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.