The issue of school vouchers is a highly divisive one.  It is even controversial within the libertarian community.  The libertarian argument in favor of school vouchers is similar to that of conservatives.  They see the government-funded school system as wasteful and in the hands of the teachers unions.  They see the lack of accountability and want some kind of a change.  They figure they can just hand a big check to parents each year to determine the school of their choice and that it couldn’t be any worse than what we have now.

There is a strong case to be made against school vouchers from a libertarian standpoint.  This is the position that I take.  It is completely different from those on the left who oppose school vouchers because they want the status quo.  I do not like the status quo at all.  I don’t believe in government education.  As I have written before, government education is a form of welfare.

As with most issues, there are two arguments to be made against school vouchers from a libertarian standpoint.  There is the moral argument and there is the pragmatic argument.  Today, I will focus on the moral argument against vouchers.

Libertarians generally believe that force or the threat of force should not be used for political or social change.  While I kind of stole that from the Libertarian Party pledge, it applies to all libertarians, whether or not they are a member of the actual party.

School vouchers does not change the fact that people are being threatened with force to obtain their money.  In fact, school vouchers don’t even reduce the amount being confiscated in most cases.  Most advocates of vouchers are not proposing a dramatic decrease in education funding.  They are just changing the direction of the funding.  Instead of the money going directly into the school systems, the money will first go to the parents, who will then decide on where the child and money go.

School vouchers are still welfare.  It is still a redistribution of wealth.  There is no way around it.  There are many people who never have kids, yet they are forced to pay for other people’s kids.  For those who have kids, the numbers vary.  Some have just one child, while others may have 4 or more.  Yet, when people pay their property taxes, it is based on the rate of the tax and the value of the property.  It has nothing to do with how many kids you have.  If anything, the money coming from Washington DC for education comes disproportionately from those with fewer kids or no kids, because they do not get the extra tax credits and deductions.

School vouchers would not reduce government in any significant way.  They would not eliminate or even reduce the amount being confiscated, so it is hard to make a libertarian argument in favor of them.

As we will see in Part II, there are also pragmatic reasons to be against vouchers for libertarians.  They may not necessarily improve education and they could make things worse.  Stay tuned.

I received a comment recently from an anonymous person.

This person sounds like a fairly typical example of a somewhat average American.  Perhaps you could say this person is somewhat of a typical example of an average American who reads my blog, since the person has some gold investments.

It is hard to comment precisely, not knowing details about family, location, income, total savings amount, and risk tolerance.  But I can make some comments that might be helpful.  Since others may find them helpful, I decided to write a separate post, instead of just a response in the comments.

First, I think this person is on the right track.  He (I will assume this is a “he”) has a good portion invested in gold and silver (hopefully more gold than silver).  He has some of his savings in cash or cash equivalents, which is actually a good position to be in right now.

It is good that he is only contributing to his 401k plan up to the company match.  You should never go beyond this.  I have written about the risks involved with 401k type plans before.  If your contributions are hurting your other savings to a large degree, then you might even consider not contributing to the 401k.  Yes, I know every financial advisor out there is screaming.  But 401k money is the most illiquid savings you can have, especially when your employer won’t let you withdraw your own money.  It is more important to have an emergency fund that you can actually access, than a 401k.

He did not say what his investments are in his 401k plan.  Hopefully it is well diversified.  Some plans allow you to opt in to a special brokerage link account where you can buy any mutual fund that you want.  You would probably have to fill out a special application for this.  If your company allows this, then you should do it and you can then put the majority of your 401k money into PRPFX.

I would not start a regular IRA.  If you are going to start an IRA, then go with a Roth.  At least you can withdraw your principal money (not any gains) before hitting retirement age without getting hit with a penalty.

For the brokerage account, this person can set up something similar to the permanent portfolio using ETFs.  I have written about this strategy before.  He is already doing one portion with a gold ETF, probably GLD.

I’m not sure the total net worth of this individual.  He says that he has some of his savings in cash though.  If he is in a decent location, he might want to consider investment real estate.  If he could just buy one three-bedroom house and put 20% down, it might be a good payoff in the long run.  Mortgage rates are historically low and housing prices are low, depending on where you live.  This should generate positive cash flow for the average month.  If it doesn’t, then it shouldn’t be done.

Of course, there is also the option of paying down your mortgage if you own a home and have a mortgage.  This is a guaranteed rate of return equivalent to the interest rate on your mortgage.  It is a good compliment to gold holdings that hedge against inflation.  Paying down your mortgage is more of a hedge against deflation.

Overall, I encourage everyone to set up the majority of their investments (outside of real estate) into something similar to the permanent portfolio.  You will probably sleep better at night.

While the price of gold in terms of U.S. dollars has been fairly steady over the last several months, that hasn’t been the case for gold stocks.  Most gold mining companies have been hammered, particularly in the last year.

Fidelity’s gold mutual fund (FSAGX) is down over 30% over the last year.
GDX, a gold mining ETF, is down about 30% over the last year.
GDXJ, a junior gold mining ETF, is down a whopping 49%.

This is why gold stocks should not be part of your permanent portfolio.  They should be left for your speculative investments.  It is obvious why by looking at the recent performance.

So where do gold stocks go from here?  It is a tough question to answer and I think it will all depend on the direction the economy takes.  If we fall back into a recession (not that it seems like we ever got out of one), then gold stocks are likely to continue their poor performance.  If a recession is averted, at least for a little while, then we could see gold stocks resume an uptrend like we saw years ago.

Much of this will depend on the Federal Reserve.  The adjusted monetary base has been flat since QE2 ended just over a year ago.  The Fed is on hold, waiting to see what happens.  It is possible that it is waiting for another crisis like we saw in 2008 where it bailed out the big banks and financial institutions.  It is possible that the Fed will give in to pressure to boost the economy if the stock market turns down significantly or even if unemployment stays high.

If the Fed starts creating new money out of thin air again on a regular basis, then I would expect gold to start another run up.  I would also expect that gold stocks would then reverse the downtrend and go up. If that happens, then now might be the deal of the decade with how much of a beating the gold stocks have taken.

If the Fed stays tight and the economy falls into recession, then gold stocks will likely continue their fall, especially with a fall in the broader stock market.

Owning investments that reflect the price of gold are still much safer than owning gold mining companies.  If you try to speculate on some gold stocks, or funds that invest in gold stocks, just be sure that it is money you can afford to lose.

The top headline on Drudge Report today is, “Canadians Now Richer Than Americans”.  It links to an article by U.S. News that says the average Canadian household is worth about $40,000 more than the average American household.  The article claims that this is the first time in recent history.

The article states, “The net worth of the average Canadian household in 2011 was $363,202, compared to around $320,000 for Americans.  It goes on to point out that the Canadian dollar has caught up to the U.S. dollar and the two currencies are at about par.

The U.S. and Canada have been somewhat similar for a long time now, although there is certainly a perception that the U.S. is still somewhat better in terms of economic growth.  There was probably a certain element of truth to this in the past, as Canada does have a little more of a welfare state.

There are several reasons contributing to the average net worth being higher for Canadians.  Some of them are good and some are bad.

As the article points out, “real estate held by Canadians is worth more than $140,000 more on average and they have almost four times as much equity in their real estate investments.”  The last part is good.  More equity means that Canadians have saved more, at least in a sense.  It means that more Canadians will reach the point of paying off their mortgage and freeing up their incomes for other things.

The fact that Canadian real estate is worth more than real estate in the U.S. is not necessarily a good thing for Canadians.  The Canadians may be richer on paper in this respect, but it doesn’t necessarily translate into wealth.  We should all know that from the peak in the housing bubble, approximately 6 years ago.

It is likely that parts of Canada are having a real estate bubble of their own now.  Have you seen the prices of houses in Toronto?  It looks like parts of California and Florida did 6 or 7 years ago.  If the real estate pops in Canada as it did in much of the U.S., then it will show that some of this wealth was illusory and there probably isn’t much of a difference between the two countries in terms of wealth.

As far as government policies go, there are also differences that are good and bad between the two countries.  As mentioned, Canada is a bigger welfare state.  Canada has higher taxes.  There is a national sales tax there.  These are all negatives.

On the other hand, Canada is not as entrenched in the warfare state.  While Canada has symbolically supported the U.S. in its wars abroad, the expenditures do not come close to matching the U.S., even on a per capita basis.

Another difference is that the central bank of Canada has been a little better than the Fed in the recent past.  Of course, if Canada experiences a real estate bust, maybe the central bank there will be stupid enough to follow in Bernanke’s footsteps and create new money out of thin air like crazy.

Overall, despite some differences, Canada and the U.S. are very similar.  I don’t really see Canadians as being wealthier than Americans.  It’s not to say this couldn’t happen in the future, but that will depend on government and monetary policies.

I have written about the recent performance of PRPFX.  Yesterday I wrote about the stock holdings in PRPFX.  Today, I will discuss the silver portion.

One of the main reasons to invest in the permanent portfolio as described by Harry Browne is that it provides diversification in almost any economic environment.  It tends to do the poorest during a recession, but these are usually short-lived and there is also a tendency for stable or even declining prices during those times.

The primary protection for the permanent portfolio in an inflationary environment is the 25% devoted to gold and gold related investments (but preferably not gold stocks).  There is some additional protection with stocks, but even stocks did not hold up too well in the 1970’s when there was high price inflation in the U.S.

The mutual fund PRPFX does things a little different.  It holds approximately 20% in gold and 5% in silver.  While the overall percentage in metals is the same as the regular permanent portfolio, the mutual fund deviates with silver.  The regular permanent portfolio does not have silver at all.

This is a fairly small percentage (five percent), so a major drop in silver isn’t going to completely crush the mutual fund.  However, it can make a little bit of a difference, and it can be good or bad.

Silver is far more volatile than gold.  In a boom of precious metals, silver is likely to outperform gold.  In a bust period of precious metals, silver is likely to fall much further than gold.

Another difference is that silver is used more as an industrial metal.  While silver has some history of being used as money and gold has some uses outside of being money, gold is heavily favored over silver when being used as a form of money.  In a recession, silver is more likely to go down due to its uses as an industrial metal.

Another interesting aspect is that central banks and governments hold gold.  They don’t usually hold silver.  In the past, this could have actually been a reason to prefer investing in silver over gold because central banks had more of a tendency to sell gold, thus driving down its price.  Today, I would say the opposite.  Central banks all over the world are actually increasing their gold reserves, probably because of the shaky financial system and the growing mistrust of fiat currencies.  This has seemed to put a floor on the price of gold.

As far as PRPFX, what does this mean?  It means that it will tend to be more volatile.  One of the great attractions about the permanent portfolio setup is that it tends not to move in wild swings.  You don’t feel like you are on a roller coaster the way pure stock market investors have felt over the last 4 years.  By adding a little silver to its fund, PRPFX can potentially be a little bit more volatile than the regular setup.  In a high inflationary environment, it will probably pay off.  In a recession or depression, it will probably mean bigger losses, or at least less gains, assuming that precious metals take a big hit.

In conclusion, while it would seem that having 5% in silver would add diversification, it actually makes the fund more volatile.  This may not be a bad thing for younger and more aggressive investors, but you should at least know that there is a slight amount of increased risk due to this allocation.

For those who follow me, you know I am a big advocate of setting up your own permanent portfolio as described by Harry Browne in the book Fail-Safe Investing.  Since investments are dependent on human action, nobody can predict with absolute accuracy what stocks and other investments are going to do in the future.  It is even harder in trying to time such investments.  Therefore, I suggest that you put at least half (for risk takers) or closer to all (for conservative investors) of your investments into a setup like the permanent portfolio.  This would not count investment real estate.

I recently wrote a piece about the mutual fund PRPFX and its performance.  I said that it did not do a near perfect job of emulating the actual permanent portfolio, particularly because of the holdings in Swiss francs.

There is another aspect of PRPFX that differs from the permanent portfolio as described by Harry Browne.  The fund invests in individual stocks instead of the broad stock market.  For example, PRPFX holds BHP Billiton, FedEx, and Wynn Resorts, among others.  To be fair, none of these holdings make up over 1% of the fund.  However, it should be noted that according to the regular permanent portfolio setup, only 25% should be in stocks.  Therefore, if a stock had only a 0.5% weighting in PRPFX, it would actually be about 2% of the stock portion.

If any one company were to go bankrupt overnight, then it would not hurt PRPFX by any more than 1%.  This is really the purpose of mutual funds.  It diversifies risk, particularly with individual companies.

The main reason I point this out is because I want people aware that PRPFX is not the same as the permanent portfolio as described by Harry Browne.  The fund is actually speculating in stocks, even if it is in small amounts.  If it were true to the permanent portfolio, then the stock portion of the fund would just invest in the overall S&P 500 or even a broader stock market fund.  It would not be trying to pick individual winners.

I’m sure the managers at the PRPFX fund have done their research and found these individual holdings to be solid companies.  You may benefit with a higher return if you are invested in PRPFX.  However, I just want to reiterate that it is a form of speculation, even if much less so than the average mutual fund.

I still believe PRPFX is a simple and easy way to put at least some of your money into a setup that is at least close to the actual permanent portfolio.  It is just important to know what you are buying when you do so.

James Altucher has written an article on his past.  He calls it a resume, but I certainly wouldn’t say half of the things he’s done on my resume, even if it were true.  For those of you who read LewRockwell.com, there are often links to Altucher’s articles there.

I would not imitate Altucher.  There are certain things to admire about the guy, but overall his life has been a disaster, even with all of his successes.  He writes a great blog and I would encourage people to read it.  You can learn some things of what not to do.

With that said, Altucher does offer some great motivational advice too.  He seems to be quite honest in his writings and it serves him well.

For someone who wants to imitate Altucher, I really say, “don’t do it”.  There are certain qualities to imitate (particularly the honesty thing), but some of his better characteristics are part of his personality.  If you are capable of imitating his good characteristics and staying away from the bad, then go for it.

One thing in particular that you can learn from reading Altucher, especially about his past, is that it is important to remain humble in life.  This goes for your investments, your money, your business, your job, your relationships, and virtually everything else.  I have seen it too many times where someone thinks he is on top of the world and then comes crashing down.  It is often the result of not remaining humble.  If that wasn’t the cause, then being humble would have at least made it easier on the person when they fell down.

There is a difference between being humble and not being confident.  You can be confident in yourself and your abilities while still remaining humble.  It is important not to cross that barrier of becoming over-confident when you think you are indestructible and that nothing can go wrong in your life.

Stepping over that line costs people their jobs, their money, and even their relationships.

You can see that with Altucher’s resume.  He did not remain humble.  It seems like he has learned from his past and is more humble now, but who knows?

The funniest part of Altucher’s piece is when he tells of a job he had for about a week.  He writes, “One day, in the middle of a meeting I had set up I said, ‘excuse me for just one minute, I have to go to the bathroom’ and I walked out of the meeting, walked out of the building with my coat, walked to the subway, went to Grand Central, and never came back to the office.  Never returned their calls afterwards.”

This is funny on the one hand and also creates some jealousy on the other.  There are a lot of people who would love to do that.  They would love to be able to just get up and leave their job because they don’t like it.  The problem is that most people don’t have the financial freedom to do it.  If they did, they probably wouldn’t be in the job in the first place.  For the few that might have the gall to do this, they probably shouldn’t because they need the income to support themselves and their family.

If I were an employer looking at Altucher’s resume, there is no way I would hire the guy.  He is the epitome of irresponsibility.  He made millions and lost it all.  He didn’t take his work seriously.  It seems that his blog is the first job in his life that he actually takes seriously.  While I wouldn’t hire the guy, I might consider him as a consultant.  He is full of ideas and some of them are actually pretty good.

We can all learn from people like Altucher.  He was not humble and he got crushed.  But I like his writing and his creativity.  Some of his writings can be uplifting.  I will continue to read his blog posts that interest me and I would encourage others to do the same.  I just wouldn’t imitate his past life.  If you do, just imitate the good parts.

I occasionally like to review the chart of the adjusted monetary base.  You can view the shorter-term chart here.  For a better look at what has happened in the last several years, you can view the chart here.

While there has been some zig-zagging over the last year, it is interesting to note that the monetary base is almost at the same exact level as it was just over a year ago when QE2 ended.  So after the major explosion in the monetary base since the fall of 2008 through June 2011, the Federal Reserve has actually been in a tight monetary mode.

We constantly hear in the mainstream financial media about the possibility of QE3, we hear about Operation Twist, and we hear about the federal funds rate.  But this stuff really doesn’t mean much right now.  What does matter is the money supply that the Fed is controlling right now.

I like to use the adjusted monetary base because it seems to be the best indicator of what the Fed is actually doing.  Right now, the Fed has stabilized the money supply and this could be a strong indicator for another recession.

Most of us who paid attention to the monetary base back in 2008 and 2009 would have expected significant price inflation to follow.  But it hasn’t happened, or at least not yet.  Something unique happened then that was not common at that time.  The commercial banks actually increased their excess reserves way beyond the reserve requirements.  Instead of loaning out all of this new money, they decided to park it at the Fed and earn a quarter of a percent of interest.  This, along with the recessionary fears, helped to keep price inflation way down.

I don’t think the Fed is going to start QE3 (more money creation) for a slight downturn in the economy or stock market.  The Fed has bigger fish to fry.  They have to hold back right now in case there is something more serious that comes along, particularly another banking crisis.

If the Fed started QE3 now and then there was a banking crisis, then it would have to move to QE4 with the possibility of massive price inflation.  The Fed officials would rather keep their powder dry for now and save their money creation for when it is really needed.  They will bail out the banks before they bail out the whole economy.

If the Fed keeps its current monetary policy in place, I expect we will see another recession.  The recession from 4 years ago was never allowed to fully happen.  Since then, there has been a lot more misallocation of resources that needs to be corrected and flushed out.  I suppose the big question at that point will be whether the Fed starts another round of digital money printing or if it allows a deep recession to occur.  Hopefully it will be the latter, but I wouldn’t bet your gold on it.

I have been hammering away at the Republican politicians for the last couple of weeks, particularly those found in Washington DC.  It is not that I favor the Democrats in any way, but I find they are slightly less dishonest.  At least the Democratic politicians don’t usually pretend to be in favor of smaller government.  They play their class warfare and lie in other ways, but that is a subject for another day.

I have discussed before (here and here) the Federal Reserve’s policy of “Operation Twist”.  This is the Fed’s policy to buy long-term government debt in favor of short-term debt.  Its main purpose is to lower long-term interest rates.

I already discussed some of the reasons that the Fed might want to do this, as well as some of the possible unintended bad consequences.  For today’s post, I want to discuss another bad side effect of this policy of setting interest rates below where the market would set them.

Interest rates tell us the price of money.  Almost everyone would prefer to have one dollar in their pocket today than have it a year from now, even if their intention is to save it.  If someone is going to defer getting paid a dollar today and instead get paid a dollar one year from now, then this person would expect some additional reward.  This extra amount is the interest rate.

The interest rate serves as a price.  Since it is essentially a price, it also serves as a signal to the market.  If interest rates are really high, then that means the market is signaling that savings are too low.  People are consuming too much and not saving enough for the future.  The high interest rate provides an incentive.  It is an incentive for people to save more, as they will get rewarded with a higher interest rate for their savings.  It is also an incentive for people to borrow less, since their borrowing costs will be so high.

There is a saying that the solution to high prices is high prices.  The same goes for interest rates.  The solution to high interest rates is high interest rates.

The same goes for low interest rates.  This is a signal that savings are high.  It actually gives incentive for people to borrow more due to the low rates.

It should be mentioned that interest rates also reflect expected inflation and risk.  If there is a big risk that the lender won’t be able to pay off the loan or if there is an expectation that there will be high inflation, then the interest rate will reflect these things.  But it is important to know that these are only two factors and we should not forget that interest rates are also an indication of the time value of money as discussed above.

If the federal government manipulates the price of oil or tampers with the production of corn, it mostly just affects these things and the other products that rely on them.  However, when the government/ Fed tampers with the interest rate, they are tampering with the price of money.  Money is used on one side of a trade in almost all transactions, unless you count barter (which is not much in a high division of labor economy).  So when the Fed tampers with the interest rates, it is really distorting the entire marketplace.

While it is impossible to say what interest rates would be exactly in a free market economy, there can be little doubt that they are artificially low right now, if anything.  This is a problem because it distorts the need for savings.  It is telling the market that interest rates are really low because savings are so high.  The problem is that this may not be the case.

Fortunately, despite the government’s profligate spending, many Americans are actually trying to save more, spend less, and pay down debt.  Unfortunately, it is still not enough to offset all of the bad that the government is doing.  If the Fed would stop buying government debt, then interest rates would eventually rise and Washington DC would be forced to cut back.  It would raise the rates on long-term bonds and it would also send a signal to people to save more.

Interest rates are low because of the bad economy and the fear that goes with it.  But the Fed is not helping in continuing to buy government debt with all of its schemes.  Of course, the Fed and the governments are also the cause of the bad economy in the first place.

In some ways, it might be better if the Fed were to create money out of thin air by directly handing it over to the government to spend, instead of buying its debt.  It would still be counterfeiting, but at least it would be more transparent.  It would also have less of an effect on interest rates.

We should demand an end to price controls, starting with the controlling of interest rates.  The free market should determine rates, which would allocate capital in the most efficient way.  This would mean more prosperity and a higher standard of living in the long run.