There are stories all over the internet (at least for those visiting such sites) that Germany wants to audit its gold holdings, particularly gold held by foreign governments/ central banks.  Specifically, the Audit Court in Germany is recommending that the Bundesbank, Germany’s central bank, account for all of its supposed gold holdings.

A large percentage of the gold that is held by Germany is actually stored in New York with the Federal Reserve.  Germany also has holdings in London and France.

If some kind of audit does go through, I’m not sure if it will prove anything.  Perhaps the U.S. Fed will pretend to show the gold holdings and the Bundesbank will pretend to see it and that will be the end of it.

It would actually be very difficult for Germany to account for all of its gold at this point, unless it demands physical delivery.  Germany could decide to hold all of its own gold and that is really the only way to completely verify.

The only other possible way would be to have a full audit of the gold held by the United States.  Without this, there is no way to fully trust that all of the gold is there.  If five different people give me twenty dollars to hold onto for them and each one wants to audit my holdings, then I can just show each one the same twenty dollar bill, as long as they are not there at the same time.  So I really only need to hold twenty dollars to “prove” to the five individuals that I have their money, even though I should have one hundred dollars.

It would not be surprising if the U.S. central bank has lent out some of the gold it holds.  This is the organization that encourages fractional reserve lending on a wide scale.  Why wouldn’t it do the same with its gold?

Most likely, nothing will come of this right now.  But let’s just say that Germany does demand a full audit or else a delivery of all of its gold.  If the Fed could not deliver, or if it had to buy the gold to make good on its contract, then this could mean a real boost for the gold market.  This would be the best kind of price rise possible for gold investors.  You would be getting a higher price of gold and it would not be a direct result of inflation or fear in the market.

Estimates vary, but Germany’s total holdings of gold is only approximately $170 billion.  The New York Fed holds about $78 billion worth.  This is not a big amount when you consider that the U.S. government can spend that amount in about 8 days or so.  Still, on the margin, if it was discovered that the U.S. government and/or the central bank had lent out its gold or sold it, then the gold price would likely respond with a huge rise.

So while I don’t expect much to come of this right now, it is interesting just in the fact that it is being discussed.  More and more questions are being asked and more skepticism exists of the Fed than ever before.  I guess the skepticism isn’t just in America.  In the long run, this is good news.

As I write this, Hurricane Sandy is making its way on shore somewhere in the New Jersey area.  The stock market was closed in the U.S. on Monday and will be closed again on Tuesday.  We’ll have to wait and see if it is open on Wednesday.

Why is the stock market closed?  That is a question that I can’t really find a good answer for.  I can only speculate on the reasons.

I could completely understand this scenario if it were 20 years ago or more.  New York City was, and still is, the financial capital of the world, at least unofficially.  However, the world we live in today is vastly different.  It is a truly global economy.  It is also a digital economy, particularly when it comes to finance.

Most stock trades that take place today are done through computers.  The guys on the floor of the stock exchange, waving their hands in the air, just don’t matter that much anymore.  This is why you can execute most trades through a few clicks on your computer.  It is digital.  You don’t have to call a broker and get him to send an order to the floor.

It is kind of strange to me that the two major exchanges in the U.S., the biggest in the world in terms of value, would shut down for two days because of a storm coming.  This is not to minimize the power of the hurricane.  It is also not to say that workers should go to work on Wall Street in the middle of the hurricane.  The point is that the entire U.S. stock market should not have to close down just because a few people are going to be absent from the New York Stock Exchange and NASDAQ in New York City.

Most companies today, even smaller ones, have contingency plans.  They have committees that identify employees who are in key roles.  They often have branch offices that can fill in during an emergency.  They have backup employees who can shoulder the load in the short term so that business can go on, at least in the critical areas.

I can only think of a couple of reasons why the stock market would shut down due to a forecasted storm.  One reason is that the stock exchanges are simply unprepared.  The other reason is that the big shots on Wall Street have a massive ego and want to pretend like the world can’t function without them.

This may seem a little harsh, but I really can’t see any other reason.  I’m sure I can find many explanations that are offered about why the stock market can’t be open when Wall Street (the actual physical location) is shut down.  But for every excuse, I just go back to the fact that most companies have some sort of contingency plan, usually in a branch office.

If anyone has any other valid explanations of this, please let me know.  I would love to hear it.

While there weren’t many memorable moments in the debates between Romney and Obama, there are a couple of items that have received more attention than I expected.  Ironically, I have heard these brought up by conservative talk show hosts in order to criticize Obama.  But these are two of the few things that Obama said that were actually truthful and somewhat accurate.

The first incident happened while the two were discussing the economy in the second debate.  In particular, the high price of gas came up.  Romney was criticizing Obama because gas prices are so high now.

Obama responded, “He said when I took office, the price of gasoline was $1.80, $1.86.  Why is that?  Because the economy was on the verge of collapse, because we were about to go through the worst recession since the Great Depression, as a consequence of some of the same policies that Governor Romney’s now promoting.  So, it’s conceivable that Governor Romney could bring down gas prices because with his policies, we might be back in that same mess.”

Republicans and others in the media have criticized Obama immensely for this comment.  But, as much as I hate to say it, Obama was basically right here.  Gas prices were also extremely high under the Bush presidency.  The price of gas went way down, along with oil prices, right when it became evident that there was a major recession.  So gas prices came way down right before Obama was inaugurated, so it is an unfair benchmark to use gas prices on the first day Obama took the presidency.

While lower gas prices do not necessarily indicate a bad economy, it is true that a bad economy can cause gas prices to go down.  That is what recessions do.  The demand for goods and services go down, while the demand for money goes up.  This means that prices usually go down, including energy prices.

Gas prices were high during the Bush presidency when the artificial boom was still going on.  This was a time when there was a severe misallocation of resources.  In addition, the two major wars certainly added to the high prices of oil and gas.  The monetary inflation caused both the artificial boom and the high gas prices.  But when the bust came, the prices went down.  I guess you could say that Obama actually got a small piece of the business cycle correct.

Don’t get me wrong here.  Obama is still a fool when it comes to economics, but I guess the Republican criticism of his point on gas prices just makes many of the Republicans economic fools themselves.

The second incident was in the last debate on foreign policy.  Romney was accusing Obama of reducing the size of the Navy.  Obama responded, “You mention the Navy, for example, and that we have fewer ships than we did in 1916.  Well governor, we also have fewer horses and bayonets.  We have these things called aircraft carriers and planes land on them.  We have these ships that go underwater, nuclear submarines.”  He went on to say, “It’s not a game of battleship where we’re counting ships, it’s ‘What are our capabilities?'”

While some people may not have liked the sarcastic tone, Obama was absolutely right on this point.  Regardless of your opinion on foreign policy, we live in a different world than we did almost a hundred years ago.  Actually, it is completely different than it was just 25 years ago when there was a Cold War and the Soviet Union still existed.

Today, terrorism and guerilla warfare are the dominant threats, or at least portrayed that way by the U.S. government.  Of course, if the U.S. government stopped intervening around the world, then guerilla warfare would no longer be a factor and terrorism would probably be much less of a factor.  And there is no question that Obama has continued the interventionist policies of his predecessors.  But on this one point, Obama was actually correct that Romney’s criticisms were baseless.

What do ships do now?  They are used to transport goods, they are used as aircraft carriers, and they patrol the open waters.  But there isn’t an Iraqi Navy or an Afghan Navy, which are the two places where there have been major wars.

In conclusion, there are a lot of things that Obama could be criticized for and yet conservatives are picking on a couple of quotes from the debates where Obama actually had honest and valid points.  Since the conservatives can’t really attack Obama on major things (because Romney and Ryan supported many of those same things), they resort to these petty things to try to make it look like there is a difference between the two candidates.  Unfortunately, we are going to be stuck with one of them for another 4 years.

I saw Atlas Shrugged 2 over the weekend.  It is the second part (out of three) of the movie based on the book by Ayn Rand.  I wrote my review of the first Atlas Shrugged movie last year.

Despite some negative reviews, even by libertarians, I still enjoyed the movie.  You definitely should see the first one before seeing the second.  I would also recommend reading the book before seeing the movie, but I’m sure that is not the case for everyone.  The book is over 1,000 pages long and it isn’t an easy read.  I’m curious what the movie looks like to someone who hasn’t read the book, but I suppose those people are curious about the differences of the book and movie.

It has been 12 years since I read the book from start to finish, but I still remember it fairly well.  I remember the book being a bit more of a mystery.  It seems that you know what is going on a little more with the movie.  That is the way it seems to me, but again, I’m not sure if that is just because I have read the book and I know what happens.

The second movie starts off with the end of the movie.  Dagny is flying a plane in the mountains.  I thought they were playing the wrong movie at first.  I knew it was the end of part 2 or the beginning of part 3.  After showing that clip, the movie then goes back in time 9 months to tell the story leading up to her flying the airplane.

I still remember when I read that part of the book 12 years ago.  It was in the summer and I was actually excited to get home from work every evening so that I could read for a couple of hours.  I was a rather slow reader (I like to absorb everything).  I read almost every night and it took me about a month to finish the book.  But I remember that part about her flying the plane in the mountains and what happens next.  It was really exciting to read and anticipate what would happen next.

The book starts off rather slow, but I found that things built up more and more.  The third part of the book is by far the best.  As far as the movies go, I found the first one a little better than the second.  The acting was just ok and the storyline stayed mostly with the book, although the movie takes place in the future.  Obviously, because the book is so long and has to be fit into three movies, there is a lot that is cut out.  For example, Francisco’s speech is a very condensed version.  I’m sure Galt’s speech will be much the same way in part 3.

I have to say that I am quite excited for part 3, which will hopefully come out next year.  It was my favorite part of the book and I fully expect it to be my favorite movie.  Hopefully I won’t be disappointed.  In the meantime, if you haven’t read this great pro-liberty book, you probably have about a year to do so before the third movie comes out.

I watched the third party presidential debate on C-Span on Tuesday night.  It was either a low budget debate, or else they spent their big budget on hiring Larry King as the moderator.  While it is referred to as a third party debate, I think a better term would be a non-establishment debate.

(debate starts around 1 hour and 3 minutes)

It wasn’t that well run and the questions weren’t all that great (although good in comparison to the debates between Romney and Obama).  However, it was refreshing to watch as the candidates did talk about issues that you wouldn’t hear from Romney/ Obama.

The four candidates in the debate were as follows:

Jill Stein of the Green Party
Rocky Anderson of the Justice Party
Virgil Goode of the Constitution Party
Gary Johnson of the Libertarian Party

Jill Stein and Rocky Anderson were good on foreign policy and civil liberties.  Unfortunately, these two wouldn’t recognize a rational economic thought if it hit them on the head.  They have no concept of how a free market works and they can’t understand that “free” stuff by the government is not really free.

Virgil Goode is an interesting character to watch.  Let’s just say that the Constitution Party took a major step backwards from the last election when they had Chuck Baldwin as their nominee.

Gary Johnson was the most well-spoken of the candidates and he even somewhat impressed me a couple of times.  However, most of the time, he seems to come up a little short.  He just doesn’t have that radical edge that Ron Paul has.  He concentrates on pragmatism and not on morality.

The federal war on drugs was discussed a few times.  It was refreshing to hear it even talked about.  Virgil Goode makes no sense on this.  Isn’t the federal war on drugs illegal under the Constitution unless you pass an amendment like what was done for alcohol prohibition?

Unfortunately, Gary Johnson fell short on this too.  He keeps talking about marijuana.  But what about the other drugs?

The logical position for any libertarian running for president should be that the federal drug war is unconstitutional and should be ended.  It is not even a question of legalization.  It should be up to the states to decide that, although I think a wiser policy and a libertarian policy for the states would be to legalize drugs.  And yes Gary Johnson, that includes all drugs and not just marijuana.

I like that Johnson says he would balance the budget immediately.  This is actually somewhat radical, proposing to cut well over 1 trillion dollars from the federal budget.  And by his vetoing record in New Mexico as governor, he might actually follow through.

My biggest frustration with Johnson came at the end with the last question.  They were asked, if they could get one constitutional amendment passed, what would it be.  Johnson said an amendment for term limits.  I’m sorry, but this is lame for a libertarian.  Term limits would probably do little to stop the growth of big government.  Presidents are term limited and it doesn’t stop them from spending trillions of dollars and making war.

There are so many answers he could have given that would have been acceptable to most libertarians.  He could have said an amendment to end central banking and fiat money, an amendment to end the income tax, an amendment to require a direct vote of the American people before sending any military personnel overseas, an amendment to end the federal war on drugs, an amendment to end federal spending on education of any kind, an amendment to cap federal spending at 5% of GDP, etc.  The point is, I could think of a hundred constitutional amendments that would be better for liberty than an amendment for term limits.

I should mention, there was also a question about the National Defense Authorization Act (NDAA) and the provisions to allow the military to arrest and detain American citizens without trial.  It is interesting that this question was never asked in three debates to the actual president who signed the legislation.

In conclusion, while I have my criticisms of the debate and some of the positions taken by the candidates, it was a refreshing change from the two establishment candidates.  Unfortunately, none of them have a chance of winning.  It is doubtful that any of them will break 1%.  If any one of them does, it will be Gary Johnson.

I struggled through the last debate between Romney and Obama, and it certainly was a struggle.  I only watched it so that I could comment on it on my blog here.

It was really boring and filled with political rhetoric designed not to say anything inoffensive to the small percentage of voters who are undecided.  At this point, most people have made up their minds.  Some people are firmly with Obama and some are firmly with Romney.  There are also people like me who are firmly with neither one.

So there is a small percentage of the voting populace who plan to vote but don’t know who they are going to cast their vote for in the presidential race.  These are the so-called independents.  I’m not really sure how someone can get to this point without having made a decision, unless they simply don’t like either one.  I wish these people would resolve to themselves that it is not their patriotic duty to vote for one of the two big party candidates.

The last debate was on foreign policy.  Romney sounded like less of a war hawk than he has in the past.  Again, he is trying to pander to the small percentage of undecided voters.  Obama tried to act a little tougher, although he still manages to come out as the anti-war candidate, or at least the less pro-war candidate.  Of course, Obama’s words do not match his actions, especially when it comes to foreign policy.  He has continued the Bush wars and started some new ones, although smaller in nature.  He claims to have ended the Iraq War, yet there are still tens of thousands of American contractors there.  I guess if the government subcontracts the work out, then it isn’t considered a war.

Romney is an unknown.  It is known that he will continue the pursuit of empire building, but it is hard to say how much of a war hawk he will be in office.  He panders so much on the campaign trail, it is difficult to know what he will do with anything.

If the Federal Reserve weren’t there to create fiat money out of thin air to pay for the wars, these wars would probably never happen, or at least not on the same scale with the occupations.  If Americans had to pay direct taxes to fund the wars each year, then most would rebel.  The government is only able to wage large-scale wars through deficit spending and money creation.  Of course, the Fed was not mentioned again, just as it wasn’t mentioned in any of the other debates.

In conclusion, I thought Romney was mostly incoherent with the things he said.  He was trying to please the independent voters, while trying to be pro-war enough so as not to upset his base.  Obama sounded a little better and he will probably get away with his words because the voters that count now are not paying much attention to his foreign policy record of war and intervention.

This election is really a nightmare for a libertarian.  I miss watching the Republican debates with Ron Paul.

In my last post, I discussed how Romney’s proposed cutting of funding for NPR is a drop in the bucket.  You could eliminate all federal funding for NPR for a year, and it wouldn’t balance the budget for one day.  I also wrote about my surprise that, in a poll last year, only 27% of Americans knew that federal funding for public broadcasting was less than 1% of the total federal budget.

In poll after poll, one of the issues that concerns Americans the most is the federal debt.  It keeps increasing each year by leaps and bounds.  For the last several years, the yearly deficit has exceeded $1 trillion.  This means that the government is spending over $1 trillion more each year than it takes in from tax collections.

So Americans say they want a balanced budget.  But unfortunately, most Americans do not really understand what that would entail.  Most Americans do not really know what makes up the federal budget.  It makes it easy for people like Romney and Obama to demagogue the issue (Romney probably more so).

Here is a pie chart of a breakdown of federal spending for FY 2011.  The numbers can vary slightly depending on the source you use.  There are some items in the budget that can get grouped in different categories.  Also, as any libertarian in his right mind knows, the amount listed for defense is really military spending.  It has little to do with defense, as a large portion of military spending is spent on making war and empire building.  But although there are slight variations between sources, the following is a reasonable summary of the breakdown.

Medicare and Medicaid made up 23% of the budget.  Social Security was 20%.  So-called defense spending was 19%.  Interest was 6%.  So between just these things, that is about two-thirds of the entire federal budget.  If none of these things are touched, then you would basically have to eliminate the rest of the entire budget to get somewhere close to a balanced budget.

One of the hot topics in the presidential race is Big Bird and the federal funding that goes to NPR (public broadcasting).  Romney said in the first debate that he would eliminate federal funding for NPR when he was responding to a question about government spending.  As I wrote in my libertarian commentaries about the first and second debates, NPR funding is a drop in the bucket, or perhaps more like a drop in a swimming pool.  Obama actually asked the best question of the entire second debate when he pointed out that Romney’s math doesn’t add up.

Art Carden of the Independent Institute wrote an article about the same topic, pointing out that PBS funding only accounts for 0.014 percent of federal spending.  Again, it is a small fraction of one percent.

There was something that actually shocked me in his article though, and that is the knowledge (or lack of knowledge) of the American people on the federal budget.

Carden writes: “A CNN poll shows just how badly American voters understand how much of the federal budget goes to PBS.”  He continued, “7 percent of respondents to the 2011 CNN poll thought the Corporation for Public Broadcasting accounted for over half of government spending.  Forty percent of respondents thought it accounted for 1 to 5 percent of the federal budget, 8 percent thought it accounted for 6 to 10 percent of the budget, 6 percent thought it accounted for 11 to 20 percent of the budget, 5 percent thought it was 21 to 30 percent, and 4 percent thought public broadcasting consumed 31 to 50 percent of the federal budget.”

Carden then writes, “The good news is that 27 percent of poll respondents correctly believed that the CPB accounted for less than 1 percent of the federal budget, but this is cold comfort when the other 70 percent of those polled overestimated CPB funding by a factor of at least 71, with a median answer – 5 percent – that was off by at least a factor of 357.”

I really had no idea that Americans were this ignorant about government spending.  According to this poll, 16 percent actually thought that federal spending on public broadcasting exceeds 20 percent of the entire budget.  This is borderline moronic.

The plurality (40%) thought it was between 1 to 5 percent.  While they were way off, perhaps we can give them a pass for at least knowing that it wasn’t a huge percentage.

I’m not sure whether this is good news or bad news.  I wish even more now that these statistics about what percent goes to NPR were made known during the presidential debates.  It is bad news that there are so many ignorant Americans on the subject of federal spending.

I suppose the good news in all of this is that, perhaps with just a little bit of education, the American people might be able to wake up to what is going on.  If they found out that eliminating funding for PBS couldn’t balance the budget for one day, then maybe they would start to wake up to the reality that is coming.

I think the whole issue of funding for public broadcasting is somewhat of a symbolic issue of what the role of government should be.  However, we should not let politicians like Romney pretend like he is in favor of a balanced budget when he can’t offer a specific spending cut that adds up to more than a fraction of a percent of total government spending.

In a future post, I will go over what the percentages are for different categories in the federal budget.  It will show that the budget can’t be balanced without cuts that will hit the American people over the head like nothing they’ve seen before.

I have discussed the miracle of compounding interest before in regards to individuals and to whole civilizations.  It is an important concept to learn when you are young.  You can benefit a great deal from understanding the power of compounding interest.  Those who don’t grasp the concept are bound to make bad decisions in life.

Compounding interest applies to other things aside from your individual investments.  While there may not be any numbers associated with this, compounding interest often occurs with learning.  It can also occur with starting a business or with taking up a hobby.

The whole concept could apply, at least in a sense, to someone learning how to surf.  The person might be really bad the first time he goes out in the ocean with a board.  It may take many times going out there before he ever catches his first wave.  But as he practices and puts his time in, he slowly gets better and better.  It is no coincidence that many of the great athletes in this world started when they were young.

Back to the idea of investing, is compounding interest still beneficial in an environment of low interest rates?  Currently, putting money in a cd or a savings account in the bank will barely make any interest.  In fact, if you factor in price inflation, you are probably losing money.

But I ask, what is the alternative?  Are you better off going into debt?  Are you better off having little or no savings?

Another thing to consider is that interest rates will not always remain low.  If and when rates go up, you don’t want to be in a position where you are heavily indebted, especially if the rate is not fixed.  Imagine having credit card debt or some other variable rate loan.

On the other hand, if and when rates go up, having money set aside will be beneficial.  You can start earning those higher rates of return instead of paying them to creditors.

Of course, an important point is that you don’t have to put your money in the bank.  You can put it in a setup like the permanent portfolio as described in Harry Browne’s book Fail-Safe Investing.

I am also a big fan of real estate, especially in the post-bubble world.  Mortgage rates are incredibly low and you can find some real bargains in many parts of the U.S.  Many people are finding they can buy a place and get a return of 10% or more from the rent.  In addition, they are getting their mortgage amount paid down each month.  This in itself is a form of compounding interest.

In conclusion, just because we are currently in a low interest rate environment, it doesn’t mean that you shouldn’t save money.  While it is harder to get ahead, it is not impossible.  And you are better off saving a little than nothing at all.  When rates do go up, you will be better off with savings.  If it is in a highly inflationary environment, you can buy hard assets to protect yourself.  So while compounding interest may not seem to be beneficial right now, it can still work miracles for us over time, whether it is with your money or learning a new skill.

There was recently an article on LewRockwell.com by Jeff Clark, who is an editor at Casey Research.  His short articles’s main theme is that there is a high correlation between the gold price and the adjusted monetary base.  He uses the time period of 2008 to the present.

Clark says that based on that correlation and on what the Fed says it is going to do with QE3, that we will see $2,300 gold by January 2014.

While it is certainly an interesting correlation to note, I just want to warn readers that it will probably not stay this way.

The time period of less than 5 years is a short one.  In his article, he references January 2008.  But the chart that is shown actually appears to start in October 2008, which is right around the time of the major crash.  Gold went way down from its highs during that time.  This was also the beginning of what would end up being a tripling of the monetary base over the next 4 years.

However, it is important to note that there are many times in history where there was not a strong correlation between the monetary base and the gold price.  During the mania of the late 1970’s and early 1980’s, gold was going up much faster than the monetary base.  Meanwhile, during the later 1980’s and the 1990’s, gold prices stayed low while there was a continuing increase in the monetary base (although nothing like what we’ve seen recently).

From 2001 to 2008, gold prices approximately tripled, depending on the specific dates you use to measure.  The monetary base also went up during this time, but at a much slower pace.

The point is that this direct correlation will probably not hold and it should not really be used as a major predictor of the gold price.  It is a major factor, but it is just one factor.

Ironically, gold prices have probably been held back, despite the huge increases in the monetary base.  Bank lending has been slow as excess reserves have piled up.  In addition, people’s fear of a bad economy has kept consumer spending down.  This means a lower velocity with a higher demand for money.  This actually somewhat counteracts the inflationary policies of the Fed.

So if banks start lending more and if velocity picks up, then I would actually expect gold prices to increase faster than the monetary base.  So if Helicopter Ben does as he promised, then a gold price of $2,300 by January 2014 may actually be a rather conservative estimate.  It will mostly depend on future inflation expectations and the mood of the people.  Of course, Congress can just exacerbate the situation at this point by continuing to spend recklessly and racking up more debt.