Paul Up, Obama Down

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

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

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

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

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

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

Gold and Velocity

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

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

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

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

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

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

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

Gary Johnson, The Fair Tax, and a Balanced Budget

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

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

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

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

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

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

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

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

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

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

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

Herman Cain and His 9-9-9 Plan

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

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

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

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

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

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

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

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

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

Gold Plummets This Week

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

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

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

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

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

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

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

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

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

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

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

Libertarian Thoughts on the Republican Debate in Orlando

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

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

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

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

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

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

The Fed to Buy Longer-Term Government Bonds

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

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

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

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

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

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

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

Obama’s Millionaire Tax

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

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

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

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

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

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

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

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

Once In A Lifetime

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

From a libertarian standpoint, Ron Paul is easily the greatest congressman of the last hundred years and perhaps ever.  We have this man running for president and we couldn’t really ask for a better scenario.
Politics, ultimately, is not a solution in moving our society towards greater liberty.  But most people think politics and voting are the mechanisms we need to roll back government.  Go talk to an average guy on the street and tell him that if he becomes more educated about liberty and some others do the same, then that in itself will achieve greater liberty.  He will think you are nuts.  He is under the assumption that you have to vote in the “right” people.
If you tell the average guy on the street that withdrawing consent from the government will ultimately cause it to collapse, he will not understand the concept.  In fact, many libertarians do not understand this, so how can we hope for non-libertarians to understand this?
This is why Ron Paul is so important.  He has a platform right now to reach millions of people.  The grassroots from his 2008 campaign are all over the internet spreading his message.  Meanwhile, it almost seems as if a day doesn’t go by that Congressman Paul is not making an appearance on television or radio.
There are some issues in which there will always be disagreements between libertarians, such as immigration and abortion.  There will also be disagreements about just how small government should be.  But could libertarians ask for a better person to represent their viewpoint that Ron Paul?  He is consistent, honest, and principled, and he takes the libertarian position on all of the major issues.
This is especially important.  If you get into a discussion with someone about politics, or specifically about Ron Paul, you don’t have to make any excuses for him.  You don’t have to say, “well, he is good on this particular issue, but don’t pay attention to him when he talks about this other thing.”  Again, libertarians can disagree, but on all of the major issues, you can count on Ron Paul to take a principled and consistent position.  It is helpful when you don’t have to be apologetic for someone you are trying to defend.  You don’t have to make any excuses for Congressman Paul.
Although politics is not the ultimate solution, Ron Paul and his devoted followers will continue to chip away at people’s beliefs.  It is impossible to say if he has a good chance of getting the Republican nomination, but it is a testament to the libertarian community that it is even possible.  Remember that most people, outside of libertarians and those in his district, did not even know who Ron Paul was just 5 years ago.
Libertarians now have a great opportunity with the internet and social networking to spread the message of liberty and we have a great spokesperson to represent us and our ideas.
Regardless of what happens in this election, there will be far more libertarians than there were before it started.  This will slowly have its effects.  It may not be noticeable to many, particularly when the government is getting bigger and more intrusive.  But the pedestal of the American empire is being chipped away.  It may not be noticeable, but the foundation is starting to give way.
If enough people begin to withdraw their consent, then the empire can come crashing down quickly.  Very few people expected the Berlin Wall and the Soviet Union to fall apart like they did.
Libertarians will often complain about the times we live in due to an uneducated populace and a huge national government.  But there is one freedom that we mostly still have and that is freedom of speech.  As long as we are mostly free to communicate with each other and spread ideas, then government can be stopped.  Ideas are a powerful thing.
It is interesting that many libertarians like to point to the Founding Fathers of the United States and their wisdom, but today’s libertarian leaders are far more wise and radical than the Founding Fathers.  Libertarians of today have the benefit of more history and more open communication.  But regardless of the reasons, I will take Tom Woods over Thomas Paine.  I will take Gary North or Anthony Gregory or Robert Murphy over Adam Smith or Patrick Henry.  I will take a President Ron Paul over a President Thomas Jefferson.

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

Investing in Foreign Currencies

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

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

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

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

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

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

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

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

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