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.

Gold finished up today, closing above $1,780 per ounce.  After its big run in the last few weeks, it pulled back a little and now seems to be resuming its up trend.

A couple of weeks ago, I wrote that I don’t think gold is in a bubble.  With the movement this week, not only is gold not in a bubble, but it doesn’t even look like it is going to have a significant pullback any time soon.

My analysis of the economy and investments usually comes from a libertarian/ Austrian point of view.  I like to look at the facts and make judgements based on the fundamentals.  For this reason, I have been bullish on gold.  The Fed has tripled the adjusted monetary base in the last three years and the federal government is running a yearly deficit of $1.5 trillion.  These are enough reasons alone to be bullish on gold.

I am not usually a chart guy.  I don’t like to look at breakout points or moving averages.  With that said, even if we look at gold from this perspective, you still can’t help but be bullish.  Gold made a significant move during the recent stock market turmoil.  After hitting new highs (several times), it had a slight pullback.  The price has been consolidating and looks ready for another possible move.

Compare gold in the last few weeks with silver this past spring.  A few months ago, silver went parabolic.  It went up about 50% in a very short time span.  It went all the way to near $50 and then the bottom fell out.  Silver managed to lose 30% in the matter of days.  It snapped back to below $35 in an incredibly short time frame.

When you look at gold in the last few weeks, it looks much stronger.  It looked like it could go parabolic, but then it stopped and made a slight retreat.  It is not going to the moon in the matter of days, as silver did a few months ago.

Perhaps foreign central banks are putting a floor under the gold price and buying on dips.  There are also a lot of scared investors out there looking at gold.  Most people do not own gold, except for small amounts in jewelry.  Most don’t even own much in the way of stocks.

I know a couple of people who are looking to sell some gold (mostly jewelry).  Again, if we were in a bubble, people wouldn’t be looking to sell now.  I expect gold to go parabolic at some point, but we are not even close to the final run yet.  I think at some point, gold stocks will get hot.  I am not making a prediction as to the timing, but I am making a prediction (which I usually don’t like to do) that gold stocks will catch fire as investors look for alternatives.

Warren Buffett, one of the world’s richest individuals, wrote an opinion piece in the New York Times in which he called for higher taxes on the mega-rich.  This has been a standard line of his for years.  Buffett is an Obama lover and he is a statist (or do I repeat myself).

The results are in for the Ames Straw Poll.  Michele Bachmann won, while Ron Paul took a close second.  The spread between the two was less than 200 votes.  Tim Pawlenty came in third, but it was a distant third.  I think this just about puts him out of contention.  Although Romney finished 7th, he was not competitively trying to win.  You can see the results here.

As I blogged on Thursday, I think the race for the Republican nomination comes down to four people.  Those four are Mitt Romney, Rick Perry (who just announced), Michele Bachmann, and Ron Paul.  I think my prediction has become stronger based on the straw poll results.

If Sarah Palin enters the race, I don’t think she will win the nomination.  If anything, she will probably just take votes away from Bachmann.  They are both women and they are favorites amongst Tea Party conservatives.  I don’t think her entering the race would be damaging to Ron Paul, as his supporters are more libertarian than conservative.

As for the debate, I watched most of it on Thursday and it was a bit more interesting than past ones.  Pawlenty and Bachmann went at it and I thought that Bachmann got the best of him.  I think this was his last chance to perform well and he basically failed.  He had a few funny one-liners, but this is not enough to be successful.

Newt Gingrich came across fairly well, although I still think he is a fake.  He does not stand a chance because most people sense (rightly) that he can’t win against Obama.  So even those who like him realize that others don’t.

Rick Santorum has never stood a chance and that will continue.  He claims to be a wonderful Christian, yet he wants to bomb the Middle East back to the stone age.

Herman Cain occasionally sounds good when he is speaking libertarian rhetoric.  The rest of the time he comes across as vague and, quite frankly, stupid.

Jon Huntsman just comes across as creepy and he is another establishment favorite, except he has little chance.

Ron Paul had an interesting night at the debate.  I thought he would shine more with economics.  We are in an economic crisis and he has predicted much of what has happened.  He did not shine as much as I thought (or hoped) he would.  He nailed it when they were talking about Romneycare and the 10th Amendment.  He said that while it may be bad policy, the federal government should not go in with their guns to overturn state law.  Bachmann got this completely wrong, which should show libertarians that she is not a libertarian.

I thought Ron Paul shined the most when it came to foreign policy.  Of course, people who disagree with him will see things differently.  This is where he really distinguishes himself from the field.  When Santorum challenged him on Iran, Paul really showed off his intelligence when he pointed out that the Iranian conflict goes back to at least 1953 when the U.S. government overthrew their leader.

When it comes to the economy and fiscal policy, I think Ron Paul needs to challenge the other candidates more.  It was actually Santorum who pointed out that a majority of the budget is made up of Medicare, Medicaid, Social Security, and the military.  This makes it almost impossible to balance the budget unless you make huge cuts to one or more of these things.  But Ron Paul actually could cut enough to balance the budget.  It would be difficult for Michele Bachmann to explain how she would balance the budget.  She emphasized that she voted against raising the debt ceiling, but it is unclear what she would specifically cut to balance the budget.

In conclusion, I think we are down to four: Romney, Perry, Bachmann, and Paul.  This is great news for libertarians as we have a spokesman in the national spotlight.  Even if he doesn’t win, the country will be better off as more people move towards true liberty.