The Dow is below 13,000.  Gold is below 1,600.  Oil is below 100.  The 10-year yield is just above 1.8%.  The roller coaster ride is continuing.

It looked like we were in the midst of a mini-inflationary boom.  While the Fed’s tripling of the monetary base in the last three and a half years has not produced massive price inflation, some of it has gone into certain sectors.

If you are an investor in the stock market, times have seemed somewhat decent lately.  If you are a middle-class consumer, then your trips to the gas station and grocery store have not been all that pleasant, as you see rising prices.  Rising prices affect different people in different ways, but overall it is a negative thing in the long run.

I don’t know where things go from here.  A few down days don’t necessarily make a trend.  With all of the massive malinvestment that has taken place, particularly in the last 4 years, we are going to experience pain in the future.  If the market turns back up from here and we continue a little inflationary boom period, it will just mean more pain later on.

However, it worries me the other way too.  We need a liquidation of the bad investment and a proper reallocation of resources determined by the marketplace.  In that sense, a downturn would be a good thing.  What worries me is different though.  If we go through a somewhat severe downturn, then I am afraid of what the Fed might do.  If the Fed goes into QE3 and creates a new round of massive monetary inflation, we might be in for some real trouble.  I’m not sure if Bernanke and company really understand the egg shells they are walking on.

It continues to be a fight between an artificial boom and a recession or depression.  The two sides are tugging back and forth.  If one side tugs too hard, everyone might go over a cliff.  I would rather go off the depression cliff, but I’m afraid that the Fed might yank us over the inflationary cliff, which would actually do more damage in the long run.

I expect the roller coaster ride to continue.

For anyone in doubt about where Mitt Romney stands on economic issues, he has made it quite clear that he is a Keynesian.  Of course, anyone already paying attention should know this, but his latest comments at a town hall event in Cleveland leaves no doubts.

Charlie Munger, vice-chairman of Berkshire Hathaway, has chimed in on gold.  He said, “Gold is a great thing to sew into your garments if you’re a Jewish family in Vienna in 1939, but I think civilized people don’t buy gold.  They invest in productive businesses.”

This seems to echo his partner/ boss, Warren Buffett, who is not a big fan of gold either.  While these two men are businessmen, they are also partially thugs, dressed in ties.  They have no problem pushing for bigger government and they have no problem in using the power of government to benefit their own businesses.

Munger is 88 years old and Buffett is 81 years old, but I have little tolerance for them.  I can be somewhat sympathetic to the man on the street who is naive about economics, politics, and monetary matters.  The average man on the street simply doesn’t know better.  However, with these two, it is hard for them to use that excuse.

Ironically, Warren Buffett, who is a statist and an Obama supporter, really has no excuse.  His father, Howard Buffett, was one of the great congressmen of the 20th century.  He probably ranks second behind Ron Paul as the most libertarian politician in Washington DC.  He was a strong advocate for peace and free markets.  This included his support for a sound monetary system.

Munger says that civilized people don’t buy gold, but he is the one who is not civilized.  He wants to use the monopoly power of government to threaten violence on others who don’t share his world vision.  He uses the power of the government to stifle competition and give Berkshire an edge using statist means.

If it weren’t for statists like Munger and Buffett out there, then people might be more likely to invest in productive businesses.  But when the government makes it extremely difficult to start businesses and then makes it even more difficult to succeed and compete with behemoths like Berkshire, it is hard for the little guy.  Since he can’t make it big like these two, the little guy might try to protect what little wealth he has by buying gold.  Who can blame him with people like Buffett who supports more taxation and more big government policies under Obama?  This all leads to more money creation by the Fed and a depreciating dollar.  Yet Munger has the gall to say that civilized people don’t buy gold.

I have no use for these two men.  They are not at all the embodiment of American capitalism.  They are what is wrong with the system today.  They are protectionists who hurt the little guy by advocating big government.  And now they are telling the little guy that he is not civilized if he tries to protect what little wealth he has.

The national convention for the Libertarian Party (LP) is wrapping up in Las Vegas.  The LP has nominated Gary Johnson, former New Mexico governor, as its presidential nominee.  Johnson won on the first ballot easily with about 70% of the vote.  The only other person who had any kind of a chance was Lee Wrights, who received about 25% of the vote.  Jim Gray was chosen as the vice-presidential nominee.

It is a little disappointing for me.  It is a disappointment to see the LP continue in this direction, it is disappointing for the country, and it is disappointing for the cause of freedom.  I don’t think it is a major setback for liberty, but I think having Wrights as the nominee would have been much more positive in the short run.  I wrote a piece on this back in late March, basically saying that Wrights should be the nominee.

I have nothing personal against Gary Johnson.  He seems like a decent guy.  I just don’t believe he is a principled enough libertarian.  Of course, he is leaps and bounds better than Romney or Obama, but that is not saying much.

There is a reason that Gary Johnson could not even get 1% support in most polls in the Republican race.  Meanwhile, Ron Paul was (or is) polling in double digits in many of the same polls.  If someone is going to put themselves out there as being completely different (in other words, libertarian), then why would they choose someone like Johnson?  He parses his words.  He said that he wants to end the war on drugs at the LP convention, but he was preaching to the choir.  During the time he was running on the Republican ticket, he would just say that he wants to decriminalize marijuana.

Taxes are another good example.  Ron Paul and Lee Wrights both want to end the income tax and replace it with nothing.  Gary Johnson wants the “Fair Tax”, which would be a massive national sales tax.  If you are going to promote such a bold idea as getting rid of the federal income tax, why would you advocate replacing it with a massive sales tax?  That position is not going to be attractive to that many people.  The Fair Tax is seen as too radical by many people.  If you are going to get labeled as “too radical”, then it should at least be for something significant that would progress us towards liberty.

Foreign policy is another example.  Paul and Wrights are anti-war and are not afraid to make it known.  Johnson, while again much better than Romney or Obama, parses his words.  If Johnson were to become president (which he won’t), we can’t be sure if he would bring the troops home right away.

Even Johnson’s time as governor of New Mexico is highly questionable for libertarians.  While he vetoed a huge number of bills, state spending still went up on his watch.  He even brags about having kept public education spending up so that he could push for school vouchers.  Again, this is not much of a libertarian position.

I think Johnson is more honest and principled than Bob Barr, who was the LP nominee in 2008, but that isn’t saying much again.  Barr was a total disaster for the LP, and apparently many people did not learn that lesson.

My guess is that there are about 2 million enthusiastic Ron Paul supporters in the country right now.  Assuming Paul doesn’t get the Republican nomination, where will they go?  Lee Wrights would have been an easy choice.  Gary Johnson is a more difficult pill to swallow.

I hope that the LP can get back to nominating principled candidates like Harry Browne and Ron Paul.  The 25% who voted for Lee Wrights are the highly principled libertarians.  If just a tiny percentage of the Ron Paul crowd switched over to the LP, it might tip the scales back to the Libertarian Party nominating highly principled candidates once again.

There are a lot of competent people in the world, particularly in their niche.  They are considered very smart in their field of work.  Many people don’t realize how smart Michael Jordan was on the basketball court.  People think of him as a great basketball player.  They think of him soaring through the air and dunking.  I thought Michael Jordan was actually at his best during his last couple of years with the Bulls.  He was an incredibly intelligent player who knew how to manipulate his opponent’s weaknesses.

Michael Jordan was an incredibly talented basketball player and very smart on the court.  He is probably quite intelligent in other areas of life too.  It does not necessarily mean that I would take investment advice from him.

Warren Buffett has had incredible success in investing, yet he doesn’t understand free market economics.  If he does understand, then he is basically evil for promoting what he does.  He is the opposite of his father.  Howard Buffett was a great libertarian congressman who understood the benefits of free markets and less government.

It actually astounds me how many brilliant people there are, particularly in their field of work, who seem to have the mentality of a 5 year old when it comes to understanding free market economics.

My main word of advice here is to be careful about listening to experts.  The more intelligent the person is, the more of a risk there is that you may be guided down a bad path.

I even see bad investment advice in the libertarian/ Austrian school arena.  Peter Schiff was great in calling the housing bubble.  He has been great in advocating gold.  Yet, he had his clients in international stocks that went tumbling down in 2008.

Robert Murphy is another great free market economist.  I consider him to be brilliant on many levels.  Yet, he has been admittedly wrong in some of his predictions.  He did not call the housing bust like Schiff did. He also predicted high price inflation.  While his prediction may still come true, his timing was at least bad.

There are other free market economists who have made some bad calls.  While they understand that economics is all about human action, they don’t necessarily do a good job in predicting how humans will act.

If Austrian school economists get things wrong, how do you think others are going to do when they don’t even have a sound and correct basis for their thinking in economics?

You may know someone who you consider really brilliant.  Yet, they are most likely not that brilliant when it comes to understanding free market economics.  If that is the case, then think of this person whenever you hear some talking head on television giving out investment advice.  If you understand Austrian economics, you may know more than the person on television.

In today’s world of fiat money, it is hard to know how much you need to retire.  Life expectancy is a guess and health costs are skyrocketing.  There are a lot of other variables.  Of course, the biggest variable and the biggest threat to your retirement is the debasement of money.

If you lived in the late 1800’s in America, you could save your money without investing it and you could be reasonably certain that it would hold its value.  When money is backed by gold, the only inflation you have to worry about is from gold miners.

So what is the best way to determine a good retirement target amount?  You can’t say that you need a million dollars, because the target is moving.  By the time you reach that goal, one million dollars may not buy you that much.

There is the option of measuring it in gold.  You could say that you need 500 or 1,000 ounces of gold to be wealthy enough to retire.  The problem here is that gold is not the everyday money that we use in today’s society.  In the year 2000, 1,000 ounces of gold would have been worth just $300,000 at 300 dollars per ounce.  Today, with gold near 1,700 dollars per ounce, 1,000 ounces would be worth 1.7 million dollars.  While prices have risen in the last 12 years, they have not gone up by a factor of 5 or 6.  This illustrates that measuring your wealth just in weight of gold is not a good measurement.

You could set your target in dollars and then adjust it each year according to the CPI, but then you would be relying on government statistics, which may understate the actual inflation rate.

As I have written before, I think using real estate may be the best measure for wealth accumulation and for a target retirement number.  If you own 10 properties free and clear (no mortgage) and each one is worth $100,000, then your net worth in properties is a million dollars.  But let’s estimate rental income, instead of worrying about the value of each property.  Let’s say that you could rent out each place for $1,000 per month.  But you still have expenses for HOA fees, property taxes, insurance, repairs, and other administrative costs.  Let’s say these add up to $500 per month (which is probably on the high side in most areas).  You net $500 per property per month, times ten properties.  That is $5,000 per month or $60,000 per year.  If you can live on $60,000 per year right now, then this is a good target number.

So why do I like using real estate?  The reason is because rents don’t fluctuate much.  It is not like the price of gold where futures markets are driving prices up and down on a daily basis.  Rents are more stable.  However, rents do tend to keep up with inflation over time, so it relieves some of the anxiety over central banks creating money out of thin air.

This is not a perfect measurement, but I don’t think you can come up with anything perfect in today’s world.  Perhaps it could be some combination of dollars and gold.  If anyone else has any suggestions on this topic, I would be glad to hear them.

Robert Murphy, the brilliant Austrian school economist, has written another post on whether government debt can burden future generations.  I have dissented from his view in the past.  His answer is that future generations are burdened.

My view on the subject is one that Murphy previously held (according to some of his more recent writings).  I believe that future generations are burdened only in the sense that there is less savings and capital investment that future generations will benefit from.  We are relatively wealthy today with houses, cars, televisions, refrigerators, plentiful food, etc. because of the capital investment that has taken place in previous history, especially in the last couple of hundred years.

In Murphy’s latest piece on this subject, he uses an example of someone buying what is essentially a government bond in 2012 and then being able to cash in on it in 2112.  The government declares that the debt will be paid off in one hundred years using the taxpayers of the country.

First, this is assuming that there is no default, whether through inflation or outright repudiation.  The taxpayers in one hundred years could simply refuse to pay up.

Second, the country as a whole won’t be any poorer in one hundred years, even without a default.  It will just be a redistribution of wealth, which is exactly what happens in 2012.  It is the person buying the government bonds in 2012 who is transferring wealth to the government.  In 2112, wealth may or may not be transferred again, depending on whether the taxpayers are willing to pay up and also depending on the level of previous inflation.

Let’s go back to the basics and pretend we have a tropical island with four people living there.  There is Al, Bob, and Chris, along with George the government.  George wants to throw himself a party.  He wants to feast on three big fish for the night.  He does not want to order a confiscation of one fish from each citizen.  Instead, he issues debt.  He asks someone to loan him three fish and they will be paid back in the future through the fish catching of all of the citizens.  Whether or not he offers additional interest is irrelevant to this discussion.

Bob decides to take the three fish that he just caught and to loan them to George.  He is now Bob the bond holder.  Meanwhile, George the government has his feast.

In one year, Bob the bond holder tries to cash in on his previous loan.  At that point, there are two possible scenarios.  George the government may be afraid of Al and Chris if he tries to confiscate their fish.  It might be easier for George to default on his debt and stiff Bob.  The other scenario is that George wants to keep his parties going and he wants to be able to issue more debt in the future.  In this case, he confiscates fish from Al and Chris (and maybe even Bob) to pay off Bob.

In the first scenario, it is obvious that future generations were not burdened (even though it is still Al and Chris and not their children).  The only person who lost was Bob, but his loss occurred when he made the loan.  He may have realized his loss a year later, but his actual loss was at the time of the loan.

In the second scenario, Al and Chris were burdened a year later.  Their fish were confiscated to pay for the previous excesses of George.  But here is the key thing.  A year later, the island as a whole was not worse off.  There was simply a redistribution of fish from Al and Chris, to Bob.  The only way the island as a whole may be worse off is because of the lack of previous capital investment.  A year ago, when Bob made the loan, if George hadn’t made his loan and had his feast, then Bob would have had three extra fish.  He might have spent an extra day building nets and fishing rods or even shelters, knowing that he had three extra fish to feed on during that time.  But since he gave up his three fish, he did not have the extra opportunity for savings and capital investment.

In conclusion, I believe that government debt is harmful in the present.  It is also harmful in the future because there is less opportunity for capital investment and future wealth generation.  However, I would not say that government debt is a burden on future generations, at least on the whole.  It could cause a redistribution of wealth if the taxpayers are willing to pay the bond holders, but this in itself would not make society poorer as a whole.  There would still be the same number of fish to eat.

The most well-known libertarian, Ron Paul, faced off against Paul Krugman, probably the most well-known big government “economist” of our time.  The link is here.

I may be a bit biased, but Ron Paul took Krugman to school.  He has a way of making Krugman’s positions look ridiculous, which in fact they are.

Ron Paul made a reference to Milton Friedman and the Great Depression.  Krugman was correct that Friedman actually advocated that the Fed should have printed more money.  Ron Paul’s point was that the Fed is constantly causing booms and busts, regardless of who is in charge and what the policies are.

I found it amusing that Krugman says that the time after World War II was the most prosperous time in the country’s history.  First, it really wasn’t the most prosperous.  If you simply measure growth and an increasing standard of living, the late 19th century was better.  Regardless though, as Ron Paul pointed out, the end of World War II brought on liquidations, less regulations, bringing home the troops, drastically less spending, and less debt.  Many of the policies followed right after World War II were the epitome of being anti-Krugman.

I liked the point about allowing competition with currencies.  Ron Paul makes the point that if he is wrong, then there is nothing lost.  But people should be free to use whatever they want in the way of money.  Krugman said that people can barter, but that misses the point.  Businesses are not free to accept gold and silver and decline the use of federal reserve notes.  Even in a bartering situation, people would have to pay taxes on capital gains in gold or silver if it is to be legal.

Krugman said, “do you really think that people use dollar bills only because the federal government isn’t allowing them to use other stuff?”  But if this is the case, then what is he afraid of?  If he thinks that people would use dollars even if there were no legal tender laws, then why doesn’t he allow Ron Paul’s proposal to stand?  Again, if Ron Paul is wrong, then there is nothing lost.  Krugman doesn’t explain this.

This debate is the debate of the country, or maybe the whole planet.  It is a solution of liberty vs. a solution of big government.  These two people represent each side well.  If you think that more debt, more money creation, and bigger government is the solution, then Paul Krugman is your man.  If you think more liberty and drastically less government is the solution, then Ron Paul is your man.

Addison Wiggin has written a piece on Harry Browne’s permanent portfolio concept.  This piece was also published at LewRockwell.com.  Since I promote the permanent portfolio as number one in my investment advice, I figured I would comment on this.

First, I think Wiggin has done a fair assessment of the permanent portfolio.  He points out that there is not a lot of volatility, with very few years where there are negative returns.  With this, the portfolio still gives an overall good return, particularly considering that you don’t have to go through the major up and down swings.

Wiggin also does a nice job of describing the mutual fund PRPFX, which is based on the concept.  As he notes in his article, the mutual fund deviates from the permanent portfolio.  It is a little more complex and perhaps a little more aggressive.  While this can mean bigger returns, it can also mean more volatility.

At the end of his piece, Wiggin asks the reader for his opinion.  He is wondering if there is another allocation that could possibly work better for the next 10, 20, or 30 years.  Here are a few responses, most of which I don’t really care for.

I am in the Richard Maybury camp on this one.  The permanent portfolio is not perfect and it actually somewhat scares me.  With that said, it is the best and safest portfolio that I know of.

If we tweak the portfolio because of today’s environment, then we are speculating.  That should be saved for the speculation portion of your portfolio, which would be separate from your permanent portfolio.  The only time I would really consider changing it would be is if there is some drastic structural change.  For example, if the government ever stops issuing bonds or decides to go to a gold standard, then this would change things.  Of course, this is unlikely any time soon, but there are other possibilities of major structural changes that might alter the permanent portfolio.

Government bonds scare me, but I realize they still serve a purpose.  It helped the portfolio quite a bit in the downturn of 2008.  In addition, the Federal Reserve is the biggest buyer of bonds right now, so I wouldn’t fight it.  Of course, if the Fed keeps buying government debt, then gold will do exceptionally well.

I do like the suggestion of real estate, but I’m not sure how that would fit into the permanent portfolio.  I would just keep it as a separate investment right now.  It is more of a speculation in the sense that I think now is a good time to buy.  If you are in the right position to buy an investment property, now may be a good time, especially if you live in a good place.

My one suggestion of the permanent portfolio is that it could be tailored for risk tolerance.  If you want to be more aggressive, you could reduce the cash portion only.  If you are really aggressive, you could have 30% stocks, 30% gold, 30% long-term government bonds, and 10% cash.  I would always try to keep a minimum of 10% cash, just so that you have some cash to buy depressed investments after a recession.

It is hard to imagine getting more conservative with the permanent portfolio, but I suppose it could be done.  To be more conservative, I would reduce the holdings of bonds and stocks and hold more cash and slightly more gold.  For example, you could hold 15% bonds, 15% stocks, 30% gold, and 40% cash.  If you are going to increase your cash, you should add a smaller portion to gold, just to protect against the threat of inflation.

In conclusion, the permanent portfolio still works.  It outperforms many professionals.  You can do it yourself and pay little in the way of trading and management fees.  If it is too complicated, you can always just buy the mutual fund.  The permanent portfolio should really be called the sleep-at-night portfolio.

America has been in a relative decline lately, especially compared to places like China.  America is supposed to be capitalist.  China is supposed to be communist.  However, in some ways, at least economically speaking, China is more free than the U.S.  China actually has less in the way of bureaucratic regulations against businesses which are actually enforced.

There is still far more capital and wealth in the U.S., but much of that is because of the previous prosperity of the last couple of centuries.  China is starting out from being completely poor just a few decades ago.  There are other countries that have surpassed the U.S. economically, at least per capita.  Hong Kong and Singapore come to mind.

I still think the U.S. is the best or near the best when it comes to religious freedom and freedom of speech.  It is also relatively good when it comes to gun rights.  While Congress is trying its best to regulate the internet, its continued attempts will mostly fail.  The cat is already out of the bag.  Americans are not going to shut up and this is a good thing.

I still believe that America offers the best hope for liberty in the future.  I will use the term “America” in this case, instead of “the United States”.  The individualistic spirit of Americans has remained, even if it has faded somewhat over time.  Americans are also not ashamed to make money.  Entrepreneurs are mostly embraced, despite listening to some of the “Occupy Wall Street” crowd.

I don’t think it is a coincidence that Ron Paul has had great success in America.  I have heard Europeans and other foreigners say that they wish they had a Ron Paul where they live.  But they don’t really understand the problem.  I’m sure there is someone like Ron Paul in every country in the world.  It is just that there is not enough support for freedom in those places for their “Ron Paul” to get a footing.

You could take someone exactly like Ron Paul and put him in any European country, Asian country, or anywhere else.  Perhaps even Canada might qualify, although Canada is slightly closer to the American way of life.  The Ron Paul clone would probably fail in these other places.  Perhaps the foreign policy message might resonate with some, but his economic views would be laughed at by the large majority of people.  He would not get a hearing because of the socialistic tendencies of the people.

Obama (and Bush before him) may be a socialist.  Maybe he isn’t.  Maybe fascist is a better description for his economic views.  But these politicians have to moderate their rhetoric in most cases.  They can’t talk like Castro and expect to be elected.  If Obama had campaigned with speeches taken from Hugo Chavez, it is unlikely he would have won the presidency.  While some Americans buy into the class warfare, most Americans do believe in some forms of property rights.  It is as much a moral issue for them as it is an economic issue.

Hugo Chavez would never be elected in America.  Ron Paul would never be elected in Venezuela, at least at this point in history.  It is part of the culture.  I believe that America has the best chance of leading the world away from statism and towards liberty.  If some other country can prove me wrong, then that is fine with me.