The small island of Cyprus is getting some unexpected attention.  It was announced that there would be a one-time tax on bank deposits.  The proposal would put the tax at 9.9% for those with over 100,000 euros and 6.5% (minor correction: 6.75%) on everything else up to that amount.  So if a person had 10,000 euros sitting in a Cyprus bank, that would mean he would have 650 euros seized from him, never to be seen again.

This is part of a deal formulated by European “leaders” to bail out the small country.  It is not as if there had already been a massive run on the banks and this was some kind of a solution to solve it.  Perhaps the banks there are set to go under and this proposal was submitted to try to spread the pain around.  But ironically, this announcement, no matter what ends up being passed by the legislature, is sure to spell doom for the Cyprus banks.

They scheduled “bank holidays” for Tuesday and Wednesday so that the legislature could officially pass something and get the money while it is frozen.  If they had not shut down the banks, then bank runs would probably have bankrupted the banks within a couple of days.

But even when banks open up again, do you think depositors are going to feel like their money is safe now?  Maybe it will be safe for another month or another year.  But why would they take that risk?  If you are a person living in Cyprus and just had 6.5% of your savings taken away overnight, wouldn’t you look for another place to do your banking, even if it is inconvenient?  It is far more inconvenient to lose 6.5% of your savings.

I’m guessing that the proposal will be changed to lessen the hurt on the little guy.  But it won’t matter much now.  One thing I learned from this whole incident is that Russians make up a large percentage of deposits in Cyprus banks.  I’m guessing most Russians are going to be taking their money elsewhere, which will surely send the banks there into a nosedive.

Ironically, it would have been cheaper and easier for the European Union to just bail out Cyprus in full and not ask for anything in return.  It is a tiny country with just over a million people.  Yet it is causing shockwaves and rightly so.  It is quite symbolic of what could potentially happen with the bigger players.  So we shouldn’t be surprised to see bank runs occurring in some of the vulnerable countries like Italy and Spain, even if it happens somewhat quietly and subtly.  This in turn will just cause more problems for the banks and more economic issues overall for the euro zone.

Whenever you read someone who is talking about a grand central conspiracy to control the world and the world’s economy, just look at what happened with this debacle.  Do you really think this was planned?  It is the nature of bureaucracy and bureaucrats.  A few of the elitists made a mistake.  Even elitists can be complete morons sometimes.  They went too far this time.  If this is some kind of a grand central conspiracy, I don’t think we have much to fear.

All of this news sent the markets in turmoil.  Stocks were down.  The dollar went up.  Gold went up, despite an up dollar and despite the fact that the other metals did not go up.  The most interesting thing about reading all of the news stories today on the internet was actually the comments below in the many articles out there.  People (particularly Americans) are aware that they are being dealt a bad hand by their own government.

It will be interesting to see if this story dies down or if this was the trigger for something bigger to happen.  I still fully expect that the euro zone will eventually break apart.  I have no idea in what order or form it will happen.  If we start to see massive runs on banks all over Europe, then that alone could spell the end of the European Union as we know it.  It still may take years.  But then again, with what is happening with Cyprus banks, it may only be weeks away.

I don’t know what the effects will be on the U.S.  I will discuss this further in detail tomorrow and whether it could happen in the U.S.  For now, I expect short-term volatility in the financial markets with the chaos in Europe.  The next few days and weeks ahead could get very interesting.

A new Pope was recently elected.  Pope Francis is from Argentina and is said to be a strong advocate for the poor.  I’m guessing this doesn’t necessarily mean that he is a radical libertarian who understands that free market capitalism is the best solution to eradicating poverty.  But I am willing to give him the benefit of the doubt and I have no reason at all to doubt his intentions (unlike most politicians).

Pope John Paul II is considered one of the most significant figures of the 20th century.  He is credited for helping to bring down communism.  I guess it is a competition between him and Reagan on who gets the most credit.  I think communism was destined to fail anyway (as Ludwig von Mises predicted), but it is always good to have people who help speed it along.

I have always wondered what would happen if the Pope were to take on a libertarian message in economics.  Imagine if the Pope were to go to a country like the Philippines, which has a population of over 90 million people, about 80% of whom are Catholic.  Now imagine that the Pope tells millions of people that the state is an immoral institution and that they must have a society of voluntary trade and strong property rights in order to prosper.  Would they get mad at the Pope or would they listen to him?  I really have no idea.

For some reason, politics and religion often clash.  This goes back thousands of years.  But libertarianism in particular seems to get caught up with religion.  Just like so many other issues, there are a lot of misconceptions by those who don’t have a good grasp of what it means to be a libertarian.

It is possible to be religious and not be a libertarian.  It is possible to not be religious and not be a libertarian.  It is possible to be religious and be a libertarian.  It is possible to not be religious and be a libertarian.  And you can really be any religion and be a libertarian, assuming that your religion does not advocate the initiation of force.

Now, it is certainly possible, and even likely, that someone’s religion could influence their political beliefs.  We certainly see that with abortion.  But even with an overall world view, not just on one issue, it can play in heavily.

There are many socialists who think they are being good Christians because Jesus would have advocated giving to the poor.  The problem here is that socialists are not advocating “giving”.  If they simply held the belief that everyone should give to the poor, but do so voluntarily, then there probably would not be a contradiction.  The problem is that socialists must use the force of government to extract money from people in order to “give” it.  They are not giving their own money.

There are certainly Christian libertarians too (along with other religions), many of whom I’m sure have their political beliefs influenced by their religious beliefs.  If your religion teaches against the initiation of force, then if you actually apply it logically and consistently, you will actually find libertarianism, even if you don’t immediately understand the economics of it.

To be clear, you can be a libertarian and advocate that everyone give a portion of their money to the poor (except the poor probably wouldn’t give their money to the poor).  It is consistent with libertarianism as long as you don’t suggest that the government or any means of force be used in carrying out your goals.  You must believe in persuasion and not in coercion.

In conclusion, libertarianism is a philosophy on what you think the law should be.  It is a philosophy that believes there should be no initiation of force, or the threat of force, for political or social change.  You can have any religious beliefs you want and be a libertarian, as long as your beliefs do not conflict with the non-aggression principle.

Iran is in the news again.  Obama, in an interview with Israeli TV, said the following:

“Right now, we think it would take over a year or so for Iran to actually develop a nuclear weapon, but obviously we don’t want to cut it too close.  So when I’m consulting with Bibi as I have over the last several years on this issue, my message to him will be the same as before: ‘If we can resolve it diplomatically that is a more lasting solution.  But if not I continue to keep all options on the table.'”

It is hard to tell if Obama is just blowing smoke and trying to suck up to the Israeli lobby, or if he might actually resort to war.  I worried about this issue more when George W. Bush was president.  Bush started two major wars.  Obama has somewhat continued those wars and he has started some new ones, although smaller in nature.

I don’t expect that Obama and his handlers are planning to start a war with Iran.  They usually prefer to pick on smaller and easier targets.

With massive deficits and a still struggling economy, arguments can be made both ways.  Some people say that Obama might use war as a distraction from all of the domestic problems.  But then there is also the argument from the other side that the U.S. government simply cannot afford another major war.  The yearly deficits are over $1 trillion and the future doesn’t look much better, even with the so-called sequester “cuts” that are set to take place.  Another major war would mean massive cuts in entitlements or else even larger deficits.

If you don’t think Obama is bluffing and that we may actually see a major war with Iran, then you should be taking all of your money and putting it into gold and oil, particularly the latter.  Right now, the oil market is not indicating a large probability for war there.  If we see a major war in Iran, I think crude oil could easily hit $300 in a relatively short period of time.  It is currently less than $100.

I’m not sure if there can be an “in-between” scenario here.  I suppose that the U.S. (or Israel) could use drones and airplanes to drop tactical strikes on Iranian facilities without trying a foolish occupation like Iraq.  But even here, don’t you think there will be consequences?  You will see missiles flying into Israel.  You will probably see the Iranian government try to shut down oil routes in the Persian Gulf.  So even without an occupation, there is still a potential for a huge spike in the price of oil.

Aside from the fact that starting a war in Iran would be completely immoral, it is also bad economics.  It would damage the U.S. economy that much more and the average American would feel even more pain, this time with vastly higher gasoline prices and probably higher prices overall in consumer goods.

Let’s hope that Mr. Nobel Peace Prize is not serious with his implicit threats to Iran.  He shouldn’t play with fire, because we may all get burned.

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.