Real estate has been in a major downtrend for the last 5 years.  While all real estate is local, it is safe to say that there was a real estate bubble that burst for the large majority of Americans.  The downtrend may continue for a little while longer, depending on how long it takes for the malinvestment to clear.  Mortgage rates are even harder to predict, as it depends on what happens with interest rates in general, which depends on the Federal Reserve’s monetary policy and the overall state of the economy.

I have read and heard people say that now is a terrible time to invest in real estate.  Perhaps that means that we are beginning to see a bottom.  Perhaps not.  But now is not a terrible time to invest in real estate.  It was a terrible time 5 years ago.  In many places, housing prices are half of what they were back in 2006 or 2007.  With the loose monetary policy by the Fed and the potential for it to continue, it is easy to see a scenario where housing prices go up quite a bit from here, at least in nominal terms.

If you are in the right situation and you live in an area where housing prices are a good deal, I think now is an excellent time to start investing in real estate.  If you have some money in the bank and you plan to stay in your current area, then you may have a great opportunity.

So how do you know if you can get a good deal?  One easy way is to calculate the monthly expenses of a place (including mortgage, taxes, insurance, and potential repairs) and compare that to the potential rent.  If you can have a positive cash flow with the rent, then it is probably a good deal.

You should look for a place in a decent neighborhood.  You should look at 3 bedroom – 2 bathroom houses, and not more.  Condos and townhouses may be ok, but keep in mind that they will not appreciate as much and you will also have to include the association fees as a significant cost.

There are different ways to calculate your potential return on investment (ROI).  Here is how I like to do it.  Forget taking a mortgage (even if you may have to).  Let’s say you can buy a place for $100,000.  Let’s say that the taxes will be $100 per month.  Let’s say there are association fees for $100 per month.  Let’s say you can estimate repairs of $50 per month (just as an average estimate).  Let’s say the insurance will be about $50 per month.  Your total expense are $300 per month.  Let’s say you can rent the place out for $1,000 per month.  This will mean a net of $700 per month.  Again, this is without a mortgage.

In that scenario, you take the $700 and multiply it by 12 months.  You get $8,400 per year.  Take that number and divide it by the purchase price of $100,000.  You get 8.4%.  That is your ROI.  Your $100,000 investment will get you a return of 8.4% if your estimates are correct and you keep it rented.

To me, that seems like a decent return.  When you are considering an investment property, don’t worry too much about appreciation.  That will be icing on the cake.  Just make sure to buy in a decent neighborhood where it is unlikely to lose nominal value over the long run.  Worry the most about your ROI.  If you are taking out a mortgage, you want to have positive cash flow.

Many Americans have been financially devastated from the housing bubble crash.  Many feel defeated.  Now is a great time for investors to take advantage of great deals.  You can be choosy and take your time.  If you see something you like and the numbers look good, you can build real wealth over time.

Most of the Republicans have it wrong on Obamacare.  In fact, they are probably more inconsistent with their proposals than Obama.  Since I am a libertarian, I am obviously in favor of a complete repeal of Obamacare, but I think the Republican plan may be worse.  Since the Supreme Court is hearing arguments about the new health care legislation (also known as Obamacare), I figured now would be a good time to discuss the merits of the Republican “plan”.

First, a few side notes on this whole thing.  On Monday, the court heard arguments about whether they could even hear the case based on some 19th century law that says a tax hike cannot be challenged in court until the tax actually takes effect.  I find this strange because some taxes from the legislation have already taken effect.  The tanning tax (is Obama against white people getting a tan and getting some vitamin D?) has already taken effect.  In addition, you can no longer use money from a health savings account to buy over-the-counter medicine without a prescription.  This is basically a tax hike.

I suppose this whole tax debate is centered around the mandate to buy health insurance.  The tax penalty for not buying insurance has not yet taken effect, but there certainly have been new taxes that have already taken effect from Obamacare.

Next, from a constitutional standpoint, this whole piece of legislation is unconstitutional.  The 10th Amendment clearly says that those powers not delegated by the Consitution are to be left to the states or the people.  Since managing health care is not mentioned in Article I, Section 8, the federal government has no constitutional authority to pass legislation regarding health insurance or health care.  Of course, this would also mean that the federal government should not be doing anything like Medicare, Medicaid, HMOs, and the thousands of other things it does in health care.

The ironic thing is that if there is one thing the federal government does have the power to do based on the Constitution, it is regulating interstate commerce.  That means the federal government could strike down state laws which prohibit people from buying health insurance from another state.  This would actually create more competition and reduce costs.  Therefore, the one constitutional thing that could be done by the federal government is not done and it is one of the few things that would make health care and health insurance cheaper (aside from repealing all of the federal laws).

So why are the Republicans actually worse than Obama and the Democrats on this?  Most Republicans that I listen to say they support certain aspects of Obamacare, but they don’t support the insurance mandate.  Of course, this does not include Ron Paul and a few others.  But most of the Republicans I hear, even the supposedly conservative ones, say they support a law that requires insurance companies to not discriminate based on pre-existing conditions.

This is completely ridiculous.  Not discriminating based on pre-existing conditions defeats the whole point of insurance.  It would no longer be insurance.  If I can just buy insurance after my house burns down or after I get in a car accident, why would I ever get it in the first place?  If the Republicans have their way, people would wait until they get sick before they buy insurance.  That means that the healthy people would be less likely to get insurance and insurance companies would get stuck covering mostly sick people.  This would drive insurance rates sky high.

The ultimate result of the Republican plan would drive health insurance companies out of business or make insurance completely unaffordable.  It would be a sure path to fully nationalized healthcare.  So based on the plan being spouted by many Republicans, we would surely have socialized medicine.

Obamacare, while fascist and a boom to insurance companies, actually makes more sense.  People would be required to buy health insurance or face a penalty (tax).  Therefore, people would not be allowed to just wait until they get sick and then buy health insurance, unless they chose to pay the penalty.  Obamacare is actually less of a disaster than the plan being proposed by many Republicans.

The Republicans are saying that nobody should be forced by the government to buy anything.  I agree.  But most of the people saying this are completely hypocritical.  We are forced to buy nearly 4 trillion dollars worth of things every year by the federal government, along with an almost equal amount by state and local governments.  For every tax that I pay, I am being forced to buy something I don’t want to.  I am being forced to buy wars, food stamps for others, education for other people’s children, etc.  At least with Obamacare I am being forced to buy something that I can actually use for myself and my family.

This is not a defense of Obamacare.  I just wanted to point out the absurdity of the Republican “plan” and the absurdity of the arguments being made by many Republicans.

In conclusion, I hope that Obamacare is repealed.  However, if the Supreme Court strikes down the insurance mandate while leaving the rest of the legislation in place, it could be a total disaster for health care in the future.

There was an article on LewRockwell.com, by Robert Wenzel of the Economic Policy Journal, discussing a gold bar that had been filled with tungsten.  Tungsten can be used to make fraudulent gold bars.  Gold is a very dense metal and tungsten is the only substance that comes close to gold in density.  Since tungsten is much cheaper than gold, a gold bar filled partially with tungsten would be worth a lot less than what is supposedly being sold.

One of the points of this article was to point out the potential fraud in Fort Knox.  Perhaps the U.S. government owns a lot less gold than what is thought.  If this was discovered, it wouldn’t mean all that much to you as an individual.  It would be interesting to know.  It would make people realize that their government is dishonest (as if you need anything else to realize that).  It would mean that the government is a few days closer to bankruptcy than we thought.

As an individual investor, I think it is good to own a small amount of actual gold and silver.  You should not get carried away with buying the actual metal due to the risk of theft or fire or some other accidental loss.  Even keeping it in a bank safe deposit box is not a guarantee.  Even there it could be subject to an accidental loss or a government seizure.  At some point, you should put a little bit of faith in the whole system and buy gold and gold related investments in other forms, even if it is through a warehouse.

But to start out, it is a good idea to own some actual physical gold and silver.  In regards to the referenced article, I would not worry too much about being defrauded.  First, I would stay away from any large quantities of gold (or silver) in one piece.  The largest piece of gold you should buy is one ounce.  The article referenced a 1 kilo bar, which is over 32 troy ounces.  It is much harder to fill a one ounce gold piece with tungsten.

Second, I would stay away from bars.  It is better to stick with common coins such as the American Gold Eagle.  This coin is easily recognized and hard to counterfeit.  The eagle comes in four sizes: one ounce, half ounce, quarter ounce, and one-tenth ounce.

Third and finally, I would buy from a reputable company or dealer, especially if you are unsure.  You can shop around and find the best prices from companies that are established.  You can also try to find a local gold dealer who you trust and who has decent prices.

So remember, stay small and stay in coins.  Then you don’t have to worry about being defrauded.  If there are gold bars in Fort Knox filled with tungsten, then that is someone else’s problem.  The U.S. government is almost insolvent anyway, unless it resorts to mass inflation.

Taxation, regulation, spending, and monetary policy all have a big impact on a nation’s economy.  But what matters most?  Of course, it depends on the degree of each one.  If there were a regulation that said you are not permitted to start a business unless you first hire 100 employees, then this would almost completely stifle a nation’s economy if enforced.  If you have a lot of regulations and yet they do not really impose any significant cost to businesses and individuals, then it will not harm the economy much.

The same goes for all of these.  And really, all of these things are inter-related in different ways.  Taxation can affect spending and spending can affect taxation.  The same can be said with monetary policy.  The size of government affects all of these areas.

But if you could fix one thing first, what would it be?  It is difficult to say.  If you didn’t have a central bank and the government did not have a monopoly on the money supply, then it would not be able to spend as much.  It would also not be able to run up massive debt.  The federal government would be more like state governments are today.  It could still spend quite a bit and do a lot of damage, but it would be forced to scale back in hard times.

On the other hand, if you dramatically cut spending, then it would not be necessary for the central bank to create money out of thin air.  The debt monetization would not be needed.  You don’t need a central bank to buy government debt if there is no government debt to begin with.

Regulations are quite difficult to measure.  Just by being aware of the many thousands of pages of regulations put out by Washington DC, you have to know that they are a significant cost to Americans.  Even here, if there were very low spending and taxation, many of these regulations would not be enforceable.

I used to think that taxation was the biggest issue in driving an economy.  While I still think it is very important, I’m not sure that it is the number one thing to look at.  The 1950’s in America were a relatively prosperous time.  Think of Leave It To Beaver.  The husband went to work.  The wife stayed home.  Times were pretty good for most Americans.  Medicine was cheap.  That part we can thank the low regulations in healthcare at the time.

However, the 1950’s also had one of the highest marginal tax rates in history.  You can see the history here.  The top tax rate was over 90% at some points in the 50’s.  This was draconian.  Luckily, taxes for the average American were much lower.  Overall spending was much lower.  Deficits were low.  Monetary inflation was relatively low.

I think the biggest drivers of a nation’s economy are monetary policy and overall spending.  They are related.  If the government didn’t spend so much, we would have lower taxes and more stable money due to less debt.  But again, the government wouldn’t spend so much without the Fed there to create new money out of thin air.

Monetary policy is huge.  Debasing the money is really degrading to a civilization.  It redistributes wealth.  It misallocates resources.  It rewards debtors at the expense of savers.  It causes bubbles, booms, and busts.  It allows government to continue to grow.  It allows government to run up the debt.  It allows government to start wars without new taxation.  It allows banks to take bigger risks.

In conclusion, all four of these areas are important to an economy.  While tax reform and tax relief are important,  I believe the government and central bank’s control over the money supply is the biggest factor, along with the overall spending.

Yesterday, I discussed the wonders of compounding interest and the benefits to an individual investor.  For this post, I want to talk about compounding interest applied to an entire society or civilization.

Just as an individual can accumulate great wealth over time with compounding interest, a society can also accumulate great wealth.  It is the same concept.  If the economic growth of a particular area averages around 4% per year, then that area will be twice as wealthy about every 18 years.  But you have to realize that after another doubling after the next 18 years, then the people will actually be 4 times better off than 36 years ago.  After another doubling, they will be 8 times better off.

Despite the economic growth of the 20th century, the 19th century was actually more prosperous for America, in a sense.  There was great economic growth through most of the 1800’s.  We saw the great results in the 1900’s, even though growth was lower (as an average) during that time.  The 1900’s were so great (at least some of the time) because the wealth was being built off of what was already accomplished in the 1800’s.

While technology certainly plays a big role, it is actually capital investment that is the main thing that makes this happen.  People save money and invest their excess capital.  This enables people to be more productive.  This allows them to save even more and invest even more, which leads to even more production with less labor necessary.

If America had the massive government spending, regulation, and bureaucracy in the 19th century that we have today, the people then would have been really poor.  The people of the 20th century also would have been really poor.  And we would be far worse off today.

We are a quite wealthy society now, especially compared to anything a hundred years ago.  This is in spite of the massive government we have.  If we didn’t have the massive government, then we would be that much more prosperous.  But most of what we have today is due to the previous capital investment that took place previously over hundreds of years, or more.

It has been said that the American Founders would have had more in common with the people living in the era of Jesus than with us today.  In other words, there was not that much advancement for a couple of thousand years.  Something happened in the late 1700’s and early 1800’s where the economy got going.  Much of this is due to freedom in Britain and America (at least economically speaking).  The economy was like a car that needed an initial push to get it going.  Once it got going, then it could accelerate.

Even a small 2% growth can add up significantly over time.  People don’t notice it unless they look back several years and compare the living standards.

With the tough economic times (due to the massive government and central bank), it is still important to have some economic growth.  It can give us hope that we can get beyond the government interference enough to continue to prosper.  If we ever did get government off of our backs, we could see real growth at 5%, 10%, or more.  Our standard of living would increase at a staggering pace.

It is often surprising how few people understand the power of compounding interest.  It is a powerful thing.  A lot of investment companies will sell their products by giving you examples of compounding interest.  For example, if you invest $10,000, just one time, at the age of 20 and earn a return of 6% every year, you will have over $137,000 by the time you reach age 65.

It is called compounding interest, but “interest” just refers to the rate of return.  You can make your return by earning dividends or capital gains and it doesn’t have to be with stocks.

While it is a lot harder these days to get a decent and consistent return on your money, compounding interest is still important, especially if you are relatively young.  You don’t need a lot of money to start building a portfolio.  It may seem small at the start, but if you stay with your plan and you keep contributing money, even in small amounts, it can add up to a big sum later on in life.

I think one of the best things to look at right now is real estate.  In many places in the U.S., houses have fallen 50% or more in price.  In many places, you can buy a house with 20% down and actually get positive cash flow.  You will get a return on your money every month (assuming no major repairs).  Plus, you will be slowly paying down the mortgage.  Plus, you might even get capital gains one day on the price if the housing market recovers.  While houses may or may not go up in real terms, monetary inflation is likely to eventually drive the nominal prices higher.  Meanwhile, you can pay off (or your tenants can pay off) your fixed-rate mortgage with depreciating money.

Outside of real estate, I advocate that you invest in something like the permanent portfolio as described in Harry Browne’s book Fail Safe Investing.  It is the best thing I know of that will allow you to sleep at night.  It has been quite consistent in providing good solid returns above the inflation rate.

Tomorrow, I am going to continue on this subject of compounding interest, but instead of applying it to individual investors, I am going to apply it to civilizations.

Obama has been a complete disaster.  The only good thing I can say about him is that, while he has expanded wars and started new ones, at least he hasn’t started an all-out world war, at least yet.  I don’t know if we would be able to say the same thing if McCain were president.

Obama has been a disaster for civil liberties and, of course, a disaster on the economic front.  The debt has grown a staggering amount on his watch.

I hear Sean Hannity and other conservatives talk about the Obama debt.  While Obama certainly is partially responsible, these conservatives are also letting the Republican politicians in DC off the hook.  Being apologists for Bush for eight years wasn’t enough for them.

It is true that Obama has been president for over 3 years now and the Democrats controlled both the House and Senate for the first two years.  But what about the last 14 months, when the Republicans have controlled the majority in the House?

According to the Constitution, all spending bills have to go through the House.  The House of Representatives actually holds more power than the president when it comes to spending.  The president can only sign or veto a spending bill.  The congress can actually override a presidential veto.

If the Republicans in the House really wanted to cut spending, they could do it.  If they really wanted a balanced budget, they could do it.  If they really wanted smaller government, they could make it happen. The conservative apologist will say, “but then the media would make them look bad”.  My response is, “so what?”  The conservative media, like Sean Hannity, wouldn’t attack them for cutting spending (or would he?).  If the Republicans are never going to cut any government because they are afraid of what the media will say, then what is the point in electing them?

The Republicans in the House could shrink government simply by refusing to pass any spending bills that would cause a budget deficit.  The Republicans could have refused to raise the debt ceiling.  If they didn’t want to be that drastic, they could have raised the debt ceiling by a much smaller amount.

Do these establishment Republican voters never learn?  They think the Republicans are the lesser of evils because they talk about smaller government.  If you’ll notice, most of these Republican politicians never actually offer any specific cuts of any substance.

I say all of this for a couple of reasons.  First, don’t be fooled again into voting for Republicans, unless it is someone like Ron Paul who offers specific and drastic cuts (which is rare to find).  Second, don’t count on anything significant changing if Mitt Romney beats Obama in November.

Regardless of who is president next year and what party controls the House and Senate, it will probably not make much of a difference.  There will be short-term pain even if Ron Paul becomes president, simply because of all of the previous malinvestment.

If Romney (or Santorum or Gingrich) were to beat Obama, you probably shouldn’t change your economic outlook.  They will continue to spend other people’s money and they will continue to drive the train over a cliff.  Things will only change due to a collapse or a major change in people’s thinking, or maybe both.  Technology will also play a role in changing things.

When enough people realize that government is not the solution, but the problem, then things will take care of themselves.  It will not be necessary to vote for the right person.

Last week, there was a well-publicized story about 16 Afghan civilians who were murdered in their homes in the middle of the night.  Most reports have said that it was done by one American soldier.  However, there have been some conflicting reports saying that several American soldiers took part.  Regardless, it is an important story and one that deserves attention.

If nothing else, this story points to the extreme hypocrisy of the U.S. government and even many Americans who continually promote war.  Almost all Americans condemn the 9/11 terrorists who murdered about 3,000 Americans, and rightly so.  But didn’t this American soldier just do the same thing that the terrorists of 9/11 did.  Perhaps the motives were different, but the results were the same (except for the number of dead).

These were Afghanis who were completely innocent.  Many of them were children.  This American soldier (or soldiers) murdered these innocent people.  So should the Afghan government now have the right to start bombing America because of this act of murder?  In the eyes of Americans who want to continually bomb Afghanistan because of 9/11, wouldn’t this be the consistent thinking?  The terrorists on 9/11 were supposedly linked to the Taliban, but even that is sketchy.  However, there is no question that this American soldier was connected to the U.S. government.  In fact, he was trained to kill by the U.S. government.

The other point to be made with this whole story is that this is only one incident.  This particular incident is more newsworthy because it was a deliberate act.  But there are many times when innocent Afghanis are killed “accidentally”.  If a plane drops a bomb on an Afghan village that “accidentally” hits a wedding party and kills innocent people, it is labeled as regrettable, but there are rarely charges brought against those who dropped the bombs or those who ordered that the bombs be dropped.  But why should this be any different?  Even if the pilots dropping those bombs were not trying to deliberately kill innocent people, they still knew that there was a good chance that innocents would be killed.

If someone deliberately shoots someone, while another person randomly fires a gun in the air in a crowded area and kills someone, is there really much of a difference?

This whole incident never should have happened.  The U.S. military is occupying Afghanistan (along with many other countries).  These soldiers should not be there in the first place.  The people that were directly responsible for 9/11 are dead.  Osama bin Laden is also supposedly dead.  There is absolutely no reason for the U.S. government to be in Afghanistan and definitely no reason for bombing or shooting anyone there.

All U.S. military personnel and government contractors should be brought home to the U.S. at once.  The innocent people of Afghanistan do not deserve to be terrorized by Americans.  Americans must take the moral high ground and withdraw immediately.

I am not big on using charts, graphs, etc.  They are useful in telling us what has happened in the past, but I am not particularly fond of charts and patterns for predicting the future.

There are a lot of people out there who use charts and trends to make predictions on investments.  They will talk about head and shoulder patterns or breaking above a 200-day moving average or some other jargon.  They base their analysis of an investment primarily using these charts and trends.  While I often find it fascinating, I also think it is mostly bogus.

If there is one thing you should learn from Austrian school economics, it is that economics is really a study of human action.  Everything in economics depends on human action.  And that is really the problem with charts and graphs.

You could read some analyst who says that gold is about to break out because of a particular trend line on his gold chart.  But why should this mean anything for the future?  What happens if Bernanke comes out tomorrow and announces that the Fed will not engage in any more quantitative easing (money creation) for as long as he is Fed chairman?  The gold chart can’t possibly know any of this.  If it did, then the chart would already reflect this and the price would have gone way down, assuming that people believed what he said.  How can the chart know what millions of individuals are going to do the next day and whether they are going to buy or sell or hold or do nothing?

Again, charts and graphs can give us a good overview of what has happened in the past.  Perhaps this can contribute to our decision on whether or not to invest in that particular thing.  But charts can’t predict the future any more than a Magic 8 Ball.

When I read some analyst who says something along the lines of, “this stock’s 6-month chart shows that it is about to break out and will probably double in price over the next few months”, I wonder many things.  First, if this is such a great tip with a high, practically-guaranteed, rate of return, why is this person sharing the information with everyone else?  Second, if this person is so good at doubling his money every few months, why doesn’t he have wealth in the neighborhood of Warren Buffett or Bill Gates?  Third, why doesn’t he list all of his previous calls and tell us what the results were of his recommendations?

Charts can be somewhat useful and informative, but they can’t predict the future.  They can’t predict human action.  If anyone is selling you an investment solely based on the use of a chart or graph, my recommendation is to walk away from that person.

The Federal Reserve chairman, Ben Bernanke, talked this week and markets moved.  There was nothing really significant that Bernanke said though.  The Dow surged passed 13,000.  Gold tumbled this week.  However, I think the most significant news is in the bond market.

Bonds got hammered this week.  The 10-year yield has been around 2% or a little lower for quite some time now.  While it was hovering just above the 2% mark earlier this week, the yield is now 2.28% as of this writing.  While a few days don’t necessarily make a trend, a rise in interest rates has to start somewhere.

The 10-year yield and mortgage rates tend to be highly correlated.  That means that when the 10-year yield goes up (as it has this week), then mortgage rates are also likely to rise.  If the rate were to keep going up, even to just 3%, this could be devastating for the housing market.

Many libertarians/ Austrian school followers have been predicting higher rates in the U.S. for quite some time now.  It hasn’t happened yet, like it did in the 1970’s.  It never ceases to amaze me how long things can take to unfold.  It seems that the interest rates in Japan should have gone way up, yet the rates there continue to be close to zero.

The Japanese government has a debt-to-GDP ratio that is well over 200%.  This makes the U.S. government look fiscally responsible in comparison.  The Bank of Japan has not inflated much in comparison to other central banks.  But how could a government with such high debt manage to keep rates so low?  You would expect at some point that investors would stop buying government debt, which would either force the government to cut spending or force the central bank to monetize the debt (inflate).  Yet this hasn’t happened.  The only explanation is that these investors are naive and do not understand what is going to happen.

This just goes to show that markets are unpredictable.  You may think it is a rational response for investors to stop buying Japanese government debt because the debt has reached such a high point.  Yet, others do not see it this way.  They may not be smart, but it also wouldn’t have been smart to bet against Japanese bonds at this point.

I don’t think the U.S. government and the Fed will be able to stop higher interest rates for decades like has happened in Japan.  Higher interest rates and higher price inflation are the two main things to look out for.  These two things will determine Fed policy.  I believe the Fed will stop inflating when the U.S. dollar is severely threatened.  At that point, the government will finally be forced to make real cuts.

Higher interest rates will be bad for the elitists in Washington DC.  In many ways, higher interest rates would be a blessing for the long run, as it might slow down the train and lessen the impact of the coming wreck.

We will keep an eye on the 10-year yield and see if the higher rates become a trend.  This could change Fed policy and encourage a start to QE3 (more money creation), but it will eventually bring on the day of reckoning.