Total Spending vs. Total Taxes

There is a particular point that I have been hammering home in the last few months.  It is that total government spending is what ultimately matters the most, whereas tax rates or total taxes are not nearly as significant.  This is especially important to know right now, with all of the talk about the so-called fiscal cliff.

The fiscal cliff is a combination of increasing tax rates and “forced” spending cuts.  While the cuts are almost insignificant, I think any cuts in government spending are a positive thing.  But most of the focus on the fiscal cliff right now is on the tax rates.

The federal government is spending over 3 and a half trillion dollars per year right now.  Regardless of where this money is coming from, it is being spent.  While it is not all a complete waste of resources, it is a big misallocation of resources.  The government is spending your money on things that you probably wouldn’t have chosen if you had been able to keep the money you earned.

There are three main ways that the government can get money.  It can get it through taxes, borrowing, or inflation.  I do not count “revenues” from things like the Post Office, because the revenues aren’t even enough to cover the expenses.  And even if they were, it is only because the government is using the threat of force to keep away competition.  There is also the possibility of the government selling land or buildings or other assets, but this is not common and will be disregarded for this discussion.

If the government is getting most or all of its money from taxes, borrowing, and inflation, then that capital is being drawn away from someone else.  It means that some individual or business cannot use that money.  It doesn’t really matter how it is obtained.  In one way or another, it is money (which represents resources) that is being drawn in to the government and spent.  We pay for it in some way or another.

We frequently hear that running up the national debt will burden our grandchildren and future generations.  But it is really burdening us now.  We are paying for it now.  Future generations are only paying for it in the sense that there is less savings, less capital investment, and less advances in technology than would have otherwise occurred.

Even if a private investor is buying a government bond, he is still handing resources over to the government.  I suppose the only case where the total spending scenario does not hold completely true is when a foreign central government (like China) buys government debt.  The Chinese government is subsidizing the U.S. in a sense.

I know everyone wants to focus on the taxes, because that is what you see on your paycheck.  While it might matter in the very short term, it really doesn’t matter much ultimately.  Perhaps it will matter a little in how wealth is distributed, but it means very little to the overall health of the U.S. economy.

The government could cut all taxes to zero and keep spending what it spends now.  Do you not think that you would pay for this?  If it had to resort to inflation to spend over 3 and a half trillion dollars per year, you would see massive price increases in a short period of time, with most wages lagging far behind.  So your bigger paycheck wouldn’t really get you any more.

This is why the focus must be on total government spending.  If you are going to waste time writing to your congressman, at least focus on the right thing.  Don’t tell him to keep taxes low.  Tell him to dramatically cut spending.  That is really what ultimately matters.  If spending is cut enough, then taxes can eventually follow.  Just cutting spending enough to stop the Fed from monetizing any government debt would be a big accomplishment at this point.  At least we wouldn’t be paying the hidden tax of inflation.

This whole issue of total government spending vs. total taxes is what has allowed the Republican politicians to get away with having a label as the party of smaller government.  It is easy for them to advocate lower taxes.  But lower taxes don’t matter if they keep increasing spending.  We are paying for it one way or another.

We are not burdening future generations like we think.  We are burdening ourselves now.  We are not going to see a really strong economy again until government loosens its grip.  That means that government spending must be cut drastically.  Until that happens, it doesn’t matter much in the long term what the tax rates are.

Regime Uncertainty and the Fiscal Cliff

Robert Higgs has written extensively on “regime uncertainty”, particularly as it relates to the Great Depression.  In a nutshell, he says that uncertainty regarding future policy helped contribute to the lack of investment during the Great Depression.  When individuals and businesses don’t know what the laws will be in the near future, it serves as a deterrent to starting or growing businesses, along with investing in them.

We have major economic problems for a variety of reasons, but they all somehow revolve around the government (or governments if you include state and local) and the central bank (the Federal Reserve).  Spending, debt, inflation, taxes, and regulations all contribute to our problems.  With that, you can add regime uncertainty, which is the lack of predictability with all of these factors.

I am writing this post on December 27.  We go over the so-called fiscal cliff on January 1.  I don’t really include any spending cuts as part of this, as I view this as a positive thing, even if small.  But there are a bunch of different taxes that are scheduled to go up.  While the president and Congress are supposedly trying to work something out, we have no idea if any agreement will be reached, and if so, what it will entail.

As an individual, assuming you are working or making money, you don’t know what your tax rate will be in less than 5 days.  If you are a small business owner, you don’t know what your taxes will be in less than 5 days.  If you are an investor, you don’t know what your taxes will be in less than 5 days.  If this isn’t regime uncertainty, I don’t know what is.

This distorts the market in many ways.  It affects investors on their decisions to buy and sell stocks (or other investments).  It affects business owners on whether to expand their business or hire new people or even to replace someone who has left.  It affects individual workers on their decisions to save, or buy a house, or buy a car, or plan a vacation.  Even if the tax changes mean “only” $200 per month to a family, this could affect their decision making if they are on the margin.

Obamacare was bad enough.  It created regime uncertainty.  As Nancy Pelosi said, we will find out what is in the law, now that it has passed.  But for people and businesses to not know what the tax rates will be (in many different categories) in just a few days from now, it is hard to imagine that this isn’t affecting human behavior on a grand scale.  It may even encourage some people to die early.

While I still believe that overall government spending is far more important than the tax rates, the looming fiscal cliff is just another example of how the government makes us poorer.  This regime uncertainty is preventing individuals and businesses from engaging in activity that could make our lives better.  We will never get to see the new products and services that we could have had if only the government had made our laws more predictable, along with being less tyrannical.

In conclusion, it doesn’t matter at this point if we go over the so-called fiscal cliff or not.  It has already damaged and distorted our economy.

Real Estate in an Inflationary Environment

I recently wrote a post stating that I would not be shocked if we end up having another real estate bubble.  The government and the Fed are engaging in policies that distort the market and it is quite likely that some of this capital is being directed (or misdirected) into housing.

I received a comment from that post that said the following:

“You’ve recommended buying real estate as an investment, and I’m curious why that is?  What makes a single family home or a duplex a suitable investment rather than a depreciating good like a car, other than the hope that inflation might outpace the depreciation?  Just wondering what your thoughts are.  Thanks.”

As stated above, I have recommended buying investment real estate several times.  I have said this without thinking that there will necessarily be another real estate bubble.  I have multiple reasons for liking the prospects of investment real estate.  It helps that prices are much lower than they were 5 years ago.  Housing would not have been a good investment in most places 5 years ago when you can now buy in some places for almost half the price.

I also like investment real estate because of Federal Reserve policy.  With huge deficit spending and other problems still to come (like the massive unfunded liabilities), I think the Fed will continue to pursue monetary inflation, at least until price inflation gets out of control.  Since houses are hard assets, they can benefit from inflation, or at least provide some wealth protection.

It also helps that you can get a 30-year fixed-rate mortgage for under 4 percent right now.  You get to borrow money at a low and fixed rate and have your renters pay it off.  If inflation continues, then you will pay off your loan with depreciating money.

In response to the question about buying housing versus buying a depreciating good like a car, the question already has the answer.  A car is a depreciating asset.  The more you drive a car (and even if you don’t drive it) the less it is worth.  The engine wears down fast.  While both cars and houses are consumer goods, houses hold their values better.  There are repairs involved with housing too, but there are many houses that are decades old and still in good shape.  That is rare for cars.

If price inflation is bad enough, then perhaps the nominal price of a car could go up.  But the real (inflation adjusted) price will almost always go down, unless you foresee a huge shortage in cars.

The other major difference between houses and cars is that you can continue to rent out a house.  I don’t really know anyone who rents out cars, other than car companies and rental companies.  Rents are another hedge against inflation.  Rental prices for housing are likely to go up in an inflationary environment.  Even if rents do not go up as much as price inflation, you don’t need to worry as a landlord.  You may have some variabilities with taxes, repairs, and insurance, but your biggest cost is fixed.  It is even better once you pay off your loan.  So your revenue should go up more than your expenses, at least over time.

If you personally need a car to drive, it may be a good time to make a purchase if you can get good terms on a loan.  But it is only an investment in that it can get you to work and to the store.  It is more of a necessity than an investment.  But I do not see it making sense as an investment in the sense that you would buy investment real estate.

One other thing to note is that housing has an advantage even against other hard assets like gold.  As stated above, you can rent out your investment housing.  It is much easier to buy gold.  It is much easier to hold your gold.  And gold is a good hedge against inflation.  But you aren’t going to rent out your gold.  You will rent out your investment housing, which will help you pay for it and will provide a nice stream of income if you accumulate enough and start to pay off loans.  It is more work, but most things aren’t free and easy in this world.  If you get any appreciation on the price of your housing, that will be like icing on the cake.

Merry Christmas and Peace

I hope everyone out there has a merry Christmas and is able to enjoy spending some time with friends and/or family.  It is easy for Americans and others in first-world countries to take for granted that we live our daily lives with plenty of food and adequate shelter.  The good news is that there is probably less poverty today (at least percentage wise) than at any other time in history.  We can thank the flourishing of liberty, along with the advancement of technology.

Regardless of your religious beliefs, I think Christ sets a good example of how we can live our lives, at least in terms of morality.  All of the major religions are grounded in common law.  You should treat others how you wish to be treated.  You should not harm other people or their property.

It really amazes me how many people there are who call themselves Christians, yet are some of the people most clamorous for war.  To this day, many Christians will defend the U.S. government and its starting of war in Iraq.  While some of these people are complete phonies, I really believe that many of these Christians have just not thought through their position.  How can you possibly be a follower of Christ and yet be supportive of dropping bombs that kill many thousands of innocent people?

When it comes to arguing in favor of libertarian principles, I believe it is important to use both moral and pragmatic (or utilitarian) arguments.  However, when it comes to the issue of war, I believe that the moral arguments have to be placed front and center.  I want Christians, and all other war supporters, to become fully aware of what they are supporting.  The evil ones can keep supporting it.  The good guys need to see the illogic and immorality of their position.  You cannot be a follower of Christ and advocate the killing of innocent people without being inconsistent.

Merry Christmas to everyone, whatever your beliefs are.  May Santa bring a new found peace in the new year, so that everyone around the world can enjoy some peace and tranquility, and hopefully some presents too.

Ron Paul on the NDAA

Ron Paul has now spoken out in opposition to the latest National Defense Authorization Act (NDAA).  He criticizes the legislation way beyond the most controversial portion that allows the president and military to detain people.

Ironically, I was recently critical of Rand Paul (Ron’s son) for supporting the initial version that was passed unanimously by the Senate.  Rand tried to justify his vote, but it was all empty political rhetoric to me.  In fact, if I did enough research on the legislation, I could probably write a long term paper on the corruption and anti-liberty elements of the latest NDAA (the 2013 version that Rand has initially supported).  At this point, I don’t care what Rand’s vote is on the final NDAA bill.  He has already shown his true colors.

While Ron didn’t specifically mention his son (as he shouldn’t), there is no doubt that they are in opposite positions from each other.  Ron is anti-establishment.  Rand goes along to get along.

In fact, I would venture to say that Ron and Rand are virtually complete opposites; perhaps as much, or even more so, than Ron is with many Democrats.  At least some Democrats vote at least part of the time on principle.  You may not like everything they stand for, but at least they are somewhat consistent.  (I do understand that most Democrats in DC will go with whichever way the wind is blowing also).

I really don’t like being so hard on Rand.  I’m sure Ron and Rand love each other very much.  And I have no idea what is going on in Rand’s head.  But I feel the need to criticize Rand because I fear he will do great damage to the cause of liberty.  There are many Ron Paul supporters who are looking for someone else to take the torch, so to speak, especially since Ron is retiring from Congress.

Real leaders, like Ron Paul, do not jump into a parade when it is already moving.  They lead the parade.  They don’t vote a certain way because they are scared of the backlash and public opinion.  They help mold public opinion by articulately explaining their position.

Meanwhile, Rand is showing that he is not a real leader and he is not a good representative of the liberty movement.  Even if he votes against the final version of the NDAA, it will be because of people like me inflicting political pain on him.  He will jump into the already moving parade and act like he was a part of it the whole time.  In other words, he is a typical politician.  Even Bill Clinton could be convinced to support somewhat pro-liberty legislation if public opinion were strong enough.  Rand Paul and Bill Clinton; what’s the difference?

This is another reason that the liberty movement should not rely on electing the “right” people into office.  The better goal is to educate others on the benefits and morality of a more libertarian society.  We cannot count on a conservative (and a pretty bad one at that) like Rand Paul.  He is leading us in the wrong direction.  He is representing everything that is bad about politics and Washington DC.  His votes, just in the matter of a couple of years, has shown that he cannot be trusted by libertarians.

At the risk of sounding similar to a vice-presidential debate a long time ago: I’ve met Ron Paul.  Rand Paul is no Ron Paul.

Ron Paul is closing his congressional career the same way he started it.  He is standing on principle and on the side of liberty.

Another Real Estate Bubble?

After the bursting of the U.S. real estate bubble, I was convinced that it would not happen again, or at least not any time soon.  It is fresh in people’s minds.  It is so fresh that there are still tens of millions of people who own houses that they could not sell for at least what they paid.  And many of these people are underwater, with their mortgages exceeding the assessed value of their house.  This is a consequence of  not only the sharp downturn in prices since 2006 or 2007, but also because of the low down payments that were being required by the banks and government agencies.

Since so many people were hurt by the bursting of the housing bubble, it would be hard to imagine that it would happen again.  As long as the Federal Reserve keeps inflating the money supply and causing boom-bust cycles, then bubbles will happen.  But they don’t have to happen with housing.

In addition, there are still a lot of foreclosures out there being held off the market by banks (probably at the direction of the government).  This is another factor that would make it difficult to see another housing bubble that is anywhere near the last one.

With all of that said, I am no longer completely convinced that another housing/ real estate bubble is not possible.  As long as the Fed keeps up with its quantitative easing (money creation) programs to prop up the economy, then almost anything is possible.

All of this monetary inflation has to go somewhere eventually.  The adjusted monetary base will rise to over 4 times what it was in early 2008, assuming the Fed follows through in 2013 with its latest plan to buy $85 billion per month in assets.

In addition to this explosive growth in the monetary base, the Fed is also directing its actions toward the housing market.  40 billion dollars of its monthly purchases are supposed to be in mortgage-backed securities.  And its other purchases are geared towards longer-term government debt.  This is all setting up the possibility of even lower mortgage rates on top of the already historically low rates.

It would not surprise me now if a good portion of this new money flows into real estate.  There are cheap rates, low prices compared to 5 years ago, and it is a hard asset.  If the money supply keeps going up at high rates and velocity starts to pick up, then people will be turning to hard assets.  This could be gold, silver, oil, other commodities, baseball cards, antiques, or stocks.  It could be some combination of these things.  Of course, real estate is also a hard asset and a good rental property can also pay a fairly consistent “dividend” in the form of rent.

So whether or not we see another real estate bubble will be determined by the Fed, just as the last one was.  If people start to sense that there will be no end to the new money creation, then we could see people flocking into hard assets.  It would no longer surprise me if real estate is one of those things.  The only question will be if it gets as bad as it did just a few short years ago.

Defining and Understanding Inflation

It really amazes me how many people are out there who talk and write about a subject, yet have little clue about how wrong they are.  There are people like Paul Krugman, who I find hard to believe are stupid.  In his case, I think he is a fraud, but I’m not positive.  But I do know there are a lot of people out there who really just don’t understand what they are talking about.  There are also some who have some understanding, but have no idea how to articulate what they want to say.

I received this comment recently in response to a blog post I wrote 5 months ago:

The purchase by the Fed of Treasury debt obligations on securities, could be inflationary only if the economy were at full production and full-employment. Inflation does not occur automatically if new money is created and introduced into the economy. If the additional dollars are able to match up with available materials, productive capacity and wages to newly hired employees at current prices, there will be no inflation.
Since creation of new money is the result of deficit spending, it would be the responsibility of the Congress and the President to determine that deficit spending is not likely to be inflationary. In a deep depression or recession, deficit spending is not going to be inflationary.”

The person making this comment first needs to define inflation.  He must be using the modern establishment’s definition of rising consumer prices.  I consider inflation to mean an increase in the money supply.  To distinguish the two different meanings, I try to use the terms “monetary inflation” and “price inflation”, so as not to confuse anyone.

This is a good example of why the definition of the term is so important.  The commenter must be defining inflation as rising prices, otherwise his second sentence would be a complete contradiction.  Replace the term “inflation” with “new money creation” in that second sentence.  It would then read: “New money creation does not occur automatically if new money is created and introduced into the economy.”  Again, it doesn’t make any sense, so he must be referring to rising prices.

But even here, he is still wrong.  He says that the Fed’s purchases can only be inflationary if the economy is at full production and full employment.  This is his first statement in the comment and it is completely absurd.  Either he did not articulate himself very well or he doesn’t understand monetary policy and the economy.  I read his first sentence to mean that you can never have rising prices unless the economy is at full production and full employment (which he doesn’t define).

The 1970’s was not that long ago.  There was double digit price inflation, along with high unemployment.  How does he think the high price inflation came to be, other than the Fed buying assets (monetary inflation)?

Even now, we don’t have zero price inflation.  Even by the government’s measures, the CPI has been running at around 2%.  Isn’t this price inflation, even if it is low?

In the commenter’s third sentence, he says that there will be no inflation “if the additional dollars are able to match up with available materials, productive capacity and wages to newly hired employees at current prices”.  Doesn’t this completely contradict what was just said in his first sentence about price inflation only occurring at full production and full employment?

Price inflation has gone up virtually every year for the last 50 years (in the U.S.), so is he claiming that we have had full production, full employment, and dollars not matching up in every single year?

He then goes on to say that the creation of new money is the result of deficit spending.  While the two are certainly correlated, even this is incorrect.  You can have deficit spending and not have any new money creation.  State and local governments do it all the time.  It will be investors or other governments who buy the debt at the going interest rate.  Not all debt issued by the U.S. government is bought by the Fed.

Also, there doesn’t technically have to be deficit spending for the Fed to create money either.  The Fed is buying mortgage-backed securities now.  It could buy stocks, gold, real estate, or fine art if it wanted to do so.  The Fed has a legal monopoly over the creation of money.  It can create money by buying almost anything.  Traditionally this has been U.S. treasuries, but not always.

To end the comment, he writes that deficit spending is not going to be inflationary in a deep depression or recession.  Again, let’s assume he is talking about rising prices.  While high price inflation is not as likely in recessionary conditions due to the likely increased demand for money, it doesn’t have to be this way.  Again, look at the 1970’s.  Even Ben Bernanke admits that the Fed can cause rising prices at any time if it credibly threatens to increase the money supply enough.  So while high price inflation is less likely in a recession, the commenter is still wrong on this point.  You can have price inflation and recessionary conditions at the same time.

There is a lot of ignorance out there.  If you are just learning economics, it is important to think through everything rationally.  There are people out there who may sound like they know what they are talking about, even using big words and jargon to sound like an expert, but it doesn’t necessarily mean they have much to say that is actually correct.

Guns In America

With the recent tragedy that took place at an elementary school in Connecticut, it seems that nearly everyone is clamoring for some kind of a solution.  Some people want armed guards in all schools across America.  Some want teachers to carry guns.  Others want more gun control.  Some on the left go so far as to wanting all guns banned.

While it is a great tragedy, it doesn’t mean there is necessarily a grand solution in preventing something similar from happening again.  There are crazy people out there and we live in an uncertain world.  As long as we live in a somewhat free society, it is impossible to achieve total safety.

From a cost/ benefit analysis, the answer is to do nothing.  It is hard for people to do a cost analysis when you are dealing with human life, but it is happening all the time, whether you like it or not.  On an average day, there are about 4 times as many deaths in America from car accidents as the number of deaths from the school shooting in Connecticut.  That is in one day.  If you are going to put armed security guards in every school across the country, wouldn’t it make much more sense to put roll cages on every single car?  It would save hundreds of times more lives.

Of course, this whole incident is being used as an excuse for more gun control.  However, you can’t get any more gun control than at a typical school, where guns are banned.  Unfortunately, the bad guys don’t seem to want to follow the rules.  The same thing would happen if all guns were banned.  Many of the good guys would give them up, while the guns would remain in the black market.

One other obvious point to libertarians is that the government doesn’t impose gun control on itself.  Having an armed citizenry is not only important for self defense against street criminals.  It is just as important, or perhaps more so, to have a last line of defense against your own government.  There was strict gun control enforced upon the Jewish people who lived in Germany in the 1930’s and we all know how that ended.

Regardless of what you think about guns and what the laws should be, I will tell you this.  GUNS WILL NOT BE BANNED IN AMERICA.

It doesn’t matter what Obama says.  It doesn’t matter what Diane Feinstein says.  It doesn’t matter what people at the United Nations say.  Guns will not be banned in America.

It is estimated that almost half of American households own a gun.  I’m sure it is much less than this in the big cities, particularly in the northeast and west coast.  I’m sure the numbers are much greater in rural areas and in the south.  But a lot of Americans own guns.  Americans own more guns, even on a per capita basis, than any other country.

There will be no gun ban.  A lot of people are worried about Obama right now.  This is the opposite of a self-fulfilling prophecy.  Because there are so many worried people, it won’t happen.  What police unit or military unit is going to go door to door in the south to collect guns?  They would be safer in Iraq.

If we see anything, it will be tinkering around the edges.  It will be mostly symbolic.  There may be a ban on certain “assault weapons”.  There may be a change in the so-called gun show loophole.  The worst I can imagine is an additional tax on guns or bullets, but even that I would find hard to believe.

So if you are worried about Obama taking your guns, you don’t need to be.  But then again, I don’t want to tell you that.  Keep worrying.  Then I will know for sure that it won’t happen.

Laws That Apply to Congress

There is an email circulating that is asking people to support a proposed 28th Amendment to the U.S. Constitution.  It is saying that people in Congress get exempted from certain laws and that the law should apply equally.

The text of the proposed amendment is as follows:

Congress shall make no law that applies to the citizens of the United States that does not apply equally to the Senators and/or Representatives; and, Congress shall make no law that applies to the Senators and/or Representatives that does not apply equally to the citizens of the United States.”

I’m sure that many people will support this amendment, thinking that the politicians in Congress should not be getting away with these things.  However, I think there is something that most people fail to realize.  If this amendment were to pass and be properly enforced, then it would, in effect, abolish Congress.

While the website promoting the amendment addresses specific things like healthcare and Social Security, it fails to understand the key point that makes governments (as we know them today) unique.  The reason that a government is a government is because it exempts itself from the laws that it makes.

If this amendment were held true to its words, then Congress would not be able to tax us, start wars, enforce regulations, or do almost anything at all.  The only way that Congress and the government in general can do anything is because it is legally allowed to do what no individual citizen could do.

If you or I were to steal money or property, it would be called theft and we would be thrown in jail.  If the government does it, it is called taxation.  If you or I were to print fake money and try to use it, then it would be called counterfeiting.  When the government does it (via the Fed), then it is called monetary policy.  When we kill someone, it is called murder.  When the government does it, it is called war or collateral damage.

So as far as having laws apply equally, there is really only one that is necessary.  Tell Congress that they may not initiate force or the threat of force, as it is illegal for the average person.  If just that one thing would be applied equally, then Congress would essentially be abolished, or at least be in a minarchist state.

I don’t think the people proposing this amendment, and probably most of those supporting it, understand the unique feature of government.  Government is unique because it possesses the legal monopoly over the use of force.  Take away this one power and we have a libertarian society.

Outlook for Gold in 2013

Gold is about to end the year with its 12th straight year of gains.  Of course, it hasn’t been straight up.  The fall of 2008 took gold down, along with stocks, but the price still ended the year higher than where it had started.  While you can’t get much more bullish than 12 straight years of gains, there is not a lot of excitement out there for gold right now, especially considering the circumstances.

Gold, while making slight gains in the last few months, seems to be stuck.  There seems to be a ceiling in the mid 1,700’s.  There also seems to be a floor just below 1,700.  Perhaps this is due to central bank buying, but it is anyone’s guess.  And aside from the metal itself, gold stocks have done especially poorly in the last 4 years or so.

So where do things go from here?  If anyone can tell you for sure, then he should be really rich.  Nobody knows for sure where the gold price is going, just like any other investment.  However, my best guess right now is that 2013 will be another up year for gold, at least in nominal terms.

The only way I can see gold not having a strong year in 2013 is if we have a really bad recession.  While this is certainly a possibility, the Federal Reserve is trying its hardest right now to kick the can down the road.  While it may be able to avert a recession in the short run, ultimately its policies will fail.

If we do go into a deep recession in 2013, then it will likely keep price inflation in check.  The demand for money will go up, which will, in effect, counteract the increases in the money supply.  So if we are in a bad recession and there is low price inflation, then the Fed might move on to another round of so-called quantitative easing (QE) and pump even greater amounts of money.  It is already scheduled to add $85 billion per month to its balance sheet.

So even if we do have a recession in 2013, the Fed will probably just continue to make things worse, which will ultimately make things better for gold.  And if we don’t have a recession in 2013, then gold should do quite well in the short term.  Either way, recession or no recession, gold is probably a good buy right now.  The only question is if there will be an even better buying opportunity in 2013.

If you are like me and you are betting on a higher gold price, then you can invest in gold by buying the actual physical metal or something like an exchange traded fund (ETF).  There are also companies where you can purchase gold and have them store it for you.  These are the best ways to play the price of gold.

So what about gold stocks?  These are a little trickier.  We have seen gold stocks do much worse than the gold price in recent years.  But it doesn’t always have to be this way.  I think gold stocks are far riskier, but they also offer more reward because of the high leverage.  If we hit a gold euphoria stage (and we haven’t yet), then I can envision gold stocks really taking off.  You could see some stocks go up ten-fold easily.  But just as a word of warning, if we do get a recession in 2013, expect gold stocks to get really hammered down.

In conclusion, I think gold, as an investment in the short term, will depend upon whether we have a recession in 2013.  But either way, it should be a strong investment over the next few years.  There is no sign of big price inflation yet and the Fed will be creating money out of thin air as fast as Congress can spend it.