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.

I have been writing about the Republican presidential race quite a bit, particularly since Ron Paul is making big waves and drawing a lot of attention.  This blog is “Libertarian Investments” and I have been paying a little less attention to the economy and investments due to my extra attention on politics.  Today, I am going to try to tie together the issues.

So what does the presidential race mean for the economy and your investments?

First, let’s talk probability.  Even though Ron Paul is doing really well, his chances are still relatively low for actually winning the presidency.  Right now, I would give Obama an almost 50% chance of being re-elected.  Since Romney has the best chance of being the Republican nominee, I would give him about a 40% chance of being elected president.  The remaining 10% goes to Ron Paul, Newt Gingrich, or some wild card in the case of an unexpected event or late entrant.

If Obama, Romney, Gingrich, or anyone else other than Ron Paul wins the election, I don’t see much short-term change.  (I am assuming that a third-party candidate does not win.)  There really won’t be much of a difference between Romney and Obama.  Romney will, of course, pander to his Republican base more, but the policies won’t be much different.

Gingrich or Santorum might actually be worse if they are crazy enough to start a major war with Iran.  But then again, Romney or Obama might be just as crazy.  Who would have thought in 2000 that George W. Bush would start 2 major wars and be a huge spender?  It is hard to imagine now that Al Gore would have been any worse.  If Gore had been elected (or had won a recount), it might have been better with more opposition to big government policies coming from the Republican side.

If Ron Paul somehow manages to get the Republican nomination and go on to win the presidency, then that would be the one scenario that changes everything.  It would mean an end to the wars.  It would probably mean a drastic cut in spending.  While the Congress has to pass the spending bills, a President Paul could veto anything and force a super majority to pass spending bills.  In addition, just by him being elected, it would mean a major shift in the attitude of the country.  It would mean there would be massive pressure on Congress to drastically scale back government.

So what would a President Paul mean for your investments?  It would probably mean a quick and deep recession to start off.  This would be the cleansing needed.  It would mean a return to prosperity.  Ironically, the one investment that would probably do really poorly would be gold, along with other commodities.  The Fed would be in hiding mode and would hopefully stop the high monetary inflation.  The initial deep recession would drive down asset prices.  Oil would also likely go down, depending on what happens in the Middle East when U.S. troops head home.

There could be some analogies with the 1980’s when Reagan became president.  But interest rates and price inflation were really high when Reagan was inaugurated and the Fed had already started tightening.  Of course, Ron Paul would be a completely different president than Reagan because his policies would match his words.  Reagan talked a good game about small government, but did not actually implement much to reflect this.

If Ron Paul is not elected, then it would be wise to continue defensive positions with an emphasis on inflation hedges such as gold and oil.  We can count on more war, more big spending, and more monetary inflation.

I am a long-term optimist, particularly now with all of the support pouring out for Ron Paul from young people.  But regardless of who is elected next November, there will be short-term pain.  It is almost unavoidable due to the huge spending and huge monetary inflation that has already taken place.  The best we can hope for at this point is for the attitude of the overall population to continue to head in the direction of liberty.  We can deal with some short-term pain if we have something to look forward to in the future.

The Republican race has moved to South Carolina.  There was a debate last night (Monday) and there will be another one on Thursday.  The voting will be on Saturday.

The Monday night debate was bizarre.  There were definitely a lot of attacks on Mitt Romney.  With there only being five candidates left on stage, you would think that the candidates would get a lot of time and a lot could be revealed in two hours.  But we are talking about Fox News.  While perhaps not as bad as CBS and PBS, they still only managed to ask one question to Ron Paul in the first 35 minutes of the debate.

The crowd was also rowdy with a lot of cheers and boos.  It was mostly annoying.

It was also annoying when Ron Paul was asked about the killing of Osama bin Laden.  He was trying to answer, but he kept getting interrupted.  But the interruptions were not from the other candidates.  They were coming from the Fox News moderators of the debate.  Paul made a comparison to Saddam Hussein, saying that he was captured and at least had some kind of a trial.  Paul was interrupted by Bret Baier (with his smugness) telling Paul that he didn’t support the Iraq War.  Hey Baier, you moron, that wasn’t his point.  That is a different subject.  You can’t understand that Paul was just saying that bin Laden could have been captured without being killed (if that is what actually happened)?

Then there was the topic of the National Defense Authorization Act (NDAA) which has provisions which suggest that American citizens on American soil can be detained for terrorist activity by the military and be detained indefinitely without trial.  While I find it just as outrageous that it is done to foreigners, this is obviously a horrible law.

Romney said that he supported the NDAA and that he expects Obama will not abuse it and he said that he will not abuse it as president.  Romney basically said that the legislation is ok because Americans can trust him and Obama not to abuse any power.  Hey Romney, if that is the case, then why not just advocate repealing it?  Even the crazy Santorum couldn’t defend this thing.

One of the things that Harry Browne liked to point out was a quote by Michael Cloud.  He said that the abuse of power is not the problem.  The problem is the power to abuse.  This goes to the whole point here.  The NDAA may not be used for any bad purposes for the next decade, but it is putting in place a power that will eventually be used by bad politicians for bad purposes.

Should we just give Romney power because he says that we can trust him?  Romney’s answer to that one question completely disqualifies him for being president (in case you had any doubt).  If he thinks that is the way government should operate, then it shows that he himself is a total thug who should never be trusted with any power at all (not that I would really trust anyone with power over others).

There was some entertaining back-and-forth between Paul and Santorum.  When Paul was asked about running negative ads, it was funny to hear him say that he wished he could have had longer than a minute in his commercial to expose all of the big government policies that Santorum had supported.

Then there was a bizarre exchange on gun control.  Santorum said that he supported federal gun control legislation as a “compromise”.  Yeah, that’s exactly what we need in the White House.

Then Santorum accused Ron Paul of being anti-2nd amendment because he did not support a law protecting manufacturers from lawsuits.  Paul explained that it was a jurisdiction issue.  He explained that tort law like this should be handled at a state level.  So Santorum ignored everything he said and repeated his claim that Paul is against the 2nd amendment.  Santorum was either demagoguing the issue or he is simply too dumb to understand Paul’s position on this.

Overall, I don’t think many minds were changed on Monday night.  People who love Paul will still love him.  Most of those who don’t like him will probably continue to not like him after last night.

While I think Gingrich is full of it, I think he had a stronger appeal than Santorum in the debate.  For that, I think Gingrich will emerge as the third candidate.  I had been leaving the door open for Perry because it is harder to criticize his record and because he has had significant financial backing.  However, it turns out that Perry is a complete moron who debates about as well as the last president from Texas.

My prediction for South Carolina is that Perry finishes last and drops out of the race.  Santorum will not be far behind.  Then we will have a three-way race between Romney, Paul and Gingrich.  Stay tuned.

Last week, I wrote a post on Robert Murphy (who I regard highly) and his discussions on the national debt.  I may have a rare disagreement with Murphy on this topic and I wanted to add a few points to this.

Murphy gave an example of consuming apples.  He was trying to show that future generations pay for the excesses of current generations.  But the last person on the chart was really just paying at the expense of the person right before.

The interesting thing about the example is that you could not save any apples for the future.  If you could, that may have actually given a better argument for Murphy to use.  If there is only a given amount of wealth at one particular time and it doesn’t even have the potential to increase over time, how can one generation benefit at the expense of another generation unless it is two generations that live during the same time?

If you can’t carry any wealth into the future, then how can someone living in the year 1900 consume something at the expense of someone living in the year 2000?

Murphy’s example is like a Ponzi scheme.  You will only enter into it if you think you can sucker the next group of people behind you into it.  If someone (in this case a whole generation) says “no”, then the scheme is over and the last people to buy into it are the losers.

What would happen if the U.S. government just defaulted on the whole national debt right now?  Would we still say that future generations would have to pay for the debt?  If there is a default, then no future person has to pay anything.  It is the people currently holding the bonds who have to pay.  They were the last suckers to pay up who couldn’t get another buyer behind them.  It is like people who bought real estate in 2006 in a hot market.  It came to a point where they could not find one more person after them to buy the house at a still higher price.

As I said in the last post, Murphy’s original instincts were correct.  The national debt does place a burden on future generations, but not because they necessarily have to pay for anything.  The burden is placed on them because there is less development in technology and capital investment than if there had been no national debt.

The real problem with the huge national debt is the massive government spending.  If the government could not borrow all of this money (or create it out of thin air with the Fed), then it would be forced to cut back spending.  Government spending automatically misallocates resources.  This misallocation leads to less growth and less advancement, and that is where future generations “pay”.

The national debt  hurts us right here and right now.  The massive government spending is one of the reasons for the high unemployment and weak economy.  It misallocates resources and it is preventing a proper correction of the previously misallocated resources.  It is taking capital away from the free market economy.

We should worry about the national debt and government spending.  We should not just worry about it because of our future grandchildren, we should worry about it because of everyone living right now.

When Rick Perry entered the presidential race, he was instantly the front runner.  Then he had to show up at the debates.  He stumbled a bit and the other candidates beat up on him and his record (and rightly so in most cases).  Some of his not-so-conservative record from Texas was exposed.  He also has the problem of a Texas swagger and a Texas accent that remind people of George W. Bush.  Bush is not all that popular these days, even in the Republican Party.

Even though he fell dramatically in the polls, I still thought he had a chance to recover.  He raised a lot of money and still had a significant backing.

He should have hired me as his campaign manager (or someone like me because I wouldn’t have worked for the man because he is horrible and I am a Ron Paul supporter).  Nobody can turn him into a great debater, but if he had been given some good advice and taken it, he could have made a comeback.

This is what Perry should have said in the last couple of debates in New Hampshire.  It is also what he should say in the upcoming debates, but probably won’t.  He should say something like the following:

“If you like Ron Paul on domestic issues, then I am with you.  I agree with Ron Paul that we need to start eliminating departments and making big budget cuts.  As far as economic issues go, I am the closest one here to Ron Paul.  But I know some of you disagree with Ron Paul on foreign policy.  I don’t agree with him either.  I believe we need a military presence in the world to defend our vital interests.  If you are looking for the anti-Romney candidate, I am your man.  I agree with Romney to a great extent on foreign policy.  I do not agree with his economic agenda of Romneycare and keeping the status quo in Washington DC.  I am the best parts of Romney and Paul put together.  For all of you Tea Party conservatives out there who want a real fiscal conservative who is strong on national defense, please consider supporting my campaign.”

Some of this would be a lie.  He really isn’t close to Ron Paul on domestic issues.  But saying all of that would attract a lot of people in the Republican Party who are not Ron Paul supporters and who are uncomfortable with Romney (which is almost half the party).

Instead, Perry used the last couple of debates to say he would march back into Iraq and that we shouldn’t support Romney because he broke apart companies.  He also said that everyone else was an insider, including Ron Paul.  Have you ever heard such a ridiculous claim in your life?

Perry has continually messed up.  He coulda’ been a contender.

I am glad that Perry and much of his campaign staff are a bunch of fools.  He would have been a horrible president and he would have given fiscal conservatism a bad name.  At least with Obama messing things up, nobody can seriously claim that it is the fault of his capitalist policies.

Today, I am going to sum up my economic outlook for 2012 (from a libertarian perspective of course).  While I don’t like to make specific predictions, I do want to lay out some possibilities.

Nobody really knows what will happen with Europe.  Can the bureaucrats keep kicking the can down the road for a while longer?  Will Greece break apart from the European Union?  Will Greece decide to default on all of their debt?  Will any major European banks go under?  Will the European Central Bank bail out the major banks?  Will the Federal Reserve bail out major European banks?

These are all questions that are impossible to answer right now.  But even if there is a big event, the U.S. economy has seemed fairly immune.  There might be blips in the stock market.  There might be some fleeing from the Euro (which has actually helped the U.S. dollar).  But until something major happens there, it seems that the U.S. is on its own clock.

I still see a major fight right now between the forces of inflation and recession (or depression).  The Federal Reserve has tripled the adjusted monetary base since late 2008.  While prices are certainly going up at the grocery store, it is mild compared to what it could be.  Price inflation has been quite tame considering the massive monetary inflation.

I see two major reasons that price inflation has remained in check.  First, most of the new money created by the Fed has gone into banks and held as excess reserves.  The banks have not used fractional reserve banking for this new money.  Second, the depressed economy has led to a high demand for money.  Another way of saying this is that velocity is low.  The speed at which money changes hands has been slow.  People are uncertain about the economy and have cut back on their spending.  They are trying to pay down debt and build up cash balances.  This has had the equivalent effect of keeping prices down.

Regardless of the two points above, the monetary base has still tripled and it is almost impossible to keep prices down at this point.  Perhaps they could stay down in the electronic industry where technology is increasing at an exponential rate.  Perhaps housing prices will stay down due to the previous bubble.  But in most sectors, that money is going to leak out and cause price inflation.

In 2012, it would not surprise me to see a mini-boom occur.  This would be an artificial boom.  We have already seen stocks do well, with the Dow around 12,500.  This could very well be because of hot money.  Perhaps this is the first sign of money leaking into the system from QE2.

On the other hand, the Fed has been tight with new money since QE2 ended over 6 months ago.  With the adjusted monetary base being basically flat since then, we could see the economy tip the other way and head into another recession.  At that point, we would probably just see more money creation.

While I am bullish on gold for the longer term (5 or more years), I am more uncertain in the short term.  If we see a mini-boom cycle, then gold will most likely go much higher.  If we see the return of a recession, then I expect gold to go lower, at least until more money printing is announced.

Either way, there is more pain to come with the economy.  Even if we have a mini-boom cycle, it will eventually turn into severe price inflation or it will turn into a market crash.

There has been severe malinvestment in the economy.  The interference of the Fed and the federal government has caused huge distortions.  These were not allowed to correct in 2008 and after.  It has been made worse.  The market economy is trying to sort things out and properly reallocate resources, but the crazy laws and crazy monetary policy are not allowing it to happen.

Prepare for a continued roller coaster.

Judge Andrew Napolitano, the host of Freedom Watch, was a guest on Jon Stewart’s show (link is via LewRockwell.com).  I am a fan of Judge Napolitano, but I occasionally have my disagreements with him.

At about 3:25 into the video, Jon Stewart asks Napolitano about states’ rights.  Stewart says, “The federal government cannot infringe on your freedoms.  But apparently if the states do it, yeah, it’s ok.”  Napolitano answers Stewart by citing the 14th amendment, saying that it made the Bill of Rights apply to the states.

I’m not sure why, but Napolitano kept talking about how Republicans stand on the issue.  He should have been talking about libertarians, especially when Stewart framed the question that way.

I am not sure where to start on this, but I strongly disagree with Napolitano (and Stewart) in many ways.

First, I think the 14th amendment is a terrible amendment overall.  It was another thing done by the federal government to centralize power.  Perhaps there were good intentions with it, just as there were with the Civil Rights Act of 1964.  Perhaps portions of it were good.  But overall, it centralized power, regardless of the intentions (although I’m sure not all intentions were pure).

Napolitano says that the 14th amendment made the Bill of Rights apply to the states.  But that is just the way it has been interpreted by many courts, mostly to centralize power.  It is open to interpretation.  Many of the people who supported the 14th amendment did not intend for that to be its purpose.

Second, even if Judge Napolitano were completely correct about the amendment applying the Bill of Rights to the states, that still doesn’t answer the question.  Romneycare in Massachusetts has nothing to do with the Bill of Rights.  Go through the first 10 amendments.  There is nothing about healthcare.  It doesn’t say “Congress shall make no law regarding healthcare.”  Just on that alone, his argument fails.

Third, he really doesn’t answer the question in regards to jurisdiction.  Just because you don’t think the federal government has the authority to do something, it doesn’t mean that you have to agree or disagree with it.  I don’t think the federal government or U.S. Supreme Court should strike down Romneycare in Massachusetts, but that doesn’t mean that I think it is good policy.  I also don’t like it when the Chinese government infringes on property rights and freedom of speech in China, but that doesn’t mean I want the U.S. government to tell the Chinese government what to do.

It is hard to believe that a libertarian judge could not address the issue of jurisdiction (as well as decentralization) in regards to this question.  There are a lot of things that state and city governments do that I don’t agree with, but it doesn’t mean that I think the federal government should do anything about it, even if it were seemingly good.

In conclusion, I am still a fan of Freedom Watch and Judge Napolitano, but I am disappointed with his answer on states’ rights.