It is not hard to find these accusations, particularly from those on the left.  We hear that capitalism is dog eat dog.  We hear that capitalism is a system where only the strongest survive.  We hear that the weak and poor suffer the most under capitalism.

In a sense, it may be true that the weakest are the worst off in a capitalist system, if by weakest we mean those who are the least hardworking, the least intelligent, and the least connected, or some combination of those things.  But in a capitalist system, even the poorer people will be far better off than the poor people of a less capitalist system.

There is a certain amount of dog eat dog competition in a capitalist system, but that competition is simply trying to please consumers.  If you are not doing a good job of pleasing consumers, then another person or business is going to do better.  Those who are the most innovative and who know how to please customers the best are the ones who will likely be rewarded the most.

The ironic thing is that in a capitalist system, the weak can survive better than in any other system.  Whether we are talking about being physically weak or intellectually weak, these people can still live a decent life in a relatively free society (just think of all of the rich dumb people in America).

In a system where brute force is used, then the weak will not survive, unless they can develop their own weapons to defend themselves.  But who would want to live in such a society?  There would be little or no division of labor and everyone would be living as savages, if living at all.

In a system that is heavily centrally planned by a government, those with the most political connections and those who are the most corrupt are the ones who are the most likely to benefit.  Perhaps some highly intelligent people, who are not necessarily corrupt, will do reasonably well in comparison to others, but they will still be worse off than they otherwise would have been.

If you live in a relatively rich country with a decent system of law and property rights, then you can flourish, even if you are just average.  Even opportunities arise for the poor and uneducated, even if they won’t be equal to others in terms of wealth.  In addition, a rich country has the means to provide charity for those who are really down on their luck or who are severely handicapped.

Capitalism is a system where everyone benefits, except maybe the politicians and the politically connected.  But even the politicians would benefit financially in the long run as everyone shares in the benefits of economic growth and increasing technology.

If certain poor countries were isolated from the rest of the planet, the dictators/ politicians there would be living far worse than the average American.  It is safe to say that the wealthiest people on this planet just twenty years ago did not have ipads, iphones, or high definition broadcasts for their cable channels.

In conclusion, capitalism benefits nearly everyone over time.  A rising tide really does lift all boats.  There is inequality in poor countries and rich countries.  If there is going to be an inequality of wealth, wouldn’t it be better for everyone to have more?

The associated press released a story yesterday in which they did a “fact check” on things that were said in the recent Republican presidential debate.  While the story went after several of the candidates, I want to analyze just the portion that was devoted to Ron Paul.  The story from the AP said this:

There are so many things wrong with these two paragraphs labeled “THE FACTS”, that it is hard to know where to begin.

First, the AP is saying that nearly all of the money has been paid back with interest.  But it is hard to know all of the facts because the Federal Reserve system and the bailouts are so secretive.  However, it is fairly well known that the Fed exchanged U.S. treasuries for a bunch of junk assets in the form of mortgage-backed securities.  So the government bought these bad assets at full price from the financial institutions.  Were all of these bad assets sold back to the institutions?  I don’t think so.

Let’s say I bought a bunch of shares of a stock for $50 per share and the price of the stock then fell to just $10 per share.  Then the Fed comes along and buys those shares from me and pretends they are still worth $50 per share.  So I get my $50 per share.  Meanwhile, I also take a loan from the Fed and pay it back with interest (at a very low rate).  Should we all boast about how the Fed was brilliant and how it didn’t cost taxpayers anything?

These banks got bailed out.  It wasn’t just loans, although that would have been bad enough.  Without the backing of the Fed, these banks and other institutions would have gone bust.

One thing that the writers of this story fail to understand is that even if the Fed had just loaned out money and all of the money had been paid back, it would still be harmful to the economy.  First, it is propping up the bad companies and the bad debt.  If every company in America is bailed out that is on the verge of bankruptcy, then we will soon be a very poor country.  There is no incentive to perform well and please customers.  Money is constantly being allocated to inefficient firms.

Another thing that the writers don’t understand is that by diverting funds to these failing businesses, it is preventing other individuals and companies from using this capital in a better way.  This is what Bastiat and Hazlitt taught.  You have to look at the unseen consequences.  By diverting hundreds of billions of dollars in capital, there are many businesses and products that would have been developed but which we will never know about.

In the last part of the AP’s story on Ron Paul, it says that the Fed does not operate on taxpayer money and does not receive any operating funds from the Treasury.  Yeah, no kidding Einsteins.  The Fed has a legal monopoly to create new money out of thin air.  Why would it need to collect directly from the taxpayers when it can just create whatever it needs?

Give me a legal monopoly to print money and I will be very profitable too.  I will fund my own operations and remit money back to the Treasury each year.  These writers are absolute geniuses.

In conclusion, the biggest part of the Fed bailout was buying up all of the toxic assets and paying the original full values.  This is highly inflationary in the long run because the Fed cannot sell them on the open market for anywhere close to what was paid for them.

It may be technically correct to say that the bailouts didn’t actually cost taxpayers.  It cost everyone who holds dollars (which is most taxpayers).  The TARP bailouts were inflationary and we will continue to see the effects, even if they can’t be seen directly.

I am continuing my commentary following Republican presidential debates.  It is important because it will shape our future and this is a rare race in that people actually have a choice.  If Ron Paul were not in this race, I would not be devoting even one quarter of the time that I have.

This debate had a slightly different feel, as there was no Jon Huntsman and Herman Cain.  With only six candidates on stage, it allowed them to have more time to answer questions.  It was also a little different with Newt Gingrich being one of the current front runners.  He was attacked a lot more (and rightly so) and it forced him to start being critical of the other candidates, instead of him just being critical of the media and Obama as he has done in the past.

Early on in the debate, Romney was pointing out some of his differences with Gingrich.  One of those things had to do with the space program.  Gingrich said he thinks America needs a place in space.  But doesn’t this just go to the heart of Gingrich’s philosophy?  I love space and the idea of exploration, but I don’t think it is the role of government to explore space or fund it.  Gingrich is equating America with government.  He thinks the bureaucracy in Washington DC is America.  He thinks that the only way Americans will be in space is if it is run and funded by government.

Rick Perry continued to stumble with his words, but I still can’t count him out.  He has a lot of money and he may still be an alternative to some people if Gingrich self destructs.

I don’t think there is much to add about Romney, Bachmann, or Santorum.  There was nothing significant that stood out to me from the things they have said in the past.

As for Ron Paul, I thought he did an excellent job in the debate.  It is always tough for me to judge on how a non-libertarian might view some of his answers.  But I got the feeling that many non-libertarians would have liked many of his answers.

I liked Paul pointing out that he is the candidate that has remained consistent.  Just about everyone who has been paying attention understands that this is the case, whether they agree with him or not on the issues.

I also liked that Paul pointed out that government is force.  He was responding to a question related to healthcare and Obamacare.  He pointed out an obvious but rarely mentioned fact that having to pay Medicare taxes is a mandate as you are essentially forced to do it.  I don’t know if that will win a lot of new votes, but it may convert a few more people towards libertarianism.

It was interesting that in the last round of questioning, both Romney and Perry gave compliments to Ron Paul.  I think Perry’s comment about thanking Ron Paul for hammering away on the Fed and leading him to studying it more shows a lot.  It shows that Paul has been quite successful in his quest to educate people about the Federal Reserve.  This is an issue that most people did not care about or even know about five years ago.  Now it gets a lot of attention and the other candidates are realizing that the Fed is an issue that appeals to some voters.

Overall, I think this debate will benefit Ron Paul.  His poll numbers have been rising slowly and steadily.  Most of his supporters are not going anywhere, so I would be surprised to see his poll numbers drop (except for variances in the type of poll and the statistical sampling).

Ron Paul needs to win Iowa or come in a very strong second.  His chances are better than I would have imagined just a few months ago.

You can view the short-term adjusted monetary base here:
http://research.stlouisfed.org/publications/usfd/page3.pdf

You can view a longer term chart of the monetary base here:
http://research.stlouisfed.org/fred2/series/BASE

You can view the excess reserves held by commercial banks here:
http://research.stlouisfed.org/fred2/series/EXCRESNS

The adjusted monetary base is indicating that a recession is ahead.  The Austrian Business Cycle Theory tells us that an artificial boom will turn into a bust when the there is a deceleration in the money supply.  There does not have to be a contraction in the money supply.  It just has to be a reduction in the rate of increase.  If the money supply is growing at 10% per year and then it slows down to 5% per year, this could be enough to cause a bust.

In our current situation, there is actually a slight decrease in the adjusted monetary base since the end of QE2 back in June of this year.  Although we have not really seen a boom, the large increase in the money supply in the last 3 years indicates that things may have seemed better that they otherwise would have been without the large monetary increase.  Regardless, the monetary inflation of the last 3 years has misallocated resources and this will need to adjust at some point.  The bigger problem is that the original large misallocation that took place prior to 2008 was never allowed to correct.

So in just looking at the chart of the monetary base, it looks like we should see a recession coming.  However, there is a big “but” here.  Starting in late 2008, we saw something that we had never really seen before.  The excess reserves held by commercial banks increased dramatically as shown in the link above.

Typically, banks will lend almost all of their money and keep just enough to stay within the reserve requirements.  If they fall below the reserve requirements, then they can borrow money from the Fed on an overnight basis, which is the Fed funds rate that the Fed controls directly (except now because banks don’t need overnight borrowing, which is why the Fed funds rate is so low).

In 2008, the Fed started paying banks interest to keep their excess reserves with the Fed.  However, I have never really believed that this is the reason that banks have dramatically increased their reserves.  The Fed is only paying a quarter of a percent interest.  I think the reason the banks have increased their reserves as never before is because of their bad financial positions and their fear of what is still looming in the economy.

Regardless of the reasoning, the increase in the excess reserves has just about imitated the dramatic increase in the monetary base since the fall of 2008.  This has kept price inflation in check.

So while the monetary base is indicating a recession, the excess reserves are not.  If we see a drop in the monetary base with an increase of reserves (or at least no change), then a recession is more likely.  On the other hand, if the Fed keeps the monetary base steady and we see a big drop in excess reserves by the banks, then you should prepare for severe price inflation.

Right now, it is still a tug-of-war.  I would not be surprised to a see a mini-boom cycle with the stock market and commodities continuing to go up in price.  I also would not be surprised to see a recession.  There are a lot of factors out there.  Right now, we should be in asset protection mode and we should keep watching the charts above.  If there is any big change, I will be sure to let you know.

German Chancellor Angela Merkel and French President Nicolas Sarkozy have come up with a proposal to save the euro.  This plan could actually work, if only it had been implemented 5 or 10 years ago.

To quote this summary article, “It says governments that allow their deficits to exceed 3 percent of their GDP should be automatically sanctioned and asked to lay out a plan for reducing spending.  It also says that countries that continue to flout spending rules will face a series of increasingly strict sanctions.”

First, this proposal is too little and way too late.  The problems are already here.  Greece is basically in default.  Italy is now on the brink.  The other PIIGS, Portugal, Ireland, and Spain, are still in major trouble.  All of these countries could come up with a plan to reduce their deficits to 3 percent of their GDPs right now and it would not be nearly enough to get them out of the woods.

Second, there were already conditions in joining the European Union for countries to limit their deficits and overall debt.  They were unenforceable words.  Why would this proposal by Merkel and Sarkozy change any of this?  Just because they write out specific penalties?  But what happens when a country like Greece just ignores the sanctions?

I am not sure if this whole thing is just for show or if they are serious.  Can they really believe that this proposal will save the euro?

The problem with Greece and others is that they are welfare states.  Their governments have made these grand promises that cannot be kept.  It is much the same way as the U.S.  The difference is that the U.S. controls their own money supply and relies on the Federal Reserve to create new money out of thin air to fund its debts.  It also doesn’t hurt that the U.S. dollar is still considered the world’s reserve currency.

Greece does not control the European Central Bank.  However, the bankers probably do and the bankers are owed a lot of money from Greek debt, Italian debt, and so on.

Eventually, I think the European Union will break apart.  The big banks will get bailed out.  Greece will officially default along with others.  Then the welfare statists will be in for a shock as they will be unable to sell government bonds to anyone to fund their welfare.  So they will separate and form their own currency and central bank.  Hopefully some people will learn a lesson from this.

In Bill Clinton’s first campaign, “it’s the economy stupid” was a favorite phrase by Clinton and his team.  In some ways, they were right on because Americans tend to vote for their own self interest, and the economy is something that directly affects them.  There was a recession during the Bush presidency, although a recovery had already begun when Clinton was elected (with just 43% of the vote).

Now, it’s really the spending stupid.  You can add the debt to that, but that is really just a result of the spending.  In order to control the debt, the spending has to be controlled.

Virtually every time the government spends money, it misallocates resources.  Even if the politicians had all the best intentions in the world, there is still no possible way they could allocate money exactly according to how each individual would.

Now that the government in DC alone is spending nearly 4 trillion dollars per year, that is 4 trillion dollars that is being misallocated.  It is not to say that it is necessarily being completely wasted (although some of it is), but it is not being used in its best way according to consumers.

If you included state and local government spending, government at all levels in the free U.S.A. is spending half the GDP.  This means that, on average, Americans are paying half of their income to the government, and this is before we even factor in regulations.

The only way this economy will improve significantly and sustainably in the near future is for a dramatic decline in spending.  While the immediate impact might be tough on some, it would allow resources to properly reallocate and would set the stage for a sustainable boom in the economy.

The problem right now is that the American people are not knowledgeable enough or desperate enough to demand a massive cut in government spending.  This would mean an end to the American empire.  It would mean scaling back so-called entitlements.  It would mean other things like ending the war on drugs, ending federal education funding (and hopefully state and local eventually too), ending subsidized college loans, ending farm subsidies, ending bailouts, and ending government charity.

While I am encouraged by the strength of the Ron Paul campaign, it is still not enough yet.  As long as there is not a big voice in America demanding these cuts, then the politicians are going to keep spending as long as the laws of economics allow them.

It is not too late for us.  There is still a lot of wealth, combined with great new technologies.  If Hong Kong could build itself up as one of the richest countries in the world when it started near the ground, then America can really boom.  We just need a change in the mentality of the people.  Once there are big enough numbers to demand a full-scale retreat by big government, then things will get better.  If the size and scope of government were cut in half within one year, then you would see an economic miracle take place.

The political scene continues to heat up.  Herman Cain is out of the race (I think his wife got tired of lying) and now Ron Paul and Donald Trump are going at it.

Trump is planning to moderate a Republican debate and Paul declined the invitation, with some rather scathing words.  He called Trump a reality television personality and he said that such a debate would have a “circus-like atmosphere”.

Trump fired back and said that Paul has no chance of winning and said that his own poll numbers were higher when he was “running”.  It is not surprising that Trump came back with something, as he is never one to back down from a fight.

Actually, I think that was Trump’s appeal to some people when they thought he might be running.  He was very blunt with his criticism of Obama and some people like that.  Sometimes he just tells it like it is and people find that refreshing.  With that said, Trump is full of himself.

I wasn’t sure that Paul should have picked this fight.  It’s not that I necessarily disagree with the statement that was put out.  But sometimes you are just better off going along with it for the time.  He would have received more media exposure from the debate and he could have embarrassed Trump there if any stupid questions were asked.

It is hard to decline the invitation just because Trump is a bit of a clown.  If that is the case, then Paul should not have participated in that awful PBS debate where the moderators were a bunch of left-wing hacks.  Or even worse, how about that CBS debate where he only had 89 seconds to talk during the first hour?

However, I have been having second doubts about my own opinion in the last few hours.  There is no guarantee that this debate is going to happen and it may not even be available for most people to watch.  If this whole debate blows up, then Ron Paul will come out looking even better.

I actually agreed with something Mike Huckabee said this morning.  Although he was touting his own candidate forum that he ran the other night, it was still a good point.  He said that it was inappropriate for Trump to be moderating a debate when he is still considering a candidacy for himself.

That is absolutely true.  Trump said he can’t do anything until his show’s contract ends in May, but he is not ruling out a third party run.  Hey, maybe we can get one of the current candidates from the Libertarian Party to moderate a debate too.

I remember over a decade ago when Trump was talking about running for the presidency.  He floated some ridiculous idea that he would pay off the national debt by doing a one-time wealth tax of 14.25% on everyone with over 10 million dollars in net worth.  You can read one current story here.

In 1999, when he came out with this ridiculous proposal, I was not a radical libertarian yet.  I was fairly libertarian on economic issues and I thought Trump’s proposal was horrible then (and I still do).  Not only would this be highly immoral and unfair, the economic consequences would be disastrous as well.  It probably would have crashed the stock markets and real estate markets.  Some billionaire who all of a sudden had to fork over hundreds of millions or billions of dollars to Washington DC, does not just have that money sitting in a bank account.  It is usually tied up in a business or in stock or in real estate or some other productive asset.  These assets would have to be sold off in massive amounts in a short period of time.

Of course, Trump was just spouting off at the time, just as he does now.  I recall Jesse Ventura supporting him then, and I thought less of Jesse after that.  Luckily, Ventura has come to his senses and he is basically a Ron Paul supporter now.  He has been really good on social liberties and civil liberties.  He still might need some work on economic issues.

In conclusion, we’ll see what happens with the whole Ron Paul vs. Donald Trump thing.  The best thing would be for Ron Paul to prove Trump wrong by going ahead and winning the Republican nomination. Maybe that would finally shut Trump up, but I doubt it.

One of the most popular blog posts I have written was on “Collecting Nickels“.  I can see the statistics and this particular post has been read a lot compared to other posts on my blog.  That means that either it is not a widely discussed topic on the internet or a lot of people are searching it.  If you type “collecting nickels” into google, my post is on the second page of ten.

In the post, I say that it is the one investment you can make that is a hedge against inflation and deflation at the same time.  It is a hedge against deflation because it is the same as holding cash.  Your purchasing power grows with deflation.  With short-term interest rates right now at a fraction of a percent, the interest you would lose from not having it in a bank is negligible.

It is a hedge against inflation because of the metal content of the coin.  If there is massive price inflation ahead, then metal prices will most likely go much higher.  The metal content of the coins will increase and the coins will be worth far more than five cents.

So what about pennies?  Pennies are actually quite similar.  However, I see less attraction trying to collect pennies because it is even more bulky than trying to collect nickels.

There is a story on “Penny Hoarders” by ABC News.  They ran a full story on it on “Nightline”.  This story covers some serious collectors.  This is a business to these people.

The story says to collect those that are dated 1982 or before.  The reason is because of the metal content of the pennies.  Pennies dated from 1982 and earlier are made with 95 percent copper.

This story also says, ” In what could be the biggest legislation to hit the U.S. Mint in 50 years, officials are now looking at the composition of pennies and nickels and considering an overhaul.  If the laws change and the mint decides to abolish the penny, people would be free to melt them down for the copper.”

Regardless of whether the law is changed, we will see Gresham’s law take over and we will see older pennies and all nickels slowly go out of circulation.  This is a very similar situation to pre-1965 dimes and quarters, which are made out of silver.  They are held by people investing in silver.  Holders of these silver coins would rather not melt them anyway, because they are easily identifiable as silver and they are in small denominations.  I have written before on this subject too.  I could see melting pennies as more attractive because of the low value of the metal content as compared to silver.

I am not sure that it will matter if the law is changed.  Either way, if you have the time and patience (and space), go ahead and start collecting pennies along with your nickels.  Pennies are more difficult, not just because of the space required, but also because you have to sort out the pre-1983 ones.  However, it is practically a no-lose investment.

The Republicans and Democrats in DC are bickering over the extension of the payroll tax cut that was enacted for this current year.  While both sides say they want to extend the tax cuts, the Democrats want to expand it further and “pay” for it by putting a “surcharge” of 3.25% on people making over a million dollars.

Most of the Republicans are full of it, but they are refusing to blatantly raise taxes as they know what happened to George H. W. Bush in 1992 after he broke his pledge of “no new taxes”.  Meanwhile, the Democrats do not hide their socialism and class warfare as they want to increase income taxes on high-income earners.

As the article linked to above says, Harry Reid said that Republican opponents “insist on helping the very wealthy while turning their back on the middle class.”  Ok, if Reid were talking about Republicans bailing out banks or giving big contracts to military companies, then he might have a point.  But Reid is talking about not raising taxes on high income earners.  So Harry, for anyone who does not believe that the already high income taxes on high-income earners should be raised, you consider that helping the wealthy at the expense of the poor?

Of course, never in a million years could the Democrats advocate something without “raising taxes on the rich”.  Never could they actually come up with something to cut out of the budget.  They really are a bunch of socialists, but that in no way should imply that the Republicans are any good (with the exception of a very few like Ron Paul).

If I were in Congress, I would vote to extend the payroll tax cut.  However, I would vote “no” if it meant raising any other taxes (unless those taxes were specifically for members of Congress).  While spending should be cut dramatically, I think that any tax cut we can get, we should take.  It is just allowing us to keep a little bit more of our earnings.

As far as helping unemployment, this won’t really do much.  As I have said before, if they really wanted to help create jobs and lower unemployment, then the tax cut would be for the employer portion of the payroll tax.  By cutting taxes for employees, it gives a raise to people who are currently employed.  It will only marginally help those unemployed if it doesn’t actually hurt them.  If taxes were cut for employers, it would decrease the cost of hiring labor and there would be some net improvement in employment on the margin.

If the Democrats got what they are advocating, it would just hurt the economy more.  It would mean less money on the margin for high-income earners, who are often the employers.

All of this talk is more class warfare by the Democrats and more posturing by the Republicans.  Neither side is advocating any significant cuts in spending, which is really what we need.  This economy will not have a sustainable recovery until government spending is cut dramatically.

American taxpayers and holders of American dollars got the news today that they are getting ripped off again.  Not that many people pay attention, but the Fed announced today that it will be providing liquidity for the European financial institutions.  The stock market loved the news and soared.

It wasn’t enough that the Fed bailed out American financial institutions in 2008.  It wasn’t enough that they subsidized foreign banks and foreign governments.  Now they are doing it again.  The Fed is acting as a lender to European banks.  Americans and holders of American dollars (are you paying attention China?) are subsidizing European banks.  In a sense, Americans are actually subsidizing the irresponsible European governments and their welfare recipients.

The main reason that the European banks are in so much trouble is because they stupidly bought government debt from countries like Greece and Italy.  Now that these countries are on the verge of default, the banks in Europe are in major trouble.  Here comes Helicopter Ben and the Fed to the rescue.

The Fed teamed up with the central banks of Europe, Canada, England, Switzerland, and Japan, although it is likely that it will be the American central bank that does most of the subsidizing.  I guess Germany could not serve as the host any more.  The parasites have to keep sucking the hosts dry before moving on to someone else.

While this might temporarily save the European banks, it kicks the can down the road again.  It props up the profligate spending of countries like Greece.  These countries should declare bankruptcy and they should be forced to dramatically cut back on their welfare states.

With the Fed essentially subsidizing loans to European institutions, it will once again harm the American economy.  It is another misallocation of resources.  The voluntary free market economy in the U.S. (at least what’s left of it) is starving for capital and investment.  With the Fed doing this move and others like it, it is hurting the overall savings pool.  This hurts economic growth.  In order for the economy to grow sustainably, there must be savings and the government/ Fed are not allowing this to happen.

Nothing should be a surprise any more.  If there is one lesson from today, it is that the future is unpredictable.  I continue to say that we can’t predict the economy and investments with any absolute certainty because the economy is made up of millions of people acting.  In this case, the human action is just coming from a few elitist individuals who are affecting virtually the entire world economy.

As Ron Paul would say, “End the Fed.”