This presidential election gives us Willard Mitt Romney against Barack Obama (supposedly known as Barry Soetoro as a child).  Since the Ron Paul news has quieted down, I haven’t spent as much time on presidential politics.  For today’s post, I am going to discuss the possible implications of either one of these two winning the presidency.

First, unless there is some major event, it will be one of these two men.  I know that Romney isn’t officially the Republican nominee yet.  I know that people like Gary Johnson are running on a third-party ticket.  However, barring something huge, there is no way that someone like Johnson is going to come anywhere close to winning.

Most Republicans are absolutely terrified of Obama.  While I somewhat concur, I don’t find him any more terrifying than most others running for that office.  Obama probably really does have Marxist roots.  He truly believes in big government.  He believes that government is the primary reason for prosperity in our society.

With that said, Obama is a politician first.  He rarely let’s his philosophy interfere with his political calculations.  He did overstep his bounds when he said that if you have a business that you didn’t build it; that someone else did.  He let his true philosophy slip out of his mouth.  It wasn’t a good political calculation.  But when it comes to policy, Obama probably isn’t even the one making the decisions.  It is his advisors around him.  It is the establishment telling him what to do.

Many Republicans fear that if Obama is given a second term that he will be out of control.  They believe that if he doesn’t have to worry about another election, that he will do whatever he wants.  The problem with that theory is that it simply hasn’t been true in the past.  Bill Clinton, at least domestically speaking, was actually probably better in his second term.  That was when the budget actually came close to being balanced.  (It was really borrowing from the Social Security fund, so there wasn’t truly a surplus, but it was still much better than we have seen since.)

If Reagan was really a great conservative who believed in small government, then why didn’t he act that way in his second term?  Government spending and deficits were still obscene in Reagan’s second term.

I doubt that Obama will be out of control in a second term.  He will probably do less.  Also, if there is a Republican majority in Congress, then we will actually have some opposition to big government, even if just in rhetoric.  While I don’t expect a Republican Congress to control spending any better than it is doing now, we wouldn’t see any more disasters like Obamacare.

While Obama has been bad on foreign policy, he hasn’t been as bad as he could be.  While he has continued Bush’s wars and started some smaller ones, at least he hasn’t directly attacked Iran.  I’m not saying it can’t still happen under Obama, but I would hate to see what the world might look like if John McCain had been elected 4 years ago.

That brings us to Romney.  I have no idea what Romney’s foreign policy will look like.  He sounds belligerent now.  He just visited Israel to show his support there.  He seems like a war hawk.  Again, it is impossible to say what he will be like in office.  Because of that, I would give a slight edge to Obama on foreign policy in terms of liberty.

Now you would think that Romney would at least be much better on economics than Obama.  But I don’t think this is the case at all.  He may have been successful in business, but he doesn’t understand free market economics at all (unless he is a complete liar).

I heard Romney on Sean Hannity’s radio show today.  Hannity asked him about cutting spending.  The only thing Romney said was that he favors entitlement reform in the form of means testing.  In other words, he wants to deny Social Security checks (or reduce them) to rich people.  Regardless of whether this is right or wrong, it is a drop in the bucket.  I hate to break it to you conservatives out there, but even if he got through that reform, we would still have trillion dollar budget deficits.  Romney has not offered one other specific cut that is anything of significance.  He has not called for the elimination of any departments.  How could he when he hasn’t even called for any cuts in them?

The other thing I heard Romney say is that China is not playing fair.  I remember him saying this multiple times during debates.  This means that Romney is a Keynesian.  He is not a monetarist in the mold of Milton Friedman.  He is a Keynesian in the mold of Keynes.  He does not understand free market economics at all (again, unless he is lying).  Either way, Romney is sounding like a mercantilist. Does he think that China’s currency is harming Americans?  Does he think that having the Chinese sell inexpensive products to Americans is harmful?  Does he not understand that this is beneficial to the American consumer?

If Romney is saying these things now, I can only imagine what his policies will look like.  If a candidate is already talking like a lover of big government before he gets into office, then it isn’t going to get much better when he is elected.

So for economics, I can’t even say that Romney will be better than Obama.  If Romney is president, then we lose all opposition to big government in Congress, just as we saw during the Bush years.

In conclusion, if you love liberty, there is no way you should vote for either one of these two.  If I were absolutely forced to pick between the lesser of two evils, I think Obama may actually be the lesser of the two evils.  At least we know what we are getting.

The Federal Open Market Committee (FOMC) released its statement today regarding the economy.  It stated that information received since June “suggests that economic activity decelerated somewhat over the first half of this year.”  With that said, there was no announcement of a new quantitative easing (QE) or any other kind of major stimulus.  The stock market was only down slightly on the news.

The statement said, “The Committee anticipates that inflation over the medium term will run at or below the rate it judges most consistent with its dual mandate.”  I find it hard to believe that they believe this.  If inflation is expected to be at or below its dual mandate and the economy is still showing weakness, then why wouldn’t the Fed inflate more?

As I have discussed recently, the Fed is holding back right now on purpose.  The monetary base has been flat for over a year now.  They are walking on a tightrope right now and they would prefer a controlled liquidation over any of the other options.  The Fed is saving any additional QEs for something more major than a minor stock market downturn or 8% unemployment (at least based on the government’s statistics).  In addition, as I recently discussed, the Fed does not care about re-electing Obama.

The Fed will buy more government debt to keep rates low and to keep the big banks afloat.  Right now, rates are at or near all-time lows and the banks are still technically solvent.  Therefore, the Fed will wait for something more major before creating more new money out of thin air.

The FOMC statement said, “To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate more consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy.  In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

This means that the federal funds rate will be near zero for at least 6 years.  That is unprecedented.  However, it is misleading for the FOMC to say that it is being highly accommodative by keeping rates so low.  While the original Fed monetary inflation contributed to the situation, it is not really the Fed that is holding rates low now.  The federal funds rate is near zero because the banks have built up massive excess reserves.

The FOMC decision was almost unanimous, with one person dissenting because he “preferred to omit the description of the time period over which economic conditions are likely to warrant an exceptionally low level of the federal funds rate.”

Yes, these are the people controlling our economic future right now.  It is not consoling.  The good news is that I don’t think the Fed/ FOMC will go to hyperinflation.  I see that with their actions now.  If I see anything new that changes my mind, I will be sure to write something about it.  But for now, the Fed is sitting tight and we should too.

I am a big proponent of the permanent portfolio as described by Harry Browne in his book Fail-Safe Investing.  I believe you should have a majority of your investments in a setup like the permanent portfolio.  For more conservative investors, it should be closer to 100% of your investments (not counting any investment real estate).

The one thing that scares many people, particularly libertarians, is the bond portion.  You are supposed to invest 25% in long-term government bonds.  Many libertarians (and others) are convinced that rates will be going up.  This would drive down the value of the bonds.  Ironically, I have heard this for many years now, even about 7 or 8 years ago when Harry Browne was alive.  Yet, bonds have done quite well over this period of time.

I understand the fear that people have of government bonds.  You shouldn’t be afraid of an outright default, as we see coming in Europe.  I’m not saying it isn’t possible, but I think we still have quite a bit of time before the U.S. government considers an outright default.  The main threat is rising interest rates.  If we hit a period of higher price inflation and the Fed is forced to stop buying government debt, then higher interest rates will probably occur.

The problem here is that the future is unpredictable.  Japan has really high debt and yet interest rates have stayed very low there for decades.  The bond portion of the permanent portfolio is designed to keep the portfolio performing well in the face of a deflation/ depression.  It actually kept the portfolio from falling too dramatically in the fall of 2008 when stocks and gold tumbled down.

So I have come up with a compromise for those interested in the permanent portfolio, yet too scared to put such a big portion in bonds.

Earlier this year, I wrote a special report titled, “Should You Pay Down Your Mortgage?“.  It is available on kindle for just 99 cents and can be read in less than an hour.  I have mixed opinions on this subject and I laid out the pros and cons of paying down or paying off your home mortgage.

One thing I mention is that paying down your mortgage is somewhat of a hedge against deflation.  While actually selling your house might be a better hedge, that isn’t a realistic option for many people.  Some people don’t want to rent.  Plus, it wouldn’t make much sense to sell your house in anticipation of deflation when you can’t be certain of the future.  If the deflation doesn’t come, then it was a bad decision to sell.

So here is my proposal, assuming you have a mortgage and assuming you have money to invest.

Instead of investing 25% in bonds, take half of that portion and make a payment towards the principal balance on your home mortgage.  In other words, let’s say that you have $20,000 to invest.  You will take $5,000 and buy gold or gold investments.  You will take $5,000 and buy a broad stock market index.  You will take $5,000 and put it in some kind of a money market fund.  For the remaining $5,000, you will take $2,500 of it and put it in long-term government bonds and you will take the other $2,500 and pay down the principal on your mortgage.

Assuming you have an interest rate of 4% on your home loan, you will get the equivalent of a 4% return on this money.  You will essentially be locking in that return with compounding interest, so it will benefit you if interest rates go lower. In other words, it is somewhat of a hedge against deflation.  If you have trouble thinking of it this way, just think that having a big mortgage is a hedge against inflation.  You can pay off your mortgage in depreciating money as time goes on.

With that said, I wouldn’t recommend taking the full 25% and paying down your mortgage.  You have more leverage with the bonds.  In addition, paying down your mortgage makes that money illiquid.  If there is a deflationary depression, you need to be able to rebalance your portfolio.  That’s why you should still leave a portion in bonds in your permanent portfolio, even if it is a smaller amount.

This is not an exact science, but neither is the permanent portfolio.  It is just a suggestion for those of you who are really scared of buying bonds with rates so low.  If you have a mortgage, then you can hedge against deflation by paying that down.