Most Americans (and people throughout the world) do not have much of an understanding of the Federal Reserve, if any at all.  There is a much larger percentage who understand that the Fed does us harm than there were just 5 years ago.  This is mainly due to Ron Paul and the internet.  The economic fall of 2008 also helped, as more people became curious about the subject.

Still, not more than 10% of Americans have a good understanding of the damage that the Fed causes.  On this subject,  I would guess that even fewer people understand central banking throughout the world.  Americans can make foreigners look ignorant on this subject, but it is all relative.

For those who do have a grasp of the damage done by the Fed, even some of these people do not understand the extent of it.  Not only does the Fed (and its monopoly power over the money supply) cause prices to increase, it actually prevents prices from falling.

I know that many libertarians speak out against the CPI (consumer price index).  They see it as a manipulated government statistic.  In some ways, they are right.  I do believe that the CPI can be somewhat useful in at least determining trends.  But actually, the biggest failure of the CPI is that it hides the fact that prices would actually gradually decrease over time.  This is the way it should be.

Think about the electronics industry.  Think about computers, televisions, cell phones, cameras, etc.  All of these things are cheaper now and yet the technology is exponentially better than just a few years ago.  Compare this to the healthcare industry, which by no coincidence is heavily controlled by the government.  Healthcare gets more and more expensive each year and the quality doesn’t even improve much in some areas.

If there were no central bank with a monopoly over the money supply, or even if the Fed did exist but just kept a stable money supply, then prices for electronics would be even lower.

Over 10 years ago, I bought a Sony 27″ television for about $400.  The thing weighed about as much as a medium-sized 12 year old.  The quality wasn’t even that good, particularly for a Sony.  I never liked the sound.  Now I can buy a television for $400 that is bigger in screen size, much better quality, flat panel, and far lighter.  But, here is the kicker.  Not only can you get a better television for the same price, price inflation has gone up over 27% in the last decade, and that is just according to government statistics.

If there had been stable money just in the last decade, a 55″ big screen television might cost only $400 now, if that.

I know some people will counter this by saying that inflation also raises our wages.  But how much weight does this argument really carry now?  In the last couple of years, wages have been stagnant in nominal terms, with unemployment having gone up.  In real inflation-adjusted terms, wages have been going down.  Wages are usually the last thing to go up in an inflationary environment.

For most people, their wages and benefits have not kept up with the price of healthcare and health insurance, food, gasoline, and other essentials.  Inflation has been quite devastating, particularly to the poor and middle class.  Government spending and monetary inflation are squarely to blame for the declining living standards of the American people.

If we could get a crystal ball to show how much better our lives would be without the Fed’s monetary inflation, then there would be rioting in the streets.  As more Americans learn the scam that is the central bank, we can hope that one day we will once again realize true peace and prosperity.

Although I usually write about investments and money from a libertarian perspective, it is good every once in a while to talk about debt.  Debt and investments are not mutually exclusive things.  You are making an investment decision if you have extra money and you are not using it to pay down your debt.

Of course, there are many different kinds of debt.  Mortgage debt is not necessarily bad debt, while credit card debt is bad under most circumstances.  Credit card debt should be aggressively paid down if you have it.  With mortgage debt, there are pros and cons to paying it down.

If you have credit card debt that you are not paying off each month, then it is almost foolish of you to be investing money.  It really doesn’t even make sense to have an emergency fund.  If you pay down your credit card debt while leaving little money in the bank, you can at least go back to using your credit card in an emergency situation and you will be no worse off than if you had kept the money in the bank.

If you have credit card debt with an interest rate of 18%, why would you even think about investing?  How are you going to find a guaranteed return of 18%?  Even if your interest rate is 10%, how could you match that with investing?

Some will argue that the one exception is a 401k where your employer is contributing matching funds.  You might be able to get a 50% or 100% return on the money you contribute.  This is a possible exception, but even here my individual choice would be to not contribute to the 401k and use that money to pay down the credit card debt.  You can start contributing once all of your high interest debt is paid off.  Money going into a 401k plan is not liquid.

Other debt like car loans are a little trickier.  If you have a low interest rate like 2.9%, then I don’t really see a problem in investing extra money, as long as you know what you are doing.  However, if you are taking all of your money and betting on one stock, I think it would be a better choice to pay down the car debt, even at 2.9%.  If you are taking your money and putting it in a money market fund that earns .1% interest, then you should definitely be paying down your car loan instead.  The only reason not to pay down the loan in this situation is if you might need that money for an immediate emergency.

I have actually heard people ask if they should take out extra student loans so that they can invest the money.  You should absolutely never borrow money for an investment, unless it is for investment real estate where you know you can generate positive cash flow.

In knowing and reading many other libertarians, I have also seen the argument that it is acceptable to take on debt because you can just pay it off in depreciated money after we have severe inflation.  While this might turn out to be correct, it also may not.  You cannot predict Federal Reserve policy in the future.  You cannot predict what hundreds of millions of people are going to do.  Perhaps unemployment will get worse and people will become so fearful that they dramatically cut back on their personal spending.  In this scenario, we could actually see prices decline.  In addition, even if there was massive inflation, it will be prices that will go up.  Your income will probably not keep pace, so don’t think that it will be necessarily easier to pay off your debts.

In conclusion, when you are investing, you should consider all of your circumstances.  If you are in debt, particularly with credit card debt, then don’t direct any of your money to investing.  Get out of debt first and then you can start investing your money.

The results are in for the Maine caucuses.  Well, kind of.  There are still some small ones left to go.  This whole primary process is really bizarre in some states.

It looks like Mitt Romney will win, with Ron Paul taking a close second.  Without the final results yet, Mitt Romney has approximately 39% of the vote to Ron Paul’s 36%.  Once again, Ron Paul has done considerably better than 4 years ago, this time about doubling his percentage.

It really is too bad that Paul could not come away with a win in Maine.  It’s not that it matters that much in terms of delegates, but the headlines and the subsequent momentum would have been nice.  While it is still amazing to think how far the libertarian movement has come in the last 5 years, the mood of the country still isn’t quite ready for a dramatic change in the status quo.

The status quo is war, government spending, government debt, government spying, government orders, government regulation, taxation, etc.  While many Americans say they want a balanced budget and less government, they are not prepared to support significant and specific spending cuts.  Too many people want to live at the expense of other people.

The biggest laugh is when I hear someone go off on people collecting welfare.  Then I hear that same person talk about his Social Security and Medicare.  Or perhaps they are younger and will talk about his kids attending government schools.  Look, I am not condemning people for collecting Social Security and Medicare benefits.  They are just trying to get something back from all of the taxes they paid previously and are currently paying.  But we at least have to admit to ourselves that these are welfare programs.  It is not like all of the previous payroll taxes were set aside in private accounts for people.  They can only be paid right now by collecting current taxes or by running up debt and creating new money out of thin air.

So while the libertarian movement has made great strides, much because of Ron Paul and his message, we still have a long way to go.  With the coming economic storm ahead and with the open communication of the internet, I think we will get more people looking for answers over the next few years.  I think Keynesianism will be seen less favorably.  I think many people with an open mind will start to see libertarianism as an answer.

I hope Ron Paul stays in this race all the way to the convention.  As I’ve said before, the longer he stays in, the more time there is for people to hear his message.

European “leaders” are going to kick Greece’s can down the road again.  They are working on negotiations to hand over another 130 billion euros (about $170 billion) in bailout money.  According to this article, they are giving Greece until next week to find an extra 325 million euros ($430 million) in savings.  Is that a typo?  They only have to find an additional 325 million euros, a fraction of a percent of the 130 billion in bailout money?

This whole Greece situation is a joke (although certainly not for people living there).  The European ministers are handing over more money to an insolvent government.  They are making European taxpayers and holders of the euro poorer.  They are essentially flushing this money down a toilet.

I am really tired of the word “austerity”.  These politicians and media pundits over use the word and they abuse it.  For many, their idea of austerity is small cuts in government spending, coupled with large tax hikes.  Then they have the temerity to insist that austerity just isn’t working.

If Greece cut government spending and balanced its budget, then no bailouts would be necessary.  The problem is that they keep spending money that they don’t have.  The Greek government has made more promises than can be kept.

Greece could default on 100% of its debt tomorrow.  In fact, it should do this.  But the European “leaders” do not want this to happen, so they send more bailout money.  If Greece did a 100% default, then the government there would still be in major trouble.  It is not just the interest payments on the debt that are difficult to pay.  Again, it is all of the promises that have been made in the form of pensions and other welfare benefits.

The same situation would be true in the United States, except the U.S. government has its own central bank.  The Fed can always buy government debt, even if there are no private lenders available.  But if the U.S. government did not have the Fed and nobody wanted to lend money at low interest rates, then there would be a default on the debt and we would finally see massive cuts in spending.  The U.S. government is running yearly deficits that are close to $1.5 trillion.  If there could be no borrowing, then the government would be forced to cut spending by the amount of the yearly deficit.

The situation in Greece is horrible.  There is extremely high unemployment.  The crime has gone up.  There are people struggling to meet their basic needs.  Many rich people are fleeing the country, and who can blame them?

Greece is an extreme example of a democratic welfare state.  As Margaret Thatcher said, the problem with socialism is that eventually you run out of other people’s money.  Greece has run out of money.  The many years of over consumption and underproduction has finally caught up with the people there.  All of these people who thought they could retire at 50 on a sweet government pension are now starting to realize that they will have to work again.  The people that are not accepting this fate will face much worse.  I can imagine that there is severe depression in Greece right now and I don’t mean with the economy.  I mean that the mood of the people is very down.

If Greece wants to solve a lot of its problems quickly, then the government needs to default on all of its debt.  It then needs to default on all of its promises to the Greek citizens.  All pensions and welfare must end immediately.  If they want to throw a bone to those over the age of 80, perhaps that could be afforded.  Everything else must be cut dramatically and immediately.  Regulations must be repealed.  Taxes must be lowered dramatically.  The government should set up something economically that resembles Dubai, Singapore, or Hong Kong.  If this were done, the economy would be on the road to recovery within a couple of years and you would see great gains in wealth and productivity shortly after.

The government of Greece is only going to free up the economy if it is demanded by the people.  The Greek people have been majorly abused.  They should not be bailed out any longer.  They must admit that their welfare state policies have been a total failure.  They must turn to economic liberty if they ever hope to have a decent standard of living again.

There were three states that had voting on Tuesday.  They were Colorado, Missouri, and Minnesota.  Rick Santorum won all three, two of which were basically a landslide.  In Minnesota, Ron Paul took second place, pushing Romney down to third.

It was an incredibly good night for Santorum.  It was an incredibly bad night for Romney and Gingrich.  It looks like the anti-Romney people who can’t support Ron Paul are turning away from Gingrich and towards Santorum.  Gingrich is almost done, unless there is some dramatic turnaround (which wouldn’t be far fetched in this roller coaster race).

It was a bad night for Romney too.  He is still the favorite to win, but his odds went down a little after the Tuesday sweep by Santorum.  Romney is no longer seen as a lock.  With Ron Paul and likely Santorum in this race for the long haul, it will be hard for Romney to get a majority of the delegates by the convention.

While Santorum’s philosophy disgusts me, it was still a positive thing for Ron Paul.  It slows down Romney and allows for Paul to push on with his message of liberty.  The longer that he has debates and a platform to express his views, the more libertarians there will be for the future.

Santorum really is disgusting.  He preaches religion and morality and yet he sees no problem in killing innocent people in Iraq, Iran, and elsewhere.  He is pro-life when it comes to fetuses in America.  He is anti-life when it comes to foreigners.  You can’t even claim that it is just foreigners with a different religion, as there were many Christians who died in Iraq.  If Santorum has his way and bombs fly in Iran, then there will be Muslims, Jews, Christians, and others who will die as a result.

Of course, Santorum is also bad on economics.  He supported many of the big government policies of the Bush administration.  He supported more spending and more centralization of government.  He was also a big supporter of anti-liberty acts like the so-called Patriot Act.

Again, while I despise Santorum, I am happy he had his three-state sweep.  It hurts Romney and Gingrich and it allows Ron Paul to carry on with more momentum.  If Santorum somehow miraculously became the Republican nominee, Obama would wipe the floor with him, unless Obama does something really stupid in the next 9 months, which isn’t out of the question.

The next round of debates, starting in a couple of weeks, will be interesting.  There will be opportunities for Ron Paul to change more hearts and minds.

Gold has been quite strong lately.  As of this writing, it is close to $1,750 per ounce.  It had a big down day yesterday and then gained most of it back today.  I am quite bullish on the yellow metal right now, both in the short term and in the longer term.

My short-term bullishness for gold is tempered by the economic outlook.  If the economic outlook remains relatively good, or at least stable, as compared to the last few years, then I think gold will do quite well.  The one scenario I can see where gold would tumble is if the economy slips into another deep recession.  If that happens, then stocks will do horrible and gold will also probably do horrible, although probably not as bad as stocks.  Bonds would be the place to be if that happens, despite the already low interest rates.

I have been saying for the last several months that we might be in the midst of a mini boom cycle.  The Fed pumped in a lot of new money with QE1 and QE2.  Although most of this new money is being held by the banks as excess reserves, it can and will have its effects.  Perhaps it is starting to leak out into the economy.  Some of it may be going in to stocks and some in to gold.  While the government’s measure of price inflation is still relatively low, I can personally attest that food prices at the grocery store are going up at a decent clip.  The one sector that continues to go down in price (besides electronics, which is due to technology) is housing.

If you are waiting for another dip in the gold price to buy some, I wouldn’t wait any longer.  While there is certainly a threat of a deep recession and a strengthening dollar in the short run, that is not where I would put my money right now.  If your portfolio is low in its percentage of gold and other precious metals, then I would not wait.  I recommend a minimum of 15% in gold and gold related investments, just to protect yourself.  You should probably be higher than that though.  If you have about 20% in gold investments and another 5% in silver, platinum, and oil, then that should be a good hedge against inflation and uncertainty.

While I don’t like making predictions, I am going out on a limb on this one.  I think gold is likely to go over $2,000 per ounce in 2012, unless we have a deep recession.

You should be responsible for your own money.  You work hard for your money and you should guard over it.  While I am not completely against the idea of financial advisors, you should be warned of their capabilities.

Most financial advisors are Keynesians.  They believe that spending drives an economy.  While some are more to the left economically than others, even many of those who say they believe in free markets do not really understand free market economics.  By far, the biggest mistake that financial advisors make is that they do not understand inflation.

Inflation is an increase in the money supply, although the definition has been changed through the years by the statists.  Now inflation means a general increase in the price level, which is really the eventual result of an increase in the money supply.  Many financial advisors do not understand how big of a threat inflation is to an investment portfolio.  They think stocks will protect against inflation.  Most do not believe in a substantial holding of gold or gold related investments.

This is why you have to look out for yourself.  Even if you have an honest financial advisor who means well, he may not understand inflation.  He might not understand the possible ramifications from the government spending and debt and the previous monetary inflation that has taken place.  He might not understand just how big of a threat this is to your investment portfolio and to the average American’s standard of living.

Ron Paul has probably changed this slightly.  There are probably a few out there now who do understand this.  Unfortunately, most of these people probably work for a big financial company.  These financial advisors probably do not have much flexibility in devising their own portfolios for their clients. They are probably given formulas and certain criteria to follow.  It is actually a shame.

While most financial advisors may not understand free market economics, they are not necessarily useless either.  A lot of these people are quite intelligent and they may do a good job of analyzing individual stocks and mutual funds.  They may actually have a good track record in comparison to the broad stock market indexes.

If you are someone with a lot of money and you want a financial advisor to help you out, then you might be fine.  But be sure to take your own action in protecting against inflation.  You can be fairly certain that your financial advisor will not be buying a lot of gold investments for you.  Personally, I would just avoid financial advisors completely and manage your own money if you are knowledgeable enough to do so.

The Federal Reserve is engaging in what is nicknamed “operation twist”.  It means that the Fed is reducing its holdings of short-term treasuries and increasing its holdings of longer-term bonds.  The Fed is not claiming to expand its balance sheet with this operation.  It is merely changing the maturity dates of some of its holdings from shorter-term to longer-term.

The primary reason given by the Fed and by analysts for this move is to keep down long-term interest rates.  This will help keep down or even lower mortgage rates, as mortgage rates are highly correlated to the 10-year yield.  The Fed sees this as a way to incentivize buying in the weak housing market.  It will also encourage more people to refinance (for the few who actually can) so that their monthly payments are reduced.

I see another potential reason for the Fed doing this.  If interest rates were to rise, then it could be less harmful for the government’s debt.  Whenever a U.S. treasury reaches maturity, the Fed has to buy a new one in order to roll it over.  If its holdings are longer-term, then there will be fewer to roll over in the shorter term.  This means that the government would not have to find as many buyers for its debt, whether it is private investors, central banks (like China), or the Fed itself.

In the last FOMC meeting, it was indicated that the Fed will continue this operation twist.  I discussed the FOMC’s meeting and some of Bernanke’s comments here.

Here is the problem.  There ain’t no such thing as a free lunch (TANSTAAFL).  Maybe Bernanke and the Fed think they are being smart here and doing things that can only help, but there are potential consequences.

The main bad consequence that I see coming from this policy is that it increases the likelihood of severe inflation.  If interest rates were to start rising, then the value of bonds would go down.  That means that the Fed’s holdings would go down.

If the Fed held shorter-term treasuries and interest rates were to rise while price inflation started getting out of control, then the Fed could just simply reduce its balance sheet by not rolling over its maturing assets.  Of course, this would serve notice to Congress that government spending needed to be cut quickly as the Fed would no longer be funding the big deficits, but at least the Fed would be capable of having an “exit strategy”.

If the Fed has longer-term bonds in its holdings and interest rates go up while price inflation is getting out of control, what is the Fed going to do then?  If it sells its bonds, they will be worth much less.  This will drive up interest rates even more as it is forced to sell even more.  Also, because the values will be down so much with the higher interest rates, who knows if the Fed can even sell enough to reduce its balance sheet significantly enough to stop the price inflation.

Back in 2008, the Fed bailed out the banks by buying their bad assets.  These assets can’t be sold today for what the Fed bought them.  These were mortgage-backed securities and many of these mortgages have gone into default.  These securities are worth much less now than they were before the financial crisis showed up.

In conclusion, maybe Bernanke and the Fed think they are being smart with their operation twist.  But they really are just adding fuel for the fire that will be coming.  They are putting everyone at risk by increasing the likelihood that it will not be able to control price inflation when it shows up in a big way.  It will also make for a harder crash for the federal government when it can no longer rely on the Fed to fund its massive deficits.

I have been particularly interested in the Republican primaries in this election cycle, just as I was 4 years ago.  The main reason is Ron Paul and his message of liberty.  It has been both really exciting and frustrating at the same time.

I am optimistic for the long-term future.  I think that a combination of technology, open communication, and a sense of individualism in America will be strong enough to overcome big government and usher in a new era of liberty.

My hopes for the near-term future are not as bright.  There are wars going on in several countries (some bigger than others), the U.S. government is trying to run an empire on the planet, the spending is out of control, and the debt is a ticking time bomb.  There is going to be some serious economic pain in the near future.

I also don’t have much hope in politics, particularly in the near future.  I have been a big supporter of Ron Paul’s campaign, only because he is spreading the message of liberty and turning more people into libertarians with each passing day.

Unless something big happens in the next few months, Mitt Romney will probably be the Republican nominee.  Even with third party runs, Obama or Romney is highly likely to win the general election in November.  The American people, while starting to awaken, are unlikely to awaken enough and fast enough to back Ron Paul in large numbers like Romney is getting today.

It is frustrating to watch.  Ron Paul didn’t really campaign in Florida and I thought it was a good decision, but it would have been nice to see him at least get into double digits.  He received about 7% of the vote, which means that 93% of the voters on that day weren’t ready for serious change.  They may vent a lot to friends and family and they may say they are fed up with the system and the politicians, but their actions didn’t reflect their words.  They haven’t felt enough pain or had enough self-education to really want something different than the status quo.

Let’s face it – all of the candidates in the two major parties are part of the status quo, except for Ron Paul.  Their language may differ a little here and there, but their overall policies would keep the establishment in place.

Donald Trump, the media whore that he is, called a press conference for a big announcement.  People thought he was going to endorse Newt Gingrich.  Instead, Trump endorsed Romney.  I’m not saying this because it will have much of an effect, but it tells you that he could have gone either way.  He jumped on the Romney bandwagon because he can now see the writing on the wall.  But there really isn’t much difference between Gingrich and Romney when it comes to their politics.

When Ron Paul ran 4 years ago, I was very active.  I was making signs, mailing letters, making calls, etc.  I have not really been active in the last year, except to write about him and talk to friends about him.  I guess you could say that Ron Paul has made me apathetic.  4 years ago, I thought it was important to get his name out there and expose people to the man and his philosophy.  If there is someone out there today who doesn’t know who Ron Paul is, then they just aren’t paying attention at all and don’t really care and will probably never care.  Everyone else should know Ron Paul and at least be vaguely familiar with his message.  There is not much of a point for me to hold signs.  I will be more than willing to talk to people and explain his philosophy for those who are interested.

It is really up to the American people now.  It is their choice.  The libertarians have done their job in exposing the message of liberty.  It is now our job to explain it as well as we can when people ask.  It is important for us to write and speak so that people who want to learn more have a place to turn.  But there is no sign waving for me now.  We have led the horse to water.  We can’t force the horse to drink it.

The American people are going to regret not getting behind Ron Paul, although some will always be too oblivious even when the problems become more evident.  The ones who supported Paul, or at least didn’t support any of the others, can hold their heads high.  We have done what we can.  We will continue to work hard in spreading liberty, but it is ultimately up to the American people to decide.  It is not too late, even after the elections are over.  Americans must withdraw their consent.  They must realize that more liberty and less government are the answers to so many of our problems.  They must drink the water or suffer the consequences.

Ron Paul is most likely having an effect on the price of gold.  This doesn’t mean that Ron Paul is driving the price up or down by buying or selling.  It means that, because of his message that has reached millions of people, it has probably affected their decision of whether to buy gold, even if it is just a fraction of his supporters.

It is impossible to prove the answer to this question and it is impossible to know exactly how much of an effect that Ron Paul has had on the price of gold.  However, with his warnings about the Federal Reserve and the debt and his discussions about gold, it is hard to imagine that this hasn’t had at least some kind of influence on some of his supporters.

If there are a million people who would consider themselves Ron Paul supporters and 10% of these people have bought gold or are considering buying gold because of their recent exposure to Paul’s message, then that is potentially 100,000 people who could drive up the price of gold.  This isn’t a lot of people, except that buying actual physical gold is a fairly thin market.  It doesn’t trade like Google or Apple stock.  On the margin, this could have a slight impact on the price of the metal.

Ron Paul supporters tend to be younger and they tend to have lower incomes (partially because of their age).  Most rich people are not Paul supporters (although they should be).  There are certainly some older people who are Paul supporters, but many of them were already libertarians before 2007 (Paul’s first run for president as a Republican).  These people probably already bought gold if they wanted it.

So the demographics of the Paul supporters do not point to a lot of people that would be able to buy several ounces of gold.  Most wouldn’t be able to afford one ounce in this economy.  But again, it doesn’t take that much to move a market like gold, particularly if people buy the actual metal (instead of an ETF or mutual fund).

There are millions of people who now have a decent understanding of the Federal Reserve.  Five years ago, most of these people couldn’t have told you what the Fed was or what it did.  These people understand that the economy is in trouble and they understand that the Fed is going to try to inflate its way out of it.  A good portion of these people may start buying a little gold, if they haven’t already.  They may only buy half ounce coins or one-tenth ounce coins.  Perhaps they will buy silver, which is the poor man’s gold.  The point is, because there are so many people aware of the Fed and what it does and what the potential harmful effects are, a lot of these people are going to be looking to protect themselves.

If you took all of the gold above the ground and distributed it evenly to every human inhabitant on the earth, everyone would have less than a troy ounce of gold each.  That is not very much gold to go around.  All of that gold above the ground includes the gold used for jewelry.  In addition, a good portion is held by various central banks.  It doesn’t leave a lot left for investors.

This indicates that there is a potential for a real spike in the price of gold, particularly if the Fed goes into QE3 (more money creation).  As more people become aware of the situation, the more there will be demand for gold.  Do you at least have your individual share of the world’s gold?  It seems expensive now, but it may seem really cheap in five years.