It seems that China is in a boom that may go bust.  I was talking to people about this years ago.  I remember 4 or 5 years ago hearing some people say that China may go into a recession after the 2008 Olympics.

China has a reported price inflation rate above 6% right now.  I would not be surprised if that number were understated significantly.  Of course, this is price inflation.  Monetary inflation in China has been much higher in the last several years.

I am hearing more people today talk about the possibility that China is “overheated”.  This is absolutely true, but I just want to be clear on something.  The only reason that China is “overheated” is because of the previous monetary inflation.  There is absolutely nothing wrong if an economy grows 8 or 10 percent per year, as long as it is not part of an artificial boom.  In a free market economy with stable money, a huge growth rate of 8 or 10 percent does not mean that things have to slow down or go bust.  If the growth is built on real savings and investment, then the growth is real.

Unfortunately for China, much of its growth has been artificial.  There is no doubt that the Chinese people are far better off now than they were 3 decades ago or even 1 decade ago.  Some of this growth is real due to the semi-liberalization of the economy by the communist rulers.  However, as I mentioned, China has had significant monetary inflation over the last several years.

The Austrian Business Cycle Theory applies to China just as it would apply anywhere else.  The easy money policies of the Chinese central bank have created an artificial boom that is misallocating resources. This is why we see these new cities being built that are practically empty.  If China keeps increasing its rate of monetary inflation, then eventually they will go to hyperinflation.  The more likely scenario is that the Chinese central bank will slow down monetary inflation and there will be a severe correction.

For anyone who studies and understands Austrian free market economics, there should be little doubt that there will be a bust in China.  It will be China’s first major recession, since this is the first time that China has had any kind of significant economy.

The interesting thing to learn from the Chinese boom is just how long it has been able to continue.  Again, there were people five years ago predicting a bust.  While Austrian economics can help us in predicting that a bust will occur, it is almost useless as to the timing.

Remember this lesson when the price of gold goes through the roof.  A bubble can last a lot longer than people think.  When the day comes that it does go bust, be prepared and step out of the way the best you can.

Gold finished up today, closing above $1,780 per ounce.  After its big run in the last few weeks, it pulled back a little and now seems to be resuming its up trend.

A couple of weeks ago, I wrote that I don’t think gold is in a bubble.  With the movement this week, not only is gold not in a bubble, but it doesn’t even look like it is going to have a significant pullback any time soon.

My analysis of the economy and investments usually comes from a libertarian/ Austrian point of view.  I like to look at the facts and make judgements based on the fundamentals.  For this reason, I have been bullish on gold.  The Fed has tripled the adjusted monetary base in the last three years and the federal government is running a yearly deficit of $1.5 trillion.  These are enough reasons alone to be bullish on gold.

I am not usually a chart guy.  I don’t like to look at breakout points or moving averages.  With that said, even if we look at gold from this perspective, you still can’t help but be bullish.  Gold made a significant move during the recent stock market turmoil.  After hitting new highs (several times), it had a slight pullback.  The price has been consolidating and looks ready for another possible move.

Compare gold in the last few weeks with silver this past spring.  A few months ago, silver went parabolic.  It went up about 50% in a very short time span.  It went all the way to near $50 and then the bottom fell out.  Silver managed to lose 30% in the matter of days.  It snapped back to below $35 in an incredibly short time frame.

When you look at gold in the last few weeks, it looks much stronger.  It looked like it could go parabolic, but then it stopped and made a slight retreat.  It is not going to the moon in the matter of days, as silver did a few months ago.

Perhaps foreign central banks are putting a floor under the gold price and buying on dips.  There are also a lot of scared investors out there looking at gold.  Most people do not own gold, except for small amounts in jewelry.  Most don’t even own much in the way of stocks.

I know a couple of people who are looking to sell some gold (mostly jewelry).  Again, if we were in a bubble, people wouldn’t be looking to sell now.  I expect gold to go parabolic at some point, but we are not even close to the final run yet.  I think at some point, gold stocks will get hot.  I am not making a prediction as to the timing, but I am making a prediction (which I usually don’t like to do) that gold stocks will catch fire as investors look for alternatives.

Warren Buffett, one of the world’s richest individuals, wrote an opinion piece in the New York Times in which he called for higher taxes on the mega-rich.  This has been a standard line of his for years.  Buffett is an Obama lover and he is a statist (or do I repeat myself).

The results are in for the Ames Straw Poll.  Michele Bachmann won, while Ron Paul took a close second.  The spread between the two was less than 200 votes.  Tim Pawlenty came in third, but it was a distant third.  I think this just about puts him out of contention.  Although Romney finished 7th, he was not competitively trying to win.  You can see the results here.

As I blogged on Thursday, I think the race for the Republican nomination comes down to four people.  Those four are Mitt Romney, Rick Perry (who just announced), Michele Bachmann, and Ron Paul.  I think my prediction has become stronger based on the straw poll results.

If Sarah Palin enters the race, I don’t think she will win the nomination.  If anything, she will probably just take votes away from Bachmann.  They are both women and they are favorites amongst Tea Party conservatives.  I don’t think her entering the race would be damaging to Ron Paul, as his supporters are more libertarian than conservative.

As for the debate, I watched most of it on Thursday and it was a bit more interesting than past ones.  Pawlenty and Bachmann went at it and I thought that Bachmann got the best of him.  I think this was his last chance to perform well and he basically failed.  He had a few funny one-liners, but this is not enough to be successful.

Newt Gingrich came across fairly well, although I still think he is a fake.  He does not stand a chance because most people sense (rightly) that he can’t win against Obama.  So even those who like him realize that others don’t.

Rick Santorum has never stood a chance and that will continue.  He claims to be a wonderful Christian, yet he wants to bomb the Middle East back to the stone age.

Herman Cain occasionally sounds good when he is speaking libertarian rhetoric.  The rest of the time he comes across as vague and, quite frankly, stupid.

Jon Huntsman just comes across as creepy and he is another establishment favorite, except he has little chance.

Ron Paul had an interesting night at the debate.  I thought he would shine more with economics.  We are in an economic crisis and he has predicted much of what has happened.  He did not shine as much as I thought (or hoped) he would.  He nailed it when they were talking about Romneycare and the 10th Amendment.  He said that while it may be bad policy, the federal government should not go in with their guns to overturn state law.  Bachmann got this completely wrong, which should show libertarians that she is not a libertarian.

I thought Ron Paul shined the most when it came to foreign policy.  Of course, people who disagree with him will see things differently.  This is where he really distinguishes himself from the field.  When Santorum challenged him on Iran, Paul really showed off his intelligence when he pointed out that the Iranian conflict goes back to at least 1953 when the U.S. government overthrew their leader.

When it comes to the economy and fiscal policy, I think Ron Paul needs to challenge the other candidates more.  It was actually Santorum who pointed out that a majority of the budget is made up of Medicare, Medicaid, Social Security, and the military.  This makes it almost impossible to balance the budget unless you make huge cuts to one or more of these things.  But Ron Paul actually could cut enough to balance the budget.  It would be difficult for Michele Bachmann to explain how she would balance the budget.  She emphasized that she voted against raising the debt ceiling, but it is unclear what she would specifically cut to balance the budget.

In conclusion, I think we are down to four: Romney, Perry, Bachmann, and Paul.  This is great news for libertarians as we have a spokesman in the national spotlight.  Even if he doesn’t win, the country will be better off as more people move towards true liberty.

Tonight is a Republican presidential primary debate.  It will air on Fox News.  On Saturday, the Ames Straw Poll takes place.  Do not mistake this as a regular poll with a random sample.  The Ames Straw Poll is a better indication of a campaign’s organization and the loyalty of its followers.  For this reason, Ron Paul will likely do well.

It is impossible to predict what will happen tonight, but I expect the economy will be the big topic.  I’m sure Fox News will find a way to ask Ron Paul some bizarre question, but he will get his points across as usual.

I see the whole race for the Republican nominee coming down to four people at this point.  I never expected John McCain to get the nomination in 2008, but I do believe we are in a different era now, just 4 years later.

I expect the 4 main contenders to be Mitt Romney, Michele Bachmann, Rick Perry, and Ron Paul.  I do expect Perry to enter the race and to be a contender.  Even if Sarah Palin enters the race, I think it is unlikely she will get the nomination, although it would certainly make things interesting.

Romney and Perry are the establishment candidates.  Romney is out of favor with the Tea Party.  He has to defend Romneycare in Massachusetts.  Romney passed Obamacare in his state before Obamacare actually existed.  If there is one thing that unites the Republicans, it is their hatred of Obama and Obamacare.  How could Romney possibly be the nominee given this fact?

Perry is trickier.  He sometimes talks a good game.  He sometimes sounds libertarian.  He said he was open to the suggestion of Texas seceding from the U.S.  He was pandering to his audience at that time.  If conservatives look closely at his record (most won’t), then they would see that he has been horrible on some issues.  He has an advantage being the governor of a large state that is not struggling as much economically.  His rhetoric will fool a lot of people.  Just remember that this is the man who wanted, essentially, a forced vaccination program for young girls.

Bachmann is not favored by the establishment, but she would still be acceptable.  She would continue the U.S. empire.  She says she favors ending the Department of Education.  It is hard to say if she is telling the truth.  Besides that, she doesn’t offer much in the way of specifics.  I would be a little more impressed with her if she did.  She says she wants lower taxes and less spending, but she doesn’t really say what she would cut.  I fear Bachmann in the way that Reagan was bad for libertarianism.  She will espouse all of these free market principles, but her policies will not reflect her rhetoric.  Then the hacks in the media will say that her free market principles have failed.

Then we are left with Ron Paul.  The establishment hates him and his ideas.  They fear him.  They fear he is correct in what he says.  They fear the following that he has accumulated.  It is really unbelievable that he is polling in the double digits in many national polls.  For anyone in the libertarian movement prior to 2007, this should be really impressive.  This is the first time in modern day America that libertarian views are being heard by millions and millions of people.

The Ames Straw Poll is rather important.  If any one of the big candidates, excluding Perry, finishes less than third, then I think their chances will be low of getting the nomination.  It is very important, for those campaigning and participating, to finish in the top three.  I expect Ron Paul will be in the top three.

The stock market has been on a roller coaster ride in the last week.  The drops have been more than the ups.  This is very bearish news for the stock market and the economy in general.  Of course, if you have been paying attention and you understand Austrian free market economics, then none of this comes as a shock to you.

Even less shocking, although notable, is the huge run in the price of gold.  It topped over $1,800 per ounce today.  People are buying gold due to economic uncertainty and fiat currency uncertainty.  The interesting thing is that the other metals have not been on this same run.  Even gold’s cousin, silver, has not done that well.  If silver is the poor man’s gold, then I guess rich people are buying right now.

The other notable thing is that, as of closing today, an ounce of gold is worth more than an ounce of platinum.  I discussed this in a blog post last month.  Platinum is typically more expensive than gold.

In today’s environment, it is easy to see why gold is doing so much better.  Gold has a history of being money.  Platinum is more of an industrial metal, often used for cars.  Gold is primarily used for jewelry and investment.

Another factor right now is the fact that many foreign central banks are buying gold.  They are certainly not buying platinum.  Bernanke says that central banks hold gold because of tradition.  But the reason it is tradition is because gold acted as money for thousands of years.  Central bank buying is probably helping in this gold explosion.

I am even more adamant now that platinum might be a good speculation at this point.  The gold to platinum ratio is now over 1 to 1.  While ratios don’t always mean anything, it can be useful for speculative purposes.

I think the last week has confirmed my overall strategy of investing in a permanent portfolio setup, as described in Fail Safe Investing.  I am also an advocate of holding far more gold than silver.  I am not against silver as a speculation, but gold should be a rock in your portfolio.  It is there for more stability and a hedge against inflation.  Silver is much more volatile.

So while I am still advocating that a majority of your portfolio be in the permanent portfolio and that most of your precious metal holdings remain in gold, I think there are opportunities for speculation.  If you want take a very small portion of your investments and buy platinum, I think now would be as good of a time as any.

After my last post on platinum, there was an anonymous comment listing ETFs and ETNs.  If you don’t want to buy and take possession of the actual metal, then PPLT looks like a good alternative that you can easily trade through a brokerage account.

After yesterday’s huge drop in the stock market, the Fed met today and released its statement regarding the economy and its policies going forward.  You can read the transcript here.  It is a short read.

The Fed announced that the current conditions “are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”  I have written about the federal funds rate before.  The Fed is not really controlling this rate right now, at least through the money supply.  The banks have piled up massive excess reserves and most of them don’t need overnight loans.  This has kept the rate near zero.

This statement didn’t mean all that much.  If anything, it should really be a bearish sign that the Fed expects to maintain this policy for at least 2 more years.

The transcript does say that the Fed “will maintain its existing policy of reinvesting principal payments from its securities holdings.”  This is an indication that they plan to have a stable money policy.  As usual, they leave open the possibility of adjusting their strategy as things progress (or regress).

The market had a slightly negative reaction after this release, but then the stock market exploded in the last hour of trading.  The Dow went up about 600 points in the last hour, closing up more than 400 points for the day.  Of course, this still did not erase all of the losses from yesterday.

Interest rates went down.  It is ironic that rates on government bonds have gone down since being downgraded from AAA status from S&P.  If you want to refinance a mortgage and you procrastinated last year when rates were way down, you have another opportunity.  If you can get a 30 year loan for about 4%, why not take it?  If you stay in your house for a long time, your last payment in 30 years will be practically nothing.  Make inflation your friend, even though it is not.

It is impossible to predict where the market will go from here.  I expect a lot more volatility in the short term.  Ultimately, it is going to depend on government policies and, even more so, Fed policies.  It is important to keep an eye on the adjusted monetary base.  This is far more meaningful than the federal funds rate.  The Fed actually controls the monetary base right now.

The bottom fell out of the stock market today, with the Dow falling more than 600 points.  It was even more brutal for the Nasdaq and S&P 500, which were both down over 6 and a half percent.  This came after news from late last Friday that the S&P was lowering the U.S. government’s AAA rating.  Today, the S&P announced more downgrades, including some municipal debt.  The news keeps getting worse and worse.  Meanwhile, gold exploded today, hitting new highs above $1,700 per ounce.

For anyone who has followed my speculation strategy of going long in gold and silver and shorting the stock market, you have done very well these last few trading days.  If you have a lot riding on market shorts, you might consider taking a small amount off the table.  While I expect the stock market to continue down for now, you never know if the Fed comes out with an announcement of QE3 that could drive the market right back up.

Of course, if the Fed does announce another massive round of quantitative easing (money creation), then this will be even more bullish for gold.  The Dow to gold ratio is now less than 6.5 to 1.  In other words, you need a little less than 6.5 ounces of gold to buy one share of the Dow.  I have no magic ratio of what would make a good buy on the Dow or a sell on gold.  There will continue to be roller coasters, but I think a Dow to gold ratio of 4 to 1 or less might be a good indicator.  I would be very surprised to see it hit 1 to 1 any time soon, but we really are in unknown territory.

I think the S&P downgrade was largely symbolic.  The U.S. government should have been downgraded a long time ago.  The three major agencies (S&P, Moody’s, and Fitch) are basically granted a monopoly by the government.  They are part of the establishment.  I’m not sure what this tells us here.  Perhaps the government will use this downgrade as an excuse for more taxes or more so-called stimulus.  Or perhaps things are so bad that even the S&P could not ignore it.  Whether the government will ever officially default is unknown, but it defaults almost every day by devaluing our money.

Besides gold, the other investment that did well today was bonds.  The 10 year yield was down to about 2.34%.  There is a tug-of-war going on between gold and government bonds.  Investors are seeking both for safety, but for different reasons.  Investors in bonds fear a major recession.  Investors in gold fear major price inflation.  Both sides may be right.

The Keynesian policies of this administration and the one before have put us in this situation, along with Congress and the Fed.  The Fed has tripled the monetary base since 2008 and we have seen deficits of around $1.5 trillion.  All of this and the economy is already going back in the toilet.  This is what happens when the government does not allow the correction to take place.  With all of the spending, debt, and money creation, things are only going to get worse.

My biggest fear right now is that these politicians will take a page out of Paul Krugman’s playbook and say that the only reason the economy is not recovering is because the previous stimulus was not big enough. If the government spends even more and the Fed goes crazy with QE3, then we could get hit really hard with price inflation.  Ron Paul and Peter Schiff may be proven right sooner than we could have imagined as both have warned of severe consequences for the U.S. dollar.

Just remember that the name of the game right now is to keep what you have.  If you can make any extra profits while maintaining your purchasing power, then consider yourself lucky or really good.

The velocity of money is a topic that I find even many libertarians do not understand.  Although it is impossible to accurately measure, it is a subject that is very important when looking at the economy.  I have discussed this topic before, but I think it is important enough to warrant more discussion as it relates to the current economy.

The velocity of money is the speed at which money changes hands.  If the velocity is high, then money is changing hands quickly.  Another way to say this is that there is a low demand for money.  Going the other way, low velocity means that money is slow to change hands.  It means that there is a higher demand for money.  In this case of low velocity, people are holding the equivalent of cash, usually in a bank.  It means people are not spending as much.

When more people are paying down debt, I consider this almost equivalent to low velocity.  People have a higher demand for money.  But if someone has credit card debt with a high interest rate, it makes sense for that person to pay down the debt instead of holding cash that is earning little or no interest.

I believe there are two main reasons that we are not experiencing high price inflation, in spite of the fact that the Fed has tripled the adjusted monetary base since 2008.  One reason is that the commercial banks have piled up this new money into excess reserves.  This has prohibited the fractional reserve banking process.  The other reason for a lack of massive price inflation is, I strongly suspect, a high demand for money.

People are not spending money as they were before the fall of 2008.  Although the national government debt is growing exponentially, the average American has actually reduced debt from a few years ago.  Americans (as well as others throughout the globe) are fearful of the future.  There is high unemployment and high deficits.  Future tax rates are uncertain and government regulations are causing huge uncertainty for individuals and businesses.  Many companies are sitting on big piles of money, but they are not investing it right now.  Excessive regulations (think Obamacare) and other uncertainties are causing Americans and American businesses to be conservative, fiscally speaking.

Since Americans are spending less, I believe this has helped keep a lid on price inflation.  If the economy falls back into recession, which seems likely, I would predict that the velocity of money stays low.  Of course, I don’t think we’ve ever really been out of the recession.

It is important to remember that just because there is high monetary inflation, it does not automatically translate into high price inflation, especially in the short term.  On the other hand, velocity can go the other way too.  If the Fed starts up a QE3 program (more money creation) and more Americans start to fear future price inflation, then the velocity of money can turn up quickly.  You can have a scenario where prices are going up even faster than the money supply, especially if people think that the central bank is not going to stop creating new money in the future.

This is actually what can happen in a hyperinflation, or as Mises called it, the crack up boom.  If the Fed keeps creating new money like crazy and people doubt whether it will ever stop, the dollar could actually become worthless rather quickly.  I do not think this scenario is likely as I think the Fed would tighten up its monetary policy before it allowed hyperinflation to occur, although I will admit that anything is possible these days.

In conclusion, while velocity is hard to measure, you should at least know of its importance.  Consumer prices will not always directly correlate to the money supply, at least in the short run.  This is due to the demand for money.  If consumers remain tight with their money, expect price inflation to remain much lower in comparison to the new money in circulation.

The Dow fell more than 500 points today.  The Nasdaq was down over 5%.  Oil was down 6%.  The silver ETF fell more than 7%.  Gold hit new highs and then fell back, although not as violently as silver.  There were two good investments to be in today: U.S. bonds and the U.S. dollar.

I am an advocate of the permanent portfolio.  Part of that portfolio is to put approximately 25% into long-term government bonds.  Some people think this is stupid.  They wonder how anyone could possibly invest in bonds when interest rates are sure to go up.  Well, today is your reason why.  Although interest rates are at near historic lows, they can still go lower.  For some reason, investors still flock to bonds for safety.

Today was also a good lesson on why the permanent portfolio invests in gold and not silver (although the mutual fund PRPFX puts a small percentage in silver).  I am not against owning silver, but I do favor a much higher percentage in gold.  Today was a perfect example as silver was off more than 7%.  While silver has the potential for bigger gains, it also has the potential for bigger losses.

Today should not be a big surprise for readers of this blog.  It should not be a surprise to libertarians and followers of Austrian economics.  When the government’s solution to a recession is more spending, more money creation, and more debt, it is not a surprise that the economy remains weak.  Today revealed to many people that we are going into another recession.  I think a better description is that it is a continuation of the recession.

The government and the Federal Reserve have pumped in massive amounts of money and “stimulus”.  It made things appear a little better over the last year and a half.  The stock market was going up.  But the so-called recovery was an illusion.  It was not built on stable foundations.  A recovery needs savings.  A recovery needs for the correction to have taken place to correct all of the malinvestments.  The government would not allow this to happen with all of the bailouts and spending.

This economy is in major trouble and it will continue to be until the government gets out of the way.  Obama and his Keynesian advisors are morons.  The Republicans rightly blame Obama for making the economy worse.  But they lack specifics.  Most of them also fail to mention that Obama is a continuation of the bailout and spending policies of Bush and the Republicans.

The trouble in Europe is also getting worse.  There is now talk of Spain and Italy needing help.  Greece is a drop in the bucket compared to these two countries.  We are either going to see massive inflation from the European Central Bank or we are going to see a breakup of the European Union.

Meanwhile, the Bank of Japan is going to create more yen out of thin air because its currency has been too strong.  This is more mercantilism.  They are morons too.  The Swiss have also announced a looser monetary policy for the franc.  In other words, two of the strongest fiat currencies will also be inflated.  This is why you should own gold and other hard assets.  All fiat currencies are risky at this point.

This whole thing sets us up for more quantitative easing (QE3) from the Fed.  This will eventually drive the dollar back down and will drive gold up even higher.  Bernanke is a student of the Great Depression.  He thinks that the Great Depression happened because there was not enough money printed.  This is his only solution to the down economy.  I expect more and more inflation.  Prices will rise.  I think “leaders” from other countries will tell him to stop.  If he doesn’t listen, then the U.S. dollar will no longer be the reserve currency of the world.  It will lose this status quicker than most imagined.

Hold on to your hat.  This will be another wild ride.  I recommend keeping your money as safe as you can.  I recommend the permanent portfolio.  I recommend holding some extra cash (in the bank) and gold.  I recommend getting out of debt.  I recommend that you sit back and watch Obama and Bernanke continue to squirm.  These clowns are absolutely clueless as to what to do next.  Their only solution is to spend more and print more.  This has not worked so far.  It has made the problem worse.