean slate, or at least as clean as possible.  Maybe they won't cut off the welfare checks for people in their 80's.  But anyone with government pensions, early retirements, and other government handouts should be cut off, almost immediately.  It is harsh, but the alternatives are worse.  I understand that many of these people worked hard in previous years to "earn" these pensions.  But it was the government that made these promises and current residents should not be forced to pay.

If Greece drastically cuts back spending, regulation, and taxation and has a reasonably stable monetary policy, then growth can return there.  On the other hand, if Greece continues in its ways and continues its big government policies and central planning, then we can expect massive price inflation and an economy that continues to deteriorate.  It will mean a lot of poverty for a lot of people.  Let's hope the people decide on the first option.

Saturday, May 12, 2012

An Example of Debt Hurting Now

One of the themes I have been hammering away at lately is that of government debt and the burden it imposes on us.  It is common to hear people say that we should not keep running up government debt because it is harming future generations.  But my position is that it is not future generations who are paying for it.  The harm government debt brings to future generations is because of the lack of savings and capital investment in the present.

Future generations can simply decide not to pay the debt that was previously run up.  In that scenario, it will be the bond holders who are left holding the bag.  But regardless of how resources are redistributed in the future, government debt is harmful to people in the present day.

For round numbers, the U.S. federal government is currently collecting about $2.5 trillion per year, while spending about $4 trillion.  This leaves a deficit of $1.5 trillion.  (I am just using these as approximate figures, as the yearly deficit is a little lower.)

If the federal government weren't spending that additional $1.5 trillion in deficit spending, then it would instead be left in the hands of people and businesses who would choose to save it, invest it, or spend it.  When the government spends this money, it is being misallocated.  It is not necessarily all going to waste, or even destruction in the case of war.  Some of the money could be going to useful things like roads and bridges.  However, politicians (or anyone else) do not know the preferences of hundreds of millions of people.  So even if you had a group of really smart and really honest politicians, they would not know how to properly allocate trillions of dollars based on the wants and needs of hundreds of millions of people.

Since resources are misallocated, we are all poorer.  Our standard of living is less than it should be.  The government debt and overall government spending is hurting the current generation.

The U.S. government can cover this up for longer because of the Federal Reserve and its ability to create money out of thin air.  But even in the U.S., families are struggling more than ever and it is mostly because of the high levels of government spending and government debt.

A good example to look at right now is Greece.  It is a real world example of how massive government debt hurts right now.  The people living in Greece right now are not worried about future generations having to pay down the debt.  The debt will be gone anyway when the Greek government defaults in full.

The Greek people are suffering right now because of the massive debt and massive government spending.  The standard of living for the average Greek resident has fallen substantially.  Some people are just struggling to put food on the table.  The government has made so many promises (that can't be kept) and has spent so much money (misallocated resources), that it has actually led to a decline in real wealth.  They are paying the price right now, in the form of poverty.

As the U.S. government continues to spend like crazy and accumulate more debt, it is not our unborn grandchildren that we should worry about most.  It is the people suffering right here and right now from a massive overdose of big government.  If the government drastically cuts spending as it did after World War II, then we will see a big improvement in living standards in a short period of time.

Wednesday, May 9, 2012

Market Update for May 9, 2012

The Dow is below 13,000.  Gold is below 1,600.  Oil is below 100.  The 10-year yield is just above 1.8%.  The roller coaster ride is continuing.

It looked like we were in the midst of a mini-inflationary boom.  While the Fed's tripling of the monetary base in the last three and a half years has not produced massive price inflation, some of it has gone into certain sectors.

If you are an investor in the stock market, times have seemed somewhat decent lately.  If you are a middle-class consumer, then your trips to the gas station and grocery store have not been all that pleasant, as you see rising prices.  Rising prices affect different people in different ways, but overall it is a negative thing in the long run.

I don't know where things go from here.  A few down days don't necessarily make a trend.  With all of the massive malinvestment that has taken place, particularly in the last 4 years, we are going to experience pain in the future.  If the market turns back up from here and we continue a little inflationary boom period, it will just mean more pain later on.

However, it worries me the other way too.  We need a liquidation of the bad investment and a proper reallocation of resources determined by the marketplace.  In that sense, a downturn would be a good thing.  What worries me is different though.  If we go through a somewhat severe downturn, then I am afraid of what the Fed might do.  If the Fed goes into QE3 and creates a new round of massive monetary inflation, we might be in for some real trouble.  I'm not sure if Bernanke and company really understand the egg shells they are walking on.

It continues to be a fight between an artificial boom and a recession or depression.  The two sides are tugging back and forth.  If one side tugs too hard, everyone might go over a cliff.  I would rather go off the depression cliff, but I'm afraid that the Fed might yank us over the inflationary cliff, which would actually do more damage in the long run.

I expect the roller coaster ride to continue.

Tuesday, May 8, 2012

Mitt Romney is a Keynesian

For anyone in doubt about where Mitt Romney stands on economic issues, he has made it quite clear that he is a Keynesian.  Of course, anyone already paying attention should know this, but his latest comments at a town hall event in Cleveland leaves no doubts.

It is easy to get carried away using terms like "socialist" or "fascist".  The same goes for the term "Keynesian".  But his latest remarks are really the definition of Keynesian.

Romney said, "My job is to get America back on track to have a balanced budget.  Now I'm not going to cut $1 trillion in the first year."  This seems to be in reference to Ron Paul's proposal to cut $1 trillion from the federal budget in the first year.

When someone apparently asked "why not?" in the crowd, Romney then proceeded to give a response that is at the heart of Keynesianism.  He said, "The reason is, taking a trillion dollars out of a $15 trillion economy would cause our economy to shrink [and] would put a lot of people out of work."

So there you have it.  Romney doesn't want to cut government spending because it would cause our economy to shrink.  There are many good comments at the bottom of the article on this.  One commenter suggests that if Romney thinks cutting government spending will hurt the economy, then the opposite must be true and that increasing government spending should help it.

Several other people comment (correctly) that if the government doesn't spend that one trillion dollars, it doesn't take it out of the economy.  It simply allows people to spend it, instead of government.

Romney is supposed to be a businessman, but when it comes to economics, he is either a total fool or a liar.  In this case, he might actually be a fool.

The truth is the exact opposite of what Romney said.  Cutting government spending will get us back on the road to recovery much quicker.  It is what the American economy needs.  Every time the government spends a dollar, it is one less dollar in the hands of individual people in the marketplace.  When the government spends money, it is automatically a misallocation of resources.  There is no way that the government can know better how to spend money than each individual.

When the government spends money, it is diverting real wealth into less productive activities.  When consumers spend the money, they are getting exactly what they are knowingly paying for.  They are telling producers what they want.

Even if individuals decide to save more money (as opposed to the government spending it), it is still a benefit.  Real economic growth comes about through savings and investment.  If someone wants to save more money, there is probably a good reason for that individual to do so.  He is simply delaying gratification.  This temporarily benefits society by having one less person bid up prices.  It has the effect of making consumer goods cheaper for others.

When the federal government spends about 25% of the national income, this is a massive misallocation of resources.  It is going to administrative costs, wasteful projects, lobbyists, and welfare recipients.  It encourages less production for the future.  Even for projects that may seem decent and useful, it is still a misallocation of resources, as it does not fit the preference of every individual.

Romney has given us proof that he is a Keynesian.  He believes that cutting government spending would hurt the economy.  Is there much of a difference at all between him and Obama?

Monday, May 7, 2012

Charlie Munger on Gold

Charlie Munger, vice-chairman of Berkshire Hathaway, has chimed in on gold.  He said, "Gold is a great thing to sew into your garments if you're a Jewish family in Vienna in 1939, but I think civilized people don't buy gold.  They invest in productive businesses."

This seems to echo his partner/ boss, Warren Buffett, who is not a big fan of gold either.  While these two men are businessmen, they are also partially thugs, dressed in ties.  They have no problem pushing for bigger government and they have no problem in using the power of government to benefit their own businesses.

Munger is 88 years old and Buffett is 81 years old, but I have little tolerance for them.  I can be somewhat sympathetic to the man on the street who is naive about economics, politics, and monetary matters.  The average man on the street simply doesn't know better.  However, with these two, it is hard for them to use that excuse.

Ironically, Warren Buffett, who is a statist and an Obama supporter, really has no excuse.  His father, Howard Buffett, was one of the great congressmen of the 20th century.  He probably ranks second behind Ron Paul as the most libertarian politician in Washington DC.  He was a strong advocate for peace and free markets.  This included his support for a sound monetary system.

Munger says that civilized people don't buy gold, but he is the one who is not civilized.  He wants to use the monopoly power of government to threaten violence on others who don't share his world vision.  He uses the power of the government to stifle competition and give Berkshire an edge using statist means.

If it weren't for statists like Munger and Buffett out there, then people might be more likely to invest in productive businesses.  But when the government makes it extremely difficult to start businesses and then makes it even more difficult to succeed and compete with behemoths like Berkshire, it is hard for the little guy.  Since he can't make it big like these two, the little guy might try to protect what little wealth he has by buying gold.  Who can blame him with people like Buffett who supports more taxation and more big government policies under Obama?  This all leads to more money creation by the Fed and a depreciating dollar.  Yet Munger has the gall to say that civilized people don't buy gold.

I have no use for these two men.  They are not at all the embodiment of American capitalism.  They are what is wrong with the system today.  They are protectionists who hurt the little guy by advocating big government.  And now they are telling the little guy that he is not civilized if he tries to protect what little wealth he has.

Saturday, May 5, 2012

Libertarian Party Nominates Gary Johnson

The national convention for the Libertarian Party (LP) is wrapping up in Las Vegas.  The LP has nominated Gary Johnson, former New Mexico governor, as its presidential nominee.  Johnson won on the first ballot easily with about 70% of the vote.  The only other person who had any kind of a chance was Lee Wrights, who received about 25% of the vote.  Jim Gray was chosen as the vice-presidential nominee.

It is a little disappointing for me.  It is a disappointment to see the LP continue in this direction, it is disappointing for the country, and it is disappointing for the cause of freedom.  I don't think it is a major setback for liberty, but I think having Wrights as the nominee would have been much more positive in the short run.  I wrote a piece on this back in late March, basically saying that Wrights should be the nominee.

I have nothing personal against Gary Johnson.  He seems like a decent guy.  I just don't believe he is a principled enough libertarian.  Of course, he is leaps and bounds better than Romney or Obama, but that is not saying much.

There is a reason that Gary Johnson could not even get 1% support in most polls in the Republican race.  Meanwhile, Ron Paul was (or is) polling in double digits in many of the same polls.  If someone is going to put themselves out there as being completely different (in other words, libertarian), then why would they choose someone like Johnson?  He parses his words.  He said that he wants to end the war on drugs at the LP convention, but he was preaching to the choir.  During the time he was running on the Republican ticket, he would just say that he wants to decriminalize marijuana.

Taxes are another good example.  Ron Paul and Lee Wrights both want to end the income tax and replace it with nothing.  Gary Johnson wants the "Fair Tax", which would be a massive national sales tax.  If you are going to promote such a bold idea as getting rid of the federal income tax, why would you advocate replacing it with a massive sales tax?  That position is not going to be attractive to that many people.  The Fair Tax is seen as too radical by many people.  If you are going to get labeled as "too radical", then it should at least be for something significant that would progress us towards liberty.

Foreign policy is another example.  Paul and Wrights are anti-war and are not afraid to make it known.  Johnson, while again much better than Romney or Obama, parses his words.  If Johnson were to become president (which he won't), we can't be sure if he would bring the troops home right away.

Even Johnson's time as governor of New Mexico is highly questionable for libertarians.  While he vetoed a huge number of bills, state spending still went up on his watch.  He even brags about having kept public education spending up so that he could push for school vouchers.  Again, this is not much of a libertarian position.

I think Johnson is more honest and principled than Bob Barr, who was the LP nominee in 2008, but that isn't saying much again.  Barr was a total disaster for the LP, and apparently many people did not learn that lesson.

My guess is that there are about 2 million enthusiastic Ron Paul supporters in the country right now.  Assuming Paul doesn't get the Republican nomination, where will they go?  Lee Wrights would have been an easy choice.  Gary Johnson is a more difficult pill to swallow.

I hope that the LP can get back to nominating principled candidates like Harry Browne and Ron Paul.  The 25% who voted for Lee Wrights are the highly principled libertarians.  If just a tiny percentage of the Ron Paul crowd switched over to the LP, it might tip the scales back to the Libertarian Party nominating highly principled candidates once again.

Thursday, May 3, 2012

Taking Investment Advice From Competent People

There are a lot of competent people in the world, particularly in their niche.  They are considered very smart in their field of work.  Many people don't realize how smart Michael Jordan was on the basketball court.  People think of him as a great basketball player.  They think of him soaring through the air and dunking.  I thought Michael Jordan was actually at his best during his last couple of years with the Bulls.  He was an incredibly intelligent player who knew how to manipulate his opponent's weaknesses.

Michael Jordan was an incredibly talented basketball player and very smart on the court.  He is probably quite intelligent in other areas of life too.  It does not necessarily mean that I would take investment advice from him.

Warren Buffett has had incredible success in investing, yet he doesn't understand free market economics.  If he does understand, then he is basically evil for promoting what he does.  He is the opposite of his father.  Howard Buffett was a great libertarian congressman who understood the benefits of free markets and less government.

It actually astounds me how many brilliant people there are, particularly in their field of work, who seem to have the mentality of a 5 year old when it comes to understanding free market economics.

My main word of advice here is to be careful about listening to experts.  The more intelligent the person is, the more of a risk there is that you may be guided down a bad path.

I even see bad investment advice in the libertarian/ Austrian school arena.  Peter Schiff was great in calling the housing bubble.  He has been great in advocating gold.  Yet, he had his clients in international stocks that went tumbling down in 2008.

Robert Murphy is another great free market economist.  I consider him to be brilliant on many levels.  Yet, he has been admittedly wrong in some of his predictions.  He did not call the housing bust like Schiff did. He also predicted high price inflation.  While his prediction may still come true, his timing was at least bad.

There are other free market economists who have made some bad calls.  While they understand that economics is all about human action, they don't necessarily do a good job in predicting how humans will act.

If Austrian school economists get things wrong, how do you think others are going to do when they don't even have a sound and correct basis for their thinking in economics?

You may know someone who you consider really brilliant.  Yet, they are most likely not that brilliant when it comes to understanding free market economics.  If that is the case, then think of this person whenever you hear some talking head on television giving out investment advice.  If you understand Austrian economics, you may know more than the person on television.

Wednesday, May 2, 2012

Determining a Retirement Amount

In today's world of fiat money, it is hard to know how much you need to retire.  Life expectancy is a guess and health costs are skyrocketing.  There are a lot of other variables.  Of course, the biggest variable and the biggest threat to your retirement is the debasement of money.

If you lived in the late 1800's in America, you could save your money without investing it and you could be reasonably certain that it would hold its value.  When money is backed by gold, the only inflation you have to worry about is from gold miners.

So what is the best way to determine a good retirement target amount?  You can't say that you need a million dollars, because the target is moving.  By the time you reach that goal, one million dollars may not buy you that much.

There is the option of measuring it in gold.  You could say that you need 500 or 1,000 ounces of gold to be wealthy enough to retire.  The problem here is that gold is not the everyday money that we use in today's society.  In the year 2000, 1,000 ounces of gold would have been worth just $300,000 at 300 dollars per ounce.  Today, with gold near 1,700 dollars per ounce, 1,000 ounces would be worth 1.7 million dollars.  While prices have risen in the last 12 years, they have not gone up by a factor of 5 or 6.  This illustrates that measuring your wealth just in weight of gold is not a good measurement.

You could set your target in dollars and then adjust it each year according to the CPI, but then you would be relying on government statistics, which may understate the actual inflation rate.

As I have written before, I think using real estate may be the best measure for wealth accumulation and for a target retirement number.  If you own 10 properties free and clear (no mortgage) and each one is worth $100,000, then your net worth in properties is a million dollars.  But let's estimate rental income, instead of worrying about the value of each property.  Let's say that you could rent out each place for $1,000 per month.  But you still have expenses for HOA fees, property taxes, insurance, repairs, and other administrative costs.  Let's say these add up to $500 per month (which is probably on the high side in most areas).  You net $500 per property per month, times ten properties.  That is $5,000 per month or $60,000 per year.  If you can live on $60,000 per year right now, then this is a good target number.

So why do I like using real estate?  The reason is because rents don't fluctuate much.  It is not like the price of gold where futures markets are driving prices up and down on a daily basis.  Rents are more stable.  However, rents do tend to keep up with inflation over time, so it relieves some of the anxiety over central banks creating money out of thin air.

This is not a perfect measurement, but I don't think you can come up with anything perfect in today's world.  Perhaps it could be some combination of dollars and gold.  If anyone else has any suggestions on this topic, I would be glad to hear them.

Tuesday, May 1, 2012

More of Robert Murphy on Government Debt

Robert Murphy, the brilliant Austrian school economist, has written another post on whether government debt can burden future generations.  I have dissented from his view in the past.  His answer is that future generations are burdened.

My view on the subject is one that Murphy previously held (according to some of his more recent writings).  I believe that future generations are burdened only in the sense that there is less savings and capital investment that future generations will benefit from.  We are relatively wealthy today with houses, cars, televisions, refrigerators, plentiful food, etc. because of the capital investment that has taken place in previous history, especially in the last couple of hundred years.

In Murphy's latest piece on this subject, he uses an example of someone buying what is essentially a government bond in 2012 and then being able to cash in on it in 2112.  The government declares that the debt will be paid off in one hundred years using the taxpayers of the country.

First, this is assuming that there is no default, whether through inflation or outright repudiation.  The taxpayers in one hundred years could simply refuse to pay up.

Second, the country as a whole won't be any poorer in one hundred years, even without a default.  It will just be a redistribution of wealth, which is exactly what happens in 2012.  It is the person buying the government bonds in 2012 who is transferring wealth to the government.  In 2112, wealth may or may not be transferred again, depending on whether the taxpayers are willing to pay up and also depending on the level of previous inflation.

Let's go back to the basics and pretend we have a tropical island with four people living there.  There is Al, Bob, and Chris, along with George the government.  George wants to throw himself a party.  He wants to feast on three big fish for the night.  He does not want to order a confiscation of one fish from each citizen.  Instead, he issues debt.  He asks someone to loan him three fish and they will be paid back in the future through the fish catching of all of the citizens.  Whether or not he offers additional interest is irrelevant to this discussion.

Bob decides to take the three fish that he just caught and to loan them to George.  He is now Bob the bond holder.  Meanwhile, George the government has his feast.

In one year, Bob the bond holder tries to cash in on his previous loan.  At that point, there are two possible scenarios.  George the government may be afraid of Al and Chris if he tries to confiscate their fish.  It might be easier for George to default on his debt and stiff Bob.  The other scenario is that George wants to keep his parties going and he wants to be able to issue more debt in the future.  In this case, he confiscates fish from Al and Chris (and maybe even Bob) to pay off Bob.

In the first scenario, it is obvious that future generations were not burdened (even though it is still Al and Chris and not their children).  The only person who lost was Bob, but his loss occurred when he made the loan.  He may have realized his loss a year later, but his actual loss was at the time of the loan.

In the second scenario, Al and Chris were burdened a year later.  Their fish were confiscated to pay for the previous excesses of George.  But here is the key thing.  A year later, the island as a whole was not worse off.  There was simply a redistribution of fish from Al and Chris, to Bob.  The only way the island as a whole may be worse off is because of the lack of previous capital investment.  A year ago, when Bob made the loan, if George hadn't made his loan and had his feast, then Bob would have had three extra fish.  He might have spent an extra day building nets and fishing rods or even shelters, knowing that he had three extra fish to feed on during that time.  But since he gave up his three fish, he did not have the extra opportunity for savings and capital investment.

In conclusion, I believe that government debt is harmful in the present.  It is also harmful in the future because there is less opportunity for capital investment and future wealth generation.  However, I would not say that government debt is a burden on future generations, at least on the whole.  It could cause a redistribution of wealth if the taxpayers are willing to pay the bond holders, but this in itself would not make society poorer as a whole.  There would still be the same number of fish to eat.