Ron Paul is most likely having an effect on the price of gold.  This doesn’t mean that Ron Paul is driving the price up or down by buying or selling.  It means that, because of his message that has reached millions of people, it has probably affected their decision of whether to buy gold, even if it is just a fraction of his supporters.

It is impossible to prove the answer to this question and it is impossible to know exactly how much of an effect that Ron Paul has had on the price of gold.  However, with his warnings about the Federal Reserve and the debt and his discussions about gold, it is hard to imagine that this hasn’t had at least some kind of influence on some of his supporters.

If there are a million people who would consider themselves Ron Paul supporters and 10% of these people have bought gold or are considering buying gold because of their recent exposure to Paul’s message, then that is potentially 100,000 people who could drive up the price of gold.  This isn’t a lot of people, except that buying actual physical gold is a fairly thin market.  It doesn’t trade like Google or Apple stock.  On the margin, this could have a slight impact on the price of the metal.

Ron Paul supporters tend to be younger and they tend to have lower incomes (partially because of their age).  Most rich people are not Paul supporters (although they should be).  There are certainly some older people who are Paul supporters, but many of them were already libertarians before 2007 (Paul’s first run for president as a Republican).  These people probably already bought gold if they wanted it.

So the demographics of the Paul supporters do not point to a lot of people that would be able to buy several ounces of gold.  Most wouldn’t be able to afford one ounce in this economy.  But again, it doesn’t take that much to move a market like gold, particularly if people buy the actual metal (instead of an ETF or mutual fund).

There are millions of people who now have a decent understanding of the Federal Reserve.  Five years ago, most of these people couldn’t have told you what the Fed was or what it did.  These people understand that the economy is in trouble and they understand that the Fed is going to try to inflate its way out of it.  A good portion of these people may start buying a little gold, if they haven’t already.  They may only buy half ounce coins or one-tenth ounce coins.  Perhaps they will buy silver, which is the poor man’s gold.  The point is, because there are so many people aware of the Fed and what it does and what the potential harmful effects are, a lot of these people are going to be looking to protect themselves.

If you took all of the gold above the ground and distributed it evenly to every human inhabitant on the earth, everyone would have less than a troy ounce of gold each.  That is not very much gold to go around.  All of that gold above the ground includes the gold used for jewelry.  In addition, a good portion is held by various central banks.  It doesn’t leave a lot left for investors.

This indicates that there is a potential for a real spike in the price of gold, particularly if the Fed goes into QE3 (more money creation).  As more people become aware of the situation, the more there will be demand for gold.  Do you at least have your individual share of the world’s gold?  It seems expensive now, but it may seem really cheap in five years.

Mitt Romney is the winner of the Florida presidential preference primary vote.  This is not all that surprising considering that his campaign and backers most likely spent in excess of $15 million in just one state, mostly to attack Newt Gingrich.

Florida also has a lot of old people.  Wisdom is supposed to come with age, but not necessarily when it comes to politics.  Romney does especially well with senior citizens, while it is the worst group for Ron Paul.

Speaking of Ron Paul, he took about 7% of the vote.  I was hoping for 10%, but it was to be expected given that he did not campaign (other than the debates) and he did not spend advertising money in Florida. In addition, the demographics do not favor him as just mentioned.  Florida is a huge market without the delegates to match the population due to being penalized for holding its primary early.  Plus, Florida is a take-all state, where the winner gets all of the delegates.  Even without trying, Paul more than doubled his percentage from 4 years ago.

Ron Paul is wisely spending his time and money in caucus states where he can likely win, or at least take delegates.  He is campaigning in Maine, Minnesota, Colorado, and Nevada.

There is no indication that Santorum or Gingrich will drop out, but you never know what might happen in the next few days.  The demographics in Florida favored Romney, so there really is no reason for the other candidates to drop out, unless they are just plain tired or completely out of money.  Florida is not really a “southern state” (culturally, not geographically).  It is not like South Carolina where Gingrich won.

One thing that surprises me, although it shouldn’t, is how many people are saying that the number one thing they are looking for in the Republican nominee is whether they can beat Obama.  I guess that is why the Republican Party may nominate the founder of Obamacare, although it is called Romneycare for those living in Massachusetts.

By this logic of the Republican voters, if Hillary Clinton were to change party registration and run on the Republican ticket, then I guess all of these Republican voters should support Hillary Clinton since she has the best chance of beating Obama, particularly with the Republican vote solidly behind her.  It just shows the absurd thinking of so many voters out there.

This race is not over yet.  I am not naive though.  I realize that Romney is the strong favorite at this point.  Intrade agrees with me on this (or do I agree with Intrade).  Intrade has Romney’s chances at close to 90% of being the nominee, as of this writing.

The longer this thing drags out, the better.  It is more of an opportunity for people to learn about Ron Paul and his message of peace and liberty.

It is hard to fathom what life would be like without a monopolistic central bank and fiat money.  We live in a world of inflation.  This started in 1913 with the start of the Federal Reserve.  It sped up quite a bit in 1971 when Nixon closed the gold window and broke the last links that the U.S. dollar had to gold.  Since then, it has been a world of total inflation.  Of course, some years have been worse than others.

If there was no monetary inflation, or perhaps minimal monetary inflation with a gold coin standard, then things would work much differently now.  You would not see massive swings in stocks.  The price of the general stock market would not go up significantly over time.  This doesn’t mean it would be a bad investment.

Housing prices would not continually go up.  The prices might actually decline very gradually (not like a housing bust).  Houses are like cars in that they depreciate.  They just don’t depreciate as fast and the land that they sit on doesn’t depreciate.  The reason that housing prices go up over time is because of monetary inflation.

For politicians who say that we need to grow our way out of the debt, they only understand a portion of their own argument.  If the GDP grows and the additional tax “revenue” is used to pay down the debt or even if the debt remains the same while the economy grows, then the debt situation improves.  But we can also credit monetary inflation for this happening.  The only way that the national income can increase in nominal terms is through monetary inflation.

If we lived in a world without inflation (or with minimal inflation), then salaries would not rise by much, if at all.  Certain individuals would make more from one year to the next, but the average would stay about the same.

So why is inflation a bad thing then?

Inflation really plays tricks on you.  For even the best Austrian school economist, inflation will distort things.

If you get a raise for your current job for 2%, but price inflation is currently at 3%, then you are actually taking about a 1% loss.  Your income is going down by 1% in real terms, even though it is going up in nominal terms.

In a world with minimal inflation, your income wouldn’t rise, but neither would consumer prices.  In fact, in a free market economy, we would see something similar to what we see now with electronics like computers, televisions, and cell phones.  The quality would get better or the prices would go down or perhaps both.  In a relatively free market environment with minimal monetary inflation, you would see prices go down for education, healthcare, cars, vacations, food, etc., while your income would likely remain the same (in the same job).

In a world without inflation, stock investors would buy stocks for dividends.  It would certainly be possible to have capital gains for individual stocks, but the overall stock market would be unlikely to fluctuate too much.

Again, this is all hard to imagine because we live in an inflationary world.

The way to grow the economy isn’t through more monetary inflation that results in higher prices.  This is just a distortion.  The way to grow the economy is through a stable free market monetary system and minimal government interference.

The 19th century in America was a time of relative peace and prosperity (not counting the war time of the 1860’s).  Prices actually went down slightly over this time.  It was really the most prosperous time in history (unless you want to argue for England during that time).  The technology and capital investment that was built up in the 19th century really laid the groundwork for all of the new great things that came out of the 20th century.

It really is hard to imagine a world without monetary inflation.  Most people think that the world we live in today is the way things are supposed to be.  They don’t understand that prices are not supposed to go up continually, year after year.  They don’t understand how much they are being robbed from the debasing of their money.  They don’t understand how much better their standard of living could be.

There is somewhat of a myth out there that you need money to make money.  If you are investing your money in stocks or real estate and you want to retire off of the dividends and interest, then you will need a lot of money.  Just for an example, if you have $2 million and you can earn an annual return of 4%, then you will have $80,000 per year without depleting your principal amount of $2 million.

However, most people do not become rich investing.  Most people become rich by having a high income and saving a good amount of it.  For people who do not make a high income, then being frugal becomes that much more important.  To have a high income though, you don’t necessarily need a lot of money to start off.

Let’s look at a few billionaires.  Bill Gates and Steve Jobs both made their fortunes through their own work and effort.  They needed some help along the way, but they both basically started their businesses from nothing.  They used their brains and natural talents and took advantage of the situations around them.  They may have even had some luck along the way.  But the point is, they both made it big without much money to start.

Warren Buffett has made many billions through investing in companies.  He did not exactly start from nothing.  His father, the libertarian Congressman Howard Buffett, was obviously not poor.  But Warren Buffett still used his talents to make billions.  There are a lot of people who start off with a lot more and don’t amount to much.

The Walton family has inherited a fortune.  There are Walmarts almost everywhere now.  This was basically a self-made franchise and now the heirs are reaping the rewards.

The point is, most rich people are not like the Rockefellers.  They are more likely people who are mostly self-made in a generation.  It is a big advantage to grow up in a decent household that teaches good values and provides a decent education.  After that, it really depends on each individual.  There are not many people who grow up in an inner city neighborhood in the slums who grow up to be rich.  But even here, there are exceptions.  Some people are strong enough to fight through their environment and control their own destiny.

If you want to make money and become rich, don’t worry about not having money.  This is usually a benefit.  You can start from scratch.  Some people have more natural talents than others.  But there is no substitute for hard work and discipline.  If you work hard and you try to grab opportunities when they present themselves, then you can be reasonably successful.  Then you have to make sure that you live below your means and save money.  If you do this, then maybe you can reach a scenario as described above where you can have enough principal money that you can just live off of the interest.

You don’t have to have money to make money.  But it definitely helps when it comes to investing and retirement.

The last debate has finished up before the Florida primary voting.  It may be the last debate we see for almost another month.

First, I thought Wolf Blitzer did a decent job.  Of course, it is all relatively speaking.  There could still be much better questions, but at least he was reasonably fair in giving time to all of the candidates.

Second, I have a little factoid to present to Mitt Romney.  English is not the official language of the United States.  There is no official language.  Obviously, English is the most widely spoken.  There is no need to have an official language, unless there is just something that states that all federal legislation will be written in English, but there is really no need for that even.  Just like everything else, the free market has a way of handling these things.  If English is that important for someone in getting a job, then they will have motivation to learn it.  It won’t be because a bunch of politicians got together and declared English to be the official language.

Third, I thought Ron Paul had a great debate.  He was more relaxed and had a few funny lines that the audience appreciated.  He made many strong points and was quite clear that he is the candidate who believes that the role of government should be severely limited.  This particularly came through when he talked about the space program and saying that government has no role except possibly for national defense reasons.

Fourth, I thought it was interesting that Newt Gingrich was echoing Paul so much.  I think part of that was because Paul was making so much sense and resonating with the audience.  I think another part of that is that Gingrich did not want to pick a fight with him.  He is hoping that if he becomes the nominee that he can get at least a few Paul supporters to vote for him.

Fifth, I liked Rick Santorum’s presence in the debate.  I don’t particularly like Santorum and what he stands for.  In fact, he probably scares me more than anyone, including Obama.  However, he did a great job of exposing Gingrich and Santorum on their support of government-run healthcare.  The ironic thing in all of that though, is that Santorum supported the massive Medicare prescription drug program started under Bush.  That program is the epitome of top-down government-run healthcare.

In conclusion, I thought it was a good night for Ron Paul.  Gingrich and Romney beat up on each other. While they focus on Florida, Paul is focusing on Maine and other caucus states where he can win and pick up delegates.  The longer he stays competitive in this whole thing, the more of a chance that people will have to see the light.

The Federal Open Market Committee (FOMC) released its statement today saying that it is likely to leave rates near zero until late 2014.  If this ends up happening, that means that the overnight rate for borrowing will have been near zero for 6 years.  The Fed dropped the rate below .25% after the economic fall of 2008.

As I have said before, the Federal Reserve is not really controlling this rate right now.  This is the rate that banks are charged to borrow money overnight in order to meet reserve requirements.  However, since the Fed has more than tripled the adjusted monetary base, the excess reserves held by commercial banks have skyrocketed with the monetary base.  Since banks have huge excess reserves, they don’t need to borrow from the overnight window because they are not falling below the reserve requirements.

These low interest rates are not without a cost.  Overall low interest rates hurt savers.  This discourages saving, which is required for capital investment, which is required for future economic growth.  People who are saving money in a bank account right now are losing in a major way.  They are earning a fraction of a percent in interest.  They are not even keeping up with inflation.

In Bernanke’s press conference this afternoon, he suggested that QE3 (more money creation) is possible if economic conditions warrant it.  This should come as no surprise.  He did not earn the nickname Helicopter Ben for nothing.

In the FOMC statement, it was also stated that the Fed would continue its program of extending the average maturity of its holdings.  This means that it will be swapping shorter-term bonds for longer-term bonds.  I suspect this is an attempt to keep mortgage rates down, along with borrowing costs for Congress.

As Gary North has said, the Fed is in Goldilocks mode right now: not too hot, not too cold.  It does not want to tip the scales to recession or high price inflation.  If and when the Fed faces a situation of high price inflation, it will be in major trouble.

The stock market, the bond market, and gold, all reacted positively to this news today.  The dollar fell.  This is not surprising.  Stock market investors like to hear news of low interest rates and the possibility of more money creation.

Bernanke and his cohorts really don’t know what they are doing.  They are playing politics and they are hurting the economy.  There will be a day of reckoning.  We can’t know when that day will be.  There will be a day when the Fed has to make a big decision.  It will have to stop creating money and let interest rates rise and severe recession hit, or it will keep creating money and go to hyperinflation.  Let’s hope they choose the former and not that latter.

I haven’t discussed foreign policy in a while (aside from the Republican candidates).  I have stated that my economic outlook for 2012 is more uncertainty, with a fight between inflationary forces and recessionary forces.

If there is war with Iran, everything changes.  It would be quite catastrophic.  It would be horrible for the people of Iran.  There would be many needless deaths and major destruction.  Lives would be ruined.

There would also be effects felt throughout the planet.  It would be devastating to the U.S. economy, along with most other inhabited places that rely on the global economy.

One thing that is easy to predict is that the price of oil would go to the sky.  The Iranian government would attempt to close the Straight of Hormuz.  It could be quite “successful” in doing this for a period of time.  Even if it closed for just a few days, it would spook the oil market like never before.  Many people are predicting that oil would hit $200.  I think this is very conservative.  I think we could see a temporary spike go over $300 easily.

As I have said before, a rise oil prices does not cause inflation.  If there is no change in the money supply, people will have to budget differently.  They will either have to cut back on the use of oil (mostly driving) or they will have to cut back somewhere else in their budget.  Most people will do both.  This means less money to eat out, to buy electronics, to take vacations, etc.  Prices will fall in other areas.

However, if there is war with Iran, then the Fed will most likely start another round of quantitative easing (money creation).  It will cost the government even more money to fight a war with Iran, which means that the deficit/ debt will get even worse.  It means that the Fed will have to monetize this debt.

The fact that the U.S. government is in such a hole financially might just save us from another major war.  There is a lot of talking going on, but hopefully Obama is not that stupid.  He has to realize that the U.S. would suffer financially in a major way.  If Obama does not start a war with Iran, maybe I can give his presidency a “D minus” instead of an “F”.  McCain would have been more likely to start another major war.  So perhaps we could have done worse than Obama.

There is a possibility that the Israeli government might start a war.  But I find this unlikely if they do not have the support from the Obama administration.

The U.S. has really already committed an act of war by placing these embargoes on Iran.  Hopefully it will end there and there will be no major conflicts.

I give the chances of an all-out war with Iran to be less than 50%.  Those odds would continue with a Romney presidency.  They would go up with Gingrich or Santorum.  They would be near zero with Ron Paul.

Hopefully there will be no war.  If there is, be prepared for an even more wild ride financially.  Expect oil to go out of control.  You can also expect gold to skyrocket with it.

The Republican debate in Tampa, Florida has just finished up.  It was hosted by NBC and Brian Williams and the questions were just horrible.  As similar to other debates, some of the questions are just about meaningless.

I would like to see more substance on where the candidates stand philosophically.  I would like to see some questions such as:

How much should the federal government spend each year?
What specific government programs and/ or departments would you eliminate or reduce?
Do you favor tariffs on sugar (did Newt answer that?)?
What areas do you think the government should stay out of completely?
What does Article I, Section 8 of the Constitution mean to you?
Does the Constitution limit the power of the federal government?
Who are the best and worst presidents in American history?
Are there any amendments to the Constitution that you disagree with?

Of course, the media doesn’t want to ask questions like these because it would show the insincerity of three of the candidates.  It would show that Ron Paul is the only principled candidate.

Mitt Romney is so full of it, it is just ridiculous.  However, he is a little less scary because of it.  Rick Santorum does have some principles and I would be scared if he ever had the power to try to carry them out.  He probably wouldn’t back down in shoving his religion down other people’s throats.  He probably wouldn’t back down on annihilating Iran.  At least with Romney, there might be some hope that he could be manipulated into a somewhat coherent policy.

I don’t think the Florida vote will mean all that much.  It will probably determine the front runner status of Gingrich or Romney, but both candidates are staying in the race.

Ron Paul is not campaigning actively in Florida and is spending minimal, if any, resources there.  This is a wise move as he will focus on smaller states with caucuses where he has a better chance to win or to pick up delegates.

I think Ron Paul needs to start challenging the other candidates.  If the moderators of these debates are not going to ask the right questions, then Ron Paul needs to do it for them.  He should state that he wants to cut one trillion dollars in the first year (which he has said repeatedly) and then ask if there are any specific departments the other candidates would eliminate.  He should ask them how they plan to balance the budget and point out that simply growing the economy will not be enough.  Be insistent that they offer significant specific spending cuts.

One thing I noticed tonight is that Newt Gingrich was far more cordial towards Ron Paul.  I think he is realizing that he may need some Paul supporters if he were to win the nomination.  While the two acknowledged that their foreign policies are radically different, I think Paul needs to make sure everyone is aware that their fiscal policies are radically different too.  Gingrich is not for small government in any way and people need to be made aware of this fact.

Most of the results are in from South Carolina as I write this.  Gingrich won overwhelmingly (although still without a majority).  Romney took second and Santorum took third.  Paul took fourth with about 13% of the vote.

When most people use the term inflation, they are referring to prices.  The definition has changed over the years.  In the distant past, inflation meant an increase in the supply of money.  Rising prices was just the result of inflation (an increase in the money supply).  When I use the term inflation, I generally try to distinguish the two when it is necessary.

The big question these days is why there is such a big difference between monetary inflation and price inflation.  Since the fall of 2008, the adjusted monetary base has more than tripled.  Yet, consumer prices have only been going up a couple of percentage points per year.  Price inflation has been relatively mild, particularly when it is measured against monetary inflation.

I believe there are two main reasons for the big disparity.  First, most of the new money that has been created since 2008 has gone into the commercial banks and is being held as excess reserves.  This new money is not being loaned out (probably due to major problems and fears that the banks have).  This has prevented prices from multiplying due to fractional reserve lending.

The second reason is the velocity of money.  It actually amazes me how little attention this subject gets.  Even most Austrian school economists do not discuss this topic, even though it is a major player.  While I’m sure there are many people out there who discuss it, the only person I know of who discusses this topic frequently is Richard Maybury.

Velocity is the speed at which money changes hands.  Since the fall of 2008, there are a lot of fearful Americans.  Unemployment is high and the economy has been weak.  People are uncertain about the future.  A lot of people have stopped spending as much as they previously did.  More people are paying down debt and saving some extra money for a rainy day.  There is a higher demand for money.  In other words, money is changing hands less frequently.  Velocity is low compared to what it was.

This low velocity means that people are not bidding up prices as much.  This has a counter effect on monetary inflation.  The low velocity of money acts as a deflationary force on prices.

Velocity is psychological and is therefore very difficult to measure and to predict.  Velocity is dependent on the mood of people.  If people are frightened and uncertain, they are more likely to have a higher demand for cash.  The one exception to this is if people perceive that monetary inflation and debt are getting out of control.  If people have a perception that prices are going to go up fast in the near future, they are more likely to buy things so that their money is not devalued.  This money would have a tendency to go into hard assets and bid up those prices faster.

In conclusion, just because there is high monetary inflation, it does not necessarily translate into high price inflation.  There is a time lag and there is the issue of excess reserves.  However, the biggest issue is velocity.  If you can read the general mood of the people, then you will have a better chance of predicting where prices will go.