I have always found it curious how such seemingly intelligent people can be completely stupid when it comes to economics.  I suppose it is the same thing with politics in general.

I have met or seen some really intelligent people in my lifetime.  They are smart when it comes to most anything.  Some of these people are also quite dynamic.  There are just some people in this world who can entertain an audience.  They can use humor and charisma to influence others.

Yet when it comes to economics, they are complete idiots.  I don’t know if others recognize this, but I sure do.  And I’ll admit that they are smarter than I am.

I don’t know much about car engines.  I have met other people (adult males) who know even less.  But there are many people who know much more than I do.  This includes many people who are not mechanics by profession.  Of course, you can always expect someone to be smarter than you in any given area.  This is due to our high division of labor society.  You can find the most brilliant man on the planet and he probably would not know as much about a car as your average mechanic.  Maybe I’m wrong, but you get the point.

Entrepreneurs and business owners are an interesting bunch too.  They come from all walks of life.  Most of them are at least somewhat intelligent, at least in their own way.  On the other hand, I find that many entrepreneurs lack a little bit of common sense.  This sometimes can help them find success.  They don’t always sit down and calculate all of the risks of failure and the potential things that could go wrong.  They are not conservative with their money.  They generally are willing to take big risks.  You don’t hear about the hundreds of businesses that fail for every really successful one.  But the few successful ones never would have been successful had the entrepreneur not been willing to take a big risk.  Some people are just willing to go for it.

It is amazing when you find business owners who are completely ignorant of economics, which is really probably most.  You would think they would appreciate the capitalist system.

Warren Buffett is an interesting character.  His father was probably the second best congressman of the 20th century, at least from a libertarian standpoint.  (Ron Paul is first.)  I’m not sure if Warren Buffett is really corrupt and is lying about his knowledge of economics or if he is just plain stupid.  It is often a combination of both.

Is it right to call someone like Warren Buffett stupid?  He has a lot of money (more than almost anyone), but money isn’t always a measure of intelligence.

Here is my opinion on the whole thing.  Someone like Warren Buffett is highly intelligent when it comes to certain things.  When it comes to economics, he is stupid.  It is possible to have a high level of understanding in some areas and be almost completely ignorant in another.

It has baffled me for a long time and will probably continue to do so for a long time.  I think part of the reason is that I have had a basic understanding of free market economics since I was a child.  It came easy to me.  I did not become fully libertarian on other issues until my mid-twenties.  So I am more sympathetic on other issues that deal with foreign policy and civil liberties.  I try not to be this way, but it is still hard.  I understand that some libertarians were originally on the left when they were young.  They understood the pro-liberty arguments for foreign policy and civil liberties.  They did not understand free market economics until a later age.

When it comes to economics, and even politics, I can always make myself feel better when I am around someone who is more intelligent.  Again, I have seen some really brilliant people before who just seem flawless in their thoughts and expressions.  But as soon as they are asked a question about economics (or worse, venture into the subject themselves), their reputation in my eyes comes crashing down.  I just can’t understand how such a brilliant person cannot understand basic economics.  I think people (and this includes libertarians) are much more indoctrinated in society than they imagine.

How can someone successfully run a multi-million dollar business and not understand the negative effects of minimum wage laws?  How can a brilliant person think that higher oil prices are actually the cause of higher inflation in general?  How can anyone think that having the Fed creating new money will make us all richer?

I don’t know if I’ll ever know the answers to these questions.  We just have to accept that everyone in this world is different.  What might seem easy to some is difficult for others, and vice versa.  But I still won’t have patience for people like Warren Buffett who really should know better and who works the system in his favor.

I am generally conservative with my investment strategy.  I am probably even more conservative in what I recommend.  Today, I am going against this trend and recommending investments that are among the most risky.

Suze Orman, talk show host and money expert, does a segment on her show on CNBC called “can you afford it”.  She takes calls from people who want to buy something and then she does a rundown of their financial picture.  She then tells them whether they have been “approved” or “denied”.

I find myself in agreement with her most of the time.  If you have never seen it before, she might surprise you.  I have seen people call in with a net worth of 6 figures, yet get denied for something that might only be a couple of thousand dollars, or even less.  This is particularly common for older people. You might have someone who has a net worth of $150,000 and is 55 years old.  Suze would deny the person on most luxury expenditures because she would say that the person should have a bigger retirement nest egg at that age.  She is correct.

She will also deny most people that call in who have credit card debt.  Again, she is correct.

I have had my criticisms of Suze Orman before.  She is certainly not a libertarian.  She does not understand monetary policy very well, unless she has changed recently.  This makes some of her investment advice somewhat suspect because she doesn’t completely understand the need to hedge against inflation and how to do it properly.

With that said, I think most Americans would be better off if they listened to her.  She gives some great advice when it comes to money, saving, and spending.  She seems to generally understand the importance of compounding interest.

I think investors often forget about the importance of saving.  Of course, to invest money, you first have to save it.  There are basically three ways to make your bank account grow more.  You can earn more, spend less, or get a better return on your investments.  It is often difficult to directly control how much you earn and what kind of a return you get.  You generally have greater control over spending.

It is good to measure prices in terms of the value of your time.  If you make $25 per hour and you want to have a nice date night with your spouse and spend $100, then ask yourself if half a day’s worth of work is worth it to you.  If it is for a very special occasion like an anniversary, then perhaps it is worth it.

The other important thing about spending is that you get more bang for your buck when you cut back.  If you buy an item for a hundred dollars, it will probably cost you around $107 with sales tax.  And for you to earn enough to spend that much, you would actually have to earn maybe $130 or $140, depending on the type of income and what tax bracket you are in.

Another thing to consider is that you can be more conservative with your investments if you continue to save money.  If you are worth $100,000, then saving an extra $1,000 per year is like getting an extra 1% return on your investments.  This can make a significant difference over time and it allows you to take less risk.  You can focus on the preservation of your capital and not on making big returns.

In conclusion, it is fun and challenging to seek ways to earn more and make bigger returns on your investments.  But oftentimes, cutting your expenditures is far easier and probably doesn’t cost you more time.  You should constantly be asking yourself: can you afford it?  Or maybe the right question is: is it worth it?

When a libertarian in America criticizes the potential abuse of a government power, a common response is that it can’t happen here.

Take the raging debate on gun control.  Libertarians point out that the number one reason to fear more gun control is that the government would then have a legal monopoly on the ownership of guns.  Libertarians will point out that governments killed well over 100 million of their own people in the 20th century alone.  Libertarians will point out that gun control was used against the Jews in Nazi Germany before they were rounded up.

Of course, the common response is, “it can’t happen here.”

Here is a good dialogue between a libertarian and a gun control advocate:

Gun Control Advocate: Don’t you think we need more gun control?

Libertarian: By whom?

Gun Control Advocate: By the government

Libertarian: No, I don’t.  But the good news is that Americans are already well-armed and are not likely to give up their guns.

Gun Control Advocate: But why shouldn’t we try to disarm Americans.

Libertarian: Because then only the government will own guns and the government could become tyrannical and it would be more difficult for the people to resist.

Gun Control Advocate:  But that can’t happen here in America.

Libertarian: You are right, because we are well armed.

With Rand Paul’s filibuster in the Senate, there is now a lot of talk about the use of drones, particularly in America.  (For the record, I think it is just as wrong to use weaponized drones in foreign countries).  Republican senators, such as John McCain and Lindsey Graham, both as pro-war as you can get, are criticizing Paul and others.  They are essentially giving the line that it can’t happen here in America.

Here is the whole ironic thing about it.  If we had more people like John McCain and Lindsey Graham in this world, then it most certainly would happen here.  They are both thugs and would not hesitate to use violent force against others.  I don’t think their character would change any if the target were an American with whom they disagreed.

Perhaps they are right saying that it can’t happen here.  Only time will tell.  But if it doesn’t happen here (although in some ways it already is, just not with deadly drones), it will be because of libertarians and others who are warning of the dangers.  If we didn’t have libertarians and others standing on principle, then we would most assuredly see even much greater abuses of power than we already see.  We would probably see even more war and less in the way of protections of our liberties.

In conclusion, there are many who say that it can’t happen here in America, in discussing the government killing its own people en masse.  But if this is the case, it is only because of the people pointing out that it can happen here, that it won’t happen here.

The subject of Bitcoin has become a more common theme in libertarian circles.  Just like goldbugs, the promoters of Bitcoin are passionate about their positions.  The big questions are: is Bitcoin money and what is its potential for the future?

It is always good to start with a proper definition of money.  I would define money as a commonly accepted medium of exchange.  We have money so that we don’t have to barter.  We can also use it for savings.  But in order for money to function, it has to be widely acceptable.

I think this is where a bitcoin fails to meet the definition of money.  It is not widely acceptable.  It might be acceptable in certain circles of people, so it can function as a form of money in certain specific communities (not geographically speaking).  If you went up to a guy on the street and asked him about Bitcoin, he would probably look at you funny.  It is not widely recognized.  Even if it did become widely recognized, it would still have to be widely acceptable in order to function as money in society.

I would say the same thing about gold in regards to money.  Gold in America is not really money any more.  If you walk into Walmart and try to pay with a gold coin or gold dust, the cashier would look at you as if you were crazy.  And maybe everyone else is crazy for being so accepting of U.S. dollars.  But regardless, it is U.S. dollars that are widely accepted and recognized.  It is U.S. dollars that function as money in the U.S.  It has practically been forced upon us by the government by using the central bank, legal tender laws, and other tactics.  If there were a true free market, then gold and silver would likely function as money.  But given the world we live in today, U.S. dollars are money.

So could Bitcoin one day become money, assuming that the government is not able to interfere?  The answer is “yes”, but that would be for the market to determine.  It would really be up to each individual on whether they wanted to accept and trust bitcoins as a form of money or use something else.

If I had to take a guess, I don’t think bitcoins are going to be the wave of the future.  Here is Wikipedia on Bitcoin.  Wikipedia is good at giving a good summary on things.  It is usually understandable.  When I read the entry for Bitcoin, it is still confusing.  I am not trying to be insulting when saying this, but Bitcoin is an idea that comes to fruition when a libertarian meets a tech geek.  It takes an IT guy to understand all of the lingo.  The average guy on the street cannot really understand what a bitcoin is.

People understand gold.  You can actually hold it in your hand.  It can be used for jewelry.  It has some industrial uses, although not as much as silver.  It has a long history as functioning as money.

I do not agree with people who criticize bitcoins because they have no intrinsic value.  The U.S. dollar doesn’t either, but then again, the free market did not really choose it as money.  If bitcoins ever become money, it will have to come through the free market.  But intrinsic value is overrated.  Gold is mostly useless to people when it doesn’t serve as a form of money or wealth.  It can look pretty.  You can’t eat it or drink it.  You can wear it, but only to look good.  It’s not to keep you warm.  But if money were based solely on its uses, then water, oil, food, and clothing would be better candidates to serve as money.

In a free market, everything is subjective.  Things are valued according to the free market, which is really just the opinions of billions of people.

In conclusion, I doubt that Bitcoin will serve as a major form of money in the future, even if the government gets out of the money business.  I have nothing against Bitcoin and I wish its users and promoters well.  I generally think we are on the same side and seek more freedom.  I just have my doubts as to whether other people can understand Bitcoin enough to trust it as a form of money.  I think gold and silver are more likely to prevail again.

The Dow Jones Industrial Average, an index that consists of 30 major companies, surged to a new all-time high.  It went passed 14,200, beating highs last seen in 2007.  But did the Dow really just hit a new high?

In nominal terms, the Dow has set a record.  But in real terms, it really hasn’t.  If you adjust for price inflation, the Dow is actually still below its high in 2007, at least as of this writing.  If you compare it to 2000, the Dow is way below its highs if you adjust for inflation.

And this is just using price inflation numbers as determined by the government.

If you use the adjusted monetary base, the Dow is a major loser, along with many other things.  The monetary base has more than tripled since the fall of 2008 and it is still growing by leaps and bounds.  By this standard, the Dow has dropped by over two-thirds.

(If anyone knows of a good resource that shows the history of the ratio between a stock market index and the monetary base, please let me know in the comments.)

The most interesting thing about the Dow hitting new nominal highs is the similarities to another time period in American history.  The late 1920’s saw seemingly booming times.  Some argue against the Austrian Business Cycle Theory saying that the bust (the Great Depression) happened without there being prior inflation.  Of course, these critics, when they say inflation, are referring to consumer price inflation.

But Austrian school economists are quick to point out that there was monetary inflation.  It didn’t show up in consumer prices, but did show up in asset prices, particularly stocks.

Ironically, some Austrians were wrong in predicting imminent price inflation when the Fed started going crazy with its money creation in 2008 and 2009.  These people should have paid attention to their own lesson of the 1920’s when we saw significant monetary inflation and a stock market bubble, without significant consumer price inflation.

So when there is big monetary inflation (which we have now), it doesn’t necessarily have to show up in the price of food, gas, clothing, etc.  It may or may not.  Over time, overall prices will increase.  But in the short term, inflation is not uniform.  The newly created money hits certain hot spots.  Some sectors will see bigger price increases than others.  And it does not all have to show up in consumer goods.  It can, and this case did, show up in asset prices such as stocks.

This is not a prediction of where things go from here.  It is really anybody’s guess.  But as long as the Fed keeps pumping out more money at a rapid pace, I would be surprised to see a big crash in the stock market in the near term.  The Fed is making the money and stocks are one of the hot spots right now.

On CBS, 60 Minutes ran a piece about China’s real estate bubble.  You can watch it here.  While I’m not a big fan of watching news programs on regular television, I do find that 60 Minutes tends to be more educational than most.

I have been talking about a real estate bubble in China for a few years now.  I suppose this makes it the perfect bubble, because it lasts longer than what seems possible.

I am impressed by the growth of China’s economy over the last three decades.  It is remarkable what a little liberalization will do.  A crack in the door for the free market has led to hundreds of millions of people finding their way out of poverty.

With that said, China cannot escape the Austrian Business Cycle Theory.  A loose money policy and artificially low interest rates have led to an artificial boom.  It will eventually result in a bust.  China will experience its first modern day recession and it will be a bad one.

I have known for a while that the Chinese real estate market is out of control.  Watching the segment on 60 Minutes, I was still surprised.  I had no idea it was this bad.  There have been cities built for millions of people which are virtually vacant right now.  Most people in China are still too poor to afford the housing that has been built.  The only way to solve this problem will be for a dramatic drop in prices.  But this will be really painful for a lot of people.

The Chinese real estate bubble will make the U.S. real estate bubble look benign.

There are objections to my predictions of a Chinese real estate bust.  Some people say that we can’t be in a bubble because there are too many people talking about a bubble.  When the U.S. housing bubble popped, there weren’t that many people predicting it.

But just because some people see a Chinese real estate bubble now, it doesn’t mean it can’t be a bubble. 60 Minutes is an American program.  It is often easier to see from the outside.  If you talk to the average Chinese guy on the street, you will probably get a different sense.  The average Chinese guy will probably sound more like the average American did in 2005.

Another objection is that there is less leverage being used in China.  They aren’t taking out these creative mortgages that we saw in America.  Many properties in China are bought with 50% down payments.  Chinese people tend to be quite frugal and save a lot of money.  Real estate is a place that people have found to try to protect their savings.

So while this might ease the burden on banks and even the property owners (except that it makes it harder to walk away), it doesn’t mean there can’t be a bubble.  There was a gold bubble in 1980, but it was not all due to leverage.  The tech stock bubble in the late 1990’s was mostly through people buying stocks with saved money.  There was not a huge amount of leverage involved, at least relatively speaking.

People can drive up the price of an asset without using a lot of leverage.  If it is being driven up due to false signals from the central bank’s monetary policy, then we should expect a bust.

I fully expect a real estate bust is coming in China.  It will be very painful for people living there.  It will have its effects on the American economy.  The question is not so much if, but when.

Similar to the U.S. and elsewhere, there is a giant misallocation of resources that has taken place in China.  It needs to be corrected through a deep recession.  Maybe then China can try true free market capitalism.

With Obama proposing an increase in the minimum wage from $7.25 per hour to $9.00 per hour, it has become a topic of discussion.

One thing that I always find interesting is how the minimum wage debates come up.  There is a lot of Republican opposition to Obama’s proposal right now.  But where were they yelling and screaming when Bush was president?  While the last increase to $7.25 occurred in July 2009, it was because of legislation that was passed in 2007, while Bush was president.  Overall, that increase was bigger than what Obama has proposed.

And if Democrats are so much in favor of the minimum wage, why didn’t they pass it when they had the majority in Congress?  They could have passed legislation in 2009 or 2010 making it as high as they wanted.  Yet they waited to bring it up when the Republicans controlled the House.  You have to wonder if they understand that it is bad for employment, but just bring it up when they know it is harder to pass, so they can just blame Republicans for hating the poor.

I don’t want to rehash all of the libertarian arguments against a minimum wage, at least from an economic standpoint.  There has been a lot written by libertarians and conservatives that explain why a minimum wage is harmful, particularly to employment of low-skilled workers.

One important point to remember regarding the economics of the minimum wage is that an increase will not always cause higher unemployment.  If the minimum wage is low enough that most workers can still work and be profitable to the employer, then it may not matter much.  In other words, what would happen if we set a minimum wage of 10 cents per hour?  In some poor third-world country, it might cause an increase in unemployment.  In America, where there is much greater wealth and capital investment, a minimum wage of 10 cents per hour would affect virtually no one.

I would be willing to hire someone for a dollar a day to be my personal assistant.  I’m sure there are many people who would be willing to pay $20 per day for a personal assistant, assuming the person was competent and willing to work.  Since almost nobody would be willing to work for less than 10 cents per hour, the law would have virtually no effect.  I suppose it is possible someone might want to work for 5 cents per hour or for free just to gain experience.  But ironically, while you can’t get a job for $7.00 per hour, you can get one for $0.00 per hour.  It is called an internship and people do it so they can gain experience.

While most of the focus tends to be on the economic effects, I think it is important for libertarians to argue the moral side too.  Like most laws, the minimum wage is interfering in the voluntary process of the marketplace.  It is using the threat of government force to punish someone who offers a job to another person for less than the stated minimum wage.

There might be some people who simply can’t find a job in today’s market.  It could be a teenager or a mother who wants to work part time while the kids are in school.  It could be anyone.  But this person is forbidden to get a job that pays less than $7.25 per hour, unless it is an internship.  You could have someone willing to work for $6 per hour and an employer willing to pay it, yet they are forbidden because of the threat of government violence.

There are two questions you can ask  a supporter of the minimum wage.  The first question is an economic one.  If the minimum wage is good and will help people, why not raise it to $20 per hour or even $100 per hour?

The second question (or questions) is a moral one.  If someone desperately needs a job and finds a potential employer who can only pay $6 per hour, what would you do to them if they agree to these terms?  Would you send in police officers with guns?  Would you be willing to throw the people in jail?  Would you shoot them if they didn’t comply?

It is always important for libertarians to point out the government guns.  After all, virtually all laws are backed by the use of government guns.  At some point, if someone doesn’t comply with the law, then government guns will come out.  We must continually make people aware of this.

I have been hesitant to write on this subject.  Whereas everyone was tired hearing about the “fiscal cliff” back in December, now everyone is growing tired hearing about “sequestration”.  It is a confusing topic and it is hard to rely on the mainstream media for any kind of accurate reporting.  The term “sequestration” is probably not even being used accurately in these discussions.

Some people claim that we will have draconian cuts that will dramatically cut services, hurt employment, and hurt the overall economy.  There are even some who claim it will harm our defense, although I think they are really talking about offense.

Others say that these so-called cuts are not really cuts at all.  They are simply reductions in the already projected increases in spending.

This article on Forbes gives a good example of what we are dealing with.  In some ways, both sides are correct, if you cut out the Keynesianism.  If the sequester goes through and the projections hold true (which they rarely come close), then there will be an increase in overall government spending over the next ten years.  However, it isn’t as clear when you factor in inflation, which we will surely have.

There will be actual cuts in certain particular things.  On the other hand, it is also true that the overall federal budget will go up for the year.

I think we are going to see a lot more of this in the future.  It’s just a guess, but for at least the next ten years, we are likely to see these kinds of debates continue.

One of the major factors in all of this is so-called entitlements.  In particular, it will be Medicare and Social Security.  The government no longer runs a major surplus in payroll taxes.  It is actually shifting the other way around, where there is a shortage of payroll taxes in comparison to what is paid out.  It doesn’t matter if the so-called Social Security trust fund cashes in on some of its government debt or whether Congress directly funds the difference.  It is all the same.  It is just a difference in accounting.  Either way, Congress, in order to keep its promises, has to spend increasing amounts of money on these programs.  So you can have the overall federal budget going up while still seeing cuts in many programs.

Of course, even if there were actual cuts of nearly a trillion dollars over the next decade, it is still a drop in the bucket.  The government is currently running deficits over a trillion dollars in one year.  So even if these so-called cuts held, the federal government will still have accumulate another, say, $9 trillion in debt, as opposed to $10 trillion.  It is a small difference that won’t mean much in the long run.  The whole thing is unsustainable and it is just starting to unravel.

Anyone who is a libertarian, or even slightly leaning that way, should be advocating actual cuts that are far more significant.  It would be a good start to cut the federal budget by $1 trillion immediately, and stop running up the national debt.  While this would certainly be painful for many, it would start to flush out all of the malinvestment and maybe we could start on a real road to recovery.

The longer we take in getting significant spending reductions, the more painful this will ultimately be.  There is going to be a giant default down the road in some form or another.  Then these “sequester cuts” will seem like nothing.