As I write this, Super Tuesday is not done yet.  But here are some preliminary thoughts on the results so far and what they mean going forward.

The big story is that Mitt Romney has not clinched the nomination.  I know he wasn’t going to formally clinch anything from Super Tuesday, but it could have put him at 99% or better of winning the nomination.  While Romney didn’t do horrible, he didn’t do exceptionally well either.  He won the states he was supposed to win.  Gingrich won Georgia.  Rick Santorum has won several states.

The big contest was Ohio because it is a swing state in the general election and it was close in the polls.  While it is still too close to call as I write this, Romney did not get a convincing win there.

So while Romney is still the front runner, it is mostly by default.  He has the establishment backing and he has the money.  He comes across too polished though.  Conservatives understand that he says what people want to hear and he doesn’t have strong principles.  For some reason, many conservatives can’t see through Santorum and Gingrich, even though I think they are bigger fakes than Romney.

While I dislike Romney slightly less than the other two, I am happy that he is still not able to become the clear winner.  It drags things out longer.  It gives Ron Paul more of a chance to deliver his message.

Speaking of Ron Paul, it looks like he will fall short of a win in North Dakota or Idaho.  We will have to see if he can pull something out in Alaska where the voting ends at midnight eastern time.

It is interesting to note that Paul received 41% of the vote in Virginia where only he and Romney were on the ballot.

I will put in my humble two cents in a couple of days on what the Ron Paul campaign should do next.  They have to realize that his chances of winning the Republican nomination are quite slim at this point.  This is not a criticism of Ron Paul or his campaign.  I think it is remarkable how much progress has been made in spreading the message of liberty.

Frank Shostak of the Mises Institute has written a wonderful article.  He says that the economic problems are not really about the debt.  He says that the problem is monetary inflation.  As he concludes in his article, “the threat to the US economy is not the high level of debt as such but loose fiscal and monetary policies that undermine the pool of real funding.”

I recommend that you read the whole article if you haven’t already.  He has a very clear understanding of economics.

I don’t think the U.S. debt is irrelevant.  There are consequences that will be felt from the high debt.  As I have written before, it isn’t that our grandchildren will have to pay it.  Government debt hurts us right here and right now.  It takes away from savings and investment and diverts resources into ways that the market wouldn’t have.  In other words, it misallocates resources.  The only reason the high debt hurts our grandchildren is because there is less capital investment taking place.  Our grandchildren won’t have as much wealth as a result.

The other important thing to point out about the debt as it relates to Shostak’s article is that the debt is one of the causes of monetary inflation, and spending is a cause of the debt.  If the government didn’t spend so much money, then there wouldn’t be a high national debt.  If the debt weren’t so high, then the Federal Reserve would not have to create money out of thin air to monetize the debt.  The Fed and the government work hand-in-hand.  The Fed and its money creation is what allows the government to run such massive deficits.

One other important thing to note is that government spending also diverts funds and misallocates resources.  So whether it is the Fed’s loose monetary policy or the government’s profligate spending, it is diverting precious resources away from their ideal use as determined by the market.  It is misallocating resources and hurting savings and investment.  And as Shostak emphasizes in most of what he writes, savings and investment, or the pool of real funding, is what grows an economy.

In conclusion, the Fed’s money creation and the government’s spending make us worse off.  They lower  our standard of living in comparison to what it would be without their interference.  That is why we should do everything we can to reduce the power of the Fed and reduce government spending.

There was an article posted on LewRockwell.com by Allan Stevo.  Actually, it is an excerpt out of a new book called How to Win America for Ron Paul and the Cause of Freedom in 2012.  The author is obviously a huge Ron Paul supporter and is a big supporter of liberty.  From that, I don’t want to step on his toes and make an enemy out of someone who shares a similar philosophical outlook.  However, I do respectfully disagree with much of what he has said.

Stevo starts out (in this excerpt) by trying to motivate Ron Paul supporters.  He does it in an over-the-top way.  He says, “Working half-heartedly or ineffectively in these times that so matter is simply not enough, because victory is so close for a candidate who is so threatening to the forces that oppose freedom.”

The author goes on to say that “Simply sharing links of Facebook and getting into online debates will do little to make Ron Paul president”.  He is saying that Ron Paul supporters need to branch outside of the internet to be effective.  Perhaps he is partially correct here.

Then he really goes over-the-top.  He says that if you are staying online or just waving signs, then those actions are entirely ineffective in winning a campaign.  He says, “Do them and you are just as bad as any neo-con – because you have a chance to effectively fight for liberty, yet you do nothing.”  A few sentences later, Stevo writes, “In fact, I’d say you’re even worse than a neo-con, because a neo-con doesn’t get it.”

First, this is completely insulting.  I understand he is trying to motivate people, but you don’t do it by throwing insults.  They are ridiculous insults too.  If someone is open-minded enough to come around to Ron Paul’s viewpoints, you are going to say he is the villain just because he doesn’t do everything you say he should do in campaigning?  This is absurdity.

Later in this excerpt, the author does some math.  He says that now 2 or 3 voters out of 20 trust Ron Paul.  Then he gets back to his attempts at motivation by barking orders at his fellow supporters.  He says, “If you are reading this right now, you need to personally deliver 10 votes for Ron Paul on election day.  You need to personally bring in 10 voters who otherwise wouldn’t have voted for Ron Paul.”

And what if I don’t bring in 10 voters?  Am I a villain?  Are you going to steal Christmas from me?

The author makes it sound like it is quite feasible as long as you put in the time and effort.  But does he understand how hard it is to convince someone to vote for someone, particularly someone like Ron Paul who is completely different than the typical candidate?  If someone is familiar with Ron Paul and understands a little bit of his philosophy, what makes Stevo thinks that someone’s mind can be changed so easily?  If the person is on the margin and already leans libertarian, perhaps it can be done.  But most people are not there yet.  And when they get there, it will be because of their own internal motivations.

As I’ve said before, you can lead a horse to water, but you can’t force it to drink.  If someone is familiar with Ron Paul and his message and has access to all of the material on the internet that is out there, how much more can I do?  Am I going to call the person every day?  That will just be annoying and turn the person off.

If it were easy to bring 10 new voters for Ron Paul, then a lot of people would be doing it.  But it is very difficult.  It is naive to think that someone can just talk to people and bring them over to the libertarian side in the matter of weeks or days.  The people who are having online debates (who Stevo criticizes) are trying to do this very thing.

Here is the big thing with this excerpt and probably his new book.  Stevo’s main goal is to win the presidency for Ron Paul.  That is actually not my main goal.  It is putting the cart before the horse.  You have to educate people on the benefits of liberty.  You have to persuade people that liberty is moral and that it leads to the most peace and prosperity for everyone.  You cannot skip this step.

Ron Paul could become president tomorrow, but if it was not the result of a change in the hearts and minds of the American people, then it would almost be pointless.  For long-term change in favor of liberty, there has to be a change in the mindset of Americans.  People have to stop believing that government is necessary to run their lives.  Only then can we have smaller government and more freedom.

I believe it is necessary to review the adjusted monetary base on occasion.  The money supply is a major factor in determining what happens in the economy and, therefore, your investments.  While it shouldn’t be this way, that is the reality that we live in.

The money supply measure that the Federal Reserve controls is the adjusted monetary base.  You can view the latest short-term chart here:
http://research.stlouisfed.org/publications/usfd/page3.pdf

You can also view a longer-term picture here:
http://research.stlouisfed.org/fred2/series/BASE

You can see the large spike that took place in the fall of 2008.

Since QE2 ended last June, the monetary base has been pretty flat.  The Fed has not been doing much for the last 8 months.  However, in the last few weeks, you can see on the short-term chart that it has gone up and has even surpassed the mark from last June/ July.

We will have to see if this trend holds.  The Fed has not announced any official QE3 (yet).

Another interesting chart to look at is the excess reserves held by commercial banks.  The chart is here:
http://research.stlouisfed.org/fred2/series/EXCRESNS

It has basically copied the monetary base since late 2008.  So while the Fed has more than tripled the money supply, most of this new money has gone into excess reserves with the banks.  This has kept the federal funds rate near zero because banks have no need to borrow overnight money.  Since the excess reserves are so high, most banks do not fall below the minimum reserve requirement that would require them to borrow.

The huge excess reserves has also helped keep a lid on price inflation.

The most important thing to remember is that all of this monetary inflation is not without a big price.  While we haven’t seen huge price inflation to this point, it doesn’t mean that there isn’t severe damage being done.  All of that monetary inflation causes more misallocations.  Resources are not being put to their best use because of the distortion.  This is hurting savings and investment and it is the main reason for the struggling economy.

Until the Fed stops the monetary inflation and allows a severe correction to occur, the economy will continue to be damaged and will continue to struggle.  My best guess is that the Fed will not stop the monetary inflation until we see higher price inflation.

Ben Bernanke spoke today and markets reacted.  As this article notes, “Bernanke’s comments suggest that the Fed has made no decisions about another round of quantitative easing – sure to be nicknamed QE3.”  The price of gold tumbled.  The gold ETF (symbol: GLD) fell $9.20, which translates to about a $92 decline in the metal.  Gold is now around $1,700 per ounce after several weeks of steady gains.

The most amazing thing about this is how sensitive the price of gold is (in terms of the dollar) when Bernanke speaks.  It just shows the power of one person (or one committee).  There is no reason it should be this way.

This also shows that the price of gold in terms of dollars is not only a reflection of past monetary policy, but also a reflection of expectations for future monetary policy.

This is where gold is really different from consumer prices.  Consumer prices such as food and clothing are more likely to rise because of past increases in the money supply.  Gold on the other hand is more likely to rise because of expectations of a coming increase in the money supply.  It is not to say that food and clothing do not take the future into account, but just that it does not seem to be as great of a factor as it is for gold.

These roller coaster rides in the price of gold will likely continue.  I still think that as long as the economy does not drop off a cliff, then the gold price will likely go higher.

The federal government is in major trouble.  The debt-to-GDP ratio is now over the 100% mark.  The yearly deficits are over one trillion dollars and it is only going to get worse with the unfunded liabilities of Medicare and Social Security.  The government is going to try to default through inflation first.

I just don’t see the Fed saying “no” to the government right now.  If the U.S. government needs someone to buy its debt, then the Fed will buy.  If the Fed doesn’t buy, then interest rates will rise and the government will be forced to severely cut spending.  That is why the Fed will say “yes”.

There will eventually come a time when the Fed says “no”.  It will be when the dollar is threatened.  It will be when we see double digit price inflation as we did in the 1970’s.  At that point, I expect the Fed to stop buying U.S. government debt for a while.  That is when you will see a severe cut in spending.  That is when you will see a depression.  That is when you want to sell some of your gold investments and take your profits.

It looks like Mitt Romney will win Arizona and Michigan.  Just a couple of weeks ago, Santorum had taken a lead in the national polls and had a substantial lead in the polls for Michigan.

Romney can thank Ron Paul for his victory in Michigan.  The last debate, that took place in Arizona, may have been a game changer for Rick Santorum.  Ron Paul took him to school.  He pointed out many of his inconsistencies and exposed Santorum as a hypocrite.  He pointed out that Santorum campaigns like he wants smaller government, but his actions as a senator were completely different.

While there are still headlines to be made, I think Mitt Romney is the heavy favorite to win the nomination at this point.  It is hard to believe that the Republicans will put, as their nominee, the founder of Obamacare.  Romneycare was instituted in Massachusetts and is very similar to Obamacare.  While Romneycare may be constitutional, it still does not make it good policy.

The one issue that the entire Republican Party agrees on is that Obamacare is a bad thing.  So the party nominee will be the unofficial founder of Obamacare.  Makes sense to me.

Romney is really going to get the nomination out of default.  He has the money and backing to win it and the other candidates all have their major flaws.  Of course, Ron Paul doesn’t, but the majority of the country isn’t quite ready for him yet.

Rick Perry should have stayed in the race.  Conservatives are hungry for someone decent who matches their views.  Perry was horrible in the debates, but he should have stuck it out.  He actually could have come back and challenged Romney.

As for Ron Paul and his libertarian message, he will have over 100,000 votes coming out of Michigan.  If he stays in the race (which I expect him to), then he will likely amass a couple of million votes when it is all over.  While not all of the people who vote for him are hard-core, he definitely has the most loyal and passionate following.  This was shown by about 4,000 people attending a Ron Paul event in Michigan.

I think it is fairly safe to say now that there are about one million Americans who would consider themselves solid libertarians and several million more who lean libertarian.  To put this in perspective, no Libertarian Party presidential candidate has ever received a million votes in one election.

Although the percentage of libertarians still seems small, we don’t need a majority to gain liberty.  We need a tireless minority.  We need a solid 10%.  We are getting closer and closer.  I really believe that there is good reason to be optimistic for the long-term future.  More Americans are waking up and embracing the idea of liberty.  I think the libertarian revolution is really rolling now and I expect it to continue.

The price of oil has risen quite a bit recently.  Crude oil is now around $108.  The general consensus is that the price has risen due to the tensions in the Middle East, particularly the threat of war in Iran.

One thing that makes economics difficult is that you can’t look at real life in a vacuum.  It is impossible to know for sure if the rise in the price of oil is because of the possibility of an Israeli or American strike on Iran.  It is quite possible that the price of oil has gone up in dollar terms because of the previous monetary inflation that took place.

My guess is that it is a combination of the two things.  There has been a lot of new money created by the Fed since the fall of 2008.  While the bad economy and a lack of bank lending have helped to keep a lid on prices, it is hard to imagine that it wouldn’t have had some effects on prices at this point.

When there is monetary inflation, the new money does not spread out across the economy evenly.  Some things may not go up much in price, while other things may go up a lot.  The new money finds hot spots.  This can be in the stock market, gold, real estate, are any number of other things.  It can also go into oil, particularly when there are concerns of a supply interruption.

Even if most of the rise in the price of oil is due to the threat of a war in Iran, the oil market is still telling us that there is a decent chance that there won’t be any significant violence there.  While oil has risen in price quite a bit in the last month, it is still just under $110.  If the consensus in the market were that a war with Iran were likely, then I think we would see a much higher price.

Many analysts are saying that oil will go to $150 or $200 per barrel if war breaks out.  I think this is a very conservative estimate.  If Iran is successful in closing the Strait of Hormuz for just a few days, we could easily see the price spike to over $300.

If oil is going up strictly because of the threats of war and an interruption in supply, then other prices should go down.  The only way that oil will go up in price along with most other consumer goods is because of monetary inflation.  As I have written before, higher oil prices do not cause price inflation.

Time will tell if the oil prices are going up because of the threat of war in Iran or because of monetary inflation.  Either way, the higher prices are hurting the average American who is already feeling squeezed.

The ironic thing is that the higher oil prices we see now might reduce the risk of a war with Iran.  Obama is starting to feel some heat for the higher gas prices.  He has to know that a war with Iran will make gas prices skyrocket.  This would be bad for his re-election chances.  Therefore, maybe he will hold off on another war and maybe he will encourage the Israeli government to do the same.

Throughout the Republican primary process, Ron Paul has been identified as being different than the other candidates, particularly on foreign policy.  His libertarian philosophy differentiates him on civil liberties and social issues too, but most Republicans who do not support him feel that his foreign policy views make him the most different.

Everyone is right that Ron Paul is different when it comes to his views on foreign policy.  However, he is also different when it comes to economic issues.  In fact, he is not just different from the other candidates on economic issues; he is virtually the opposite.  The other candidates are far closer to Obama on economic issues than they are to Ron Paul.  Their rhetoric means nothing.

Jeff Berwick of The Dollar Vigilante has an article that was posted via LewRockwell.com.  He says he was at a conference where he said, “I have no problem with someone having 100% of their portfolio in gold.”  He said that many in the crowd laughed at the comment, but he didn’t find it so funny.

The whole article is short and worth a read.  He makes many good points.  He ends the article by backtracking a bit and saying that his organization actually recommends 30% in gold and silver.  They also recommend 20% in gold mining juniors and 15% in gold mining major stocks.  If you add all of that up, it is 65% in gold or gold related investments.  The 35% in gold stocks is highly volatile.

I completely disagree with the sentiment of having 100% of your portfolio in gold.  I don’t even like the 65% allocation.  It is too high and too risky.  What would happen if the economy falls into another deep recession as it did in the fall of 2008?  Having 35% in gold stocks and another 30% in gold and silver would devastate your portfolio.  Of course, having 100% in gold would also hurt a lot if gold were to drop like it did in late 2008.

I am an advocate of the permanent portfolio as described by Harry Browne in his book Fail Safe Investing.  This would put you in gold for 25% of your portfolio.  Of course, I see nothing wrong with some speculation money that is for riskier plays.  For this money, I would certainly favor some more gold, some silver, some platinum and maybe some gold stock ETFs like GDX and GDXJ.  These speculation plays are just because of the economic environment we are currently in and the potential for a big reward.  However, anything beyond the 25% in the permanent portfolio has some substantial risk to it.

Here is the mistake that Berwick is making with his comment about being ok to have 100% in gold.  He, like many other libertarians, are mistaking gold for money.  Gold has a history of being money.  If we had a free market in money, it is likely that gold would be used as money.  However, that is not the reality we live in.  In America, the U.S. dollar is money right at this moment, whether we like it or not.

To prove this point, try this as a test.  Walk into a grocery store and load up your shopping cart with food.  Or you can even just pick out a few items.  Then go to the cash register and try to pay for it with a gold coin.  The cashier is going to look at you like you are nuts.  In fact, you could have 100 U.S. dollars worth of groceries and offer to pay for it with a one ounce American gold eagle.  The value on the coin says $50, even though the actual value is over $1,700 as of this writing.  My bet is that nine out of ten cashiers would not accept the coin.  Most would probably have to call a manager to come over.

The point is that gold does not serve as money in our society right now.  It has all of the qualities for a good form of money, but the government has essentially forced us to use the U.S. dollar.  That is why you don’t want 100% of your portfolio in gold.  If the dollar price of gold goes down significantly, then you cannot buy as many groceries with it or just about any other consumer item.

In conclusion, my guess is that gold will continue to rise against the U.S. dollar.  However, I would not put all of your eggs in one basket.  If the price of gold in terms of dollars goes down, then you need some dollars to buy more.

Another Republican presidential debate occurred, this time in Arizona, ahead of primaries in Arizona and Michigan.  After that will be “Super Tuesday”.  This was perhaps the last Republican debate, depending on what happens in the next couple of weeks.