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.

There is this ongoing myth that the Republican Party is in favor of capitalism and smaller government.  In comparison to the Democrats, maybe this is right.  But if you compare the policies and actual results, there really isn’t much of a difference at all.

Brushing aside foreign policy (where the Republicans are huge advocates of bigger government), the Republican politicians in DC are horrendous, even in comparison to Democrats.  The only major difference is in their rhetoric.  When it comes to economics, Republican voters are probably quite a bit better than Democrats in advocating capitalism and less government.  This is why the Republican politicians talk about smaller government.  They are fooling their constituency.

The Republicans took over the majority in the House of Representatives in January 2011.  They have had control there for about a year and a half and yet the deficits persist.  Sean Hannity will refer to them as the Obama deficits, yet he somehow manages to ignore the fact that Republicans control the House where all spending bills are supposed to originate.

As I mentioned in my last post, the Republicans in the House can try to pass any budget they want.  If Obama vetoes it, they don’t have to pass anything.  They could say that they will only fund Medicare, Social Security, and vital national security projects.  Let the rest of the government shut down.  Or they can pass a more moderate budget that has many other things, but is balanced.

They had an opportunity to refuse to raise the debt ceiling, but they gave in.

I keep harping on this subject because I know so many Republicans who keep thinking there is some hope with electing Republicans to office.  They at least think they are the lesser of the evils, which I’m not even sure is true.

The Bush legacy is a complete disaster.  Under Bush, we got No Child Left Behind, a massive Medicare prescription drug bill (that rivals Obamacare), tariffs, the Patriot Act, Sarbanes-Oxley, two major wars, bank bailouts, car company bailouts, and massive debt, just to name some big things.

If Bush had continued as president, don’t think that the deficits right now would be much lower, if at all.  Other than the ridiculous stimulus plan at the start of his presidency, Obama has not increased government spending (in percentage terms) any more than Bush did.  Obama supporters are right in saying that Obama inherited a mess.  It really is true.  It’s just that Obama has continued the problem and made it even worse.

With Ron Paul basically out of the running, the best thing I can recommend is to stay away from politics.  The whole system is a disaster.  You should spend your time instead reading, writing, speaking, and trying to convince others on the benefits of liberty, without being too pushy or annoying. Stay away from the divisive political stuff.  Instead, focus on philosophy.  Focus on the moral and pragmatic benefits that come with a more libertarian society.

The whole big empire is actually more fragile right now than most people realize.  The Republicans are not going to save us.  They are part of the problem.  We just have to be prepared to pick up the pieces when things really fall apart.  This does not mean ruling over others.  It means convincing others that nobody needs to be ruled.

There are a lot of libertarian-leaning conservatives who think that the Republican Party is the answer to smaller government.  They think we just need to elect the right Republicans in the primaries and then win the general elections.  They think that if we get enough of them, that they will shrink the size and scope of government.  There are even some who just think we need any group of Republicans to win a majority in the House and Senate.  There are even some really naive people who think that the government will get smaller if we can just elect Mitt Romney to the presidency.

With the exception of Ron Paul, and maybe a few others to a lesser degree, the Republican politicians in Washington DC are lovers of big government.  They are defenders of the state.  It isn’t that they can’t shrink the government because there are too many Democrats blocking them.  It isn’t that they can’t shrink the government because they will lose their next election (although there might be an element of truth to that one).  It isn’t that they want to shrink the government but just can’t quite get the votes to do so.  The truth is that the Republican politicians love big government just as much as the Democrats.

The Republican Party has had the majority control of the House of Representatives since January 2011.  It has been a year and a half.  The only thing good they can legitimately claim is that the government has grown at a slower pace since they took control.  Even with that, some things are debatable.

The Republicans could have refused to raise the debt ceiling.  If that was too drastic, they could have raised it, let’s say, $50 billion per month and refused to raise it any more than that.  $50 billion per month is still $600 billion per year.  But at least they could have claimed that they cut the annual deficit in half.  Instead, they raised it over a trillion dollars and promised “spending cuts” in the future, which are really just cuts in the projected growth.

If the Republicans really wanted to be radical, they could have refused to pass a budget at all.  All spending bills are supposed to originate in the House.  Anyway, there is no way that a president can sign a budget bill that isn’t first approved by the House.  Since the Republicans have a majority in the House, they could simply approve a budget of $3 trillion (annual) or less.  They could refuse to go higher than that and there is not much anyone could do about it.  Obama and the Democrats could kick and scream and tell everyone that Republicans want to kick old people out on the street, but isn’t that what they do anyway?  Perhaps the electorate would turn on them in the next election, but we will never know because the Republicans will never willingly cut the government.

It isn’t that Republicans are spineless and lack the political will to cut government.  It is simply that they have little interest in cutting government.  Maybe a few of them genuinely did want to do that when they were running for office, but things change when you get a prestigious position and lobbyists start knocking on your door.

There are few Ron Pauls in this world, particularly when you narrow it down to those running for political office.  Most politicians run for office because they want power and they want to control other people.  We are not going to achieve liberty by infiltrating the Republican Party or by electing the “right” people into office.  We are only going to achieve liberty by changing the hearts and minds of the American people.

July 4 is called Independence Day in America.  It could be called Secession Day.  Not only was it a declaration of independence from the British crown, it was an act of defiance.  It was an act of secession.

Most Americans do not favor secession.  There was a recent poll that showed 24% of Americans now favor the right of a state to secede from the U.S. (the “union”).  This is considerably higher than it was just a couple of years ago.

Yet, for the other 76% of Americans who do not approve of state secession, most of them would probably endorse the Revolutionary War on the side of the American colonists.  But why was it ok for the colonists to secede but not a state today?  Is it simply because the colonists were ruled by a king whereas today we are ruled by politicians who we get to pretend to vote for every few years.  (By the way, I’m not saying all elections are fraudulent, but just that elections don’t ever change much because of the rigged game that has been set up.)

These 76% of Americans, I hate to say it, are being hypocritical.  I suppose, giving them the benefit of the doubt, they are just being lazy in their thinking.  They don’t realize that they support the secession of the American colonists, yet don’t think people in a given state (or any other jurisdiction) should have that right today.

The ironic thing about this is that a state wanting to secede today would be much more justified in doing so.  In the 1770’s, the American colonists were paying minimal taxes to the British king.  Perhaps it was 1 or 2 percent.  Today, Americans get the privilege of paying almost half of their income towards government at all levels.  The American colonists were a free people (not counting the slaves) compared to Americans of today.

On July 4, try not to get into any major political arguments with friends and family.  But you can certainly remind them that July 4 is the date that American colonists declared that they were seceding from government rule.  Unfortunately, it just got us another government, which eventually got a lot bigger.