It is hard to fathom what life would be like without a monopolistic central bank and fiat money.  We live in a world of inflation.  This started in 1913 with the start of the Federal Reserve.  It sped up quite a bit in 1971 when Nixon closed the gold window and broke the last links that the U.S. dollar had to gold.  Since then, it has been a world of total inflation.  Of course, some years have been worse than others.

If there was no monetary inflation, or perhaps minimal monetary inflation with a gold coin standard, then things would work much differently now.  You would not see massive swings in stocks.  The price of the general stock market would not go up significantly over time.  This doesn’t mean it would be a bad investment.

Housing prices would not continually go up.  The prices might actually decline very gradually (not like a housing bust).  Houses are like cars in that they depreciate.  They just don’t depreciate as fast and the land that they sit on doesn’t depreciate.  The reason that housing prices go up over time is because of monetary inflation.

For politicians who say that we need to grow our way out of the debt, they only understand a portion of their own argument.  If the GDP grows and the additional tax “revenue” is used to pay down the debt or even if the debt remains the same while the economy grows, then the debt situation improves.  But we can also credit monetary inflation for this happening.  The only way that the national income can increase in nominal terms is through monetary inflation.

If we lived in a world without inflation (or with minimal inflation), then salaries would not rise by much, if at all.  Certain individuals would make more from one year to the next, but the average would stay about the same.

So why is inflation a bad thing then?

Inflation really plays tricks on you.  For even the best Austrian school economist, inflation will distort things.

If you get a raise for your current job for 2%, but price inflation is currently at 3%, then you are actually taking about a 1% loss.  Your income is going down by 1% in real terms, even though it is going up in nominal terms.

In a world with minimal inflation, your income wouldn’t rise, but neither would consumer prices.  In fact, in a free market economy, we would see something similar to what we see now with electronics like computers, televisions, and cell phones.  The quality would get better or the prices would go down or perhaps both.  In a relatively free market environment with minimal monetary inflation, you would see prices go down for education, healthcare, cars, vacations, food, etc., while your income would likely remain the same (in the same job).

In a world without inflation, stock investors would buy stocks for dividends.  It would certainly be possible to have capital gains for individual stocks, but the overall stock market would be unlikely to fluctuate too much.

Again, this is all hard to imagine because we live in an inflationary world.

The way to grow the economy isn’t through more monetary inflation that results in higher prices.  This is just a distortion.  The way to grow the economy is through a stable free market monetary system and minimal government interference.

The 19th century in America was a time of relative peace and prosperity (not counting the war time of the 1860’s).  Prices actually went down slightly over this time.  It was really the most prosperous time in history (unless you want to argue for England during that time).  The technology and capital investment that was built up in the 19th century really laid the groundwork for all of the new great things that came out of the 20th century.

It really is hard to imagine a world without monetary inflation.  Most people think that the world we live in today is the way things are supposed to be.  They don’t understand that prices are not supposed to go up continually, year after year.  They don’t understand how much they are being robbed from the debasing of their money.  They don’t understand how much better their standard of living could be.

There is somewhat of a myth out there that you need money to make money.  If you are investing your money in stocks or real estate and you want to retire off of the dividends and interest, then you will need a lot of money.  Just for an example, if you have $2 million and you can earn an annual return of 4%, then you will have $80,000 per year without depleting your principal amount of $2 million.

However, most people do not become rich investing.  Most people become rich by having a high income and saving a good amount of it.  For people who do not make a high income, then being frugal becomes that much more important.  To have a high income though, you don’t necessarily need a lot of money to start off.

Let’s look at a few billionaires.  Bill Gates and Steve Jobs both made their fortunes through their own work and effort.  They needed some help along the way, but they both basically started their businesses from nothing.  They used their brains and natural talents and took advantage of the situations around them.  They may have even had some luck along the way.  But the point is, they both made it big without much money to start.

Warren Buffett has made many billions through investing in companies.  He did not exactly start from nothing.  His father, the libertarian Congressman Howard Buffett, was obviously not poor.  But Warren Buffett still used his talents to make billions.  There are a lot of people who start off with a lot more and don’t amount to much.

The Walton family has inherited a fortune.  There are Walmarts almost everywhere now.  This was basically a self-made franchise and now the heirs are reaping the rewards.

The point is, most rich people are not like the Rockefellers.  They are more likely people who are mostly self-made in a generation.  It is a big advantage to grow up in a decent household that teaches good values and provides a decent education.  After that, it really depends on each individual.  There are not many people who grow up in an inner city neighborhood in the slums who grow up to be rich.  But even here, there are exceptions.  Some people are strong enough to fight through their environment and control their own destiny.

If you want to make money and become rich, don’t worry about not having money.  This is usually a benefit.  You can start from scratch.  Some people have more natural talents than others.  But there is no substitute for hard work and discipline.  If you work hard and you try to grab opportunities when they present themselves, then you can be reasonably successful.  Then you have to make sure that you live below your means and save money.  If you do this, then maybe you can reach a scenario as described above where you can have enough principal money that you can just live off of the interest.

You don’t have to have money to make money.  But it definitely helps when it comes to investing and retirement.

The last debate has finished up before the Florida primary voting.  It may be the last debate we see for almost another month.

First, I thought Wolf Blitzer did a decent job.  Of course, it is all relatively speaking.  There could still be much better questions, but at least he was reasonably fair in giving time to all of the candidates.

Second, I have a little factoid to present to Mitt Romney.  English is not the official language of the United States.  There is no official language.  Obviously, English is the most widely spoken.  There is no need to have an official language, unless there is just something that states that all federal legislation will be written in English, but there is really no need for that even.  Just like everything else, the free market has a way of handling these things.  If English is that important for someone in getting a job, then they will have motivation to learn it.  It won’t be because a bunch of politicians got together and declared English to be the official language.

Third, I thought Ron Paul had a great debate.  He was more relaxed and had a few funny lines that the audience appreciated.  He made many strong points and was quite clear that he is the candidate who believes that the role of government should be severely limited.  This particularly came through when he talked about the space program and saying that government has no role except possibly for national defense reasons.

Fourth, I thought it was interesting that Newt Gingrich was echoing Paul so much.  I think part of that was because Paul was making so much sense and resonating with the audience.  I think another part of that is that Gingrich did not want to pick a fight with him.  He is hoping that if he becomes the nominee that he can get at least a few Paul supporters to vote for him.

Fifth, I liked Rick Santorum’s presence in the debate.  I don’t particularly like Santorum and what he stands for.  In fact, he probably scares me more than anyone, including Obama.  However, he did a great job of exposing Gingrich and Santorum on their support of government-run healthcare.  The ironic thing in all of that though, is that Santorum supported the massive Medicare prescription drug program started under Bush.  That program is the epitome of top-down government-run healthcare.

In conclusion, I thought it was a good night for Ron Paul.  Gingrich and Romney beat up on each other. While they focus on Florida, Paul is focusing on Maine and other caucus states where he can win and pick up delegates.  The longer he stays competitive in this whole thing, the more of a chance that people will have to see the light.

The Federal Open Market Committee (FOMC) released its statement today saying that it is likely to leave rates near zero until late 2014.  If this ends up happening, that means that the overnight rate for borrowing will have been near zero for 6 years.  The Fed dropped the rate below .25% after the economic fall of 2008.

As I have said before, the Federal Reserve is not really controlling this rate right now.  This is the rate that banks are charged to borrow money overnight in order to meet reserve requirements.  However, since the Fed has more than tripled the adjusted monetary base, the excess reserves held by commercial banks have skyrocketed with the monetary base.  Since banks have huge excess reserves, they don’t need to borrow from the overnight window because they are not falling below the reserve requirements.

These low interest rates are not without a cost.  Overall low interest rates hurt savers.  This discourages saving, which is required for capital investment, which is required for future economic growth.  People who are saving money in a bank account right now are losing in a major way.  They are earning a fraction of a percent in interest.  They are not even keeping up with inflation.

In Bernanke’s press conference this afternoon, he suggested that QE3 (more money creation) is possible if economic conditions warrant it.  This should come as no surprise.  He did not earn the nickname Helicopter Ben for nothing.

In the FOMC statement, it was also stated that the Fed would continue its program of extending the average maturity of its holdings.  This means that it will be swapping shorter-term bonds for longer-term bonds.  I suspect this is an attempt to keep mortgage rates down, along with borrowing costs for Congress.

As Gary North has said, the Fed is in Goldilocks mode right now: not too hot, not too cold.  It does not want to tip the scales to recession or high price inflation.  If and when the Fed faces a situation of high price inflation, it will be in major trouble.

The stock market, the bond market, and gold, all reacted positively to this news today.  The dollar fell.  This is not surprising.  Stock market investors like to hear news of low interest rates and the possibility of more money creation.

Bernanke and his cohorts really don’t know what they are doing.  They are playing politics and they are hurting the economy.  There will be a day of reckoning.  We can’t know when that day will be.  There will be a day when the Fed has to make a big decision.  It will have to stop creating money and let interest rates rise and severe recession hit, or it will keep creating money and go to hyperinflation.  Let’s hope they choose the former and not that latter.

I haven’t discussed foreign policy in a while (aside from the Republican candidates).  I have stated that my economic outlook for 2012 is more uncertainty, with a fight between inflationary forces and recessionary forces.

If there is war with Iran, everything changes.  It would be quite catastrophic.  It would be horrible for the people of Iran.  There would be many needless deaths and major destruction.  Lives would be ruined.

There would also be effects felt throughout the planet.  It would be devastating to the U.S. economy, along with most other inhabited places that rely on the global economy.

One thing that is easy to predict is that the price of oil would go to the sky.  The Iranian government would attempt to close the Straight of Hormuz.  It could be quite “successful” in doing this for a period of time.  Even if it closed for just a few days, it would spook the oil market like never before.  Many people are predicting that oil would hit $200.  I think this is very conservative.  I think we could see a temporary spike go over $300 easily.

As I have said before, a rise oil prices does not cause inflation.  If there is no change in the money supply, people will have to budget differently.  They will either have to cut back on the use of oil (mostly driving) or they will have to cut back somewhere else in their budget.  Most people will do both.  This means less money to eat out, to buy electronics, to take vacations, etc.  Prices will fall in other areas.

However, if there is war with Iran, then the Fed will most likely start another round of quantitative easing (money creation).  It will cost the government even more money to fight a war with Iran, which means that the deficit/ debt will get even worse.  It means that the Fed will have to monetize this debt.

The fact that the U.S. government is in such a hole financially might just save us from another major war.  There is a lot of talking going on, but hopefully Obama is not that stupid.  He has to realize that the U.S. would suffer financially in a major way.  If Obama does not start a war with Iran, maybe I can give his presidency a “D minus” instead of an “F”.  McCain would have been more likely to start another major war.  So perhaps we could have done worse than Obama.

There is a possibility that the Israeli government might start a war.  But I find this unlikely if they do not have the support from the Obama administration.

The U.S. has really already committed an act of war by placing these embargoes on Iran.  Hopefully it will end there and there will be no major conflicts.

I give the chances of an all-out war with Iran to be less than 50%.  Those odds would continue with a Romney presidency.  They would go up with Gingrich or Santorum.  They would be near zero with Ron Paul.

Hopefully there will be no war.  If there is, be prepared for an even more wild ride financially.  Expect oil to go out of control.  You can also expect gold to skyrocket with it.

The Republican debate in Tampa, Florida has just finished up.  It was hosted by NBC and Brian Williams and the questions were just horrible.  As similar to other debates, some of the questions are just about meaningless.

I would like to see more substance on where the candidates stand philosophically.  I would like to see some questions such as:

How much should the federal government spend each year?
What specific government programs and/ or departments would you eliminate or reduce?
Do you favor tariffs on sugar (did Newt answer that?)?
What areas do you think the government should stay out of completely?
What does Article I, Section 8 of the Constitution mean to you?
Does the Constitution limit the power of the federal government?
Who are the best and worst presidents in American history?
Are there any amendments to the Constitution that you disagree with?

Of course, the media doesn’t want to ask questions like these because it would show the insincerity of three of the candidates.  It would show that Ron Paul is the only principled candidate.

Mitt Romney is so full of it, it is just ridiculous.  However, he is a little less scary because of it.  Rick Santorum does have some principles and I would be scared if he ever had the power to try to carry them out.  He probably wouldn’t back down in shoving his religion down other people’s throats.  He probably wouldn’t back down on annihilating Iran.  At least with Romney, there might be some hope that he could be manipulated into a somewhat coherent policy.

I don’t think the Florida vote will mean all that much.  It will probably determine the front runner status of Gingrich or Romney, but both candidates are staying in the race.

Ron Paul is not campaigning actively in Florida and is spending minimal, if any, resources there.  This is a wise move as he will focus on smaller states with caucuses where he has a better chance to win or to pick up delegates.

I think Ron Paul needs to start challenging the other candidates.  If the moderators of these debates are not going to ask the right questions, then Ron Paul needs to do it for them.  He should state that he wants to cut one trillion dollars in the first year (which he has said repeatedly) and then ask if there are any specific departments the other candidates would eliminate.  He should ask them how they plan to balance the budget and point out that simply growing the economy will not be enough.  Be insistent that they offer significant specific spending cuts.

One thing I noticed tonight is that Newt Gingrich was far more cordial towards Ron Paul.  I think he is realizing that he may need some Paul supporters if he were to win the nomination.  While the two acknowledged that their foreign policies are radically different, I think Paul needs to make sure everyone is aware that their fiscal policies are radically different too.  Gingrich is not for small government in any way and people need to be made aware of this fact.

Most of the results are in from South Carolina as I write this.  Gingrich won overwhelmingly (although still without a majority).  Romney took second and Santorum took third.  Paul took fourth with about 13% of the vote.

When most people use the term inflation, they are referring to prices.  The definition has changed over the years.  In the distant past, inflation meant an increase in the supply of money.  Rising prices was just the result of inflation (an increase in the money supply).  When I use the term inflation, I generally try to distinguish the two when it is necessary.

The big question these days is why there is such a big difference between monetary inflation and price inflation.  Since the fall of 2008, the adjusted monetary base has more than tripled.  Yet, consumer prices have only been going up a couple of percentage points per year.  Price inflation has been relatively mild, particularly when it is measured against monetary inflation.

I believe there are two main reasons for the big disparity.  First, most of the new money that has been created since 2008 has gone into the commercial banks and is being held as excess reserves.  This new money is not being loaned out (probably due to major problems and fears that the banks have).  This has prevented prices from multiplying due to fractional reserve lending.

The second reason is the velocity of money.  It actually amazes me how little attention this subject gets.  Even most Austrian school economists do not discuss this topic, even though it is a major player.  While I’m sure there are many people out there who discuss it, the only person I know of who discusses this topic frequently is Richard Maybury.

Velocity is the speed at which money changes hands.  Since the fall of 2008, there are a lot of fearful Americans.  Unemployment is high and the economy has been weak.  People are uncertain about the future.  A lot of people have stopped spending as much as they previously did.  More people are paying down debt and saving some extra money for a rainy day.  There is a higher demand for money.  In other words, money is changing hands less frequently.  Velocity is low compared to what it was.

This low velocity means that people are not bidding up prices as much.  This has a counter effect on monetary inflation.  The low velocity of money acts as a deflationary force on prices.

Velocity is psychological and is therefore very difficult to measure and to predict.  Velocity is dependent on the mood of people.  If people are frightened and uncertain, they are more likely to have a higher demand for cash.  The one exception to this is if people perceive that monetary inflation and debt are getting out of control.  If people have a perception that prices are going to go up fast in the near future, they are more likely to buy things so that their money is not devalued.  This money would have a tendency to go into hard assets and bid up those prices faster.

In conclusion, just because there is high monetary inflation, it does not necessarily translate into high price inflation.  There is a time lag and there is the issue of excess reserves.  However, the biggest issue is velocity.  If you can read the general mood of the people, then you will have a better chance of predicting where prices will go.

I have been writing about the Republican presidential race quite a bit, particularly since Ron Paul is making big waves and drawing a lot of attention.  This blog is “Libertarian Investments” and I have been paying a little less attention to the economy and investments due to my extra attention on politics.  Today, I am going to try to tie together the issues.

So what does the presidential race mean for the economy and your investments?

First, let’s talk probability.  Even though Ron Paul is doing really well, his chances are still relatively low for actually winning the presidency.  Right now, I would give Obama an almost 50% chance of being re-elected.  Since Romney has the best chance of being the Republican nominee, I would give him about a 40% chance of being elected president.  The remaining 10% goes to Ron Paul, Newt Gingrich, or some wild card in the case of an unexpected event or late entrant.

If Obama, Romney, Gingrich, or anyone else other than Ron Paul wins the election, I don’t see much short-term change.  (I am assuming that a third-party candidate does not win.)  There really won’t be much of a difference between Romney and Obama.  Romney will, of course, pander to his Republican base more, but the policies won’t be much different.

Gingrich or Santorum might actually be worse if they are crazy enough to start a major war with Iran.  But then again, Romney or Obama might be just as crazy.  Who would have thought in 2000 that George W. Bush would start 2 major wars and be a huge spender?  It is hard to imagine now that Al Gore would have been any worse.  If Gore had been elected (or had won a recount), it might have been better with more opposition to big government policies coming from the Republican side.

If Ron Paul somehow manages to get the Republican nomination and go on to win the presidency, then that would be the one scenario that changes everything.  It would mean an end to the wars.  It would probably mean a drastic cut in spending.  While the Congress has to pass the spending bills, a President Paul could veto anything and force a super majority to pass spending bills.  In addition, just by him being elected, it would mean a major shift in the attitude of the country.  It would mean there would be massive pressure on Congress to drastically scale back government.

So what would a President Paul mean for your investments?  It would probably mean a quick and deep recession to start off.  This would be the cleansing needed.  It would mean a return to prosperity.  Ironically, the one investment that would probably do really poorly would be gold, along with other commodities.  The Fed would be in hiding mode and would hopefully stop the high monetary inflation.  The initial deep recession would drive down asset prices.  Oil would also likely go down, depending on what happens in the Middle East when U.S. troops head home.

There could be some analogies with the 1980’s when Reagan became president.  But interest rates and price inflation were really high when Reagan was inaugurated and the Fed had already started tightening.  Of course, Ron Paul would be a completely different president than Reagan because his policies would match his words.  Reagan talked a good game about small government, but did not actually implement much to reflect this.

If Ron Paul is not elected, then it would be wise to continue defensive positions with an emphasis on inflation hedges such as gold and oil.  We can count on more war, more big spending, and more monetary inflation.

I am a long-term optimist, particularly now with all of the support pouring out for Ron Paul from young people.  But regardless of who is elected next November, there will be short-term pain.  It is almost unavoidable due to the huge spending and huge monetary inflation that has already taken place.  The best we can hope for at this point is for the attitude of the overall population to continue to head in the direction of liberty.  We can deal with some short-term pain if we have something to look forward to in the future.

The Republican race has moved to South Carolina.  There was a debate last night (Monday) and there will be another one on Thursday.  The voting will be on Saturday.

The Monday night debate was bizarre.  There were definitely a lot of attacks on Mitt Romney.  With there only being five candidates left on stage, you would think that the candidates would get a lot of time and a lot could be revealed in two hours.  But we are talking about Fox News.  While perhaps not as bad as CBS and PBS, they still only managed to ask one question to Ron Paul in the first 35 minutes of the debate.

The crowd was also rowdy with a lot of cheers and boos.  It was mostly annoying.

It was also annoying when Ron Paul was asked about the killing of Osama bin Laden.  He was trying to answer, but he kept getting interrupted.  But the interruptions were not from the other candidates.  They were coming from the Fox News moderators of the debate.  Paul made a comparison to Saddam Hussein, saying that he was captured and at least had some kind of a trial.  Paul was interrupted by Bret Baier (with his smugness) telling Paul that he didn’t support the Iraq War.  Hey Baier, you moron, that wasn’t his point.  That is a different subject.  You can’t understand that Paul was just saying that bin Laden could have been captured without being killed (if that is what actually happened)?

Then there was the topic of the National Defense Authorization Act (NDAA) which has provisions which suggest that American citizens on American soil can be detained for terrorist activity by the military and be detained indefinitely without trial.  While I find it just as outrageous that it is done to foreigners, this is obviously a horrible law.

Romney said that he supported the NDAA and that he expects Obama will not abuse it and he said that he will not abuse it as president.  Romney basically said that the legislation is ok because Americans can trust him and Obama not to abuse any power.  Hey Romney, if that is the case, then why not just advocate repealing it?  Even the crazy Santorum couldn’t defend this thing.

One of the things that Harry Browne liked to point out was a quote by Michael Cloud.  He said that the abuse of power is not the problem.  The problem is the power to abuse.  This goes to the whole point here.  The NDAA may not be used for any bad purposes for the next decade, but it is putting in place a power that will eventually be used by bad politicians for bad purposes.

Should we just give Romney power because he says that we can trust him?  Romney’s answer to that one question completely disqualifies him for being president (in case you had any doubt).  If he thinks that is the way government should operate, then it shows that he himself is a total thug who should never be trusted with any power at all (not that I would really trust anyone with power over others).

There was some entertaining back-and-forth between Paul and Santorum.  When Paul was asked about running negative ads, it was funny to hear him say that he wished he could have had longer than a minute in his commercial to expose all of the big government policies that Santorum had supported.

Then there was a bizarre exchange on gun control.  Santorum said that he supported federal gun control legislation as a “compromise”.  Yeah, that’s exactly what we need in the White House.

Then Santorum accused Ron Paul of being anti-2nd amendment because he did not support a law protecting manufacturers from lawsuits.  Paul explained that it was a jurisdiction issue.  He explained that tort law like this should be handled at a state level.  So Santorum ignored everything he said and repeated his claim that Paul is against the 2nd amendment.  Santorum was either demagoguing the issue or he is simply too dumb to understand Paul’s position on this.

Overall, I don’t think many minds were changed on Monday night.  People who love Paul will still love him.  Most of those who don’t like him will probably continue to not like him after last night.

While I think Gingrich is full of it, I think he had a stronger appeal than Santorum in the debate.  For that, I think Gingrich will emerge as the third candidate.  I had been leaving the door open for Perry because it is harder to criticize his record and because he has had significant financial backing.  However, it turns out that Perry is a complete moron who debates about as well as the last president from Texas.

My prediction for South Carolina is that Perry finishes last and drops out of the race.  Santorum will not be far behind.  Then we will have a three-way race between Romney, Paul and Gingrich.  Stay tuned.