Voluntary Government and Taxes

I consider myself a panarchist, but I am open to other ways of governance in society.  It is a commonly mistaken belief that libertarians (particularly anarchists) do not believe in law.  It is just that some libertarians do not think that it is necessary to have government in order to have laws.  Every libertarians I know does not accept murder or theft in society.  It is just whether they think it should be handled by government or by private enterprise.

Libertarians generally advocate the non-aggression principle.  You are not supposed to use force or the threat of force, unless it is for defensive purposes.  But it has bothered me that it seems you cannot agree with this principle and be a minarchist (advocating very limited government) at the same time.  Even if the government were to only run the courts and police force, it would still need to collect taxes for this purpose.

I’ve been thinking about this though, and I see no reason that it wouldn’t be possible to have a government and have it funded through voluntary taxes only.  When Hollywood liberals talk about how their taxes should be higher, libertarians and conservatives often respond that they are free to write a check if they want to pay more.  We can say this mockingly, knowing almost nobody will knowingly pay more than they are legally required.  But we know this because taxes are so high already.

The federal government alone spends about 25% of national GDP right now.  State and local governments spend another good chunk.  If you live in a place like California or New York, you are easily paying over half of your income towards taxes in one form or another.  If some rich guy is already paying about 60% in taxes, do you really think he would ever voluntarily pay more?  Maybe you could convince one in ten thousand to pay extra.

Let’s imagine that we did live in a world designed by minarchists.  Let’s say that the government was only in charge of defending people and property and enforcing contracts.  It would need courts and police and maybe a few other minor things.  The total tax to fund this would be less than 1%.  If you put government in charge of roads also (which I don’t think is a good idea), maybe the total tax burden would be around 1% or even slightly higher.

If taxes were only around 1%, you could get most people to pay voluntarily.  You wouldn’t need to track people’s income and have them file forms.  People could simply send in money as they felt appropriate.  Perhaps a few big corporations or donors could pay for it all.  Maybe Coca-Cola and Toyota would donate large sums, just to put advertising on courthouses.  Or maybe they would just donate so that they could brag about funding our government, just for good public relations.

The possibilities are really endless.  The point is, you won’t get voluntary donations when people are already forking over half of their income because of the threat of force.  You don’t hand extra money over to a criminal if you don’t have to.  On the other hand, people donate to charity all the time.

There are other little things that are still debatable, even amongst libertarians.  What about jury duty?  Nobody should be forced to do something he doesn’t want to do, especially without some kind of a contract or agreement.  If someone refuses to serve on a jury, then maybe he doesn’t get the same benefits from the police and court system.  Or maybe there will be enough volunteers that it wouldn’t matter anyway.

We are miles away from this.  The details will be worked out if we ever get that close.  If we get down to a government that only protects people and property and enforces contracts, then the minarchists and panarchists and anarchists can argue all day long about the details.  But if the government were extremely limited, perhaps even I would be willing to pay a miniscule tax each year to fund it, even if it were completely voluntary.  We can all dream a little.

Lower Tax Deductions are Higher Taxes

Some of the Republicans in DC are capitulating, including John Boehner, the Speaker of the House.  Some well-known Republicans are suggesting that they would be willing to go along with a compromise that would involve some increases in tax revenue (as if the government is selling something to get “revenue”).

These politicians are now playing word games, saying that they might be willing to eliminate certain tax “loopholes” or deductions.  This way, they can avoid calling it a tax increase.  But the problem is that eliminating or reducing deductions is a way of raising taxes.  Most people filing taxes have some kind of deduction or tax credit, even when not itemizing.  Tax deductions and credits allow us to keep more of what we earn.

I heard the despicable Karl Rove on Hannity’s radio show.  I could only stand about two minutes of it, but I heard him say that Republicans should stand against tax rate hikes.  This is his slick way of saying that he favors getting rid of deductions and tax credits, which means that people will keep less of what they earn.

I often hear Republicans talk about how our tax system is so complicated (to which they have contributed) and that we need a simpler system.  While this is certainly true, it is not the number one concern of most libertarians when it comes to tax policy.  The biggest issue is not how complicated the tax system is.  The biggest issue is how much money it takes out of our pocket.  I would rather save $10,000 per year on my taxes than save an extra 5 or 6 hours per year preparing them.

Perhaps I would be in favor of eliminating deductions and credits if the tax rate were brought down to 2% or less.  But most Republicans aren’t talking about reducing tax rates any more.  They are talking about lowering deductions and credits with the existing tax rates.

Don’t believe that Republican politicians are really interested in low taxes.  Most of them only say this because this is what their constituency wants to hear.

Of course, this whole talk about taxes is ridiculous in the first place.  The federal government has a spending problem, not a taxing problem.  The big problem is that politicians refuse to cut any significant spending and the voters keep letting them get away with their promises of a free lunch.

Libertarians should not be focused on taxes.  Libertarians should be focused on the spending side.  If we want the economy to improve significantly, then we need massive cuts in government spending.  Once spending is cut, then taxes can follow.  But as long as the federal government is spending close to $4 trillion per year, then it doesn’t really matter much in the end on how it is collected.

Libertarian Thoughts on Secession

There is a lot of talk in the news about secession.  With the re-election of Obama, there are petitions in all 50 states that are being signed by people who think they would be better off if their individual state were to secede from the union.

As a libertarian, I have a lot of mixed thoughts on the subject right now.  Of course, decentralization is usually a good thing for liberty and it is ridiculous to think that 545 people (535 in Congress, 1 president, and 9 Supreme Court justices) should rule over a population of over 300 million people.

It is important to remember that the American Revolution was really a war over secession.  The colonies declared independence.  They were, in effect, seceding.  The British crown did not want this and a war broke out.

I also don’t think it is unconstitutional for a state to secede.  But even if that were the case, I wouldn’t care.  I never signed the Constitution, nor did anyone else alive today.  In fact, most of the American colonists did not sign the Constitution either.  If it is supposed to be some kind of a contract, it is a very bad one with no effect.  Anyway, it is not like anyone is actually following the Constitution today.  It is laughable when some statist tries to use a constitutional argument against secession.  Not only are they wrong, but they are extremely hypocritical too.

It would also be ridiculous if secession weren’t allowed by the Constitution.  If secession were never a possibility, then you almost have a dictatorship.  You are going to trust the federal government to write its own laws, enforce its own laws, interpret its own laws, and determine if its own laws should stand?  Without secession, there is essentially no recourse.

With all of that said, there are a few things about this secession movement that bother me.  First, I’m not sure how many of these same people would have signed a petition had Romney been elected.  Even though the policies of the Republicans and Democrats are nearly the same, all of a sudden many Republicans are giving up on their government with Obama in office.  Did they have this same attitude when Bush was in office?  So in that regard, I really only agree with the consistent libertarians who signed a petition, not the anybody-but-Obama crowd.

The other thing that bothers me about these petitions is that we are nowhere near ready for this movement.  The American colonists of the 1770’s were very well educated on the subject of liberty.  Most of them were well-read and understood what was happening.  Aside from the issue of slavery, most of the American colonists already believed strongly in liberty before independence was ever declared.

Although the internet has helped a great deal and it will continue to help in the future, Americans are simply not ready for a secession movement.  Most do not understand what liberty is.  Before libertarians start advocating secession, we have to do the dirty work of educating our fellow citizens.  As Downsize DC recently wrote, you can’t put the cart before the horse.  You can’t skip steps.

In conclusion, I don’t think this secession movement is going anywhere right now.  There are not enough truly liberty-minded people yet.  As the libertarian message spreads and Washington DC gets closer to default, then secession may become a real possibility.  But we aren’t there yet.  We must first continue to spread the message of liberty.  At least these petitions to secede are getting more people to think about not needing a federal government.

Government Spending and Wasting Resources

I consider virtually all government spending to be a waste of resources.  I suppose it could be argued that government spending on courts, police activity against crime, and a few other things are not wasteful because they may actually be protecting property and enforcing contracts.  So without arguing these points, then radical libertarians should be able to at least agree that 99% or more of government spending is wasteful, since most of what the government does (at all levels) is beyond property protection and contract enforcement.

One point that is important though is that not all government spending is unproductive.  It is just that government spending is less productive than it would have been had it been left in the hands of the people who earned it.  Governments can spend money to build bridges, manufacture electric cars, maintain parks, and an endless list of other things.  Of course, governments can also destroy resources with spending, if it is on something like war.  And government spending can create dependency and wreak much havoc in that sense.

But even if government limited its spending to producing goods and services (and not destroying them), it would still not be an efficient use of capital.  When the government spends money, it is not allowing the market to determine what should be produced and sold.  It is not that entrepreneurs don’t make mistakes.  It is just that entrepreneurs are sent market signals such as prices and profits and losses.  The entrepreneur must quickly adjust or else risk losing his money and going out of business.  Governments do not have to adjust as there are no signals telling if something is a good idea, and governments can keep taking more money through the threat of force to fund projects.

So again, it is not that all government spending is completely unproductive.  It is just that government spending misallocates resources.  The government could spend money to make an iPod for every single American and have them distributed.  It is not completely wasteful.  I’m sure most Americans would probably use their new government iPod.  But the problem is that many people would have preferred to keep their money and spend it on their next top priority.  That priority could have been paying down debt, saving more money, buying clothing, buying food, or millions of other things.

The best case scenario for an individual in the above example is that he or she would have gone out and bought an iPod with their money had the government not done it for them.  I suppose it would have been a wash in this case (assuming no government administration fees).  So perhaps a few million Americans would have been satisfied with their government iPod, while the rest would have preferred to use their money for something else.

Unfortunately, if the government used the Fed to create new money, or even if the government used general tax money (instead of having a special iPod tax), then many millions of Americans would be quite happy to receive their “free” iPod.  (I should note that I would rather the government use my tax money to make iPods than to “educate” children, fight wars, or arrest people for drug use.)

In conclusion, virtually all government spending is a misallocation of resources.  This makes us poorer and lowers our standard of living.  It is not that all government spending is completely unproductive.  It is just unproductive in comparison to leaving it to the free market.  A free market allocates resources according to the needs and wants of the millions of consumers who are using their own money to buy goods and services.

A Libertarian Solution to the Economic Problems

Libertarians, while still a small minority, are growing in numbers.  This is not in reference to Libertarian Party members, but philosophical libertarians.  This, in tandem with a poor economy, leads to many libertarians being asked what their solution is to the bad economic conditions.  There are many people out there who still don’t know much about libertarianism and are genuinely curious.  Unfortunately, there are also many people who do not like the answers.  The reason is because people want to believe there is such a thing as a free lunch.

I consider myself to be a radical libertarian.  But for the sake of this discussion, I am going to suggest some dramatic changes, without going all the way to a minarchist, panarchist, or anarchist society.  These are solutions that could be adopted without eliminating the state.

The biggest drag on the economy is government spending.  Everything that is spent by government is not being spent by the people who actually earned it.  Everything the government spends is a misallocation of resources or a redistribution of wealth or both.  In order to increase our standard of living and increase savings and production, there must be a dramatic reduction in overall government spending.  For this discussion, I will just focus on federal spending for the U.S.

All wars must be ended.  Not only are they immoral, but they are extremely expensive.  In addition, most of the bases overseas should be closed and the troops should come home.  (I did not say ALL bases, as I am trying not to be too radical for this post.)  All foreign aid should be ended.  The military budget should be cut by at least two-thirds.  If there are no more wars and interventions, then the number of military personnel can be reduced dramatically.  Even if it is just done through attrition, that process must start.  But even employing a troop in America would be far cheaper than employing a troop in a country thousands of miles away.

Domestic spending must also be cut dramatically.  The Department of Education should be eliminated.  It would be up to the states if they want to make up the difference.  The Departments of Labor, of Housing, of Agriculture, and of Energy should all be eliminated in a short amount of time.  The federal government has no constitutional authority or any other business in these matters.  There are many other departments and agencies that must go also.  The federal war on drugs must also be ended.

So-called entitlement spending like Medicare and Social Security are more difficult because there are so many Americans currently depending on these programs.  But something still needs to be done as they are unsustainable in their current fashion.  The retirement ages to collect must be increased.  It should be announced now and should be started soon.

The current tax rates must not go up.  At the very least, they should be maintained and then lowered as spending is dramatically cut.  While the tax code should be simplified and hopefully eliminated eventually, the amount of taxes being paid is more important than the method in collecting them.

The monetary system must change.  The Fed should stop buying all government debt (which won’t be necessary if there is no longer any new debt to buy).  It should stop all monetary inflation.  Legal tender laws should be repealed and all taxes on gold and silver should be repealed in order to allow for competing forms of money.

Regulations must be scaled back on a huge scale.  It is extremely difficult to do business in America compared to what it once was.  It is much easier now in other places like Hong Kong or Singapore.  There are enough regulations at the state and local levels.  We don’t need a one-size-fits-all scenario where Washington DC is dictating the lives of over 300 million people.

If all of this were done in a short time span, then we would have a deep recession to clear out all of the previous malinvestment.  But things would quickly recover and we would see a new prosperity that can only be dreamed of, especially when it is combined with current technology.

The one problem that is still difficult is the banks and the FDIC.  Perhaps the government would have to bail out  depositors (not banks) and the FDIC would have to be slowly phased out of existence.  This is probably the hardest problem to solve for a libertarian right now.

Of course, none of this will happen, or at least not in the near future.  But libertarians need to be ready with an answer on what to do about the bad economy.  Our current system is very far away from a free market system.  When government is cut dramatically and people are free to trade peacefully, then a strong economy will follow.  Otherwise, we can count on more struggles ahead.

Happy Thanksgiving

I hope everyone out there has a happy Thanksgiving and that you get to enjoy it with good food and good family and friends.

During this time of year, many people recognize what they are thankful for and sometimes this is the only time of year that it is done.  Some people don’t even do that much.  Most people who do say their “thank you’s” will usually cite family and friends.  This is appropriate.

In addition, I like to point out that we should be thankful for the times we live in.  I know that the economy is really tough right now on a lot of people.  But if you are reading this, then you have some kind of an electronic device with internet access.  This would have been unheard of just twenty years ago.  If you have this much, then you probably also have food on the table every day and clothes to wear and a warm place to sleep.

There are still a lot of people in this world who do not have those “luxuries”.  I suppose the good news is that there is a higher percentage of people in the world today than at any other time who do have plenty of food and clean drinking water and a good place to sleep.

I think recognizing this can help you in your own life.  It can make you less scared and make you feel like you can conquer most anything that comes your way.  If you are struggling financially, at least you can recognize that you don’t live in a world where you have to go out and hunt for your own food or else starve.

I think there is also a good balance to be found in enjoying our 21st century luxuries and also staying humble.  This economy has humbled a lot of people.  I am optimistic that we will find liberty again and we will see a new prosperity that cannot even be imagined today.  I am thankful that I see a libertarian spirit starting to arise, particularly in the American people.  Let’s hope it continues.

Happy Thanksgiving!

Collecting Pennies

One of the most popular pieces I have ever written was on collecting nickels.  If you type “collecting nickels” into the google search engine, my post appears on the first page.  It was written in February 2011 and it still gets many hits.  It is obviously a somewhat popular subject.

My thoughts on collecting nickels is almost the same as pennies, except pennies are a little more complicated.  As I mentioned with nickels, it is one of the few investments that is a hedge against both inflation and deflation at the same time.  The same is true of a penny.

One of the big problems is that pennies are not worth much.  While they are a little less bulky than nickels, you would also have to collect 5 times as many to get the same monetary value (not necessarily metal value) as the nickel.

Pennies are also a little more complicated because the metal value will depend on the date the penny was minted.

If you find a “wheat penny” that is dated from 1909 to 1958, then it is mostly copper (95%), with the exception of the 1943 penny.  I told you it is complicated.  These pennies are easy to spot because the back has a design of wheat heads, instead of the current day pennies that have the Lincoln Memorial on the back.  It also says “ONE CENT” in big letters.  The metal content in these older pennies is currently worth about 2.5 times the face value of the coin.  In other words, the copper is worth about 2.5 cents.  However, some of the older pennies may be worth substantially more due to rarity.

Pennies dated 1959 to 1981 (and some 1982) are made of 95% copper and 5% zinc.  These are worth more than pennies made in 1982 to the present day.  If it is worth it to sort through these, then it may pay off one day.  But it will take a lot of time.  I would only suggest doing it if you are multi-tasking.  If you are just sitting there watching a football game, then maybe spending some time sorting through your old pennies is not a waste of time.  Again, currently the metal content in these pennies is about 2.5 cents, but it will vary depending on the metal prices, particularly copper.  It was over 3 cents at one point.

The pennies from 1982 to the present are mostly made of zinc.  Only about 2.5% is copper and most of that is in the plating.  This may still end up being a good investment one day, depending on how much the Federal Reserve inflates the currency.  But zinc is not as valuable as copper, so the pre-1982 pennies should serve as a better investment.  Right now, the mostly zinc pennies have a metal content that is worth just over half a cent.

I understand that a lot of people think it is crazy to save pennies.  Perhaps it is crazy.  But you can’t judge it based on what they are worth now.  You could save 100,000 pennies and that would still only be worth $1,000.  That is a lot of pennies to store (2,000 rolls), but the question is what they may be worth one day in the future, based on their metal value.  If the Fed goes crazy with monetary inflation, then maybe the metal content will be worth $10,000 one day, or even more.

And again, even if you are completely wrong and there is no monetary inflation in the future (highly unlikely), then you can always just trade your rolls in at the bank in exchange for bills.  However, I’m not sure that I would bring in 2,000 rolls at one time.  You may want to split it up into a few trips.

While it is illegal to melt your coins, this probably won’t matter.  As I mentioned with the nickels, it is actually preferable to leave them in coin form so that the value can be easily assessed.  It is the same with pre-1965 silver dimes and quarters.  These are now traded at coin shows for their metal content.

In conclusion, collecting pennies is a personal choice.  If you have a lot of time and some space to store them, then you aren’t going to lose anything by holding them.  Interest rates aren’t paying enough right now to worry about that lost opportunity.  But I also wouldn’t spend a lot of time sorting through your pennies if your time is better spent on your career or other projects that may be much more profitable.  But if you do decide to collect pennies, then you better hurry, because there will come a day when pennies will be made of steel or else they just won’t be used at all due to the continuing devaluation of the dollar.  Either way, expect pennies, especially those dated prior to 1982, to slowly disappear from circulation.

Tax Rates in the 1950’s

Paul Krugman – the Nobel prize winner, the Keynesian economist, the face of big government economics, and the face of centralized planning and monetary inflation – has written an article in the NY Times that has gotten quite a bit of attention.  He points out that the 1950’s were a prosperous time in America, yet the higher marginal tax rate was at 91%.  He is wondering what all the fuss is about right now with tax rates.  He almost implies that we can just go back to 91% marginal tax rates and everything will be great.

This is an interesting point and I think it is important and deserves a libertarian response.  He is actually correct that the 1950’s were a relatively prosperous time considering the high tax rates.  So how can this be explained by free market economists?

This is why economics is so hard.  It is because there are so many variables.  We don’t live in a vacuum where we can keep everything the same and just experiment with different tax rates.

But it is ironic that Krugman, champion of government spending, is citing the 1950’s as a prosperous time.  Because aside from the tax rates, the 1950’s looks like a free market paradise compared to what we have now.  There was no Medicare or Medicaid.  There was no EPA.  There was no Americans with Disabilities Act.  It was also a relatively peaceful time in America, with the exception of the Korean War wrapping up in 1953, which did not consume anywhere near the resources that were used in World War 2 or in today’s wars.

The list of things could go on, but I think there is one hard statistic in general that can be pointed to that makes Krugman look bad here.  It is government spending.  The 1950’s is actually strong evidence that total government spending and monetary policy are more important factors to the economy than tax rates.  If you look at federal spending for the 1950’s, it was a fraction of what it is now.  Total federal spending never exceeded $100 billion annually for every year in the 50’s.  It was only $42.6 billion in 1951.  Adjusted for inflation, total federal spending was only about one-fifth of what it is today.

Even as a percentage of GDP, it was lower than 20% in all years except one (1953), whereas it is now about 24% or 25%.  And because spending was relatively low in the 50’s, the deficits were relatively low.  And because the deficits were relatively low, monetary inflation from the Fed was relatively low.

So while marginal tax rates on high income earners were extremely high, there was still relative prosperity because of the lower government spending and the stable money.  While the high tax rates were discouraging to entrepreneurs and workers, the relatively tight money policies were a great incentive.  Businessmen could plan and could count on the dollar maintaining its purchasing power.  It was an incentive to save.  As a result, there was not a giant misallocation of resources as we see today.  While there were downturns in the economy, there was not a severe boom and bust cycle like we see today.

So Krugman was right that the 1950’s were prosperous during a time of high marginal tax rates.  But if you look at the rest of the picture, it is actually a case against Krugman’s big government/ big spending theories.  If government spending and monetary inflation are kept under control, then you can have prosperity even with confiscatory tax rates.  This should be a lesson to Tea Party conservatives that they should focus more on government spending and less on taxation.

Mitt Romney vs. Ron Paul

Ron Paul lost out on the Republican nomination for the presidency.  Mitt Romney won the nomination, but then lost in the general election.  So neither one will be president, assuming Romney’s political career is basically done.  So the outcome is the same for them as far as attaining the highest office in the land.

So with everything over for them, at least as far as elections are concerned, which individual has had the greater impact?  For me, the answer is obvious.

Mitt Romney did not really inspire anyone.  He did not convert people’s thinking.  He did not use persuasion to convince some people to become Republicans or to change their philosophical outlook.  Romney was simply the Republican nominee against an incumbent Democrat who is mostly despised within the Republican Party.  When it comes down to it, most of the people who voted for Romney were really just voting against Obama.

Meanwhile, while Ron Paul did not get near as many votes in the primaries, and he certainly did not have backing from the establishment, he did have a profound impact on many lives.  Ron Paul’s campaigns in 2007/2008 and 2011/2012 inspired hundreds of thousands of people, or perhaps millions. He converted people to a philosophy of liberty.  Many of these people will now be libertarians for the rest of their lives.

Paul’s presidential runs were never about getting elected.  I assume that he already knew this.  I don’t know how many of his supporters knew this or even know it now.

I constantly hear some libertarians talking about electing the right people into office.  Unfortunately, they just don’t understand what it takes to achieve liberty.  At the very least, they are putting the cart before the horse.  If you are going to elect a large number of liberty-minded individuals and if you are going to hold their feet to the fire once they are in office, then you must have a large group of dedicated libertarians who stand on principle.  It doesn’t necessarily have to be a majority, but it does have to be a significant minority.

Achieving liberty is not about electing the right people into office.  It is about changing hearts and minds.  It is about persuasion.  It is about convincing others of the moral and pragmatic superiority of liberty.  It is about educating others on what it means to be a principled libertarian.  Without this step, the so-called right people will never be elected into office.

This lesson should also be learned by the Libertarian Party in general.  I think it is a good idea to run a candidate for president, but that is because it is an opportunity for media exposure that no one else can get.  It is an opportunity for the party to educate others on the benefits of liberty.  It is not about electing a Libertarian Party member to the presidency.

Gary Johnson just broke the one million vote mark for the first time for the Libertarian Party (although Ed Clark received a higher percentage in 1980).  But this doesn’t mean that much to people outside of libertarian circles.  It is perhaps symbolic that the libertarian movement is stronger now.  But it does not mean that Gary Johnson did a good job in his campaign on converting people to libertarianism through education.  It can’t mean that, since Johnson himself was learning what it meant to be a libertarian while he was campaigning.

Harry Browne received less than half a million votes in the 1996 election and again in the 2000 election.  Yet he had a far more lasting impact than someone like Gary Johnson.  Harry Browne actually converted people to libertarianism for life.  He had no hopes for winning the presidency and he said that numerous times.  His focus was on educating others.

The lesson here is simple.  You shouldn’t be convincing your friend to vote for someone like Ron Paul or Gary Johnson.  You should be focusing on introducing libertarian ideas to your friend that may have a lasting impact.

In 50 years, what will Romney’s legacy be?  People just being born now may not even know him.  He will be known in the history books as a one-term governor who lost his presidential bid.

Ron Paul will not be best known as someone who lost in his runs for the presidency.  He will be known as someone who sparked a fire of liberty and peaceful revolution in the hearts and minds of millions of people for many generations to come.

2 Months Later – QE3 and the Monetary Base

It is hard to believe, but it has been over 2 months since the FOMC announced its policy decision to implement QE3, or what some are calling QE Infinity.  While the FOMC/ Fed is not specifically referring to it as QE3 (even that has a negative connotation now), they did say they would be buying $40 billion (net) each month, although this QE will focus on mortgage-backed securities and bailing out the banks again.

Looking at the adjusted monetary base (updated 11/15/12), there has not been much of a change since the announcement back in mid-September.  I recall that QE2 started out slowly too, but the Fed did eventually deliver on its promises, even if those promises meant more disaster for the economy.  I expect it to be no different this time.

We will also keep an eye on the excess reserves held by commercial banks.  The excess reserves went up in tandem with the money supply during the previous QEs.  So most of the new monetary inflation over the past 4 years has been parked at the banks, which parks the money with the Fed in order to earn .25% interest (almost nothing).

Even if the banks keep building up reserves, the policy of more monetary inflation will still eventually show up in prices, although not as much as would be the case if the banks were to lend the new money.

For this, I am still counting on gold and other precious metals to perform well.  I am also not betting heavily against stocks, as they could benefit, at least in nominal terms, from more monetary inflation.  As I mentioned recently, the stock market is a tug-of-war right now, with QE3 on one side and the so-called fiscal cliff on the other.  For this, gold seems like a safer bet.

$40 billion per month in new money, created out of thin air by the Fed, will add up.  We don’t know how long the Fed will keep this policy, but most people suspect it will be for a year or longer.

I don’t know at what point the Fed will stop inflating the money supply.  My guess is that it will stop, or at least take a break, when we see the consumer price index rise above 5% for a few months in a row.  If we hit a recession in 2013, then we may not see the official price index rise above this for a little while longer.  A recession would likely increase the demand for dollars and would essentially counteract some of the monetary inflation.

I expect 2013 to be an interesting year.  The Fed has been walking on a tightrope and I think it has been content to keep this position.  Eventually, we will see a severe recession or high price inflation.  It is inevitable.  It is more of a question of when and how the whole thing will play out.