The economy, particularly in the U.S., continues to hang in the balance.  Unemployment is still high and the official numbers are not all that accurate because they don’t include part-time workers and people who stopped looking for work.  The stock market has been a bit of a roller coaster ride.  Meanwhile, price inflation has stayed relatively low, while interest rates are at or near all-time lows.

The Federal Reserve is walking on a tight rope.  On one side, there is inflation.  On the other side, there is recession or depression.  The problem is, as time goes on, the rope gets thinner and thinner.

If the Fed leans too far to one side, it might fall over.  Or perhaps it will try to overcompensate going the other way and fall to the other side.  Or maybe the rope will end and a fall into a combination of both pits will occur.

I think the low interest rates and the recently downtrending stock market indicate that another recession is likely.  The problem is that there was not a correction allowed to happen from the last recession.  The problems are much worse now because of all of the debt and money creation.

I think a likely scenario at this point is for another recession to appear.  Then, Helicopter Ben and the Fed will react with more quantitative easing (money creation).  The next round of QE will probably not be as generous in terms of results.  I think we are likely to see higher price inflation, unless the Fed is timid by its own standards, in which case the next recession will be deep.

I see a scenario similar to the 1970’s as more likely than a scenario like the Great Depression.  I am not necessarily talking about severity, but the characteristics.  I think it is likely that we will eventually hit a point of seeing high price inflation and a weak economy at the same time.

If things became anywhere near the Great Depression, then the Fed would open up the flood gates of money and would trigger severe price inflation.  Bernanke has been critical of the Fed during the period of the Great Depression for not being aggressive enough.

Another thing to consider is that there was no FDIC during the Great Depression (at least in the beginning of it).  There were a lot of bank failures, which reversed the fractional reserve lending process.  This was essentially a deflation of the money supply.  So even though the Fed actually did try to create some monetary inflation, it was not enough to offset the bank failures and the average person’s desire to spend less.

Hopefully, if we do see a scenario like the 70’s, the Fed will act in much the same way.  Paul Volcker, as Fed chairman, slammed on the monetary creation brakes.  The U.S. had a good hard recession, but it also set the stage for a nice recovery.  That was probably the last time in American history that a recession was allowed to play out and a great deal of the malinvestment was able to be corrected and reallocated more in accordance with the free market.

It is still possible that we could have a Japan-like scenario where we see low price inflation and an economy that just kind of sputters along.  However, I don’t see it happening for a couple of decades like it has happened in Japan.  The U.S. central bank is more aggressive than the Bank of Japan and Americans are unlikely to buy U.S. government debt to the same extent that the Japanese have bought Japanese government debt.

Let’s just hope that if we hit a 1970’s America scenario that the Fed will act in much the same way now as it did then.  While it would cause a severe recession, it is better than the alternative of hyperinflation.

There was news over the weekend that the euro zone has agreed to lend Spain up to 100 billion euros.  That is about 125 billion U.S. dollars.  Spain has been the latest country to follow Greece in its solvency troubles.

While this may help “save” Spain in the short run, it is just more kicking of the can down the road.  The problem is, whenever they kick the can further down the road, it makes the final day of reckoning that much worse.

While comparing a government to an individual or family is not a very good comparison in most cases (because governments rely on their monopoly of the use of force in a given territory), it can actually provide a pretty good analogy in this case.

Let’s say that someone makes $50,000 per year in income.  For the sake of this discussion, let’s pretend there are no taxes.  Let’s say that this person spends $60,000 per year.  He is running a deficit each year of about $10,000.  In addition, his total accumulated debt is $100,000 (and growing by $10,000 per year).  Let’s say this debt is in the form of credit card debt.

What is the solution for this person?  He could declare bankruptcy, which would wipe out the $100,000 in credit card debt.  However, his credit card companies would shut down his accounts and would no longer be willing to lend him money, especially without collateral.  So the person would be forced to cut his spending by at least $10,000 per year, assuming he can’t earn more.

Another solution is to cut spending drastically.  Not only does the person need to stop running up more debt, but it would probably be a good idea to start paying down the credit card debt, as the interest payments alone are high.  This would mean the person would have to cut spending each year by a far greater amount than the $10,000.

Another option is for the person to get another loan.  He could get a loan (from a fool) for another $20,000 and this would allow him to continue his spending for the next 2 years.  The problem is that the total debt goes up to $120,000, or more if you include interest on the debt.  By getting another loan, this person is just that much further in the hole.  It means it will be that much more difficult to get out of this situation in the future or else the bankruptcy will be that much bigger.

By Spain getting a loan from the euro zone, it just means they will be that much further in the hole.  The Spanish government will never be able to get out of the hole unless there is a big direct bailout (not a loan) or else bankruptcy.

It makes it easy to see how all of this will end.  By giving Spain a loan, it just encourages a continuance of reckless spending.  It means that things will be that much worse in the near future.

The only solution is a dramatic cut in government spending.  It will come eventually, either way.  The government can try to raise taxes, but this will not do anything.  Art Laffer had it right with his curve.  If you raise taxes high enough, it just discourages further production and can actually lead to a decrease in total tax collections for the government.

It started with Greece.  Now it is Spain.  This will be a pattern throughout the world.  It will happen in many western European countries.  It will probably happen in China, Japan, and the U.S., among others.  At some point, governments will be forced to cut back on spending.  The longer they wait, the more painful it will be in the future.

The big political news this week in the libertarian world, and I suppose maybe the Republican world, is that Senator Rand Paul announced his support for Mitt Romney in his presidential run.  Ron Paul (Rand’s father) sent out an email to his supporters saying that he would most likely come up short in the delegate count at the Republican convention in Tampa.  While Ron Paul hasn’t officially withdrawn, he is basically acknowledging that Romney will be the nominee.

Not long after Ron Paul’s message to supporters, Rand Paul appeared on Sean Hannity’s television show. He said that while his father is his first choice, he would support Romney as the nominee.  You can watch it here:

Many libertarians (particularly Ron Paul supporters) see this as a sellout.  They see it as a slap in the face. Rand Paul gained much of his financial support in his senate run from his father’s supporters.

As I have said before, Rand Paul is the best senator in the U.S. Senate.  Until Ron Paul retires from the House, Rand Paul is not the best congressional member (from a libertarian perspective).  Actually, even when Ron retires, Rand may still not be the best congressional member.  While he will remain the best senator, there are probably others in the House (like Justin Amash) who are probably better than Rand (but still not as good as Ron).

I have had my hesitations about Rand Paul from the beginning.  He is much more of a politician than his dad.  He is not a principled libertarian.  He is somewhat acceptable to some of the establishment.  People like Sean Hannity like Rand Paul.  That makes me more skeptical of him.

I don’t think this is a black or white issue (and I’m not talking about race).  It isn’t that Rand Paul is on our side (the pro-liberty side) or the other sided (the statist side).  He really is in between.  He is decent on economics, but not as good as his dad.  He is half-decent on foreign policy.  He is much better than Romney or Obama, but he is much worse than his dad.  The same can be said for civil liberties.

Overall, I think it is good that many Ron Paul supporters are giving Rand a hard time about his support for Romney.  They see it as a political move, which it is.  The only thing I would say is that you should try to stay somewhat respectful, as Rand can still be a good ally moving forward on many issues.

People are now trying to speculate on whether Ron will follow in his son’s footsteps and throw his support behind Romney and be a good little Republican.  I highly doubt this will happen.  Romney, for the most part, stands for almost everything that Ron is against, and vice versa.  If Ron Paul endorses Romney, it really will be a sellout.  He will have gone against everything he has stood for, for the last 35 plus years.

Hypothetically, if Ron Paul did endorse Romney, it wouldn’t make that much of a difference (at least as far as the election goes).  Ron Paul supporters will not fall in line, at least for the most part.  They will do their own thing.  They are not going to vote for Romney or Obama, unless they were planning to already.

I don’t think we have to worry about that scenario.  I am quite confident that Ron Paul will not endorse anyone, particularly Romney or Obama.  I also don’t think Ron will have a problem staying out of it.  The only problem would be if Rand becomes Romney’s running mate.  While I doubt that Rand will get the VP nod, it sure would make it interesting as far as Ron’s support.  Even in that scenario, I still think Ron might stay out of it and plead the fifth.  He is that principled that he might not endorse his own son if he were paired with Romney.

Many Ron Paul followers and Austrian school followers are big fans of Murray Rothbard.  I suppose most of the new and young Ron Paul followers are not as familiar with Rothbard, but many of them turn to Rothbard to expand their knowledge from what they’ve learned from Ron Paul.

I can’t say that Rothbard has been a big influence on me directly.  The people who have been a big influence on me (Harry Browne, Lew Rockwell, Richard Maybury, Ron Paul, just to name a few) were influenced by Rothbard (some more than others).

I have actually had a few disagreements in Rothbard’s writings.  I differ on his position of fractional reserve banking, just to name one.  But I still find it hard to believe that Rothbard would have advocated a law against consenting adults engaging in fractional reserve lending and borrowing.

I have not fully immersed myself in Rothbard.  I have read a couple of his shorter books and I have read many of his articles.  I always find his articles discussing politics informative and interesting.  His writings on Reagan and Clinton are really fascinating.  I also agreed with his writings on being involved in politics (endorsing candidates, forming coalitions, voting, etc.).  Some people think it is a contradiction for an anarcho-capitalist to be involved in politics at all.  I think Rothbard showed the benefits of political alliances and he was right that it wasn’t a contradiction.

It really is too bad that Rothbard passed away at a relatively young age (68 years old) in 1995.  It definitely would have been interesting to get his take on September 11, 2001 and the Bush Junior presidency.

If there is one thing in particular that I can say I really learned from Rothbard, it is his writings on consent.  He expounded on what de la Boetie said over 400 years ago.  He pointed out that a government does not have to be overthrown using violence.  All that has to happen is for a large percentage of the population to withdraw their consent.  When the government no longer has the consent of a large portion of the populace, it will collapse from its own weight.

The Soviet Union collapsed and there was virtually no bloodshed.  It is not because Gorbachev was a really great guy when he was in charge.  It is because he no longer had consent from the people.  The whole system was a joke and it was unsustainable.  The system collapsed without violence.

The message we can take here is that this is an intellectual battle.  We don’t need to elect the right politicians.  We don’t need to pass the right laws.  We don’t need term limits on politicians.  We don’t need to convince the politicians who are currently in office.  All we need to do is educate others on the benefits of liberty.  When a large portion of the populace no longer consents to government force, then that in itself will reduce the power of the politicians.

Ron Paul has had virtually no success in passing legislation.  His success has been one of education.  He has spread the word to millions of people.  He has changed hearts and minds.

It is too bad that some great libertarians like Rothbard and Harry Browne are not alive today to see the success that Ron Paul has had in educating millions of people.  These men were quite optimistic about the future, but I think even they would be surprised at how far we’ve come so fast.

There is a story linked from Drudge that says France has cut the retirement age from age 62 to age 60 for those who entered employment at 18.  Earlier in the week, Drudge linked to a story, quoting someone who said that the retirement age (in the U.S. I believe) might have to be raised as high as 80.

Of course, the first thing a libertarian might ask is, why is the government determining a retirement age?  It is up to each individual to decide what age he will retire.  The reason that the government talks about the retirement age is because of Social Security and Medicare (or their equivalents in other countries).

It is crazy that the French government would actually cut the retirement age, given the current economy and the massive budgetary problems that countries in Europe are having.  If anything, the age should be going up so that the government can stay solvent.  The new French government is admittedly socialist, which means they believe in free lunches and fairy tales.

As far as the U.S. goes, I think the retirement age (referring to Medicare and Social Security) will go up eventually.  The public sector unions lost in Wisconsin yesterday.  Next, the senior citizens will lose in the whole country.  Some think I’m crazy for saying this because seniors make a powerful voting block.  But when young people have their backs against a wall, they will vote to cut grandma’s Social Security check before they have to pay even more in the way of taxes.

This is why I don’t really worry about the unfunded liabilities too much.  They certainly are an issue, but it is an issue that can be quickly fixed by raising the retirement age.  A portion of the federal debt is also made up of intra-governmental debt, which is simply debt that the government owes itself.  Intra-governmental debt is almost $5 trillion of the total national debt of almost $16 trillion.  About $2.7 trillion alone is owed to the Social Security Trust Fund.  Just raise the eligibility age to collect Social Security to 80 and this would wipe that debt off of the books.

The squeeze is on.  The governments of the world keep trying to kick the can down the road, but things are coming to end.  They are really close for Greece.

In the U.S., things may chug along for a little while longer.  Eventually, Congress will be forced to cut back, assuming that the Fed doesn’t go into hyperinflation mode.  I think Americans will reject large tax increases.  We will eventually see spending cuts.  Since Medicare, Social Security, and the military make up the majority of the federal budget, those things will not be left alone.

I don’t think Social Security and Medicare will go away entirely any time soon.  But it is quite reasonable to think that changes will be coming in the form of reduced benefits and a higher age for eligibility.

As I write this, the results are being tallied in the recall election in Wisconsin.  The governor, Scott Walker, is on the hot seat because he dared to take on the public sector unions.  I wrote about this situation last year and the libertarian position on unions.

As a libertarian, I am not a big fan of Scott Walker.  He is not a libertarian.  However, this recall election has been symbolic.  A politician dared to take on the unions and they are trying to make him pay the price.  This is a symbolic issue of the unions vs. the average working American.  While Walker is not an average working American, his position on this issue is symbolic in the defense of the average working American.

The good news for libertarians (and maybe conservatives) is that unions are dying.  The free market (at least what is left of it) is destroying the unions.

In the case of Wisconsin, it is really government vs. the people.  I don’t think most government workers are bad people.  I’m sure most of them are just trying to make a decent living to support themselves and their families like most other Americans do.  The problem is two-fold here.

First, government in general is quite inefficient.  The more government workers you have, particularly with generous benefits, the less efficient it is.  It means that resources are being misallocated.  It means that production suffers and that nearly everyone’s standard of living is worse off because of it.

The second problem is the one that the average American is starting to understand, particularly in this economy.  These government workers with their nice salaries and nice benefits are being subsidized at the expense of the average taxpayer.  These government workers are not being paid a market wage.  They are being paid a government wage, determined by politicians.  Americans are struggling to find work and those who do have work are finding little in the way of pay increases.  Meanwhile, government workers are making out really well and leaving budgets in the red while they are at it.

The Occupy Wall Street groups like to talk about the top 1%.  But the conflict is not really between rich and poor.  It is about government privilege vs. the non-privileged.  While class warfare is still prevalent, the majority of Americans probably don’t care if Mark Zuckerberg gets rich.  The reason is because it was done in the marketplace, without coercing others to use his product.  The government unions cause conflict because they are obtaining their money by using the threat of government force to extract money from the taxpayers.

As it looks like Scott Walker will win this latest election, it symbolizes a loss for the government unions.  I’m sure they were out in full force to vote.  The silent majority really is speaking here.

This should prove that it is not political suicide to fight unions and government workers.  The reason most Republicans don’t do it is because they have no interest in doing it.  They will talk a good game, but they usually do what is necessary to hand out favors to their own special interests once they are in office.  They see nothing to gain in fighting a hot political battle when they don’t really have any serious principles.

In conclusion, while Scott Walker is no libertarian, I think libertarians should be happy with the results in Wisconsin.  It is possible to beat back the beast of big government.

Gary Johnson, the former two-term governor of New Mexico, is the Libertarian Party’s presidential nominee for 2012.  He was recently interviewed by Robert Wenzel of the Economic Policy Journal.  You can listen to the interview here:

After the interview, Wenzel posted a short piece comparing him to Ron Paul.  The amusing thing in that post is reading all of the comments below.

Wenzel really tore into Johnson, in a respectful kind of way.  He challenged him on his libertarian credentials.  It is funny because the one thing that has always worried me the most about Johnson is whether he would really withdraw the troops and end the wars if he became president.  If I was 100% sure that he would do that, then I would probably vote for him, regardless of his economic positions.

He is obviously much better on foreign policy than Obama or Romney.  Johnson is also much better on economics than Obama or Romney.  But when I listened to this interview, I think Johnson may be closer to Romney and Obama than Ron Paul when it comes to economics.  I’m not sure if that is a fair assessment, but I really came away feeling like Johnson doesn’t understand economics very well.

Gary Johnson seems like a nice and decent guy.  Of course, the same could be said for Mitt Romney.  And I do agree with Wenzel that it seems that Johnson has some good instincts.  But he really doesn’t understand the free market, libertarian position on economics.

Johnson said that we have to go through recessions and that recessions are good.  But I have to say that no Austrian school person who really understands what he is talking about would phrase something like that.  The Austrian position is that recessions are generally necessary after a central bank-induced boom.  But the way Johnson said it, he makes it sound like we would still be going through recessions frequently in a free market environment.  While he was somewhat correct in his assessment that recessions are a signal that there has been too much consumption, he misses the point that consumers and entrepreneurs miscalculated, probably due to central bank inflation.

Johnson cites Milton Friedman as a libertarian having influence on him.  Wenzel is quick to point out Friedman’s flaws.  While there is a lot to like about Friedman from a libertarian standpoint, school choice is not one of them.  Unfortunately, that was one of the two things that Johnson pointed out about Friedman (the other being drug legalization).  I suppose we should be thankful that Johnson didn’t praise Friedman for his monetary policy.

Johnson also cited Cato and Reason as good resources that he likes to read.  This pretty much shows where Johnson is on the spectrum of libertarianism.  He doesn’t understand Austrian economics.  He is from the Chicago school.  The Chicago school of Milton Friedman is better than the Keynesians, but not so much when it comes to monetary policy.

One thing I have noticed about Gary Johnson is that he usually uses utilitarian arguments.  He does not argue the position of morality often, if at all.  He will say we need to legalize marijuana, but his reasons are pragmatic.  He does not say that it is because people should be free to put anything they want in their bodies as long as they are not encroaching on other people’s rights.  He would never say that taxation is theft.  He would say that we need to reduce taxation so that we can create more jobs and have a strong economy.

Ron Paul, on the other hand, uses both types of arguments.  He argues from a pragmatic standpoint sometimes and he also argues based on morality.  I think it is important to use both.  There are some libertarians like Stefan Molyneux who tend to argue the moral position more frequently.

If Johnson is going to use utilitarian arguments most of the time, it would be nice if he understood them.  He has little grasp of Austrian economics, which means his utilitarian arguments are not even that good.

In the interview, Wenzel tripped up Johnson by asking him about libertarian books.  It has reminded some people of Sarah Palin when she was interviewed by Katie Couric.  Johnson said that he had read Rothbard at the beginning of the interview, but then later recanted.

I don’t think there is anything wrong with Johnson just because he hasn’t read Rothbard, or Mises, or Hayek.  In Johnson’s defense, Mises is tough to read.  It would be one of the last things I would recommend to someone new to libertarianism.  I am partial to Harry Browne or Richard Maybury.  If you want to teach someone economics, you don’t hand him a copy of Human Action.  That will put him to sleep and turn him off of the subject.

As I have written before, I wish that Lee Wrights would have won the Libertarian Party’s nomination.  He is a principled libertarian who understands the issue.  Gary Johnson would not even come out and say that he favors legalization (at least from a federal standpoint) of all drugs.

Radical libertarians have been spoiled by Ron Paul.  We start to take it for granted that other libertarians understand economics.  Ron Paul looks highly articulate next to Johnson, only because Paul understands the issues with great depth and he believes in what he is saying.  It will be interesting to see if Johnson’s views evolve at all through the campaign and which way they evolve.

Today, I am going to talk about myself a bit and my experience in investing.  I have been doing at least a little bit of investing for 15 years.  It has consisted of stocks, mutual funds, commodities, options, money market funds, and probably other things that I can’t think of right now.

When I look back at the big picture, there are really only two investment strategies that have paid off.  One is in the permanent portfolio (mutual fund or otherwise) that was advocated in Harry Browne’s book Fail Safe Investing.  The other investment that has done well is commodities.  This would be mostly gold and silver related investments, but also a little bit in energy.

When it comes to options or just trading individual stocks, I can’t really say that I’ve done that well.  I’ve certainly had some winners, but I’ve also had some losers.  When I consider that these things almost offset each other over time, I probably would have been better off paying down my mortgage or putting more into the permanent portfolio setup.

I am guessing that I am not alone in this analysis.  There are very few people who make it big in investing.  Even most people who spend a significant amount of time studying the investment markets do not make out big, unless they are trading other people’s money for a fee.  In that case, it is really their job or career.

The problem is that many people feel they need to spend a lot of time doing their homework and watching CNBC for the latest stock tips.  If they only understood the monetary system and understood the power of the permanent portfolio, it would save them a lot of time and headache.  They could spend just a few minutes setting up their portfolio and then basically forget about it, except for rebalancing.

When it comes to speculating on stocks or any other investments, I am probably slightly better than average.  Yet, I still acknowledge that it is usually a crap shoot and that it is impossible to time the markets.  I cannot compete with Warren Buffett at his own game.  Overall, playing the stock market is almost equivalent to playing blackjack in Las Vegas.  In the case of the stock market, the big financial institutions and the government are the “house”.  They collect the most money in trading fees and taxes.

It can be fun to speculate in stocks, just like it is fun to play the lottery.  But it really isn’t that fun once you realize that you’ve lost.  So my recommendation to most people is to save their money and be conservative with it.  Pay down your debts.  Invest in something similar to the permanent portfolio.  Then take some money and pay down your mortgage.  If you want to get ambitious, then buy an inexpensive investment property that will generate positive cash flow.  After many years, you will be thankful that you were conservative with your money.  You work hard for it, so you should watch over it carefully.  If you want to speculate, then just set aside a small percentage of your savings as “play money”.

Facebook, the extremely popular social networking site, went public recently and made big news.  Its IPO (initial public offering) price was $38.  On the first day of trading, the stock went up above $40, but then retreated back before the day was over.  Since then, the stock has taken a big hit, losing about $10 per share, which is well over 25%.

Investors are suing Morgan Stanley, Goldman Sachs, and JP Morgan, alleging they were misled in their purchase of the stock.  This is because the banks didn’t reveal lower revenue estimates before the shares started selling.

As a libertarian, I don’t have much sympathy for the big banks.  They are mostly in cahoots with the federal government.  They get protection from the FDIC and the Federal Reserve.  They get to take big risks and make a lot of money, but then when the tides turn, they will get bailed out.  The big banks in America are not free enterprise institutions.  They rely on cronyism.

With that said, I think these lawsuits are bogus.  It just shows that people will sue over anything.  The reason I am not that sympathetic to investors is because they are acting just like the banks they are suing.  They think they should get all of the upside of a winning stock.  But then when it doesn’t pan out, then they are all of a sudden suing and using the force of government to intervene.  They don’t want to take responsibility for their actions.

When I heard that Facebook’s initial public offering would value the company at about $100 billion, I knew to stay away.  I am not one of those people who is negative on Facebook.  A lot of people think the company is a joke and can’t understand how a website that doesn’t really sell anything can be of any value.  These people are wrong.  Facebook will probably have a billion users soon.  Take the entire population of the United States and triple it, and that is the approximate number of Facebook users.  With that volume, the company makes money and is going to continue to make some money, even if it is just from Google ads.

However, I think a $100 billion or more valuation seems quite high.  I could have been wrong.  The stock could have gone up quickly, particularly with people wanting to get in on the action.  But I thought it was a huge risk and I stayed away.  Nobody forced me to invest in it.  Nobody threatened me to buy some shares.  I can continue to use Facebook and pay nothing and not own a single share.

These investors who are suing knew the risk they were taking.  Any time you buy shares in a single company, you are taking a significant amount of risk.  But now that the investors are losing money on what was supposed to be a winning stock (at least to them), they are blaming others and using the courts to try to settle the score.  While I’m not exactly cheering for the big banks, I hope the investors lose in this battle.

As far as the banks, the market should be allowed to work.  Unfortunately, we don’t live in a free market world right now.  The big bankers are part of the establishment.  In a free market environment, the market would determine if these banks did anything wrong in not disclosing revenue estimates.  Customers and investors would not continue to do business with these firms in a free market environment, if they thought the banks were doing something wrong.  This is a situation where the markets should decide and not the courts.

The yield on 10-year U.S. treasuries has hit a new low, at least for the last 60 years.  The yield dropped as low as 1.62% earlier today.  The 30-year rate is also down, although not at record low levels yet.

This is interesting for a lot of reasons.  First, the 10-year rate is highly correlated with mortgage rates.  This means that mortgage rates are now at or near an all-time low.  It doesn’t seem to be doing much for the housing market, but maybe on the margin it will encourage a few more buyers.  Anyway, if you can lock in a 30-year fixed rate for under 4% right now, that really is the bargain of the century.

The next interesting thing about the super low rate is the bond market’s defiance of the bond bears.  There are a lot people, libertarians included, who have been predicting higher rates for quite some time.  I remember when Harry Browne was talking about the permanent portfolio about 7 years ago and there were people challenging him on the bond portion of it, saying that rates couldn’t possibly go any lower.  Yet bonds have been one of the best investments of the last 30 years.  While gold has done better in the last 10 years, bonds have been more consistent since the 1980’s.  I’m not saying that it will remain that way, but just that the bond market has proven a lot of people wrong, at least in timing.

Another interesting thing about the low rates is that it is allowing the Fed to stop its quantitative easing (money creation).  Since QE2 ended about 11 months ago, the Fed has been tight.  It can remain tight with low yields.  That means the U.S. Congress can continue to rack up huge debts without relying on the Fed to buy the debt.

So when will rates finally go up significantly?

I think the answer depends on price inflation.  And price inflation will depend on several factors including the general health of the economy, bank lending, and Fed policy.  If price inflation remains relatively low, then I don’t see interest rates going up.  If rates start to tick up and there is relatively low price inflation, then the Fed can step in and buy.

The only scenario I can see where the Fed would refuse to buy more government debt in the face of rising interest rates is if price inflation is also high.  If there is price inflation of 2 or 3 percent like we have now (at least according to government statistics), then the Fed has no problem creating new money out of thin air.

On the other hand, if we had a scenario where interest rates were rising significantly and we had price inflation of 10 or more percent, then the Fed would have difficulty stepping in and lowering rates, out of fear of triggering massive inflation or even hyperinflation.

Until we see a significant rise in price inflation, I don’t expect a significant rise in rates on U.S. government debt.  There will probably be a good time to short the bond market, but we are not there yet.