Romney Takes Arizona and Michigan

It looks like Mitt Romney will win Arizona and Michigan.  Just a couple of weeks ago, Santorum had taken a lead in the national polls and had a substantial lead in the polls for Michigan.

Romney can thank Ron Paul for his victory in Michigan.  The last debate, that took place in Arizona, may have been a game changer for Rick Santorum.  Ron Paul took him to school.  He pointed out many of his inconsistencies and exposed Santorum as a hypocrite.  He pointed out that Santorum campaigns like he wants smaller government, but his actions as a senator were completely different.

While there are still headlines to be made, I think Mitt Romney is the heavy favorite to win the nomination at this point.  It is hard to believe that the Republicans will put, as their nominee, the founder of Obamacare.  Romneycare was instituted in Massachusetts and is very similar to Obamacare.  While Romneycare may be constitutional, it still does not make it good policy.

The one issue that the entire Republican Party agrees on is that Obamacare is a bad thing.  So the party nominee will be the unofficial founder of Obamacare.  Makes sense to me.

Romney is really going to get the nomination out of default.  He has the money and backing to win it and the other candidates all have their major flaws.  Of course, Ron Paul doesn’t, but the majority of the country isn’t quite ready for him yet.

Rick Perry should have stayed in the race.  Conservatives are hungry for someone decent who matches their views.  Perry was horrible in the debates, but he should have stuck it out.  He actually could have come back and challenged Romney.

As for Ron Paul and his libertarian message, he will have over 100,000 votes coming out of Michigan.  If he stays in the race (which I expect him to), then he will likely amass a couple of million votes when it is all over.  While not all of the people who vote for him are hard-core, he definitely has the most loyal and passionate following.  This was shown by about 4,000 people attending a Ron Paul event in Michigan.

I think it is fairly safe to say now that there are about one million Americans who would consider themselves solid libertarians and several million more who lean libertarian.  To put this in perspective, no Libertarian Party presidential candidate has ever received a million votes in one election.

Although the percentage of libertarians still seems small, we don’t need a majority to gain liberty.  We need a tireless minority.  We need a solid 10%.  We are getting closer and closer.  I really believe that there is good reason to be optimistic for the long-term future.  More Americans are waking up and embracing the idea of liberty.  I think the libertarian revolution is really rolling now and I expect it to continue.

Iran and the Price of Oil

The price of oil has risen quite a bit recently.  Crude oil is now around $108.  The general consensus is that the price has risen due to the tensions in the Middle East, particularly the threat of war in Iran.

One thing that makes economics difficult is that you can’t look at real life in a vacuum.  It is impossible to know for sure if the rise in the price of oil is because of the possibility of an Israeli or American strike on Iran.  It is quite possible that the price of oil has gone up in dollar terms because of the previous monetary inflation that took place.

My guess is that it is a combination of the two things.  There has been a lot of new money created by the Fed since the fall of 2008.  While the bad economy and a lack of bank lending have helped to keep a lid on prices, it is hard to imagine that it wouldn’t have had some effects on prices at this point.

When there is monetary inflation, the new money does not spread out across the economy evenly.  Some things may not go up much in price, while other things may go up a lot.  The new money finds hot spots.  This can be in the stock market, gold, real estate, are any number of other things.  It can also go into oil, particularly when there are concerns of a supply interruption.

Even if most of the rise in the price of oil is due to the threat of a war in Iran, the oil market is still telling us that there is a decent chance that there won’t be any significant violence there.  While oil has risen in price quite a bit in the last month, it is still just under $110.  If the consensus in the market were that a war with Iran were likely, then I think we would see a much higher price.

Many analysts are saying that oil will go to $150 or $200 per barrel if war breaks out.  I think this is a very conservative estimate.  If Iran is successful in closing the Strait of Hormuz for just a few days, we could easily see the price spike to over $300.

If oil is going up strictly because of the threats of war and an interruption in supply, then other prices should go down.  The only way that oil will go up in price along with most other consumer goods is because of monetary inflation.  As I have written before, higher oil prices do not cause price inflation.

Time will tell if the oil prices are going up because of the threat of war in Iran or because of monetary inflation.  Either way, the higher prices are hurting the average American who is already feeling squeezed.

The ironic thing is that the higher oil prices we see now might reduce the risk of a war with Iran.  Obama is starting to feel some heat for the higher gas prices.  He has to know that a war with Iran will make gas prices skyrocket.  This would be bad for his re-election chances.  Therefore, maybe he will hold off on another war and maybe he will encourage the Israeli government to do the same.

The One Candidate for Economic Freedom

Throughout the Republican primary process, Ron Paul has been identified as being different than the other candidates, particularly on foreign policy.  His libertarian philosophy differentiates him on civil liberties and social issues too, but most Republicans who do not support him feel that his foreign policy views make him the most different.

Sean Hannity, the conservative radio talk show host, has said numerous times that he can’t support Ron Paul because of his views on foreign policy.  But Hannity has pointed out several times in this election cycle that he agrees with Paul on economic issues.
It is hard to believe that Hannity agrees with Paul on economic issues.  If that were the case, how could Hannity support any of the other Republican candidates?  How could he have been an apologist for George W. Bush for 8 years?
Hannity was mildly critical of Bush for some of his legislation and his spending, but nothing compared to his words for Obama.  If Obama had presided over the Medicare prescription drug law that Bush supported and signed into law, then Hannity would have gone nuts.  He would have been calling it socialized medicine.
Ron Paul is not just different than Bush when it comes to fiscal policy; he is virtually the opposite.  Paul is not just different than the other remaining Republican candidates; they have completely conflicting goals, even on economic issues.
In one of the previous debates, Rick Santorum did a good job of exposing Mitt Romney and Newt Gingrich for their support of health insurance mandates.  He accused them both of wanting top-down government-run healthcare.  He was right.  The problem is that Santorum supported the Medicare prescription drug program that increased unfunded liabilities by trillions of dollars.  Santorum also did a number of things that Ron Paul completely opposed such as voting to raise the national debt and supporting the “No Child Left Behind” legislation that further centralized government education.
There was another time in a past debate where Santorum said that Ron Paul could carry out his agenda in regards to foreign policy, but would not be able to carry through on his economic policies because he would have to go through Congress.  He was partially right on this.  He was actually making a good case for the anti-war left to support Ron Paul.
It is true that Ron Paul could carry out his foreign policy views easier.  As president, he could simply order the troops home and stop the wars.  On fiscal issues, things would not be as easy.  However, he could veto all spending bills that came to his desk, particularly if they did not cut at least a trillion dollars out of the budget in the first year as he has proposed.  Also, if Paul were elected, then there would obviously have been a major shift in the attitudes of the American people and Congress would feel more compelled to actually cut spending.
The ironic thing about Santorum’s statement is that he actually made a good case against himself and the other two candidates for fiscal conservatives.  Santorum was basically admitting that he would have trouble cutting spending and following through on some of his rhetoric of smaller government.  But Santorum has continually advocated going to war in Iran.  This would vastly expand the budget.  Since Congress has basically shirked its duty to declare wars, Santorum could easily follow through with his agenda to bomb Iran, but he would admittedly have trouble getting Congress to cut spending.  So spending would vastly increase if Santorum were elected.  The same would probably hold true for Gingrich and Romney.
Ron Paul is the only candidate amongst the four who actually wants smaller government.  He has offered specific proposals to cut one trillion dollars in his first year in office.  The only other candidate who was actively proposing to eliminate any departments was Rick Perry and he dropped out of the race.  While Perry’s proposal would barely have made a dent in the federal budget, at least he was offering something specific.  The three remaining candidates besides Paul are not offering any significant spending cuts that are specific.
In 1994, Newt Gingrich talked about eliminating the Department of Education.  This, of course, did not get done.  He does not actively talk about this any more.  You can safely assume that he does not want to eliminate this department.  If someone wants more war and more military spending and yet cannot even advocate the elimination of the Department of Education, then you can be fairly certain that that person has no intention of cutting government spending.

Everyone is right that Ron Paul is different when it comes to his views on foreign policy.  However, he is also different when it comes to economic issues.  In fact, he is not just different from the other candidates on economic issues; he is virtually the opposite.  The other candidates are far closer to Obama on economic issues than they are to Ron Paul.  Their rhetoric means nothing.

What Percentage of Your Portfolio Should be in Gold?

Jeff Berwick of The Dollar Vigilante has an article that was posted via  He says he was at a conference where he said, “I have no problem with someone having 100% of their portfolio in gold.”  He said that many in the crowd laughed at the comment, but he didn’t find it so funny.

The whole article is short and worth a read.  He makes many good points.  He ends the article by backtracking a bit and saying that his organization actually recommends 30% in gold and silver.  They also recommend 20% in gold mining juniors and 15% in gold mining major stocks.  If you add all of that up, it is 65% in gold or gold related investments.  The 35% in gold stocks is highly volatile.

I completely disagree with the sentiment of having 100% of your portfolio in gold.  I don’t even like the 65% allocation.  It is too high and too risky.  What would happen if the economy falls into another deep recession as it did in the fall of 2008?  Having 35% in gold stocks and another 30% in gold and silver would devastate your portfolio.  Of course, having 100% in gold would also hurt a lot if gold were to drop like it did in late 2008.

I am an advocate of the permanent portfolio as described by Harry Browne in his book Fail Safe Investing.  This would put you in gold for 25% of your portfolio.  Of course, I see nothing wrong with some speculation money that is for riskier plays.  For this money, I would certainly favor some more gold, some silver, some platinum and maybe some gold stock ETFs like GDX and GDXJ.  These speculation plays are just because of the economic environment we are currently in and the potential for a big reward.  However, anything beyond the 25% in the permanent portfolio has some substantial risk to it.

Here is the mistake that Berwick is making with his comment about being ok to have 100% in gold.  He, like many other libertarians, are mistaking gold for money.  Gold has a history of being money.  If we had a free market in money, it is likely that gold would be used as money.  However, that is not the reality we live in.  In America, the U.S. dollar is money right at this moment, whether we like it or not.

To prove this point, try this as a test.  Walk into a grocery store and load up your shopping cart with food.  Or you can even just pick out a few items.  Then go to the cash register and try to pay for it with a gold coin.  The cashier is going to look at you like you are nuts.  In fact, you could have 100 U.S. dollars worth of groceries and offer to pay for it with a one ounce American gold eagle.  The value on the coin says $50, even though the actual value is over $1,700 as of this writing.  My bet is that nine out of ten cashiers would not accept the coin.  Most would probably have to call a manager to come over.

The point is that gold does not serve as money in our society right now.  It has all of the qualities for a good form of money, but the government has essentially forced us to use the U.S. dollar.  That is why you don’t want 100% of your portfolio in gold.  If the dollar price of gold goes down significantly, then you cannot buy as many groceries with it or just about any other consumer item.

In conclusion, my guess is that gold will continue to rise against the U.S. dollar.  However, I would not put all of your eggs in one basket.  If the price of gold in terms of dollars goes down, then you need some dollars to buy more.

Republican Debate in Arizona

Another Republican presidential debate occurred, this time in Arizona, ahead of primaries in Arizona and Michigan.  After that will be “Super Tuesday”.  This was perhaps the last Republican debate, depending on what happens in the next couple of weeks.

First, Mitt Romney did get a couple of brownie points with me at the very beginning.  He was not done with his opening statement, but received applause, so he decided to stop.  He said he would take a lesson from George Costanza (a Seinfeld reference for anyone unfamiliar) and stop with the audience applause.  This was in reference to a Seinfeld episode where George learned that after he told a joke and got a good reaction from the crowd, it was just better to exit on a high note.  I don’t know if this was planned by Romney, but it at least made him a little bit human and his line was probably well appreciated by Seinfeld fans.
Aside from that, Romney had an average night.  He took some heat as usual, but he was fairly steady.  He didn’t say anything that will make any dramatic headlines.  He didn’t pull any Rick Perry moments of major blundering.
The same can be said for Gingrich.  He had a decent night.  He was better than he was in the Florida debates, but worse than the South Carolina debate.  However, he may gain some traction at the expense of Rick Santorum.
While there was no clear winner (even though Ron Paul is far superior with his ideas, I am trying to be somewhat objective here), Santorum was clearly the big loser.  He took heat from all sides.
Ron Paul took Santorum to school.  Near the beginning, Paul pointed out that Santorum is like the typical politician who campaigns on something in particular, but then does something different while in office.  He used the example of “No Child Left Behind”, which Santorum voted for while in Congress, but now says he regrets.  Paul pointed out that Santorum is inconsistent.  He was very effective in exposing Santorum’s record of supporting big government.
I was actually getting excited about Santorum’s momentum.  It was slowing down Romney.  I was also wondering if it was possible if Santorum could somehow snag the nomination.  I would like to witness the biggest landslide in American history.  If the economy doesn’t fall off a cliff in the next 9 months, Obama might be able to win every single state in the general election against Santorum.
There was not much new on foreign policy.  All of the candidates are pro-war, except for Ron Paul.  There was one interesting part where Paul said that he had already tried the moral argument and constitutional argument, so now he would make an economic argument.  He is certainly correct that there is a strong economic argument to be made against war.  However, I’m not sure that he has exhausted the moral arguments as much as he can.  I will have more to say about this, probably in a couple of weeks.
In conclusion, I think Santorum was the loser tonight.  We’ll see if others agree.  I actually hope I am wrong.  I want to see this thing drag out.  The longer it drags out, the longer we get to hear a message of liberty and peace from Ron Paul.

Greece Will Secede from the European Union

Greece is going to secede and break away from the European Union and the euro currency.  This is not a current headline.  It is a prediction.  I am not one to make a lot of predictions, but this really seems inevitable to me.

Greece basically has a couple of choices.  The Greek government can balance its budget and remain a part of the European Union or it can separate.  What do you think the chances are that the Greek government is going to balance its budget with a declining economy and riots in the street?

Greece will break away from the European Union so that it can form its own central bank.  Using its own currency, it can default through inflation.  This makes it easier for politicians to make big promises and avoid actual cuts.

Greece is being bailed out again.  The Greek Finance Minister said, “It is maybe the most important (deal) in Greece’s post-war history.”  This is a joke.  It is another waste of 130 billion euros worth of capital.  It is prolonging the agony.

The other European “leaders” say they are going to keep a tight grip on Greece and its spending.  So what?  They’ve been saying this all along and it hasn’t changed anything.  The Greek government will continue to spend money until the rest of Europe finally says “no more”.  That is when Greece will break away.  It may threaten the entire European Union.  That is fine with me.

If you think an announcement by Greece to break away will cause a huge drop in the American stock market indexes, then you better take your money out or short the market.

I can’t stress enough that a Greece departure is virtually inevitable at this point.  They are not going to cut spending enough to balance their budget.  The U.S. government would be just as incapable of doing this right now.  The U.S. government can get away with deficit spending for longer because of the Federal Reserve.  That’s why Greece will break away and form their own central bank.

The bailouts for Greece will eventually stop.  The day of reckoning is coming.  It would not surprise me if it happens in the next few months, but these things often drag out for longer than expected.  The rest of Europe has to be growing tired of paying for the recklessness of the Greek government and its citizens.

I don’t know how much this will affect the American economy.  If and when Greece separates, it will be interesting if other countries quickly follow.  I hope they do.

The Five Worst Presidents for Liberty

I am going to name the five worst presidents of all time, from a libertarian perspective.  Of course, this is highly subjective and you can use different criteria.  I am going to name the worst for liberty at the time they were president and also the lasting effect they had against liberty.

While many people will name the current or last president as the worst (Republicans will name Obama and Democrats will name Bush), they really aren’t in the top five (although Obama still has time to make it there) when you consider some of the disasters of the past.  Obama and Bush certainly deserve a spot in the top 20 worst of all time, but not the top five.

I would like to do a list of the top five sometime, but it would actually be the five who were the least bad.  The list would be unlikely to include anyone from the 20th century and certainly not from the 21st century. The top five would probably all come from the 19th century.

So here is my list of the worst five:

1) Abraham Lincoln – While Lincoln is revered by so many, he did great damage to the country.  He supposedly ended slavery, but that was just an effect of his war.  Slavery would have come to an end anyway, and it could have been done peacefully.  Lincoln waged a massive war, which killed over half a million people.  That is when the country was much smaller.  It was easily the deadliest war in American history, at least for Americans.  It severely diminished states’ rights and centralized the national government.  His policies definitely had a lasting effect that we are still paying for today.  He was really a brutal dictator in many ways.  He killed and imprisoned those who disagreed with him.  I am glad to say that it is highly unlikely that any president today could get away with the things that Lincoln did to his fellow Americans.

2) Woodrow Wilson – He presided over the Federal Reserve Act, the 16th Amendment, and the 17th Amendment.  These three things all happened in his first year of office.  In 1913, we got the Federal Reserve, the federal income tax, and the direct election of senators (another killer of states’ rights).  This alone would have been enough to put him in the top five.  On top of it, he put America into World War I and instituted a draft, much like Lincoln.  With American entry into World War I, it set the stage for the spread of fascism, World War II, and eventually the cold war.  Wilson was awful on all accounts, foreign and domestic.

3) Franklin Roosevelt – Roosevelt was horrible on economics.  He instituted his “New Deal”, which gave us Social Security.  He continued the Great Depression by not allowing the free market to work.  He really began the massive welfare state in America.  While Roosevelt is looked on highly by many for his leadership in World War II, I beg to differ.  He provoked the Japanese into attacking America by imposing oil embargoes and other restrictions.  There is even a good chance that he knew the attack was going to happen at Pearl Harbor and did not warn anyone.  This really makes him a mass murderer.  He may as well be since he loved his “Uncle Joe” Stalin so much.  As a libertarian, there is one positive thing that Roosevelt did during his reign in office.  He ended alcohol prohibition.  This was a great thing for liberty and the violent crime went way down, even in the midst of the depression.

4) Lyndon Johnson – It would not surprise me if Johnson had a hand in the assassination of JFK.  It turns out that Jackie thought that.  Johnson, of course, was a war president.  He is responsible for the deaths of millions of Vietnamese, along with many others.  While America was already involved in Vietnam when Johnson became president, he is the one who lied Americans into war and really started the violence.  On the domestic front, Johnson gave us his “Great Society” that was anything but great.  He started up Medicare and Medicaid and began his “war on poverty”.  He was really a disaster in every way.

5) Harry Truman – Truman belongs on this list because he used two atomic bombs, killing hundreds of thousands of innocent Japanese civilians.  It was not necessary to end the war.  The Japanese were already willing to surrender.  For this alone, Truman belongs on this list.  He also presided over most of the Korean War.  On economic issues, Truman was also bad.  The one good thing that he did was that he didn’t do anything at the end of the world war.  Due to his lack of action, the economy was finally able to recover for the first time since the 1920’s.

There are certainly a whole bunch of other presidents who were horrendous.  You can go back to Washington (the Whiskey Rebellion) and Adams (the Alien and Sedition Acts).  You can include the other Roosevelt.  You can include Obama and the younger Bush.  But really, almost every president of the last hundred years was a total disaster.  It’s just that some were worse than others.  For the top five worst though, they definitely all need to be war presidents.

It is no coincidence that all of these war presidents were also horrible on economic issues.  The two things are related.  A statist politician believes in big government in all arenas.  What is scary though is that most historians regard many on my worst five as the best.

Is the Federal Reserve a Private Organization?

I hear this a lot.  There are many anti-Fed people out there who say, “did you know that the Fed is a private organization?”  I will also hear things like, “the Fed is disguised as a government organization, when it is actually private.”  Unfortunately, the truth is almost the opposite.

I am always happy to hear people when they are against the Federal Reserve system.  Unfortunately, many people are misled and don’t really understand what the Fed does and what purpose it really serves.  Now, it is certainly true that the Fed serves the interests of the big bankers.  However, the Fed also serves the interests of the politicians in Washington DC.

Here are four reasons that the Federal Reserve is a government organization.

1) Look at the website for the Federal Reserve.  It ends in “.gov”.

2) The chairman of the Fed is chosen by the President of the United States.  The chairman is confirmed by the United States Senate.  The seven members of the Board of Governors is also appointed by the President.  Is the CEO of Apple or McDonald’s chosen by the government?

3) The Federal Reserve Act of 1913 was passed by Congress and signed into law.  Why was this necessary if the Fed is a private organization?

4) This is by far the most important point.  The Federal Reserve has been granted a monopoly over the U.S. dollar, which is the legal tender for the whole country.  Any person or corporation who tried to do what the Fed does, would be considered a criminal and would most likely go to jail.  If the Fed didn’t have a government-granted monopoly over the money supply, then it wouldn’t be a big deal.

While I like anyone who is anti-Fed, I think it hurts our cause when people get hung up on the idea of the Fed being a private organization.  In fact, even if your definition of a private organization is different than mine, does it really matter?  The whole point is that the Fed does great harm to us by funding Congress, devaluing our money, and causing an artificial business cycle.

We don’t really need to abolish the Federal Reserve.  We just need to revoke its special privileges in having a monopoly over the supply of money.  In fact, we really just need to repeal the legal tender laws, stop taxing gold and silver, and allow for private minting.  We just need to be free to use the form of money of our own choosing.

The Federal Reserve may have been formed by the bankers to help the bankers.  The Fed certainly does help the big bankers as we saw in the fall of 2008.  But the Fed is allowed to exist by Congress because it helps fund Congress.  There is no way that the government could be running trillion dollar deficits without a central bank.  This is why states have to balance their budgets and are very limited as to how much debt can be accumulated.  The federal government doesn’t have these restraints, thanks to the Fed.

In conclusion, you can call the Fed a private organization all you want, but it doesn’t change the fact that it has been granted a monopoly over the money supply by the government.  It also doesn’t change the fact that it helps fund the government by buying government debt through money creation.

China Can’t Escape the Austrian Business Cycle Theory

China has seen an explosion in economic growth since some liberalization began to take place over 3 decades ago.  While hundreds of millions of Chinese people still live at or near the poverty level, there is no question that the standard of living has gone up quite a bit in China, particularly for those living in the cities.

Unfortunately, not all of that growth has been genuine.  Just as some of the economic growth of the last 3 decades in the U.S. was an illusion, the same is true for China.  When you have a central bank that is inflating at double digit rates per year as the Chinese central bank has been doing for a while, then there are going to be bubbles and busts.

Just as the U.S. had a real estate bubble, China also apparently has a real estate bubble.  The U.S. real estate bubble began to pop about 5 or 6 years ago.  We are still waiting for the Chinese real estate bubble to  pop.

The Austrian Business Cycle Theory can teach us something here.  When the central bank creates new money out of thin air, along with artificially low interest rates, there are distortions in the economy.  Eventually it will result in a bust.  Either the central bank will try to accelerate the monetary inflation in order to keep the bubble propped up or the central bank will not accelerate monetary inflation.  If it continues to increase the monetary inflation rate, then it will eventually lead to hyperinflation and a total destruction of the money.  If the rate of monetary inflation is not increased (it doesn’t have to be a decrease in the money supply, just a slowdown in the rate of increase), then the bad investments will be revealed and a bust will occur.

The real estate in China has seen a massive boom.  This has occurred simultaneously with very high monetary inflation, sometimes above 20%.  There will be an inevitable bust.

Bill Sardi had an article at the other day.  He said that, “Chinese bankers are more conservative than the colleagues in the US and require 30-60% down payment on home loans.”  While it’s true that the down payments for housing have been much bigger in China than what is typically seen in the U.S., it still doesn’t negate the central bank induced boom/ bust cycle.  You don’t necessarily have to have massive leverage for a bubble to occur.

We have seen bubbles in gold and bubbles in the stock market in the past.  There was a massive bubble in the stock market in the late 1990’s, particularly in technology stocks.  While there may have been some leverage with futures and options, there were a lot of people who simply bought shares in stocks with money that was saved.  These people were not using leverage.  Yet, it didn’t prevent a collapse in prices.

The fact that there are bigger down payments in regards to Chinese real estate may result in some differences from the U.S. real estate bust.  If the bust isn’t too bad (which I’m not betting on), then perhaps we won’t see as many underwater properties because of the high down payments.  Because of this, we may see less trouble with banks.  But regardless, all indications show that there is going to be a big bust in real estate in China.

Since China’s history has been one of mostly poverty, this will be the first big bust that China experiences.  Some people there have gotten a taste of a higher standard of living.  When the bust occurs, it will be interesting to see what happens.  Will people demand less government or more?  Will communism officially fall?  Or will they turn into more of a bureaucracy like the U.S. with more financial regulation, even though the business cycle is being fueled by the central bank?

I don’t know what the outcome of all of this will be, but I am fairly certain that there will be a bust in the Chinese real estate market.

What if All Government Were Funded by the Fed?

One of the things making political news right now is an extension of the payroll tax cut.  The Republicans in the House were originally against extending this tax cut unless it was coupled with offsetting spending cuts.  The Republicans have backtracked now and have said they are willing to pass the tax cut extension without fighting over budget cuts.

As I have discussed this before, the payroll tax cut is not an effective way to reduce unemployment.  To help get people back to work, the tax cut should go to the employer’s portion of the tax cut.  This would reduce the cost of labor and help unemployment.  Instead, cutting the payroll tax for employees is just temporarily helping people who currently have jobs.

Personally, I am happy to see a reduction in the payroll tax.  I figure that the government is going bankrupt anyway, so I may as well take what I can get now.

However, I would like to take this example and perform a reductio ad absurdum.  What if the federal government decided to eliminate all payroll taxes?  What if the federal government decided to eliminate all federal income taxes?  What if the federal government decided to eliminate all federal taxes?

Before you get excited, I am not talking about the federal government turning libertarian.  I am not suggesting that all of the federal spending be cut in this example.  I am suggesting the hypothetical question, what would happen if all federal taxes were eliminated and all government spending were funded by the Fed?

If this were to happen, it would obviously be highly inflationary.  Why would people (or foreign governments) buy U.S. government debt if the only way to pay it off were to create even more money out of thin air?  Of course, it almost sounds like the situation we have now, and yet people and foreign governments continue to buy government debt, along with the Fed.

However, perhaps the Fed could just fund the government directly by creating the new money out of thin air and handing it over to DC to spend.  Whether the Fed was the only purchaser of U.S. government bonds or if it simply created new money and handed it over directly, it would obviously threaten the validity of the U.S. dollar.  Although this example sounds ridiculous, it is ridiculous to think that the government has been running deficits well over $1 trillion for the last several years.

If the government were to operate this way with no taxes, then it would be the same situation we are in today, except that the day of reckoning would happen much quicker.  There would be a threat of hyperinflation and a total destruction of the U.S. dollar.  The only way to prevent this from happening in this scenario would be to cut government spending dramatically or to start taxing again.  If it was only scene as a temporary measure to stimulate the economy (even though it wouldn’t create any economic growth without a cut in government spending), then the dollar might survive if people truly thought that the money creation would stop one day.

The Republicans were right to originally demand cuts in government spending to go along with the payroll tax cut.  However, the Republicans have the majority in the House of Representatives.  They can control spending whether it is attached to a tax cut bill or not.  The House Republicans could stop all of the deficit spending by refusing to pass an unbalanced budget.  But they won’t.

Enjoy your tax cut extension if you have a job.  I would recommend taking the proceeds and buying some gold, or perhaps a passport, just in case.