Numismatics is the study or collection of money, coins, and other related things.  When you hear gold advocates talk about numismatics, they are probably talking about rare gold coins.  You can buy coins that are worth more than their actual metal content.  You pay more because of rarity and the condition of the coin.

There are rating systems for rare gold coins.  For example, a gold coin could be rated MS 63, MS 64, etc.  The higher the number is, the better condition the coin is in.  These coins will actually come in a casing with the rating inside the casing.  The MS stands for “mint state”.  The numbers range from 60 to 70, with 70 being a perfect coin.

I am not a big advocate of buying rare coins.  It is purely speculative (although what isn’t?).  You are paying a premium for the rarity and condition of the coin.

I don’t have any specific recommendations as far as owning physical gold vs. other gold investments.  I think it is important to diversify, even here.  Overall, I think it is a good idea to have at least a few ounces of the physical metal, but be sure to store it in a safe place.

If you are going to buy physical gold, I would recommend gold eagles, particularly if you live in the U.S.  You can buy them in different denominations (one ounce, half ounce, quarter ounce, and one-tenth of an ounce).  Aside from physical gold, you can own an ETF such as GLD, you can buy gold certificates, and you can buy gold stocks (although stocks do not necessarily track the price of the metal).

There is one really attractive aspect in speculating in rare coins.  If we hit a gold bubble, you could easily see these coins rise to enormous levels and in multiples of the actual price.  There is, of course, no guarantee, but I feel that I should point out the great possible rewards for buying rare coins.

There are also some major disadvantages.  First, although all value is subjective, it seems to be even more the case with rare coins, if that is possible.  It is the equivalent of buying art, in hopes that the next sucker to come along will pay even more than you did.

Another downside of rare coins is the price spread.  I looked at one gold site and price spreads were in excess of $200 for something that costs just a little more than an ounce of gold.  The price spread on the American eagles were only about $50.  This is the difference between the buy price and the sell price.

If you are going to take a chance and speculate in numismatics, I would recommend you look at the American $20 St. Gaudens gold piece.  The thing I like most about this investment is that you limit your losses.  The actual gold content of this coin is just under an ounce of gold.  Therefore, the value of the coin will never drop below the metal content.  Right now, you should be able to buy one of these coins in MS63 or MS64 for just a few hundred dollars more than a one ounce gold eagle.

If you decide to take a chance and pick up a rare coin or two, don’t forget to unload these first if we go into a bubble stage.  You will not want to be holding these if there is a collapse in the gold price in the future.  You can always just convert them to regular American eagles and profit the difference.

There is an interesting piece today at Mises.org in which the author discusses the economic situation in Canada.  He points out that the economy is better there than in the U.S. and other wealthy nations.  He traces this to the fact that, in the last couple of decades, the Canadian government has actually reduced its debt by controlling spending.

I certainly think there is a lot to this.  As the U.S. government continues to pile up the national debt, we hear about how we are putting this burden on our grandchildren.  But the bottom line is that government spending and debt are burdening us right here and right now.  It is reducing savings and investment by individuals and businesses.  It is sucking capital out of the voluntary economy.  This is one of the reasons there is unemployment over 9%.

Property rights, in general, is typically what will determine how well an economy does in a given area.  More specifically, regulations, spending, and monetary policy are the major factors.  While taxation is important, I tend to lump this in with spending.  If spending is low and monetary policy is good, then taxation is most likely not a problem.

I generally agree with the author on his analysis of Canada.  He focuses primarily on spending.  I think monetary policy has also played a significant role as the Canadian central bank has been less inflationary than the Fed (which isn’t hard right now).

Unfortunately, and as the author admits, Canada is certainly no paradise.  It is another welfare state with high taxes and burdensome regulations.  There is free speech there, but less so than in the U.S.  The environmental regulations tend to be awful compared to most places in the U.S.  And of course we know about the healthcare system there.

The healthcare system in Canada is mostly socialist.  The system in the U.S. is mostly fascist, although there is still a tiny remnant of free markets left.  The quality of care in the U.S. tends to be much better.  I think one advantage of the Canadian system is that, because of the lack of quality and high wait times, people avoid doctors more.  This can actually be beneficial as people turn to healthier alternatives for problems instead of just getting a prescription and popping pills.

If you have a small illness, you might be just as well to be in Canada and avoiding the doctors.  If you have an emergency and you need surgery right away, I would much rather be in the U.S.

One other possible advantage of the Canadian healthcare system is that it is easier to start a small business because you don’t have to worry about getting health insurance.  In the U.S., health insurance is usually tied to your employer, so many people seek out regular jobs, particularly with bigger companies, just to have the health benefits.  It discourages entrepreneurship.

Of course, the best system is a free market healthcare system.  You could get high quality for low prices and you wouldn’t worry about health insurance because it would be so cheap.  Both the U.S. and Canada are very far from this.  The U.S. was a lot closer to this 50 or more years ago.

While it is great for Canada that its government debt has gone down, it is important to remember that spending is still high.  The taxes there are high.  They have to pay income taxes, plus they have a national sales tax (on top of the other sales taxes).

One other thing to note about Canada is that the housing market is out of control in some areas.  I have paid some attention to the housing market in big cities like Toronto and the prices are outrageous.  They might be experiencing a housing boom like the U.S. did, except Canada is five or more years behind.  If that is the case, we can expect a bust soon.

As far as money,  I think the Canadian dollar is a better place to be than the U.S. dollar.  However, we must remember that the Canadian dollar is also a fiat currency, so gold is better than either one.

Regardless of the problems facing Canada, the author of that article has made a great point.  Government spending is not what grows an economy.  The Canadian government has been less reckless, fiscally speaking, and the sky is not falling there.  In fact, things are better there.  The Keynesians should try to explain that.

The Prime Minister of Japan has announced his plans to resign.  One of the main reasons for his unpopularity is a view that there has been a lack of leadership in the face of the tsunami disaster.  While I’m sure this is correct, we cannot discount the fact that the Japanese economy is still not in great shape.  Obviously the tsunami was very harmful to the Japanese economy (despite what Paul Krugman might say), but it is also obvious that the economy would be in trouble anyway, even if there had never been a tsunami.

I expect politicians around the world to feel more and more heat as time goes on.  With the world economy in trouble, the welfare state is also in trouble.  Politicians are accustomed to being able to offer free lunches.  This buys them votes and keeps voting citizens content.  With tighter budgets coming, it is harder for politicians to offer free lunches as it is becoming more known that they are not actually free.

The areas where it is the most fun to watch are where citizens are demanding the impossible.  Think of Greece.  People there want these great benefits.  They want the government to provide for their retirement at an early age.  The Greek government is on the verge of bankruptcy.  They simply cannot fulfill these previous promises.  Some of the voters there are asking their government to do the impossible.  It doesn’t matter who they put in office.  No matter what, Greek citizens will see a cutback of the welfare state.  As Margaret Thatcher said, the problem with socialism is that you run out of other people’s money.

California is another place where it should be fun to watch (as long as you don’t live there).  If I were an advocate of one of the major political parties, I would not want to win political offices there.  For example, the Republicans should be happy that Jerry Brown (a Democrat) is now the governor there.  Brown is a big government guy.  He loves the welfare state.  And yet he will be the one that presides over a cut in the welfare state.  Who are the Democrats on welfare going to blame for an end to their supposedly free lunches?

The U.S. government can keep the game going longer.  They have a monopoly on the money supply.  The U.S. government can get the central bank to print money (digitally speaking).  This can keep the welfare state going on a little longer.  California has more limits.  They cannot run up their debts too big or they really will face a default.  They will be forced to default or cut back on their welfare state.  Perhaps it will be a combination of both.

The government in DC will eventually be forced to cut back.  There is a limit to how much the Fed can print before there are very serious repercussions.  I don’t think the Fed will go to hyperinflation.  They would destroy themselves.  There would be a serious breakdown in the division of labor.  There would be massive poverty and starvation in the U.S.

The more likely scenario is that we see high inflation and the Fed eventually tightens its monetary policy in order to save the dollar.  At that point, Congress will be forced to cut back.  The President will take a lot of blame unless he is very straightforward with the people.  Ron Paul is straightforward and none of the other candidates are.  Both major parties should be hoping that they don’t win the presidency in 2012.

Robert Murphy has a good piece today, appearing on the Mises Institute’s website.  I consider Murphy to be one of the best economists there is in Austrian economics and I consider Austrian economics to be the only major school of economics which gets things right.

Murphy concludes his article with this paragraph: “Austrian economists know to be wary of looking at financial data and drawing conclusions about what ‘must’ happen.  The future is always uncertain, the result of volitional human action.”

This is something that I harp on quite often.  The main theme of Austrian economics is that humans act.  Therefore, knowing this, we should know that it is impossible to accurately predict what the economy will do and what investments will do because it is impossible to predict how each individual on this planet will act.

With that said, it wouldn’t make for very exciting commentary if I just repeated that every day and did no more analysis.  What we can do is take the data that is known to us and try to guess at how humans are likely to react.  For example, if the government announces that it is passing a new marginal income tax rate of 99%, we can take a good guess that this is going to discourage people from working beyond a certain income.  We could be wrong, but we can take a good guess that most human beings will react negatively and will not work beyond a certain point just to keep 1% of their earnings.

Moving on from this subject, there is one other specific issue in Murphy’s article that I would like to examine.  He talks about the excess reserves held by banks and correctly points out that this has helped in keeping price inflation in check.

He then shows the Fed’s latest figures on excess reserves.  He suggests that the reserves might be leaking out and that big price inflation might be around the corner.  While he tempers his comments and says that this might just be a blip, I would like to address it a little further.

I actually see no reason to get excited (or perhaps panicked is a better word) at this point.  The excess reserves are almost the same as they were two months ago.  They are down less than $8 billion from June 15 to August 10, which seems like a lot, except that we are talking about a total of over $1.6 trillion.

This actually makes sense.  The excess reserves have had an almost perfect correlation with the adjusted monetary base, which is the monetary inflation that the Fed directly controls.  QE2 stopped around the end of June, so the monetary base has been basically flat for the last two months.  It would make sense that excess reserves are not increasing and we can always expect small fluctuations.

As Murphy says, we will have to continue to watch this data to see if the trend holds.  I will keep watching, but I am skeptical that these reserves will leak out.  It is slightly interesting to see that the required reserves have been increasing, but again, the amounts are too small at this point to get excited.

I expect more inflation (monetary and price), but I am skeptical that it will be huge any time soon.  People are afraid and the bankers are afraid to lend money out.  I don’t see this changing right now.  We will continue to monitor this data to see if there are any significant changes.  If excess reserves drop by a few hundred billion dollars without a drop in the monetary base, then I will start to sound the alarm of imminent price inflation.

Gold was down big today.  You will get different quotes depending on where you look, but some quotes show it was down over $100 today.  That is really incredible if you think about it.  The yellow metal was only trading at $300 a decade ago and now we are seeing 100 point swings in one day.  I won’t be surprised to see 100 point swings going the other way in the somewhat near future.

Today’s action is actually good news for gold investors.  I know that sounds crazy, but this is actually very bullish.  Gold is still up for the month and it needed a pullback.  A few months ago, silver went up huge in the matter of weeks and it came crashing back down in the matter of days.  It is still about 25% off of its high now.

I am expecting gold to go parabolic at some point.  This didn’t happen now.  It will go parabolic when it is in bubble territory and I think we are a long way off from that.  Right now, it is two steps forward and one step back for gold.  We shouldn’t be surprised at all to see a big retreat after the run we just had.  It is always impossible to accurately time the pullbacks and it is just as hard to predict how big of a drop there will be, but it shouldn’t surprise us.

While I am not making any short-term predictions on the price of gold, I do expect the price to continue its climb in the next several years.  The fundamentals are all there.  The economy is still struggling, unemployment is still high, the deficit and debt are huge, and price inflation is relatively low.  On this last point, you may think that that is bearish for gold, but I am not seeing it that way.  With price inflation still relatively low (especially as compared to the 1970’s), it might encourage the Fed to start QE3 (more digital money printing).  The Fed is more likely to continue its policy of monetary inflation if it doesn’t see price inflation as an immediate threat.

Expect more and bigger volatility in the gold market.  I would expect to see silver get in on the action soon.  Silver is usually the more volatile metal, but that hasn’t been the case in the last few months.  It is also a good time to eye some gold stocks for speculation purposes.  Just be prepared for a roller coaster ride.

Yesterday, I wrote about how the establishment controls things more than any particular individuals.  Today, I would like to discuss this topic as it relates to Congress.

There are 535 congressional seats.  There are 435 in the House of Representatives and 100 (2 for each state) in the Senate.  I have often heard that everyone should simply vote against the incumbent (the current office holder) and then we would have a whole new congress (although it would take 6 years to clean out the Senate).

I would certainly be happy to see everyone in congress fired, especially since Ron Paul is leaving anyway. This would certainly signal a change and it would tell the politicians that Americans are fed up.  It actually baffles me how some of these clowns keep getting re-elected, especially Republicans who supported all of the bailouts.

If all of the incumbents lost their seats, it would obviously show a change in public opinion.  However, it wouldn’t necessarily mean that public opinion had gone completely libertarian.  Perhaps we could see a scenario where the government is on the verge of bankruptcy (which it is) and it has to enact deep spending cuts in order to avoid hyperinflation or default.  Perhaps we could see the politicians practically being forced in to making severe cuts in Social Security and Medicare.  We could see a revolt that resembles Greece more than the Tea Party.

Here is my point.  If all of the members of Congress were to lose their job without a change in public opinion towards liberty, then it would do us no good.  This is why it is not important to get the “right” people elected.  It is far more important to change people’s opinions in favor of more liberty and less government.

As Hayek said, the worst rise to the top.  The federal government holds a lot of power over a lot of people.  It is this massive power that attracts the worst elements of society.  The only way to get rid of corrupt politicians is to dramatically reduce the power they have.  As long as there is power, it will attract some of the most evil people you can find who wear nice clothes.  If that power is taken away, then you don’t really have to worry too much about who is in office.

In conclusion, the reason that Congress has so many corrupt politicians is because of the power they wield.  If you take that power away, then it takes away the corruption.  As Harry Browne liked to quote Michael Cloud, “the problem isn’t the abuse of power, it is the power to abuse.”

Only the American people can take that power away by withdrawing their consent.  We don’t need to elect the right people.  We need to convince the American populace that their lives would be much better off with smaller government.

One of the biggest mistakes that people make in blaming government is thinking that things would be different if a particular individual weren’t involved.  Let me explain further.

There are many Republicans who think that things would be much better if only Obama weren’t in office.  But if you really look at it, Obama has carried on the policies of Bush.  He has continued the wars (and started new ones) and he has continued to bail out failed companies and he has continued to run huge deficits.  Even Obamacare is not much worse than Bush’s Medicare prescription drug program.

Even with other things, if you look at them close enough, it doesn’t really matter what individual is supposedly in charge.  I like to blame Bernanke when I’m talking about the Fed and monetary policy.  But the reality is that it wouldn’t matter if someone else were chairman of the Fed.  It matters far more what the general establishment’s position is on the issue.  If the big bankers and elite in government want the Fed to buy more government debt, then that is what will happen.

Bernanke is not really a decision maker.  He is a face for the establishment.  It is the same way with the presidency.  There are a few little differences between what Obama has done when compared to what Hillary Clinton or John McCain would have done.  But regardless, they were all vetted by the establishment and they were all acceptable to the establishment.

Sometimes the establishment does not favor a particular person, but they still may be acceptable.  Reagan is a good example.  They didn’t want him in office, but he was acceptable, particularly when he picked Bush as his VP.  Reagan did not shake things up that much.  He is not the hero that conservatives make him out to be.

If you look at the current group of Republican presidential candidates, most of them are acceptable.  The establishment’s first choice is Romney.  The establishment’s second choice (of the major contenders) is Rick Perry.  The third choice is Michele Bachmann.  They really don’t like Bachmann and they don’t want her to win, but she would still be acceptable, much like Reagan.

The establishment is afraid of Ron Paul.  He is completely unacceptable.  He would not be a face.  He is an individual that could actually make a difference and change things dramatically.  He is a major threat to the establishment and they know it.

This whole concept is important when viewing politics.  I believe that Kennedy was taken out because he was a threat to the establishment.  While he was certainly no libertarian, he was not playing along with the crowd.

We should even remember this when going back further into history.  I’ve heard people blame Keynes for the economic problems that we have today.  But Keynes was just a convenient excuse for the establishment during the 1930’s when the government wanted to vastly expand.  He is still used as an excuse today.  But if Keynes had never existed, the establishment would have found some other “economist” to promote their big spending policies.

I’m also not sure how much Paul Volcker was in charge of tightening monetary policy in the late 1970’s and early 1980’s when he was Fed chairman.  He may have been instructed to do so by the banking elites and foreign elites in order to save the dollar.

While I like to criticize Ben Bernanke and his Keynesian views, he is just a face of the establishment.  If the major players tell him to stop his digital money printing, then he will stop.  This is why there is hope for avoiding hyperinflation and a total destruction of the dollar.

There was an article on Yahoo describing the unemployment situation and comparing some of the statistics between the different states.  Some of the states with the highest unemployment rates include Nevada, California, and Florida.  The state with the lowest unemployment rate is North Dakota.  Can you figure out why this is?

The obvious correlation that I see is that the states with the highest unemployment rates are the ones that experienced the biggest boom and bust with the housing market.  When housing prices were going up at huge rates about 5 to 10 years ago, it was states like California and Nevada that saw the biggest housing boom.  Now that the housing boom has gone bust, these states have the worst unemployment.

A state like North Dakota, with the lowest unemployment rate, did not see a big housing boom in the last decade.  While prices were going up 20%, 30%, or even more in some areas, the price of housing in North Dakota was going up very little.  There was a minimal boom which meant a minimal bust also.

With my study of Austrian economics, along with just plain common sense, it is easy to see that the Federal Reserve was the primary cause of the housing boom.  The Fed artificially lowered interest rates and kept a relatively loose monetary policy.  Monetary inflation then translates into price inflation, but it gets directed into certain hot spots.  Housing was a natural place for this newly created money to go.

Low interest rates made borrowing cheaper.  In addition, a house is a hard asset and is therefore usually a good purchase in an easy-money environment.  In addition, the housing market is subsidized by the government in so many other ways, particularly when it comes to mortgages.  There are also other little things like the mortgage interest deduction on taxes that encourages home buying instead of renting.

The states with high unemployment actually show a real life example of the Austrian business cycle.  The Fed created an unsustainable boom that eventually went bust.  These were misallocated resources.  These resources, which included human labor, must now readjust.  This is the correction process.  This can take time, particularly when the government is interfering and trying to prevent the market from correcting the situation.

In conclusion, the Fed causes a lot of problems.  Libertarians particularly like to look at inflation and how it makes us poorer by making things more expensive.  But high unemployment in states that had a big housing boom and bust also illustrates the horrible effects of central bank policies.  The previous malinvestment that was caused by the Fed (mostly under Greenspan) is the primary reason that the employment situation is so bad right now.  It will continue to be bad in the future if the government doesn’t step out of the way and allow the correction to take place.

The volatility continues.  The Dow closed down over 400 points today.  Gold was up above $1,820 and is up again in after market trading.  With gold going up, stocks going down, and unemployment remaining high, it is an indication that the government’s policies are failing, which of course is no surprise to libertarians.

Meanwhile, Obama is going to announce his plans for another stimulus.  There is probably only one good thing that may come out of it.  He may propose to extend the payroll tax cut that will expire at the end of the year.  This is a good thing.  The government is running massive deficits and is headed for default anyway, so we may as well keep what we can now.

If Obama really wanted to help unemployment, he would propose the same payroll tax cut for employers.  A payroll tax cut for employees helps those who are working.  It lets people keep a little extra.  But in order to help unemployment, you have to decrease the cost of labor.  By reducing the employer portion of the payroll tax, it would make it cheaper for companies to hire people.  This would actually do something to help unemployment.  Of course, the politicians, particularly the Democrats, could never just “give away” money to big corporations.

I expect the rest of Obama’s “stimulus” to be horrible.  It will contain mostly welfare and government programs that will only make things worse.

The economy needs more savings and investment.  The economy needs a liquidation of the bad debt and previous malinvestments.  The economy needs less regulation.  While Americans try to pay down debt and increase savings, the government is ruining this by spending money and running up more debt.  This is making it almost impossible for any kind of real recovery.

Expect more volatility.  Day traders should be happy.  The stock market will continue its roller coaster as the market is not sure if there will be recession, price inflation, or both.  The bond market and the gold market are telling us two different things.  My guess right now is that bonds are correct for the short term and gold is correct for the longer term.  In other words, we will see a continued recession and then we will see significant price inflation.

It seems that China is in a boom that may go bust.  I was talking to people about this years ago.  I remember 4 or 5 years ago hearing some people say that China may go into a recession after the 2008 Olympics.

China has a reported price inflation rate above 6% right now.  I would not be surprised if that number were understated significantly.  Of course, this is price inflation.  Monetary inflation in China has been much higher in the last several years.

I am hearing more people today talk about the possibility that China is “overheated”.  This is absolutely true, but I just want to be clear on something.  The only reason that China is “overheated” is because of the previous monetary inflation.  There is absolutely nothing wrong if an economy grows 8 or 10 percent per year, as long as it is not part of an artificial boom.  In a free market economy with stable money, a huge growth rate of 8 or 10 percent does not mean that things have to slow down or go bust.  If the growth is built on real savings and investment, then the growth is real.

Unfortunately for China, much of its growth has been artificial.  There is no doubt that the Chinese people are far better off now than they were 3 decades ago or even 1 decade ago.  Some of this growth is real due to the semi-liberalization of the economy by the communist rulers.  However, as I mentioned, China has had significant monetary inflation over the last several years.

The Austrian Business Cycle Theory applies to China just as it would apply anywhere else.  The easy money policies of the Chinese central bank have created an artificial boom that is misallocating resources. This is why we see these new cities being built that are practically empty.  If China keeps increasing its rate of monetary inflation, then eventually they will go to hyperinflation.  The more likely scenario is that the Chinese central bank will slow down monetary inflation and there will be a severe correction.

For anyone who studies and understands Austrian free market economics, there should be little doubt that there will be a bust in China.  It will be China’s first major recession, since this is the first time that China has had any kind of significant economy.

The interesting thing to learn from the Chinese boom is just how long it has been able to continue.  Again, there were people five years ago predicting a bust.  While Austrian economics can help us in predicting that a bust will occur, it is almost useless as to the timing.

Remember this lesson when the price of gold goes through the roof.  A bubble can last a lot longer than people think.  When the day comes that it does go bust, be prepared and step out of the way the best you can.