QE2 is almost over.  If the Fed is going to create significant amounts of new money out of thin air, then we will move on to QE3 or some other name.  Either way, there is a lot of uncertainty about what the Fed will do and what is going to happen.  There are a lot of variables to consider.

Today was another big down day for the stock market.  Oil was down almost 5%.  The dollar strengthened considerably against the other major currencies.  The one notable thing is that, despite the strong dollar, gold was actually up a little today.

It is anyone’s guess as to which way things will go in the next couple of months.  Some of the variables include the Fed’s decision on QE3, Greece, the debt ceiling, revolts in the Middle East, and war, just to name a few.  There is, of course, always the possibility of some other unforeseen event occurring.

While I maintain my prediction that the Fed will continue to help Congress in a backdoor default by devaluing our money, the short term outlook is far more uncertain.  If the Fed starts pumping more money or if the banks decide to start loaning out their massive amounts of excess reserves, then we will see significant price inflation sooner, rather than later.

If the Fed stops its money creation for a while and the banks continue to hold their excess reserves with the Fed, then we could see consumer prices stabilize and we could see a significant drop in the stock market with a strengthening dollar.

Right now, investors should just concentrate on wealth protection.  I would recommend that at least a majority of your investments go into the permanent portfolio fund, the mutual fund PRPFX, or something similar.  For the rest of your money, I would put a little extra into investments related to precious metals and I would hold some cash or cash equivalent that you can use to buy up bargains later, if that time comes.

This will continue to be a roller coaster ride.  There will be ups and downs with stocks, gold, oil, the dollar, price inflation, and even real estate.  For the longer term, I still expect more inflation from the Fed and would not be surprised to see stagflation like the 1970’s.  If that is the worst that we get, we will be very lucky.  I do not expect the Fed to go to hyperinflation.  I think it will choose a depression over the complete destruction of the currency.  At that point, Congress will be forced to cut spending.

I watched most of the Republican presidential debate last night.  There were seven participants, which included Ron Paul.  The media, while paying more attention to him, continues to discount him being a contender.  I think he will have trouble overcoming the pro-war majority in the Republican Party, but it would not surprise me if he won some primaries/ caucuses.

Ron Paul made a better showing than most would have imagined four years ago.  He is starting way ahead from where he was then.  Most people outside of his district and outside of the libertarian movement had never heard of him before 2007.  Now he is a household name with a big following.  With the internet and his new notoriety, he has gained even more of a following since then.

One thing I found interesting about last night’s debate was the stance the candidates were taking on war.  Ron Paul is, for sure, the only anti-war candidate.  He is the only one who would begin troop withdrawals immediately.  But I couldn’t help but notice that the other candidates were far less hawkish than what we saw in 2007 and 2008.  Part of this may be the candidates themselves.  There is no John McCain or Mike Huckabee.  A little part of it might be because of Ron Paul.  In addition, these candidates are running against Obama and do not feel the need to defend Bush.

One other significant factor in the less hawkish war stance is public opinion.  The majority of American people have soured on the wars in Iraq and Afghanistan and most of them were never on board for Libya.  Perhaps the Republicans are starting to realize that they can’t advocate endless war and still expect to win.

One thing that surprised me about the debate was just how nice everyone was.  If I have one criticism of Ron Paul from last night, it would be that he is just too nice.  I think the candidates should be attacking Romney (the supposed front runner and establishment favorite).  They should point out that the Republican nominee cannot be someone who invented Obamacare before Obamacare even existed.  The other candidates should be asking if this election should be Obamacare vs. Romneycare, or about a real choice.

I think Ron Paul should also try to distinguish himself more (if that is possible) on economic issues.  He spoke about monetary policy which no other candidate touched and that is good.  But he is letting these other people get away with deceiving their audience with generalities.  Just about every Republican candidate is saying we need to cut spending and cut taxes.  But where, specifically, would they cut?

Since the debate moderators won’t hold them accountable, I think Paul should point out that these calls for spending cuts are not specific.  He should say that he would abolish the departments of education, agriculture, housing, labor, energy, etc.  He would end all foreign aid.  He would end all corporate welfare.  Try to force the others to take a position.

Overall, Ron Paul is a great representative of the libertarian philosophy.  Libertarians should be so thankful that we have someone who is consistently on message and who is principled and intelligent.  His many years of advocating liberty has made him into one of the best.  It is not easy in a debate when you have no idea what specific question will be asked.  He can hold his own and he will continue to help educate others on the benefits of a free society.

If I were a betting man, I would bet that Ron Paul will not win the Republican nomination, but he will surprise many.  He will probably come in second or third and he may actually win some states.  I don’t completely discount him taking the nomination, but it is still a long shot at this point with the party being so pro-war.  If Paul did win the nomination, he would have a good chance at beating Obama.

In conclusion, if Ron Paul takes second place or better in the primaries, I think libertarians should be very optimistic about the future.  If he places third, then I think there is reason for some optimism with the realization that there is still a lot of work to do.  If he does worse than third, then Galt’s Gulch becomes more appealing (a reference to Atlas Shrugged).  I think we will be pleasantly surprised.

Many in the libertarian camp believe that the U.S. dollar is headed towards zero.  Some of these same people also believe that real estate has yet to hit bottom and may stay down for many years to come.  In fact, this isn’t just a position by some libertarians, but also by many others in the investment world.

While they have been somewhat correct over the last few years and may be right for a few more, there is a limit as to how much they can be right.  If you are arguing that the U.S. dollar will continue to go down, then it should favor hard assets, one of which is real estate.

The dollar has done poorly over the last decade.  This is in relation to other currencies and this is with other currencies being devalued as well.  The price of gold has gone up in terms of all of the major currencies, but it has gone up even more in terms of U.S. dollars.  It should be noted though that there have been exceptions to this trend.  In the fall of 2008, the dollar strengthened quite a bit due to the major downturn in the economy and the flight to safety (which for some reason, people still view the dollar as safe).

It is certainly possible for the U.S. dollar and real estate to both go down some more in the short-term.  The reason for this odd circumstance is because of the previous huge bubble in housing.  The prices in real estate went up so far and so fast that they are still trying to correct, even with the government’s interventions.  Real estate is not liquid like stocks.  Therefore, it can take some time to clear the excess inventory.  In addition, the government has been trying (without much success) to prop up real estate due to the major hits that banks would take if there were even more foreclosures and short-sales.

Long-term, let’s say more than 5 years, this trend is unlikely to continue.  The U.S. dollar will not continue to go down while real estate goes down too.  Just to clarify, I am simply talking about real estate prices in nominal terms and not in real terms.

If the U.S. dollar goes down by 50% compared to other currencies in the next 5 years, then it would be 50% cheaper to buy a house for a foreigner if housing prices stayed the same.  If housing prices continue to go down, then it would be even cheaper.  And this isn’t even accounting for the fact that the foreigner’s currency probably experienced some depreciation of its own.  At some point, housing will be a bargain that just cannot be ignored.

I expect that there is a strong likelihood that the dollar will strengthen again in the near future, especially with the problems in Europe and a likely default by Greece.  Once the Fed goes ahead with QE3, then we may start to see the dollar fall again.  At some point, when velocity picks up, there will be a rush away from U.S. dollars.  People will be looking for hard assets.  Since a house is a hard asset and everyone needs a place to live, it would not surprise me to see housing prices go up again in a few years, at least in nominal terms.

The Austrian Business Cycle Theory teaches us that when we have an artificial boom, usually caused by a central bank, a correction must follow.  The artificial boom is a misallocation of resources that will eventually be corrected when the rate of increase of the money supply goes down.  The actual money supply does not actually have to decrease as the bust can come just from a slowdown in the monetary inflation.

To answer the question of this post, there are a couple of scenarios to deal with.  First, if there is a boom that is not caused by an increase in money and credit, then there doesn’t have to be a bust and there probably won’t be.  The boom would probably look nothing like what we are accustomed to in our modern world of inflation.  Most of 19th century America was a boom, but it didn’t mean huge gains in the stock market or real estate market.  In fact, consumer prices actually when down gradually during this time. (I am not counting the problems during and after Lincoln’s war.)

19th century America was far from perfect.  Even aside from slavery and the war, it was still not a completely free market economy.  But it was one of the closest things we have seen in history and it meant an increase in the living standard for the average American.  A boom in a free market economy means that living standards are rising.  Life is getting easier for the average person.

The next question is: Is it possible to have an artificial boom without a bust?  The question certainly seems relevant to our situation today.  In an article earlier this week, Robert Murphy discusses the fact that we will have to experience a bust in our current situation.  I basically agree with everything he says, except I would like to clarify one thing from his article.

In an earlier part of his article, Murphy says, “According to the Mises-Hayek theory, the preceding boom makes the corrective bust inevitable.  The goal, therefore, is not to keep the boom going, but to avoid it in the first place, rendering the bust unnecessary.”

I completely agree with the latter part of that quotation.  The boom phase is actually the bad part where mistakes are being made.  It is a misallocation of resources.  The bust phase is more painful, but it is actually trying to correct the previous mistakes.  If there was no artificial boom in the first place, then a bust wouldn’t be necessary.

But what about the statement that the preceding boom makes the corrective bust inevitable.  I agree with this in a sense, but only with clarification.  As long as the bust does not necessarily mean negative growth, then I agree with this.  The previous mistakes are going to be corrected by the market.  But just because there is an artificial boom, it doesn’t necessarily mean negative growth sometime ahead.  It could simply mean less growth than what would have otherwise happened.

To use an extreme example, let’s say the Fed expanded the money supply by $1 million.  In a $15 trillion economy, this is literally a drop in the ocean.  Conceivably, it could cause some kind of a misallocation of resources on the margin in some insignificant way.  Maybe the price of a particular good was one cent higher because of this monetary expansion.  But it would be absurd to think that this would cause any kind of noticeable bust.  Perhaps resources would realign themselves in the same insignificant way that they were misallocated, but it wouldn’t cause negative growth for sure.

Even if the Fed’s expansion were bigger, it would still be a race between the free market and the artificial tampering of the money supply.  The damage done by the Fed’s monetary inflation might be overcome with technology, investment, and growth.  In today’s situation, that scenario seems unlikely due to the unprecedented monetary inflation by the Fed, along with the huge government debt.  Technically it would still be possible to avoid negative growth if there is some huge technological discovery that can overcome the previous damage done, but it would have to be something really big.

A good analogy for this is price inflation.  Just because the Fed prints money (or creates it on a computer) doesn’t mean that there has to be a rise in prices for everything.  The electronics industry is a good example of this.  Television, cell phones, and computers get cheaper despite monetary inflation.  Technology in these areas is actually more powerful than the Fed’s damaging inflation.  However, prices would have gone down even more if it hadn’t been for the Fed’s monetary inflation.

In conclusion, the Fed’s tampering with the money supply means that resources are being misallocated.  With a slowdown in the growth of money, the free market will try to correct this misallocation and try to realign resources to their best uses.  The market it always trying to do this regardless of the central bank’s policies.

An artificial boom will make things worse than they otherwise would have been.  You can call the correction a bust, but it doesn’t necessarily mean negative growth.  Technology can overcome this, but it doesn’t seem likely in our current scenario where the government and the Fed have intervened in an unprecedented manner.

Today, I heard Rand Paul on Sean Hannity’s radio show.  They were talking about the national debt and the vote to raise the debt ceiling.  Rand Paul said that he wants some kind of a plan to pass a balanced budget amendment if they are going to raise the debt limit.

First, Rand Paul is not Ron Paul and you can tell that just by how much Sean Hannity is sucking up to him.  Ron Paul is a principled libertarian and does not usually hold back in what he has to say.  His son Rand on the other hand is less radical and less principled, at least in his talk.  He is not anti-war like his dad.  Don’t get me wrong here.  Rand Paul is by far the best senator in the U.S. Senate.  He is more fiscally conservative than any of the other 99 clowns and he has been great on certain things like the Patriot Act.  But he is still not his dad.

So Rand Paul wants a balanced budget amendment.  But do you know what is required to pass a constitutional amendment?  You have to get two-thirds of the House and Senate to approve it and then you need three-fourths of the states.  You would have an easier time getting a libertarian revolution than getting this done.

The next thing is, do we really want a balanced budget amendment.  If that were put in place right now, it would probably mean that our taxes would go up.  Now I certainly want a balanced budget, but I’m afraid that the view of Congress and many of the American people won’t be quite the same.  As a radical libertarian, I want a balanced budget with a government that is, at minimum, a fraction of the size of what it is now.  I don’t want a balanced budget with a $4 trillion annual budget or even a $2 trillion annual budget (although the latter would be an improvement).

Now for my last and most important point in all of this.  If you really want a balanced budget amendment, why would you even consider raising the debt ceiling?  By not raising the debt limit, it is doing the same thing as what a balanced budget amendment would do, at least temporarily.  The only thing an amendment does is make it more permanent.  But if you really want a balanced budget, then simply refuse to vote in favor of raising the debt limit.  It really is as simple as that.  The only reason I can see for advocating a balanced budget amendment but voting to raise the debt limit is because the person wants to kick the can down the road.

If the government did not raise the debt ceiling, it doesn’t necessarily have to default (although I think it should).  It could reduce spending dramatically.  It could eliminate all federal funding for education, agriculture, energy, housing, etc.  All of these things are unconstitutional.  It could end all of the wars overseas.  It could end all foreign aid.  It could start reducing Social Security and Medicare, even on a small scale.  It could sell government lands and government assets.

The problem is that the American people do not want this yet.  They keep putting the same clowns into office and keep demanding a free lunch.  Luckily the general public opinion is not like Greece, but it is not exactly like the American colonists of 1770 either.  I think attitudes are changing for the better, but we still have a long way to go.

As for the debt limit, it will get raised.  There will be some phony spending cuts so that the Republicans can appear to be concerned about the debt.  But this whole balanced budget amendment idea is a joke.  For anyone who cares about a balanced budget, they can simply vote no on raising the debt limit.  If the debt limit isn’t raised, that will automatically balance the budget, unless Obama declares himself a dictator and does it anyway (which is certainly a possibility).

Doug Casey has written an article, linked via LewRockwell.com, on the prospects of our future.  He outlines three possible scenarios and says that we could see any one of them or a combination of pieces from each of them.  I would like to comment on this and add to it.  If you haven’t read it, it is a long piece, but Doug Casey is always worth the read.

First, he runs through the last 100 years in 20 year increments.  It really is amazing what this planet has been through in the last 100 years.  It is really the best and worst of human history.  It is the worst because of the world wars and all of the people that died at the hands of government (mostly their own).  We saw 2 major communist empires (China and the Soviet Union).  We also saw the end of the Soviet Union.  We have also seen communist China change towards more economic freedom, at least by action and not by name.  The 20th century also saw the rise and fall of the Nazis.  One other unfortunate event was the dropping of two atomic bombs that killed tens of thousands of innocent people.

The last 100 years has also been great in other ways.  We would not recognize the world of 100 years ago when there was no air conditioning, no television, no cars as we know them today, no microwave ovens, etc.  We could make a list pages long.  In just the last 20 years we have seen the amazing technology of computers and cell phones and the internet revolution.  The last 100 years really has been a combination of great and horrible things.

Doug Casey lays out three scenarios for what things will look like in 20 years.  He has a best case scenario, a middle of the road scenario, and a worst case scenario.  His worst case scenario involves war, which is hard to argue with.

While hyperinflation is certainly a possibility, I don’t think people understand the ramifications of this.  If there is little warning for the market to prepare with an alternative form of money, we could literally see massive devastation that could wipe out much of the population.  Hyperinflation in the U.S. would mean that food is no longer shipped to the grocery stores.  It means most people staying home from work.  It means a total breakdown of the division of labor, unless there is another form of money that is legal to use and has already been established in the marketplace.  This is why I don’t think the Federal Reserve will purposely put us into hyperinflation.  They would be granting their own death wish.

In Casey’s best case scenario, it actually isn’t too rosy.  I think another possibility, that isn’t too far fetched, is new technology getting us out of the mess we’re in.  Let’s say that someone invents a car that does not run on oil, but is just as cheap or cheaper to buy and to operate than what we have now.  This would be huge and would help our standard of living tremendously.

In Casey’s best case scenario, he says, “most governments decide to endure the pain of allowing interest rates to rise and limiting increases in the money supply.”  I’m not sure that he quite stated that part correctly.  It would actually be the general population that would decide this.  Most or all governments will seize power if they think they can get away with it.  The only check on government power, when it comes down to it, is public opinion.  They will not just relinquish power.

Politicians can make a difference, but they aren’t going to voluntarily give up their power.  For example, Gorbachev would not have voluntarily given up power if public opinion had stayed in his favor.  He saw the writing on the wall and gave up.  The good thing is that he was decent enough not to fight public opinion with violence and start a massive war.  But ultimately, public opinion is what matters.  He could not prevent the collapse of the Soviet Union.

I would lay out a best case scenario that Ron Paul gains tremendous popularity in this election cycle.  He doesn’t need to win, but we need for a sizable minority of people to become strong libertarians.  If this were to happen, it would actually be possible to start rolling back government and moving towards liberty.  We would still have to go through a correction from the massive increases in the money supply and the massive debt built up.  But if government were significantly reduced from our lives, the correction from the previous misallocation of resources would not be too bad.

If you need some optimism, just think of Japan and Germany after World War II.  They were both a mess.  As Casey says in his history part for 1951, “Who imagined that Germany and Japan, although literally leveled, would be perhaps the best investments of the century?”  These two countries turned to free markets and they became two of the richest countries on earth in a fairly short amount of time.  If they can recover from that, the U.S. can certainly recover from high debt and bureaucracy.

Yesterday, I discussed Herman Cain and how he is a lover of big government, even if he doesn’t admit it.  He is also a supporter of the Fair Tax.  Today, I want to discuss the “fair tax” from a radical libertarian’s perspective.

The fair tax is proposed legislation to eliminate income taxes, payroll taxes, corporate taxes, capital gains taxes, and estate taxes at the federal level.  It calls for the repeal of the 16th Amendment.  In place of all of these taxes, the fair tax would institute a national sales tax of 30%.  The fair tax proponents will say that the tax is only 23%, but they are calculating it as an inclusive tax.  For us people living in the real world, it is 30%.  If an item costs $100, you would pay an additional tax of $30.

This tax would be on all new goods and services with few exceptions.  Every family would get what is called a pre-bate check each month.  It would cover the cost of the tax of what is calculated to be essential needs.

The fair tax is appealing to many libertarians.  It has been pushed by former congressman John Linder and radio talk show host Neal Boortz.  The two wrote a book to promote the fair tax.  It was also supported by Mike Huckabee in the primaries for the last presidential election.

The biggest problem with the fair tax that I see is that it is revenue neutral.  In other words, it is set up for the government to collect the same amount of money that it collects now.  It would not touch the Federal Reserve.  It would not balance the budget.  It would not reduce government spending at all.

Filing income taxes is annoying.  It can eat up several hours of your time during tax time each year.  But even though that time spent is bad, the amount of money being taken from the American people is far worse.  The biggest issue with the income tax isn’t that it takes a long time to complete a tax return each year.  The biggest issue is that it takes money out of our pocket and money out of the private sector.

As a libertarian, I don’t want to see legislation that merely rearranges the tax code but does nothing to actually shrink government.  This is why it is easy for hacks like Herman Cain to advocate the Fair Tax.  He can push for tax reform and yet he doesn’t have to name one program that he would cut because the purpose of the fair tax is not to cut government spending.  Why would I want to spend so much time and energy promoting something that will only save me a few hours each year and does nothing to save me any money?

I attended an event in which the speaker was explaining and advocating the fair tax.  When he was taking questions, I asked about someone who had to have heart surgery that might cost $100,000 (hypothetically).  I asked if the person would have to pay $30,000 in taxes on top of that.  His response was (and I’m paraphrasing) that he would expect for people to have health insurance.  I then said, “so could you say that fair tax supporters are in support of Obamacare because people should have to buy health insurance?”  I said I was only kidding, but I think my point was made.  The presenter was kind enough and he actually laughed at my comment.  I don’t think the two women behind me were quite as amused.

I find that most strong advocates of the fair tax are not very good libertarians, let alone fiscal conservatives.  They do not really want to cut government significantly.  Otherwise they would not be spending so much time and energy promoting something that does nothing to cut government.  I also find that fair taxers push moderation.  When they get critiques, they say things like, “don’t let the perfect be the enemy of the good.”  The only problem is, the fair tax isn’t good.

The fair tax will never pass.  If you can come up with enough support to repeal a constitutional amendment (the same as passing an amendment), then you have most of the country on your side.  If you can gain this much support, then you may as well just repeal it without replacing it with anything.

A libertarian position of dramatically reducing government has a much better chance of gaining widespread support.  The fair tax people are wasting their time.  It is a distraction.  Most of them are not supporters of a libertarian agenda.  Ron Paul has a better chance of being elected president than the fair tax has of passing.

There are many libertarians from the past who opposed the fair tax or something similar.  People like Murray Rothbard and Harry Browne not only did not support the fair tax, but they strongly opposed it.

If you are a libertarian, don’t waste your time on something that has almost no chance of passing and that, even if passed, would do nothing to reduce the burden of government on society.  The fair tax people can continue to rearrange the chairs on the sinking ship.  I would rather fix the ship or abandon ship.  I would rather push for dramatic cuts in spending and regulations.

With the Republican primary continuing to heat up, I would like to share some thoughts on Herman Cain, from a libertarian point of view.  Cain ijs known by listeners of Neal Boortz’s radio show and probably a few other conservatives.  He is becoming more well-known now that he is a presidential candidate.

Herman Cain was the CEO of Godfather’s Pizza.  This makes him attractive to conservatives.  Many conservatives believe that government needs to be run more like a business.  Unfortunately, they never consider the fact that the two are not similar.  Government relies on force or the threat of force.  Businesses rely on persuasion and customer satisfaction.  Businesses want to maximize revenue.  They do this by pleasing customers.  Governments also want to maximize revenue.  They do this through taxes and inflation.

Unfortunately, many libertarians and so-called libertarians are attracted to Cain.  He sometimes fills in for Neal Boortz on the radio and is definitely supported by Boortz, at least implicitly.  For those unfamiliar with Neal Boortz, he is a popular radio host who calls himself a Libertarian.  While he is good on some issues, he definitely does not take a libertarian stance on foreign policy and he does not have much interest in monetary policy.

Boortz is also a huge advocate of the Fair Tax.  It is a plan to replace the national income tax, payroll taxes, corporate taxes, and other taxes with a national sales tax.  I will comment more on the Fair Tax tomorrow.  But for now, I will just say that Herman Cain has come out in support of the Fair Tax.

If you are a libertarian, or even if you lean libertarian, then Herman Cain should not be for you.  If your only goal is to see Obama defeated in the next election, then perhaps you should support him.  Obama and the Democrats would not be able to play the race card (or at least not effectively), since Cain himself is black.

The problem with Herman Cain, from a libertarian perspective, is that he is not for small government.  He may sound good sometimes and even have some libertarian rhetoric, but he is not a friend for liberty lovers.  While Cain is somewhat known for being the CEO of Godfather’s Pizza, it is less well-known that he worked for the Federal Reserve Bank of Kansas City.  If you look at Cain’s resume, he is not exactly a political outsider.

In 2008, Cain was a supporter of the TARP bailouts.  That should be enough said for libertarians.  The guy is not in favor of small government.  He talks that game to get support, but he is another political hack who will dole out favors to his favored groups.  In his case, it would be the powerful bankers.

If you are a libertarian, you should be running away from Herman Cain.  He may be more dangerous than Obama.  At least with Obama, and even someone like Mitt Romney, it is obvious to anyone paying a little attention that these people want big government.  With Cain, someone trying to get Tea Party support, he will say that he favors smaller government on the campaign trail, but in actuality the guy is a lover of big government and central banking.

There is a libertarian candidate in the Republican primary.  His name is Ron Paul.  There is also a quasi-libertarian and his name is Gary Johnson.  The rest of the candidates and potential candidates are hacks who only want to expand government and expand the U.S. empire.

The economy is in rough shape and more people are starting to see that.  The unemployment numbers got worse this week and there were a couple of big drops in the stock market this past week.  Now that QE2 will be finishing up at the end of this month, some are already suggesting that we should prepare for QE3.

Quantitative easing is the new politically correct term for monetary inflation.  QE1 started with the fall of 2008.  QE2 and its eight month run is almost up.  Between QE1 and QE2, the adjusted monetary base has approximately tripled.  This is unprecedented in modern American history.

The Federal Reserve obviously sees major trouble ahead.  Otherwise, I can’t see the point of QE2 (from their standpoint).  The Fed has created all of this new money out of thin air, yet most of it has gone into the banks as excess reserves.  This has helped keep a lid on price inflation.

The bottom line is that I see a good possibility for QE3.  It may not happen immediately after QE2 ends, but even that is hard to say.  It may also be less dramatic than QE2, but eventually a straw will break the camel’s back of inflation.

It is very hard to predict what will happen to the economy and your investments in the near future.  It is all dependent upon the Fed’s decision on what to do.  If the market doesn’t expect a QE3 right away, we could see a lot more down days for the stock market.  We could see the dollar strengthen in the short run which would be bad for precious metals.  On the other hand, if the Fed announces QE3 coming up, then we could see a huge boom in gold and silver.  It is harder to say with the stock market, but it could certainly resume its path higher with more monetary inflation.

I am an advocate of putting at least half of your investments in a permanent portfolio setup as described in Harry Browne’s book Fail Safe Investing.  You should put an even higher percentage if you are risk averse.  For speculative purposes, I would put your extra money into cash and gold.  You might even consider a small short position in the stock market or else you could lighten up your stock portion of the permanent portfolio by just a little bit.

I expect that we will eventually get more monetary inflation and gold, silver, and oil will continue to do well in the longer run.  But you should expect a roller coaster ride with a lot of ups and downs.  There may come a day when you will want to sell some of your gold and silver holdings.  We are not even close to that day yet.  It is likely several years away.  That will be the day that the Fed refuses to create any more new money and the federal government is forced to cut spending.  This will cause a Rollback in government and it will also cause a depression.

Peter Schiff has written a piece on the dollar and its declining status.  He has been bearish on the U.S. dollar for quite a while now and expects it to continue its decline.  However, he points out that the euro, the yen, and the yuan have flaws (besides being fiat currencies) that will make it unlikely that any one of them will replace the dollar.  I generally agree with his reasoning and his critiques of these currencies.

Schiff goes on to say that he sees signs that the world is moving back to gold.  I like his optimism and he may certainly end up being right.  As fiat currencies continue to fail and as 21st century technology helps spread the reasons why, then there should be more of a push for using gold (and possibly silver) as money. If the governments of the world are forced to loosen their grip and at least get rid of legal tender laws, then the market may head in the direction of gold.

I would like to offer another scenario too.  While I like the idea of gold being used as money and think that may be the ultimate outcome, I see another possibility developing.  With our current technology, most money is transferred with digits instead of actual bills.  It is easy to make an entry on a computer, just as banks do all the time.

So my question is, why do we need a world’s reserve currency?  In the past 65 years or so, the U.S. dollar has been considered the world’s reserve currency.  This means that countries around the world use dollars in major trading.  For example, if Japan buys oil from Saudi Arabia, they will use U.S. dollars.  But again, why is it necessary to have a world’s reserve currency, whether it is official or unofficial?

Let’s say Japan wants to buy oil from Canada (and this example works whether we are talking about private companies or governments).  Instead of using U.S. dollars, Japan can just use their own currency.  Japan can buy the oil in yen.  Then, Canada can convert the yen into Canadian dollars on the open market. If Canada (again, a private company, individual, or government) wanted to keep the yen and save it for a rainy day, that would be fine too.

With our current technology and open trading of currencies, it is easy to trade and convert currencies in the open market.  Countries like China that have currency controls would either have to loosen those controls or else they could continue to use dollars or any other currency of their choosing.

Peter Schiff is right that the U.S. dollar is losing its status as the world’s reserve currency.  It won’t matter much in the long run except that the U.S. government and the U.S. consumer will no longer be subsidized.

The central banks around the world have done a horrible job of managing their currencies (not that a currency should be “managed”).  Fiat currencies are beginning to blow up in their faces.  The average person will pay a price for this.  The price will be higher consumer prices.  It will hurt.  Hopefully, it will be beneficial in the long run if enough people realize that we should not allow governments and central banks a monopoly over our money.