After the bursting of the U.S. real estate bubble, I was convinced that it would not happen again, or at least not any time soon.  It is fresh in people’s minds.  It is so fresh that there are still tens of millions of people who own houses that they could not sell for at least what they paid.  And many of these people are underwater, with their mortgages exceeding the assessed value of their house.  This is a consequence of  not only the sharp downturn in prices since 2006 or 2007, but also because of the low down payments that were being required by the banks and government agencies.

Since so many people were hurt by the bursting of the housing bubble, it would be hard to imagine that it would happen again.  As long as the Federal Reserve keeps inflating the money supply and causing boom-bust cycles, then bubbles will happen.  But they don’t have to happen with housing.

In addition, there are still a lot of foreclosures out there being held off the market by banks (probably at the direction of the government).  This is another factor that would make it difficult to see another housing bubble that is anywhere near the last one.

With all of that said, I am no longer completely convinced that another housing/ real estate bubble is not possible.  As long as the Fed keeps up with its quantitative easing (money creation) programs to prop up the economy, then almost anything is possible.

All of this monetary inflation has to go somewhere eventually.  The adjusted monetary base will rise to over 4 times what it was in early 2008, assuming the Fed follows through in 2013 with its latest plan to buy $85 billion per month in assets.

In addition to this explosive growth in the monetary base, the Fed is also directing its actions toward the housing market.  40 billion dollars of its monthly purchases are supposed to be in mortgage-backed securities.  And its other purchases are geared towards longer-term government debt.  This is all setting up the possibility of even lower mortgage rates on top of the already historically low rates.

It would not surprise me now if a good portion of this new money flows into real estate.  There are cheap rates, low prices compared to 5 years ago, and it is a hard asset.  If the money supply keeps going up at high rates and velocity starts to pick up, then people will be turning to hard assets.  This could be gold, silver, oil, other commodities, baseball cards, antiques, or stocks.  It could be some combination of these things.  Of course, real estate is also a hard asset and a good rental property can also pay a fairly consistent “dividend” in the form of rent.

So whether or not we see another real estate bubble will be determined by the Fed, just as the last one was.  If people start to sense that there will be no end to the new money creation, then we could see people flocking into hard assets.  It would no longer surprise me if real estate is one of those things.  The only question will be if it gets as bad as it did just a few short years ago.

It really amazes me how many people are out there who talk and write about a subject, yet have little clue about how wrong they are.  There are people like Paul Krugman, who I find hard to believe are stupid.  In his case, I think he is a fraud, but I’m not positive.  But I do know there are a lot of people out there who really just don’t understand what they are talking about.  There are also some who have some understanding, but have no idea how to articulate what they want to say.

I received this comment recently in response to a blog post I wrote 5 months ago:

“The purchase by the Fed of Treasury debt obligations on securities, could be inflationary only if the economy were at full production and full-employment. Inflation does not occur automatically if new money is created and introduced into the economy. If the additional dollars are able to match up with available materials, productive capacity and wages to newly hired employees at current prices, there will be no inflation.
Since creation of new money is the result of deficit spending, it would be the responsibility of the Congress and the President to determine that deficit spending is not likely to be inflationary. In a deep depression or recession, deficit spending is not going to be inflationary.”

With the recent tragedy that took place at an elementary school in Connecticut, it seems that nearly everyone is clamoring for some kind of a solution.  Some people want armed guards in all schools across America.  Some want teachers to carry guns.  Others want more gun control.  Some on the left go so far as to wanting all guns banned.

While it is a great tragedy, it doesn’t mean there is necessarily a grand solution in preventing something similar from happening again.  There are crazy people out there and we live in an uncertain world.  As long as we live in a somewhat free society, it is impossible to achieve total safety.

From a cost/ benefit analysis, the answer is to do nothing.  It is hard for people to do a cost analysis when you are dealing with human life, but it is happening all the time, whether you like it or not.  On an average day, there are about 4 times as many deaths in America from car accidents as the number of deaths from the school shooting in Connecticut.  That is in one day.  If you are going to put armed security guards in every school across the country, wouldn’t it make much more sense to put roll cages on every single car?  It would save hundreds of times more lives.

Of course, this whole incident is being used as an excuse for more gun control.  However, you can’t get any more gun control than at a typical school, where guns are banned.  Unfortunately, the bad guys don’t seem to want to follow the rules.  The same thing would happen if all guns were banned.  Many of the good guys would give them up, while the guns would remain in the black market.

One other obvious point to libertarians is that the government doesn’t impose gun control on itself.  Having an armed citizenry is not only important for self defense against street criminals.  It is just as important, or perhaps more so, to have a last line of defense against your own government.  There was strict gun control enforced upon the Jewish people who lived in Germany in the 1930’s and we all know how that ended.

Regardless of what you think about guns and what the laws should be, I will tell you this.  GUNS WILL NOT BE BANNED IN AMERICA.

It doesn’t matter what Obama says.  It doesn’t matter what Diane Feinstein says.  It doesn’t matter what people at the United Nations say.  Guns will not be banned in America.

It is estimated that almost half of American households own a gun.  I’m sure it is much less than this in the big cities, particularly in the northeast and west coast.  I’m sure the numbers are much greater in rural areas and in the south.  But a lot of Americans own guns.  Americans own more guns, even on a per capita basis, than any other country.

There will be no gun ban.  A lot of people are worried about Obama right now.  This is the opposite of a self-fulfilling prophecy.  Because there are so many worried people, it won’t happen.  What police unit or military unit is going to go door to door in the south to collect guns?  They would be safer in Iraq.

If we see anything, it will be tinkering around the edges.  It will be mostly symbolic.  There may be a ban on certain “assault weapons”.  There may be a change in the so-called gun show loophole.  The worst I can imagine is an additional tax on guns or bullets, but even that I would find hard to believe.

So if you are worried about Obama taking your guns, you don’t need to be.  But then again, I don’t want to tell you that.  Keep worrying.  Then I will know for sure that it won’t happen.

There is an email circulating that is asking people to support a proposed 28th Amendment to the U.S. Constitution.  It is saying that people in Congress get exempted from certain laws and that the law should apply equally.

The text of the proposed amendment is as follows:

“Congress shall make no law that applies to the citizens of the United States that does not apply equally to the Senators and/or Representatives; and, Congress shall make no law that applies to the Senators and/or Representatives that does not apply equally to the citizens of the United States.”

I’m sure that many people will support this amendment, thinking that the politicians in Congress should not be getting away with these things.  However, I think there is something that most people fail to realize.  If this amendment were to pass and be properly enforced, then it would, in effect, abolish Congress.

While the website promoting the amendment addresses specific things like healthcare and Social Security, it fails to understand the key point that makes governments (as we know them today) unique.  The reason that a government is a government is because it exempts itself from the laws that it makes.

If this amendment were held true to its words, then Congress would not be able to tax us, start wars, enforce regulations, or do almost anything at all.  The only way that Congress and the government in general can do anything is because it is legally allowed to do what no individual citizen could do.

If you or I were to steal money or property, it would be called theft and we would be thrown in jail.  If the government does it, it is called taxation.  If you or I were to print fake money and try to use it, then it would be called counterfeiting.  When the government does it (via the Fed), then it is called monetary policy.  When we kill someone, it is called murder.  When the government does it, it is called war or collateral damage.

So as far as having laws apply equally, there is really only one that is necessary.  Tell Congress that they may not initiate force or the threat of force, as it is illegal for the average person.  If just that one thing would be applied equally, then Congress would essentially be abolished, or at least be in a minarchist state.

I don’t think the people proposing this amendment, and probably most of those supporting it, understand the unique feature of government.  Government is unique because it possesses the legal monopoly over the use of force.  Take away this one power and we have a libertarian society.

Gold is about to end the year with its 12th straight year of gains.  Of course, it hasn’t been straight up.  The fall of 2008 took gold down, along with stocks, but the price still ended the year higher than where it had started.  While you can’t get much more bullish than 12 straight years of gains, there is not a lot of excitement out there for gold right now, especially considering the circumstances.

Gold, while making slight gains in the last few months, seems to be stuck.  There seems to be a ceiling in the mid 1,700’s.  There also seems to be a floor just below 1,700.  Perhaps this is due to central bank buying, but it is anyone’s guess.  And aside from the metal itself, gold stocks have done especially poorly in the last 4 years or so.

So where do things go from here?  If anyone can tell you for sure, then he should be really rich.  Nobody knows for sure where the gold price is going, just like any other investment.  However, my best guess right now is that 2013 will be another up year for gold, at least in nominal terms.

The only way I can see gold not having a strong year in 2013 is if we have a really bad recession.  While this is certainly a possibility, the Federal Reserve is trying its hardest right now to kick the can down the road.  While it may be able to avert a recession in the short run, ultimately its policies will fail.

If we do go into a deep recession in 2013, then it will likely keep price inflation in check.  The demand for money will go up, which will, in effect, counteract the increases in the money supply.  So if we are in a bad recession and there is low price inflation, then the Fed might move on to another round of so-called quantitative easing (QE) and pump even greater amounts of money.  It is already scheduled to add $85 billion per month to its balance sheet.

So even if we do have a recession in 2013, the Fed will probably just continue to make things worse, which will ultimately make things better for gold.  And if we don’t have a recession in 2013, then gold should do quite well in the short term.  Either way, recession or no recession, gold is probably a good buy right now.  The only question is if there will be an even better buying opportunity in 2013.

If you are like me and you are betting on a higher gold price, then you can invest in gold by buying the actual physical metal or something like an exchange traded fund (ETF).  There are also companies where you can purchase gold and have them store it for you.  These are the best ways to play the price of gold.

So what about gold stocks?  These are a little trickier.  We have seen gold stocks do much worse than the gold price in recent years.  But it doesn’t always have to be this way.  I think gold stocks are far riskier, but they also offer more reward because of the high leverage.  If we hit a gold euphoria stage (and we haven’t yet), then I can envision gold stocks really taking off.  You could see some stocks go up ten-fold easily.  But just as a word of warning, if we do get a recession in 2013, expect gold stocks to get really hammered down.

In conclusion, I think gold, as an investment in the short term, will depend upon whether we have a recession in 2013.  But either way, it should be a strong investment over the next few years.  There is no sign of big price inflation yet and the Fed will be creating money out of thin air as fast as Congress can spend it.

Since the latest FOMC statement, it is surprising how little impact there has been.  With the Fed starting QE4, or whatever we want to call it, there has not been a strong reaction from the stock market.  In fact, the market ended up down today (Thursday), the day after the announcement.  So a day after the latest QE (so-called quantitative easing) is announced and stocks, bonds, and gold are all down.

I have always liked the analogy of injecting monetary stimulus into the economy to a drug user shooting up and getting high.  Just like the economy, the drug user has to continually inject more drugs into his body.  If he doesn’t, he will have severe withdrawal symptoms.  But the more he injects, the more severe the pain will be down the road.

There gets to a point where the drug user injects even more and it doesn’t even give him a high. It seems to have little effect.  So while he doesn’t feel any better from the latest injection, he has made his condition even worse and will suffer an even more painful withdrawal in the near future.

This is what has happened with the latest Fed monetary inflation announcement.  With past QE announcements, at least the stock market went up.  This time, it is not even doing that.  No matter how hard the Fed tries now, it can’t give a boost to the economy.  But it is making the conditions worse for a more painful downturn in the future.

It has been a struggle between recessionary forces and inflationary forces for a while now.  Think of a tightrope walker who is losing his balance.  He keeps tipping from one side to the other.  In order to prevent himself from falling, he has to overcompensate and then ends up leaning too far to the other side.

The Fed is fearing another deep recession and is trying to overcompensate with monetary inflation.  If it “succeeds”, then we will have massive price inflation ahead.  If its QE schemes are not enough, then we will go into recession anyway.  If it somehow finds the right balance, then it will prolong things a little while longer.  But eventually it will run out of rope.  We could end up with a scenario of the 1970’s where we have high price inflation and recessionary conditions at the same time.  Unfortunately, if we see a repeat of the 70’s, we should consider ourselves lucky.  It will probably end up being worse.

I really believe that Bernanke and the Fed don’t know what they are doing at this point.  Nothing has worked and they keep making things worse.  While I think that ultimately the legal tender laws should be repealed and the Fed should be stripped of its monopoly power over money, we at least need someone like Paul Volcker right now.  The monetary inflation must stop and Congress should be forced to cut spending in the face of rising interest rates.  Until then, they will only continue to damage the economy and make the coming economic troubles worse.

A man with a white beard delivered an early Christmas present.  While he might like to think of himself as Santa Claus, unfortunately he is not.  He is Ben Bernanke.  They both like to deliver gifts, but Santa delivers toys that are made by elves.  Ben delivers stimulus at the expense of other people.

The FOMC released its statement from the December meeting.  Another round of monetary expansion has been announced.  This is on top of the announcement from September.  September’s announcement was labeled as QE3 or QE Infinity.  I’m not sure what that makes this December announcement.  It can’t really be QE Infinity plus 1.  Perhaps we could call it QE 3 and a half.  Or QE4.

The Fed will buy $45 billion per month in longer-term Treasury securities.  I assume this is net, because the statement also says that it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities.  So with $45 billion per month in government debt and $40 billion per month in mortgage-backed securities (announced in September), the Fed will be adding about $85 billion per month to its balance sheet.  If it does this for all of 2013, then the monetary base should go up another $1 trillion.  Just remember that it was less than $1 trillion before the fall of 2008.

While the monetary base has not really gone up yet since the September announcement, I assume that the Fed is not bluffing here.

The other thing in the statement that may have received even more attention is that the Fed will keep the federal funds rate at 0 to .25% as long as unemployment stays above 6.5%.  Or at least that is what most of the headline articles are saying.  But we have to read the fine print.

The statement says, “In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”

With all of this monetary inflation, it is not hard to imagine seeing price inflation go up to 3 percent or more very quickly.  So, in other words, the statement regarding unemployment is meaningless.  Of course, it is meaningless anyway because the Fed isn’t directly controlling the federal fund rate now anyway.  The commercial banks have massive excess reserves from the Fed’s previous monetary inflation.  Unless the Fed drastically raises reserve requirements or forces the banks to lend, then the federal funds rate isn’t going up anytime soon anyway.

While I don’t think the comments about the federal funds rate are significant, I do think the announcement of more monetary inflation is significant.  It is a further misallocation of resources.  It is further damaging the economy and encouraging less savings.  We will all pay for this with a lower standard of living.  If you have been procrastinating in buying gold investments, I wouldn’t procrastinate any more.

Since it is Christmas time, it is a good time to discuss its effects on the economy.  It is a common question for people to ask if Christmas shopping is beneficial to the economy.  I have discussed this before and it is a basic element of economics that is important to understand.

There is this common misconception that spending drives the economy, particularly in the U.S.  If this is the case, then surely Christmas time must give a real boost, since the average American family spends far more in late November and December than at any other time of the year.

The whole notion of helping an economy through consumer spending is one big fallacy.  It is a Keynesian fallacy.  While spending may temporarily make things look better, it only means that there will be less to consume later.

A society can only consume what is first produced.  Without any production, there is no consumption. So in this respect, the long-term consumption habits of a society are actually a decent measure of productivity, unless the society continues to save vast amounts of capital.  But it is important not to confuse correlation with causation.  Spending does not cause productivity.  Productivity is what allows us to spend.

It is also important to note that spending is not a good measure of productivity at any given time.  A society could currently be consuming more than it is producing based on previous productivity.  This will be a problem down the road.  A lack of savings and capital investment now will lead to a lower standard of living in the future.

If consumer demand were all that mattered, then virtually every place inhabited on earth would be wealthy.  Does anyone actually think that people in India and Africa are poor because they don’t have enough consumer demand?  That is ridiculous.  I’m sure most poor people would love to have big screen televisions and iPods and fancy cars.  The reason that people in a society are poor is because productivity is low.  The reason productivity is low is because of a lack of savings and investment.  The reason for the lack of savings and investment is usually due to a lack of free enterprise and property rights.

Just to be clear, there is nothing wrong with Christmas shopping and spending.  If the spending is sustainable, then you are simply reaping the fruits of your labor.  Each individual has the choice of what they want to buy and how much they want to spend.

But just as a society can only consume what it first produces, the same is generally true of individuals and families, assuming minimal government welfare.  If you produce more than you consume, then the difference is your savings.  In order to consume more than you produce, then you must draw down prior savings or else get someone to lend you the money.  The lender is counting on your future production to get paid back.  And just like a society, an individual’s long-term spending habits are probably somewhat reflective of his productivity.  If the individual consumes beyond his productivity, then it won’t be sustainable and he will be forced to cut back on his consumption.

In conclusion, while there is nothing wrong with spending, including Christmas shopping, it does not cause a boost in the economy.  If you want to spend more in the future, whether we are talking about a whole society or an individual, then you must produce more.

Ron Paul is looking better and better every day.  That is because most everyone else is looking worse and worse – at least in Washington DC.

I don’t think most people, whether they are supporters or not, realize how much of a one-of-a-kind guy Ron Paul really is.  It is hard to find people in history that come close to matching him.  He was elected into Congress by campaigning as a libertarian and, even more astonishing, actually held true to his principles.  Sure, libertarians can quibble over a few tough votes over his more than 22 years in Congress, but he basically held true to his beliefs the whole time.

It is hard to find people in history like this.  Thomas Jefferson, while a great defender of liberty, was a terrible president.  Andrew Jackson was probably one of the few politicians who was actually more pro-liberty when in office, but he was certainly no libertarian by Ron Paul’s standards.  Grover Cleveland was pretty good as president.  Howard Buffett, father of big government Warren, was probably the second best congressman for liberty in the 20th century (Ron being the best).

While I have known for a while that Ron Paul is truly unique, this past week has just solidified it even more in my head.  Last week, Rand Paul (Ron’s son) made the disgusting move of voting for the National Defense Authorization Act.  The senate bill that he voted “yes” on is anti-liberty in too many ways to name.  While Rand never claimed to be a libertarian, he did try to take the mantle of being a libertarian-leaning conservative.  Sure, compared to John Boehner and Mitch McConnell, it is not hard to be relatively libertarian.  But Rand’s vote for the NDAA should prove to everyone that he is a politician first and he will always play politics when it suits his needs.  His principles come second.

Another interesting incident happened with Justin Amash, a congressman from Michigan.  When he was first elected a couple of years ago, Amash said that he would vote similar to Ron Paul.  Now after having been re-elected, Amash commented about the “fiscal cliff” and the debt problem.  He reportedly said, “I am not going to take anything off the table if we can resolve some of our biggest issues as a country.”

In other words, Amash is willing to increase taxes and hand even more money over to the government. He hasn’t even been a congressman for two years and he has already failed to live up to Ron Paul’s standards.  What kind of a libertarian would consider raising taxes when the government is spending over 3 and a half trillion dollars per year and taking about 20% of the GDP, while making up the difference through borrowing and monetary inflation?

I think most of the people attracted to politics are drawn to power.  Because there is a lot of power available in Washington DC, it tends to attract the worst elements of society.  But I’m sure that some people go there with good intentions.  However, it is obvious that they cannot avoid the temptations.  They ultimately cannot resist the power.  Power corrupts.

The recent votes by these two politicians, who are generally considered pro-liberty, should be enough to prove to libertarians that our answers do not lie in politics.  It is not about electing the “right” people into office, because most people cannot be trusted with power.  The only way to win this fight for liberty is through education.  When there are 10 million people who are willing to withdraw their consent, then we have a real chance of achieving something big.

Libertarians have to realize that Ron Paul’s career in Congress was really unique.  He is a rare person who did not get corrupted by the power that was available.  Instead of trying to duplicate his success in being elected, we should instead try to duplicate his success in educating others.  While political office can serve this goal, it is rare that anyone uses their platform strictly for educational purposes.  With the internet and with Ron Paul’s popularity to build on, we don’t need political offices for success.  We just need more education.  As hearts and minds change, so will policy.

With mortgage rates at or near all-time lows, and with the expectations of possible lower rates due to QE3, many people are wondering if they should refinance their mortgage.  The mortgage rates tend to be highly correlated to the 10-year treasury yield.  As of this writing, the 10-year treasury is at about 1.64%.  This is near the record low that was reached about six months ago, when the yield went just below the 1.5% mark.

It is impossible to know for sure what happens from here.  The Fed announced QE3 back in September, in which it promised to buy $40 billion per month in mortgage-backed securities.  While it hasn’t shown up in the adjusted monetary base yet, this should lower mortgage rates, assuming the Fed ends up following through on what it said.

Of course, there is a possibility that all of this monetary inflation leads to price inflation, which then in turn leads to higher interest rates.  This would eventually be bad for mortgage rates, but it is hard to know if this is right around the corner or if recessionary conditions will keep price inflation relatively low for a few more years.

So here is my suggestion regarding the decision to refinance, assuming that you are in a position to do so.  If, for example, you currently have an interest rate at 5%, and your home equity and credit score are good enough that you can get a 30-year fixed rate mortgage for 3.5% or less, then I would suggest refinancing now.  This is assuming that you plan to not sell your house within the next few years.  There would be enough of a difference in your monthly payments to justify a refinance now.  If rates go down to below 3%, you will not have lost out on that much.  But if rates jump higher sooner than expected, then you will lose out.

On the other hand, if you are right on the margin, it would probably pay to wait.  If you have a current rate of 4% and you can get a new rate at 3.25%, then you can take the chance of waiting for an even lower rate.  If you are wrong and rates go higher, the difference won’t be enough that you will be really mad at the lost opportunity.  But if rates go below 3%, then it may be worth it to you at that point to refinance, assuming that your refinancing costs are a low enough percentage as compared to your loan value.

The Federal Reserve is subsidizing the banks and the government, and it is misallocating resources on a grand scale.  But if you can take advantage of low rates on a refinance and save yourself a hundred dollars a month or so, then you should take what you can get.  If you are right on the margin of whether a refinance is worth it, then I suggest you wait.  If you can significantly improve your position now by refinancing, then don’t wait.